4 Economic Reform, Rising Nationalism, and Japan’s Changing Role in the World With an economy finally on the rebound, growing tensions with its North- east Asian neighbors, and an imminent leadership transition, Japan was the focus of the plenary’s leadoff session, which featured assessments of current trends by three Japanese leaders and two non-Japanese com- mentators. Kakutaro Kitashiro, chair of the Japan Association of Corporate Executives, shared his optimism about Japan’s economic prospects; Yoichi Nishimura, a prominent journalist, drew a connection between rising income inequality and the regional emergence of nationalist tendencies; and Yasuhisa Shiozaki, a leading politician and senior vice minister of foreign affairs, described Japan’s new sense of confidence and its poten- tial regional and global contributions. Meanwhile, Bill Emmott, former editor of The Economist, explained why Japan’s economy has moved from its “exceptional unhealthiness” to the “normal unhealthiness” that characterizes most of the world’s advanced economies, and Gerald Curtis, a leading political analyst, underscored how Japan stands on the threshold of a new era. Condensed versions of their presentations and a summary of the discussion session are below. Kakutaro Kitashiro Japan’s economy is clearly back. The sun also rises. From the business perspective, we have very healthy conditions. GDP is growing at a rate of around 3 percent, the exchange rate is favorable for manufacturing, and interest rates are very low. The often-asked question is whether this is the accomplishment of the Koizumi government. I believe that this is the result of the Koizumi Cabinet’s structural reform. The prime minister’s five-year policy has had a significant impact on the recovery of business, particularly in wiping out nonperforming loans. As a result, financial institutions are much healthier today. His structural reform policies have been very important, in particular the deregulation of the economy, the shift from government-led sectors to 32 | Challenges to Trilateral Cooperation the private sector, and a particularly important initiative, the decision of the government not to increase public spending to stimulate the economy. In the past, our business community used to ask the government to spend more when the economy was bad. But Prime Minister Koizumi clearly said that, without reform, there will be no economic recovery and no economic growth. That message clearly drove significant changes in the business community, and businesses faced the tough issues of excess employment, excess capacity, and excess debt. With strong economies in China and the United States, these businesses could deliver significant returns, and with lower employment numbers, much stronger balance sheets, and much healthier capacity, there is a strong recovery. So, I give significant credit to the Koizumi Cabinet for the recovery of the Japanese economy. The question is whether this recovery or this healthy economy is sustain- able. In the short term, I am optimistic. There are a lot of risks: the risk of higher oil and resource prices, the sustainability of the U.S. economy, exchange rate stability, and rising interest rates. But all in all, considering the risks, I think it may well continue to grow in the short term. The biggest risk for business today involves the successor of Prime Minis- ter Koizumi. Koizumi clearly stated his policies in the form of a manifesto, such as privatization, no additional public spending for economic growth, and improving the fiscal situation of the government. He made a commit- ment to the people that he would follow these policies. But his successor will not have that political capacity because he has not publicly stated his policy and will have just succeeded the Koizumi government. Mid- to long term, Japan has many issues. In addition to the issues that all nations have, such as the environment, energy, and the proliferation of nuclear weapons, Japan has its own difficulties. The biggest risk is the fis- cal situation. As you know, the debt of our central and local governments is more than 150 percent of GDP—the highest amount among developed countries—and it is not clear whether this is sustainable. The government is taking actions to reduce fiscal deficits and, by 2011, it is hoping that the primary balance will be positive. We need to reduce government spend- ing, particularly in the areas of social security, welfare, medical care, and elderly care, and it may be necessary to increase taxes. The second difficulty we have is the declining population. The birth rate is less than 1.3 children per woman and it is declining. If the statistics are right, in 100 years, Japan’s population will be half of what it is today. This alone may not be a major issue, but a steep, significant decline in the short term coupled with the huge government deficit is a concern. With a falling population, we need to significantly increase productivity to drive Japan’s Changing Role in the World | 33 GDP growth so that the government’s fiscal situation can be maintained. And obviously, an aging population is a burden for the social welfare and elderly care systems. Another area of concern is the vitality of the Japanese economy. People are discussing the gap between the haves and have-nots and whether structural reforms have caused this disparity. We need to continue to work on structural reform so that we can be more competitive, but the backlash from the have-nots may cause structural reform to stall. Education plays the most important role in addressing this disparity. If people have an equal opportunity to obtain quality education, the children of those who have not may be able to learn. But the education system has a lot of problems in terms of the quality at both the K–12 and university levels. Turning briefly to international relations, in the late 1990s, about one- third of our exports went to Asia, but today about half do so. In the past we had a huge dependence on exports to the United States and Europe, but today our exports depend on Asia, including China. And maintaining good relations, particularly political relations with China, Korea, and