Japan: On the Front Line

Image: The Economist

Reflecting on my earliest childhood memories, Japan is a country outside of my home country of the United States that I first learned about. Starting with my grandfather sharing his experience of serving in the U.S. military at Pearl Harbor, Hawai'i on Dec. 7th, 1941 (an experience that does not reflect the east Asian country in a positive light), to my fourth grade teacher, Ms. Murakami, a Japanese-American who shared aspects of the country's unique culture, to summer visits to my grandfather's sister-in-law in Florida where Aunt Etsi taught me to say a few Japanese words and how to use chopsticks, I find the country fascinating.

During my professional career, I appreciate having the privilege of spending a significant amount of time in Japan. These experiences, some of which are discussed on this forum, include helping a Japanese medical device company create a strategic plan to export their product to key international markets, advising an American company to deploy its services in the country, or building relationships with business and government leaders from Kobe, Japan's only city to have a sister city relationship with Seattle. Therefore, it was with great interest to read a special report produced by The Economist about the world's third largest economy.

Accompanying the report, which is comprised of eight articles, an editorial notes that "Two takes are often told about Japan. The first is of a nation in decline, with a shrinking and ageing population, sapped of its vitality. The second is of an alluring, hyper-functional, somewhat eccentric society—a nice place to eat sushi or explore strange subcultures, but of little wider relevance to the outside world. Both tales lead people to dismiss Japan. That is a mistake."

The Economist's report argues that "Japan is not an outlier—it is a harbinger. Many of the challenges it faces already affect other countries, or soon will, including rapid ageing, secular stagnation, the risk of natural disasters, and the peril of being caught between China and America. The fact that some of these problems hit Japan early makes it a useful laboratory for observing their effects and working out how to respond."

The report begins by explaining that "Japan's new imperial era began in spring 2019, when a nondescript man in a dark suit revealed its name: Reiwa. The first character, rei, means 'auspicious' or 'orderly'; wa means 'harmony' or 'peace' (officials chose 'beautiful harmony' as the English rendering). For the first time the name came not from classical Chinese literature, but from Japan's Manyoshu poetry anthology, compiled over a millennium ago: 'In this auspicious (rei) month of early spring, the weather is fine and the wind gentle (wa).'"

With respect to Japan making a "case for a more active and interventionist security policy," The Economist points out that "If rivalry between China and America is the big story in 21st century geopolitics, no other country, except perhaps Taiwan itself, has as much influence as Japan over how it will unfold—nor as much to lose if it goes badly. 'Japan is the front line,' says General Yoshida Yoshihide, chief of the army. This reality is forcing a realization that, although there can be no substitute for America, Japan must supplement it in order to maintain a favorable balance of power."

Moreover, "Japan is strengthening defenses and building ties with others. Tanaka Akihiko, of the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, speaks of a shift from a 'one-pillar' to a 'multi-pillar' architecture. 'We can't rely on America alone,' he says. That does not mean turning away but keeping America close by contributing more. Nor does it mean antagonizing China, upon which the economy depends. 'As the rest of us figure out how to compete with China without catastrophe, Japan has been there for at least a decade and Japan has the best strategy,' says Michael Green, a former official at America's National Security Council."

On the topic of climate change, Japan is prepared for disaster, but unprepared for climate change. "As the threat from natural hazards grows, from climate change-fueled fires to zoonotic pandemics, the world must live with more risk," says The Economist. "The countries that fare best will be the resilient ones. In 'The Resilient Society,' Markus Brunnermeier, an economist from Princeton University, argues that "Resilience can serve as the guiding North Star for designing a post-covid-19 society."

The discussion on climate change importantly adds: "The biggest lesson from Japan is the value of preparation." As Karashima Yukari, who works at the Peace Boat Disaster Relief Volunteer Center, a Tokyo-based nongovernmental organization that assists people in disaster-affected communities and strengthen the capacity of local communities to response to disasters both in Japan and around the world, says, "'It's too late if you start acting after the disaster happens.' That this sounds banal in much of the world makes its absence more striking."

What is more, "Of $137bn provided in global disaster-related development assistance from 2005 to 2017, 96% was spent on emergency response and reconstruction, less than 4% on disaster preparedness. Donors prefer high-profile rescue work; the media cover disasters when they happen, not when they do not. Many governments treat prevention as a cost, not an investment. But natural hazards are not always disasters. 'The hazard becomes a disaster when the coping capacity is too weak,' says Takeya Kimio, an adviser to Japan’s overseas development agency. In 2015 he promoted the 'Build Back Better' concept in the UN Sendai Framework, a global pact on disaster-risk management."

