Japan’s Chance for Comeback


Facing the waning Pax Americana and the specter of a Pax Sinica, Japan will be at the crossroads of redefining its role in world politics, perhaps in the next decade. The status quo appears sufficiently stable, at least for a foreseeable future, under the barely sustained U.S. hegemony with which Japan is anchored through bilateral alliance.

But, China continues significant economic growth and military spending. Its challenge looms as it hardens self-righteous irredentist claims in the South and East China Seas, in tandem with the increasingly rough diplomatic, military, and paramilitary actions thereof.

The U.S. has undergone marked relative decline, so that it alone is no longer capable to maintain necessary military presence in East Asia for imposing military and economic containment on China. This is why the U.S. has recently emphasized the need to cooperate with regional allies and to have them do more for common defense.  

China will be all the more powerful around 2030, as the U.S. National Intelligence Council estimates. But, as long as Beijing’s communist dictatorship persists, a Pax Sinica is unacceptable, and an East Asian community that includes China is impossible.

Thus, unless the U.S. hegemon should revive miraculously, Japan could not but join in a balance of power system as a great power, along with China, India, Russia, and, most importantly, the U.S. that would remain as the first among equals. Yet, in the  transition, Japan will likely continue its strategic dependence on the declining yet still militarily predominant U.S. as long as possible, and first has to augment its economic power.

Since the burst of the asset bubble economy in 1992, Japan lost two decades without being able to put its economy back to a sustainable growth track. Until recently, the economy was long entrapped in a deflation spiral without adequate effective demand, due in great part to rapid greying of the affluent society.

During the lost decades, one government after another vainly employed large public works projects and welfare spending only to generate short-lived effective demand with very low multiplying effect. Consequently, the accumulated public debt now amounts to more than 200% of the gross domestic product. The Japanese state will eventually default even though it remain the largest creditor nation, given its inability to control chronic budgetary deficits that make up a half of the annual state budget,  

Fortunately, the Abe administration is making an exit out of the predicament when the rest of the developed world suffers from the severe aftereffects of the Lehman Shock, an unprecedented asset bubble burst. It was the consequence of continued abuse of U.S. hyper-finance capitalism on which the hegemony depends. The U.S. long lost industrial competitiveness, suffered from perennial current account deficits, and focused on managing financial assets that it borrowed from outside.

It is surprising to see that Japan, which was least affected by the Shock and which already completed cleaning up non-performing loans consequent on the 1992 burst, turns out to be most creditworthy, relative to the U.S. and E.U. countries. They employed a series of massive bailout and quantitative easing measures, which renders their currencies and financial markets increasingly weaker. No wonder risk-averse capital across developed countries is now heading to Japanese financial markets.

China will be all the more powerful around 2030, as the U.S. National Intelligence Council estimates. But, as long as Beijing’s communist dictatorship persists, a Pax Sinica is unacceptable, and an East Asian community that includes China is impossible

Furthermore, China’s double digit growth rate era is coming to the end. Its labor-intensive export-led growth is no longer sustainable due to sharply rising wage, while the lowered consumption of U.S. and European markets does not provide a sufficient outlet for China’s export. Also, China’s domestic consumption stagnates because of a growing wealth gap that hampers the rise of the middle-class consumers. The society is undergoing unprecedented greying as the consequence of the longtime one child policy, which will take up significant saving for welfare service and dampen consumption. Yet, the communist regime cannot continue post-Lehman massive domestic public investment to sustain effective demand, which will spur inflation, widen the already intolerable wealth gap, and destabilize the social order. All these mean China has to rely on earning through financial transaction in the bubbling Japanese economy.

Abe’s new approach, known as “Abenomics”, is designed to generate a government-initiated asset bubble, involving sharp appreciation of the state assets and holdings that are far largest across the countries. The current Bank of Japan leadership, in concordance with the Abe administration, has just taken at once extraordinarily aggressive quantitative easing measures to trigger a bubble and to induce massive capital inflows into the Japanese financial markets. Whether Japan can jump-start its economy, therefore, rests on how long it can prolong the bubbling process by keeping the risk-averse foreign capital attracted in its markets, and how quickly it can redeem as much public debt as possible.

In the evolving international financial dynamics, Japan is entering a critical moment to augment its economic power, or a prerequisite to be an independent geo-strategic player in multipolarity. Should it fail to capture this chance, Japan would decline decisively.

Masahiro Matsumura
Masahiro Matsumura
MD Advisory Board Member Professor of International Politics and National Security Faculty of Law St. Andrew's University (Momoyama Gakuin Daigaku)


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