Japan's Political and Economic Landscape Now and Ahead
This month as Japan marks the one-year anniversary of the Great East Japan Earthquake, NBR spoke with Michael Green—Strategic Asia 2011–12 contributing author, senior adviser and Japan Chair at the Center for Strategic and International Studies (CSIS), and an associate professor of international studies at Georgetown University. Professor Green assessed Japan’s political and economic direction since the disaster, including Prime Minister Yoshihiko Noda’s political leadership, the proposal of a consumption tax, and the ongoing negotiations for a Trans-Pacific Strategic Economic Partnership (TPP).
An interview with Michael J. Green
By Sarah Serizawa
March 8, 2012
This month, as Japan marks the one-year anniversary of the Great East Japan Earthquake, NBR spoke with Michael Green, Strategic Asia 2011–12 contributing author, senior adviser and Japan Chair at the Center for Strategic and International Studies (CSIS), and an associate professor of international studies at Georgetown University. Professor Green assesses Japan’s political and economic direction since the disaster, including Prime Minister Yoshihiko Noda’s political leadership, the proposal of a consumption tax, and the ongoing negotiations for a Trans-Pacific Strategic Economic Partnership (TPP).
A 9.0-magnitude earthquake occurred off the coast of Northeast Japan and devastated the country on March 11, 2011. How has the Japanese government managed the aftermath of the tragedy?
First, we need to remember that the earthquake and tsunami were among the largest in recorded history, and the Fukushima crisis was the first major nuclear disaster since Chernobyl. With respect to the earthquake, the Japanese government demonstrated an aptitude for disaster recovery that was one of the best in the world. In terms of the tsunami, which was responsible for the vast majority of the 20,000 missing and surpassed the imagination of Japanese disaster planners, the relief efforts of the Japan Self-Defense Forces were also impressive. However, while the local community and social responses were predictably resilient, and Japan’s civil society demonstrated capability, the government sector did not respond as well. In fact, the Japanese government’s management of the nuclear crisis was initially quite poor. So, overall, whereas the Japanese government handled dimensions of the earthquake and tsunami quite well, its response to the nuclear crisis encountered many problems and did not convince the public, the United States, and the world of its governance capability under such conditions.
In your Strategic Asia chapter, you discuss three burdens that have decelerated Japan’s recovery, one of which is the 200% debt-to-GDP ratio. Japan’s GDP dropped significantly in the fourth quarter, as export-demand shrank due to a strong yen, flooding in Thailand, and the European debt crisis. In January, Prime Minister Noda reshuffled his cabinet in an effort to push legislation to double the sales tax for debt reduction. Can you discuss the importance of the sales tax increase for Japan’s economic recovery? How likely is the tax to be passed?
I think the legislation will pass, but the question is who will get sacrificed along the way. Perhaps it will be Noda; we will see. The consumption tax is a necessary policy tool to ensure that Japan has reliable, long-term revenue, because revenue from the income tax will inevitably decrease as the workforce relative to the number of retirees grows smaller. But the consumption tax is hardly enough to take care of the problem as it does nothing to help the growth of the economy, which is crucial for reducing the debt burden. In other words, the consumption tax is necessary but not sufficient. Japan has years before it runs out of domestic savings necessary to pay for its debt and serve its debt. Over 90%–95% of the debt is held by Japanese institutions and individuals, and they are not going to do what the creditors did to Greece. But that savings pool, according to economists, will run out in the next three to eight years, and at that point, interest rates will have to be increased to sell government bonds. No one knows what that would do to the economy, but it would not be good. So the consumption tax is necessary right now to make sure the revenues are coming in. But that is not sufficient, and there will need to be a clear strategy for growth. Japan has to take further steps such as trade liberalization through the Trans-Pacific Strategic Economic Partnership (TPP), the stabilization of energy supplies, and a revision of the income and corporate tax rates.