The special report also discusses how Tokyo, the world's biggest city, is also one of the most livable. "[W]ith 37m residents in the metropolitan area and 14m in the city proper," Tokyo "offers lessons to developing cities elsewhere. In 1950, 30% of the world's population was urban; by 2050, 68% will be. Much remaining growth will be in megacities of more than 10m in Asia and Africa. There are 33 such cities now; by 2030 there will be 43. As Tokyo grapples with what to do when cities age and shrink, it can also serve as a case study for other rich cities."

Japan is learning to cope with an ageing population, notes The Economist. "Demographic change has two drivers often lumped together: rising longevity and a falling birth rate. Their convergence demands 'a new map of life' says Akiyama Hiroko, founder of the University of Tokyo's Institute of Gerontology." Furthermore, "Infrastructure created when the population was younger and the demographic pyramid sturdier must be redesigned, from health care to housing to transport. The new reality demands a 'completely different way of thinking,' says Kashiwa Kazuyori, head of Gojome's town-planning department. When he started work in the 1970s, the focus was on growth. Now it is about managing decline."

Part of managing the decline of an ageing workforce is replacing retiring workers with foreign workers. Japan, perhaps unfairly, is often criticized about its reticence of allowing foreign workers to immigrate to the island nation. An article focused on how the ranks of foreign workers are growing fact but from a low base, however, says "One in every 55 workers is foreign, up from one in every 204 in 2009."

As for the economy, The Economist explains how "Japan is the canary in this coal-mine":

In the 1980s its booming economy struck fear in the world. After the bubble burst in the 1990s, public debt ballooned and deflation set in. Many in the West said Japan's debt was unsustainable and the Bank of Japan (BOJ) should do more to boost inflation. In 2013 the BOJ's governor, Kuroda Haruhiko, embarked on dramatic monetary easing. The debt hovered around 230% of GDP. A strange thing ensued: no fiscal crisis struck, nor did inflation come near the 2% target. "The standard textbook on macroeconomics needs an additional few chapters—it doesn't capture the problems Japan faced," says Shirakawa Masaaki, Mr Kuroda's predecessor.

Japan is among many countries that has experienced a decline of worker productivity. As the article on the economy explains, "Boosting productivity could help to offset the impact of the shrinking population." Yoshikawa Hiroshi, president of Rissho University in Tokyo, "reckons that innovation is key to growth, and that ageing creates new problems that entrepreneurs can solve. Generational shifts may help. While many still prefer stable sarariman (salaryman) jobs in big firms, some of today's brightest graduates go into startups." Encouragingly, I have observed a rise of Japanese startups in the past several years that are developing innovative solutions in artificial intelligence, climate tech, data analytics and machine learning, digital healthcare, robotics, and enterprise services.

The report concludes with an assertion that Japan "would be better with younger and more dynamic leaders." The ruling LDP party has won every election "but twice since the party's founding in 1955." The article importantly explains that "Without a threat of losing power, any ruling party becomes unaccountable. Demographic change exacerbates things: some 20% of local politicians are elected without a contest. The result is a government that, in many ways, does not look or think like its people. Less than 10% of new Diet members are women; just three out of 21 cabinet ministers are. Only two are under 50. Dynastic politicians still dominate."

What is more, "Society is changing faster than established powers. Japan is in the midst of a quiet transformation, argues Hosoya Yuichi, a political scientist: 'There is a new wind, but within an old-fashioned structure.' On social issues from gay rights to family law, the LDP is out of step. Many voters feel they cannot change the system, which drives some into business or civil society, not politics."

While attending a conference about Japan's importance in the future of Asia in 2016, I was asked by a fellow attendee about my thoughts on economic engagement in Japan. In light of China's rapidly growing economy at the time, coupled with Japan's secular stagnation of low inflation, low interest rates and low growth, I replied that a business would be foolish to consider entering the Japanese market. I was wrong.

Despite tightening regulations on the private sector, increased censorship of the media and Internet, inconsistent policies on currency repatriation, and issues concerning human rights, China's market may be too big for some businesses to ignore. Japan, however, with its independent judiciary, democratic government, and open economy, presents an opportunity that businesses of all sizes should explore.

Do you agree that Japan is a harbinger, not an outlier? What business or investment opportunities are you seeing in the country?

 

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.