South Asia, is a major issue. Our businesses are diversifying their investments so that we will not just rely on investment in China, but still relations with China, Korea, and other Asian countries are a major issue we need to address. In the long term, I am cautiously optimistic that, once we recognize all of these issues, the Japanese people will take action. We are somewhat slow to recognize problems, but once we do, I am sure that we will take significant steps to improve the situation. Kakutaro Kitashiro is chairman of the board of IBM Japan as well as chairman of the prominent business organization Keizai Doyukai (Japan Association of Corporate Executives). Yoichi Nishimura In Tokyo, predictions about the successor to Prime Minister Koizumi and the implications for domestic politics and diplomacy have begun to domi- nate the political agenda. I would like to talk about two big political issues today. The first is the widening gap between the haves and the have-nots, 34 | Challenges to Trilateral Cooperation or the disintegration of the middle class. And secondly, I would like to talk about Japan-China and Japan-ROK relations, in other words, Japan’s Asian diplomacy. Both are related to the topic of nationalism. If you go to bookstores in Tokyo, you can easily find the two bestsellers, which epito- mize my point. One is entitled Lower Class Society, and the second is Ken Kanryu, which can be translated as “Hating the Korean Wave.” When I was a correspondent in Moscow, I heard that an aide to Mr. Gorbachev once said, “The Japanese economy and society is the most successful socialist one in the world.” The Liberal Democratic Party (LDP) had been conducting a policy in which liberalism aimed at economic growth was harmonized with socialism in pursuit of egalitarianism. In fact, 70 to 80 percent of the Japanese public considered themselves as middle class. Today, the poverty rate has nearly doubled, the number of households receiving welfare has reached 1 million, and the number of part-time and temporary workers is going up. Polls show that a significant number of people believe they have dropped out of the middle class. More than 30 books focusing on the widening income disparity between rich and poor have been published and their brisk sales reflect the public’s interest in this area. Of course, we have been witnessing a strong economic recovery as a result of Mr. Koizumi’s policy of small government and deregulation. And Japan still has a long way to go before it shows the levels of income disparity found in the United States. But the debate on the widening gap as a dark side of Koizumi’s policy reforms is an emerging political issue and a constant topic in parliamentary discussions. Not only the opposition leader, Ichiro Ozawa, but also some of the candidates to succeed Koizumi are pointing this out. In Japan, the formation of a middle class–focused society happened at a time of steady economic growth and played an important role in stabilizing the nation’s democracy. In contrast to Japan, where the disintegration of the middle class is occurring, in China the middle class is expanding—not in the style of 1960s national capitalism, which formed a huge Japanese middle class, but with the process of global neo-liberalist market capitalism, which tends to disintegrate the middle class in many industrially advanced countries. In Japan, Koizumi has been consistent in his commitment to break away from conventional LDP politics, which shaped a gigantic middle class–centered society by distributing the fruits of high economic growth to every corner of the country. But both restructuring and the end of the era of old pork barrel politics are placing a heavy burden on the younger Japan’s Changing Role in the World | 35 generation rather than on the baby boomers. The losers may be the younger generation, particularly “permanent temporary workers,” who will feel a keen sense of uncertainty. In China, it is also reported that wider gaps are opening up between the haves and the have-nots, which is also changing what was once the world’s most equal country to one of the least equal. This sense of uncertainty among the younger generation at a time of globalization may lead to emotional nationalism in both countries. Voters who no longer feel affiliated with the political system in terms of gaining benefits from politics could become increasingly influenced by emotional nationalism. If nationalism and the disintegration of the middle class is a potential issue, nationalism and Japan-China and Japan-ROK relations is an urgent issue. We have three disputes with China and South Korea. The first is a dispute over territory, sovereignty, and resources; the second is over his- tory; and the third is over security in the long term. Politically, the biggest issue is Yasukuni Shrine. The Chinese president, Hu Jintao, set a clear precondition for dialogue between Japanese and Chi- nese leaders, and this is for Japanese leaders to stop their visits to Yasukuni Shrine, where 14 Japanese war criminals are enshrined. Many political leaders said that a decision not to pay homage at Yasukuni should not be made on the basis of external pressure, and it seems politically impossible for Japanese leaders to appear to have their action dictated by Beijing. Koizumi has described his visits to Yasukuni Shrine as a “matter of the heart” and found it beyond his “understanding” that foreign governments would “try to intervene in a matter of the heart and make Yasukuni into diplomatic issue”. The Yasukuni issue is more damaging to Japanese regional influence than two or three years ago because, due to its growing political and economic clout, China is emerging as a skilled diplomatic player that can use the his- tory card more effectively to marginalize Japan than previously. Many of my friends in the United States and Japan have said that it is almost tragic to see the Japanese political leadership responding to the “rise of China” with such a reactionary emotionalism. It has done great damage to Japan’s national interests, it has damaged Japan’s relationship with both China and South Korea, and it may hurt the U.S.