The second burden that you underscore is the failure of the Fukushima Daiichi nuclear power plant. The future of nuclear power has been a highly contested issue since the tragedy. Plans to restart two nuclear reactors in the near future, in addition to the three reactors currently in operation, have faced widespread opposition. Is the government’s reduced emphasis on nuclear power only temporary?
Before March 11, 2011, the Japanese government had hoped to increase the percentage of nuclear power from 30% to 50%. But that is now politically impossible. Decreasing nuclear power to zero is also unlikely for the next few decades because the country will have to replace the 30% somehow. If it does so by increasing use of liquefied natural gas (LNG), the economy will be prone not only to price spikes through competition with China in the same markets but also to shocks such as war. Japan has only two to three weeks of emergency reserves of LNG because of long-term storage problems, and has only about three months of reserve supplies of oil. And that is it, other than renewables. In fact, 99% of Japan’s oil is imported, and most of that from the Middle East. In terms of reliable domestic sources of energy, there was a vain hope that Japan could increase the percentage of renewable energy such as solar, hydro, and wind to about 20%–25%. But the economics for renewables are daunting and make those targets extremely difficult to achieve. What that means is the Japanese economy will be extremely vulnerable to international shocks without nuclear energy. I just don’t think that the government will go there; I think it will find a way step-by-step to convince the Japanese public that nuclear energy is necessary for the foreseeable future.
Declining public trust and confidence in the government over its pro–nuclear energy stance underscore the problem of weak political leadership, which is the third burden you mention in your Strategic Asia chapter. What are your thoughts on Prime Minister Noda’s political leadership compared to that of his predecessor, Naoto Kan? Will he succeed in implementing new policies?
The Democratic Party of Japan (DPJ) came to power in Japan in 2009, agreeing only on one thing: to drive the Liberal Democratic Party (LDP) out. The DPJ didn’t have any internal consensus or any internal cohesion on what its governing philosophy or agenda would be, despite the effort to present one through the party’s manifesto. As a result, former prime minister Hatoyama—whose own platform was long on philosophical musings but short on pragmatism—failed badly. His successor, Naoto Kan, was more of a realist and understood that wild promises like those of his predecessor would be politically damaging to the party, so he was more modest about promising dramatic changes in economic or foreign policies. But Kan didn’t have much more luck in implementing policies because he came from an anti-establishment and protest background and did not know how to execute policies. He and his cabinet—with some notable exceptions like Hiroshi Gosho—were thus poorly prepared to respond to the enormous complexities posed by the March 11 disaster.
Noda, in contrast, is a much more pragmatic and centrist prime minister, who appears serious about implementing long-needed fiscal and foreign policies. I think Hatoyama and Kan were looking for policies that would save their political careers, whereas Noda appears willing to sacrifice his political career in order to implement policies that are in the national interest. The consumption tax and TPP are difficult political goals that Noda has rightly decided are in the national interest, and he is risking his political standing to achieve them. So far, he has been successful to some extent. However, Noda does not have a very high popularity rating and is hobbled by the same structural problem that plagued Hatoyama, Kan, and the three LDP prime ministers prior to them—namely, that the Upper House of the Diet is controlled by the opposition party. This structural problem of the so-called twisted (or divided) Diet could still bring Noda down within a year as it did his five predecessors. On the other hand, it is equally possible that Noda will step-by-step, without any drama, put in place the policies that Japan needs to recover—beginning with the consumption tax, TPP, and further decisions on nuclear power and security policies. What worries me is that if Noda fails badly, his successors might be tempted to resort to populism and avoid the tough calls he is taking head on. Yet I’m still hopeful that even if Noda is forced out, his successors will stay focused on a similar agenda for restoring dynamism to Japan’s economy and foreign policy. Looking at the members of both the LDP and DPJ who would likely replace him, I think that most would continue to pursue Noda’s basic agenda. And that’s encouraging to some extent.
