Bring the world closer to Japan

by Shinji Fukukawa

Once the Cold War was over, globalism was widely expected to expand but has since lost its momentum due to the credit crunch stemming from the sovereign debt crisis in Europe and the ensuing economic recession around the world. As a result, the World Trade Organization gave up in December on concluding the new round of trade rule negotiations at an early date.

Major countries are finding it hard to get out of the current predicament despite persistent efforts to expand their economies by utilizing traditional measures such as interest rate cuts and fiscal outlay augmentation. To overcome the difficulty, they must step up technical innovation, reform their social systems and hone their competitive edge. But they are still groping for ways to achieve “new growth.” The question is how Japan can contribute to the achievement of global reforms.

Since the burst of Japan’s bubble economy in 1990, its political functions have stagnated, its enterprises have clung to their conventional operational methods and its people have assumed inward-looking attitudes. Since it took power in 2009, the DPJ administration has repeatedly made foreign policy mistakes and Japan’s presence in the world is receding. Friends overseas are voicing warnings with a tinge of sarcasm by saying, “Whereas people from China, South Korea and Taiwan are active abroad, what are Japanese doing?”

Because Japan imports much of its resources and food, it cannot expect to keep its economy running well without engaging in free trade. Although China overtook Japan as the world’s second largest economy in 2011, Japan has the world’s second largest foreign currency reserves at $1.04 trillion, and $3.04 trillion in net external assets.

In Japan’s current account, balance on income has exceeded balance on goods since around 2000. Japanese firms are taking steps to shift their operations abroad due to the strong yen and the worsening business environment, thereby causing public concern about the hollowing out of Japanese industries. However, if they capitalize on this situation to improve their technologies, increase mergers and acquisitions as well as overseas investments and vigorously expand their operations in other countries, they will rather be able to stimulate effective demand abroad and at the same time boost Japan’s income.

Moves to develop regional alliances such as free trade agreements (FTAs) will accelerate in years to come, but Japan is lagging behind other countries in this respect by sticking to multilateral trade negotiations. The weight of FTAs and economic partnership agreements (that went into force or were signed) in the total volume of a country’s trade is as follows: 38 percent for the United States, 27.2 percent for the European Union (external trade), 35.8 percent for South Korea percent and 21.5 percent for China. In Japan’s case, the figure is only 17.6 percent.

South Korea has already concluded such agreements with the U.S. and the EU, and is now reportedly conducting negotiations with China. At an Asia-Pacific Economic Cooperation conference in November, the Noda Cabinet announced its decision to enter negotiations to join the Trans Pacific Partnership. And it is reported that Japan will join FTA negotiations with China and South Korea in 2012. The government must use this opportunity to shift Japan closer to the global trend embracing FTAs and improve its environment for foreign enterprises. This is the best way for Japan to enhance its national potential.

The government’s proposed participation in the TPP negotiations, however, has met strong objections from Japanese agricultural and medical-service sectors. I hear that the Japanese market may appear odd to foreign enterprises. Japan imposes high import duties on many kinds of farm products to protect domestic producers and has strict regulations governing agriculture activity. But such duties and regulations remove any incentive for firms to promote a more vigorous use of farm land. The best way to support ambitious young farmers would be to introduce competition, expand the size of farms, improve agricultural technology and modernize the structure of the distribution system for farm products. The relaxation of regulations is also indispensable in the medical-service sector.

To strengthen its national economic structure, Japan should also strive to invite top foreign enterprises and capable foreigners — in short, bring the outside world closer to Japan. Foreign business activities in the Japanese market will encourage technological innovations, product development and management reforms in this country. The actions of capable foreign entrepreneurs and workers will stimulate intellectual activities as a whole in Japan. It is said that no new ideas originate from a homogeneous social group. Hence, the introduction of the above-mentioned measures is needed for Japan to overcome its present predicament.

The ratio of foreign enterprises’ direct investment in Japan’s gross domestic product is very low at around 4 percent. But the corresponding figure in the U.S. and European countries is 30 to 50 percent and in China, South Korea and India, close to 10 percent. And many foreign firms are moving their operations in Japan to Hong Kong, Singapore and other areas because of Japan’s worsening corporate environment.

The heavy corporate tax, the strong yen, severe environmental targets, high electric utility rates and low levels of foreign language proficiency among Japanese workers are among the major reasons why foreign companies are shying away from operating in Japan. So, Japan must move closer to global standards in these areas.

Moving Japan and the outside world closer to one another is the only way Japan can overcome its persistent national problems, including its population decline.

Shinji Fukukawa, a former MITI vice minister and president of Dentsu Research Institute, is chairman of the Machine Industry Memorial Foundation.