-Japan relationship. Certainly China also has serious problems with “history issues.” But this situation has decreased Japan’s influence in Asia, which may not be in the U.S. interest either, and it has narrowed Japan’s policy options toward Asia. Many politicians and regular people in Japan question China’s motives. They think stirring up historical tensions with Japan helps deflect attention 36 | Challenges to Trilateral Cooperation away from China’s own internal social problems and that China’s criticism of Japan has less to do with historical grievances and far more to do with a desire to stem Japan’s influence or marginalize Japan. Both states are adopting confrontational stances partly because of ris- ing popular involvement in politics and resurgent nationalism. According to polls by the Cabinet Office, in October 2005, 32 percent felt warmly towards China—down from 48 percent in 2001—and 63 percent had cool feelings. Japan’s conservative postwar administrations have maintained a kind of balance between improving Asian relations and returning to old traditions. On the one hand, they advanced reconciliation based on the refutation of and reflection on Japan’s prewar conduct. On the other hand, there has been a trend to return to traditional ways that could lead to an affirmation of prewar Japan. The double face of postwar Japanese politics is symbolized by these two contradictory trends. Reconciliation and patriotism have been the specialty of LDP governments. But can the next prime minister maintain this balance? Some specialists say that, given deepening economic relations, it is pos- sible to avoid a crisis. But now that the political and economic dynamics are changing in Asia, it seems risky to think that deepening economic interdependence will automatically improve difficult relations. It is possible to face unintended conflicts if politically emotional and narrow national- ism rises. In Beijing and Tokyo, post-Koizumi politics and the implications for Japan-China relations has begun to dominate the political agenda. Former Foreign Minister Tang said, “We no longer expect anything from Koizumi. There is little possibility that our relations will turn for the better while he is in office.” Looking ahead, Beijing moved to engage Japan’s political leaders, and Prime Minister Wen called for an expansion of economic ties and people-to-people exchanges to build mutual trust and cooperation for “win-win results.” At the same time, many leaders including former Prime Minister Yasuhiro Nakasone, Foreign Minister Taro Aso, and LDP policy chief Hidenao Nakagawa began to point out the necessity of managing and controlling nationalism in East Asia. In this context, what interested me most were Nakagawa’s remarks. He said, “Japan’s GDP will be overtaken by China’s in the 2010s. Are you satisfied with the status of such a low-growth country? If Japan will be a 1 percent growth nation, in the future how can we help Asian nations at a time of financial crisis or a tsunami disaster? We have to have the political will to maintain our status as the world’s number Japan’s Changing Role in the World | 37 two economic power. There is no precedent in Asia for two big countries to have a strategic partnership based on equality. We want to establish a strategic partnership with China based on equality.” What we see right now may be a struggle between a mature power and a rising power. If nationalism in China is the nationalism of a rising power, the nationalism of Japan can be called nationalism due to a sense of psycho- logical helplessness at a time of shifting power. What Nakagawa meant was that it will be necessary for Japan to convert anti-China emotions into constructive energy to rebuild a strong economy in order to have a strategic partnership with China when it replaces Japan as an economic power. Generally speaking, growth and new economic dynamism in Asia is re- sulting in a deepening economic interdependence, but with the byproducts of psychological friction, frustration, and emerging nationalism. The ex- pansion of personal and business communications and the Internet culture has given us extensive, real-time knowledge of important issues, but easy, instantaneous access to detailed information often triggers widespread emotional reactions in each country, making it difficult for the respective leaders to control or contain public opinion. This may cause a spiraling escalation, which impedes easy political solutions. In China, because of limited political freedom, people target Japan to vent their pent-up feelings. And in Japan, populist trends allow politicians to paint China, an easy emotional target, as the bad guy. As interdepen- dence deepens, there is a built-in mechanism that strengthens short-term friction and confrontation. This autumn, we will see the LDP’s post-Koizumi election, as well as intra-party elections in the opposition party and in Komeito, the coalition partner. Together with widening gaps in our society and Asian diplomacy, the management and control of narrow nationalism will potentially be a big issue in this political season, and this may be a common challenge throughout East Asia. Yoichi Nishimura is the political editor of the Asahi Shimbun, one of Japan’s leading daily newspapers. 38 | Challenges to Trilateral Cooperation Yasuhisa Shiozaki Japan now finds itself standing at a new stage. After the difficult reforms during the last decade or so, Japan has finally emerged from the economic crisis and successfully revived its industries. This nation is beginning to regain confidence. Inspired by the rise of China and India, a sound com- petitive mind in this region is also beginning to arise. At this historical juncture, what is Japan trying to achieve and where are we headed? Ever since the Meiji Restoration 150 years ago, one of the most impor- tant sources of Japan’s power has been the diligent nature of its people. In Japanese society, everybody—even the leaders of society—is careful about details and does his or her job by him or herself. This moral standard re- garding diligence and self-discipline has enabled Japan to become a model for success. Many developing countries had taken Japan as an icon