There is another question: Is Japan capable of producing strong leadership? Was Koizumi an aberration? I think that Japan is going through a political transition, shifting out of politics based on distribution and government largesse and into a new style and political dynamic that is based more on hard choices. Koizumi demonstrated the ability to lead and be popular by making hard choices. I think that other politicians can emerge in both the LDP and DPJ, as well as in smaller parties, who will be successful because they demonstrate to the public that they are serious about the national interest and are willing to make hard choices. Koizumi demonstrated that courage and conviction sell, even if some of the specific policy choices bring pain and are unpopular in themselves. Of course, such politicians are rare in any country. So it is still too early to predict whether Japan will have strong leadership or will continue to have one-year prime ministers for the foreseeable future. Much may depend on Noda’s success in the coming months.
As you mentioned, Prime Minister Noda is pushing for Japan to join the TPP, which is a multilateral free trade agreement (FTA) among the economies of the Asia-Pacific region. What would be the implications of Japan joining the TPP, both for the Japanese economy as well as for China, which is not a member? Is Japan’s intention to counterbalance China’s economic power?
The debate over the TPP is not like past trade debates with the United States because virtually all business leaders in Japan, as well as almost all the politicians likely to succeed Noda, support the partnership. Now the opposition to the TPP is still considerable. It includes the agricultural cooperatives and the doctors association, both of which are very powerful lobbies. Nevertheless, negotiations and ratification will take years, and TPP supporters in Japan will have time to make their case and build internal consensus. The important thing will be to move this year from an expression of interest in the TPP to actually deciding to join the negotiations formally.
The case TPP supporters can make in Japan is compelling. First of all, Noda’s interest in the TPP has spurred both the Chinese and the Europeans to urge that Japan consider FTAs with them. What this shows is that the TPP gives Japan enormous leverage in negotiating FTAs around the world, which is in Japan’s national interest. Korea has demonstrated how this is done with the U.S.-Korea Free Trade Agreement (KORUS-FTA). Today, over a third of Korea’s trade is covered by FTAs—compared to only 16% of Japan’s trade—and Korea’s economy is doing very well as a result. If Japan can use this leverage to negotiate more trade agreements, it will reduce tariff and non-tariff barriers to Japanese exports; incentivize Japanese firms to stay in Japan as the economy integrates with Asia, North America, and the European Union; and bring more competitive dynamism to Japan’s economy overall. In other words, as smart Japanese officials and business leaders understand, the TPP is not about just the U.S. market. Rather, it is important for increasing Japan’s negotiating leverage with the other markets, at first principally with Europe but also eventually with China, which would be a huge advantage for Japan.
There are other advantages to Japan being in the TPP. For example, U.S. law obstructs LNG exports except to countries that have an FTA with the United States. With the United States and Japan accounting for 80% of the economic output of the participating countries (if Japan joins), the TPP would be very close to a bilateral FTA, reinforcing the alliance at a critical time in Asia’s strategic landscape.
You will hear many Chinese commentators and officials argue that the TPP is primarily about containing China, but that view is too simplistic. It is true that the TPP presents an opportunity for Japan to strengthen its leverage as it tries to convince China to play by the international rules of trade, investment, and intellectual property rights protection. So although the TPP is not about containment, nor even counterbalancing, it definitely would give Japan leverage to push China to play by the global rules. Of course, given that China does not want countries like the United States or Japan to come together and make those rules, one can understand why some in China are concerned about the partnership. But the TPP is a building block to a broader APEC-based FTA and hopefully to global trade liberalization—and not an exclusive bloc aimed at permanently freezing out any one country.
Sarah Serizawa is an intern at NBR and a senior at the University of Washington’s Jackson School of International Studies.
One Year after March 11—A Retrospective
This interview is part of a one-year anniversary retrospective of the March 11, 2011 earthquake and tsunami that struck eastern Japan. Read more from this series:
Policy Change in a Post-Crisis Japan
Q&A with Richard J. Samuels
Fukushima One Year Later
Q&A with Daniel P. Aldrich