Wednesday, November 17, 2010

'Japan's Overblown Anxiety'

Fascinating article by Ian Bremmer in the The New York Times:

Pessimism abounds, but there are solid reasons why Japan's future may not be as bleak as it seems.

Nov. 16, 2010

In Japan, anxiety over a lost decade has given way to fear that economic growth is never coming back. Japanese pundits warn that the country has “lost its animal spirits.”

A business leader I spoke with during a recent visit talked of relocating his company’s operations to Singapore. Another asked if I thought Japan “would still be around” in 20 years. I’m not sure what he meant, but I know it isn’t good.

Two decades ago, Japan’s gross government debt stood at 63 percent of the country’s G.D.P. Today, it’s at nearly 200 percent. Consumer prices have fallen in 9 of the past 20 years, depressing production. A third of Japanese between the ages of 20 and 30 don’t have jobs. [Blogger's note: This explains the regular weekday crowds of young adults strolling and shopping in Dogenzaka and Udagawacho and Harajuku, as if they had all day to do so!] Falling birthrates suggest there may soon be just two workers to support each retiree, yet there is little prospect of immigration reform to give the work force new dynamism.

Add projections for several more years of flat growth, frustration with the country’s deeply dysfunctional political system, and worries that Japan has no place in the emerging world order and you begin to see the depth of the country’s malaise. Japan’s alliance with the United States has been stuck in the mud for some time, and the country is ever more reliant for growth on an increasingly unfriendly China.

Japan’s business community seems the most disillusioned segment of society. Senior executives I spoke with acknowledge that Prime Minister Naoto Kan is more competent than his hopeless predecessor, Yukio Hatoyama, but they have little else positive to say about his government. In part, that’s because the Democratic Party of Japan arrived in power just 15 months ago after a half century of nearly uninterrupted Liberal Democratic Party rule. Only since August 2009 have the DPJ and the country’s business community begun to build working relationships.

But there is also a philosophical divide between the two sides. The DPJ’s traditional ties with trade unions, and the anti-corporate rhetoric of many of its leaders, make mutual suspicion difficult to overcome. Recent party efforts to build bridges with the Keidanren, Japan’s lead industrial organization, have produced little. In addition, many of Japan’s business leaders have been in place for a long time, and some are resistant to change.

Yet, there are three reasons to believe that all this pessimism is overdone.

First, the DPJ and the business elite now appear to see that they are stuck with one another. The DPJ will remain in power for awhile, and the industrial elite knows it can’t simply wait for the moribund LDP to stage a comeback.

In fact, finance and economic officials say work is moving forward on a proposal for a substantial reduction in the corporate tax rate, one they said enjoyed support at the highest levels of government. It’s a modest accomplishment, and the devil may yet be in the details, but it’s clearly a positive signal that Japan’s political and business elites can work together more effectively.

In addition, Japan was a one-party system for several decades, and there was little incentive for the bureaucracy to share vital information on the operation of government with leaders of the seemingly eternal opposition. Yet, DPJ officials and the army of bureaucrats tasked with day-to-day operation of government finally appear to be communicating with one another more effectively.

Second, anxiety over China’s recently more aggressive foreign policy has helped put troubled U.S.-Japanese relations back on track. Much work remains to be done to restore damaged trust. These days, U.S. and Chinese officials negotiate questions of trade, currency policy and security while American and Japanese officials bicker over the length of runways at U.S. military bases.

But real progress has been made on an extraordinarily important project: The Trans-Pacific Partnership, a multilateral free trade pact that might one day integrate the Pacific Rim’s largest economies. Singapore, Chile, New Zealand and Brunei are already members. The United States, Australia, Malaysia, Vietnam and Peru are negotiating to join. Tokyo has finally begun to show interest.

Under the LDP, Japan would not consider membership, since the country’s farmers, a key segment of the LDP’s base, stand to lose the protections of tariffs on imported staples. Prime Minister Kan has expressed interest in joining the pact, and his support will come at a much lower political cost. That’s good news for those in Washington and Tokyo who see advantage in hedging their bets on China via closer ties with one another.

The third reason for a more optimistic view of Japan’s future is that the country’s elected leaders do not face the outraged opposition of citizens and interest groups eager to make trouble in the streets. Following two decades of economic stagnation, there are no Tea Partiers, fuming French transport workers or rock-throwing South Korean students.

In China, despite three decades of go-go growth, officials warn that continued growth of 7 to 8 percent is necessary to create enough new jobs to safeguard “social stability.” Japan, by contrast, will continue to enjoy relative domestic tranquility despite yet another year of growth at less than 2 percent.

In that sense, at least, Japan’s leaders are the envy of the world.

Ian Bremmer is president of Eurasia Group and author of “The End of the Free Market: Who Wins the War Between States and Corporations?”

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