when they set out on their own paths toward prosperity. Japanese people well recognize the fact that it is not just a handful of entrepreneurs but rather the moral values shared by the common people on the street that serve as the driver for prosperity and democracy. I strongly hope that, based on our essential virtues, Japan will continue to serve as a global model in the 21st century. We must keep improving our domestic structure of national governance in order for Japan to play a more active role in the international community. Needless to say, these efforts must be made by the next administration as well. Human resources in both the public and private sectors will have to be utilized for diplomatic purposes. While the younger generation now tends to choose careers with some flexibility, many people with tremendous potential still confine themselves within the domestic system, which is evidenced quite typically in the Japanese government. Political commit- ment is required to enhance the effectiveness of Japan’s capabilities in the international arena. The Japan-U.S. Alliance and International Cooperation You may then ask what are Japan’s specific capabilities? First, the Japan– United States Alliance ensures that Japan has the capability to support stability in Asia. Japan is located as the United States’ gateway to Asia. We are determined to keep the Asian Sea a sea of prosperity, safety, and free- dom. In addition, Japan-U.S. Alliance cooperation has progressed to cover Japan’s Changing Role in the World | 39 global issues like Iraq, Afghanistan, North Korea, and parts of Africa, step by step, careful step by step. I hope this progress will continue. Second, Japan will start active international cooperation in close collabo- ration with the United Nations and other players. We must enhance our role in international standard-setting bodies as well as in decision-making processes on global issues; the UN Security Council may be one example of the latter. We hope to be a frontrunner in the world community in the 21st century by committing ourselves to sharing these responsibilities. A majority in Japan now feels that our constitution should be amended. An increasing number of Japanese look forward to Japan taking on positive roles on the international front. That said, the draft constitution formulated by the Liberal Democratic Party has maintained the current first clause of Article 9, which renounces war as a sovereign right of the nation and the threat or use of force as a means of settling international disputes. I believe that Japan’s commitment to peace, which was made after the traumatic expe- riences of the mid–20th century, will never change in the years to come. Japan’s Relations with Neighboring Countries In this century, I earnestly hope to see Japan continue to be a model in Asia. Obviously a bright future lies ahead for this region. But unfortunately more people are having concerns about Japan’s relations with neighboring countries. One could raise the issue that sovereign nations do not appre- ciate being guided by others, however well intentioned. And yet, by no means should we allow disputes about the past to negatively impact our future. Amazingly enough, 4 million people a year—more than 10,000 per day—travel between Japan and China and between Japan and Korea. We hope to engage in a future-oriented manner with these countries. The rise of China and India might offer both dynamism and instability to the world. I believe that a medium- to long-term pursuit of democracy and sound economic growth in both China and India ensures significant opportunities for other Asian countries. In this context, Japan could serve as an honest broker, paving the way for regional stability and prosperity. Japan is working toward the establishment of an open and transparent East Asian community, with the participation of Australia, New Zealand, and India, among others. I very much hope that the concept of East Asian community receives the positive interest of the United States and Europe, because the concept is one of an open and non-exclusionary Asia. 40 | Challenges to Trilateral Cooperation Japan’s Relationship with Europe As I am chair of the UK-Japan 21st Century Group, I have come to the conclusion that the trilateral nations indeed share common values, and we must work together to address global challenges. In the Iranian nuclear case, all members of the Trilateral Commission, both public and private, must take steps for an effective solution. On the economic front, Japan wishes to maintain its sound and competi- tive links with Europe by keeping markets open for goods, services, and investment. Since we have much we can learn from each other, we must not take any actions to undermine our links by damaging Asia’s security balance. We may have to show an accurate picture of the regional security situation to our European counterparts. The New Japan In conclusion, a new spirit is now emerging in Japan, although it is still embryonic. Japan will provide a stable power base, which helps to improve the standard of living for people in the global community, though not in an intrusive or noisy way. In the field of human security, Japan has been active in providing support for refugees and community rebuilding. Japan can play an enhanced role in many areas of operations conducted by the UN or by nongovernmental organizations. Japan can also expand its role in global energy conservation. Its energy efficiency now stands at three times that of the United States and 10 times that of China. With advanced technology, we should be able to live comfortably without supply constraints. Japan has shaped its own history for thousands of years, maintaining our independence and integrity through our unique model and power. In our history, there have been as many failures as successes. We have always been mindful of past errors, but it is time to build a successful future by overcoming the past. A fourth-term member of the House of Representatives, Yasuhisa Shiozaki, was senior vice minister for foreign affairs at the time of the plenary. He was sub- sequently appointed chief cabinet secretary by Prime Minister Shinzo Abe.