Japan’s Coming Challenges: What Awaits Shinzo Abe

Shinzo Abe became prime minister of Japanits seventh in six years after his Liberal Democratic Party, which has governed Japan for all but four years since 1955, won parliamentary elections resoundingly, ending a three-year interlude by the Democratic Party of Japan.

Abe has his work cut out for him. Japan has big problems — at home and abroad.

Let’s start with the economy. Time was when Japan was deemed a model for rapid growth, technological innovation, rising living standards, and expanding exports. From 1980 through 1990, for example, its economic growth averaged 6.4 percent. If China’s economy is now considered most likely to surpass America’s by the middle of this century, Japan was seen as the main competitor in the 1970s and 1980s and was the target of American critics lamenting jobs lost to “unfair” trade.

So high was Japan riding that a Harvard professor published a bestseller in 1979 entitled Japan as Number One: Lessons for America.

“If only,” most Japanese would now say of this ill-timed tome.

So what happened? During the “lost decade” of the 1990s, Japan, following the popping of a real estate bubble and a stock market crash, slipped into a slump marked by rising employment and prolonged deflation, with prices falling, and falling further because consumers held back on spending expecting that they would fall even further. In contrast to the rapid pace of the prior four decades, between 1992-99 growth averaged 0.73 percent, with the economy contracting in two of those years.

Japan has yet to fully emerge from that funk. Growth picked up between 2003-2007, though modestly, averaging just below 2 percent. Then came the fallout from the 2008 global financial crisis and three years of negative growth: 2008, 2009, and 2011In the second and third quarters of this year, the economy shrank, which means that Japan is again in a recession, its fourth in five years. Meanwhile, in 2001 China overtook Japan to become the world’s second largest economy, and India may have done so in 2012.

Another dose of economic stimulus and measures by the Bank of Japan to pump money into the economy may help, but the outlook for brisk growth is poor, and the Keynesian policies will, certainly in the short term, increase Japan’s public debt, already a staggering 200 percent of GDP (if you think we have problems, consider that ours is about 100 percent). Moreover, the old strategy of export led-growth is no longer feasible given America’s anemic growth, the slowdown in China (Japan’s top trade partner), and the Eurozone mess. And with its nuclear power network out of commission since last year’s tsunami, Japan will have to import even more energy.

A second problem, closely connected to the economy, is demography. Simply put, Japan has been aging–and fast. According to its Health Ministry, in 1970 the proportion of the population 65 or older was 7 percent, but it rose to 23 percent in 2010 and will reach 39 percent in 2050. The “Total Fertility Rate” (the number of children a woman is projected to have on average) dropped from 3.65 in 1950 to 1.39 currently, placing Japan 142nd in a list of 152 countries for which TFR data is available. The mean age for marriage has risen steadily for Japanese men and women. Japan also has the world’s third highest life expectancy: 84 years. Its population, now 127 million, has been essentially stationary over the past five years and is expected to drop to 100 million by 2050.

Now these numbers reflect advances in education and health care and are typical byproducts of modernization. But, rolled together, they point to some dismaying conclusions: the proportion of working-age people in the population will decline; the tax base will shrink; and claims on public spending related to pensions and medical care will grow as the ranks of retirees expand, leaving less money available for growth-boosting investments. Because of Japan’s historic aversion to immigration, that solution to the population crunch is pretty much off the table. Sure, robotics and other labor-saving technologies will help, but demography will still be a drag on the economy, and more so than in other graying countries.

Japan also faces hard choices abroad. Since the end of World War II, it has happily subcontracted its security to the United States. The alliance with America has served it well. Japan rejected the militarism and imperialism that brought calamitous consequences in 1945 (the atomic bombardment of Hiroshima and Nagasaki, followed by surrender and occupation), has had the luxury of keeping defense spending below 1 percent of GDP, and flourished as what political scientist Richard Rosecrance has called a “trading state.”

But the strategy of outsourcing defense will become progressively less tenable for Tokyo. The United will have to take bigger risks to protect Japan as China’s military power increases. And as Americans face their own economic difficulties, they will ask why Japan can’t do more to defend itself and what the continuing logic is for an alliance that obligates the United States to defend Japan but not vice versa.

Japan could adjust by boosting defense spending to, say, 2 percent of GDP. That would increase its military prowess significantly (its defense budget, $59 billion now, is already the world’s sixth largest) without burdening its economy unduly. But that choice would stir controversy at home, where the consensus favoring military minimalism remains strong. It would also set off alarms in East Asia given the legacy of Japanese imperialism.

The anxiety would be especially acute in China and South Korea, where anti-Japanese sentiment remains powerful. Tokyo’s unwillingness to apologize for the brutalities perpetrated during their conquest and occupation by Japan (Korea from 1910-1945, Japan from 1931-45) is one major reason. Another is territorial disputes. Japan claims rightful ownership of the Takeshima island cluster in the Sea of Japan, which South Korea controls and refers to as Dokdo. China claims the Diaoyu group, located in the East China Sea, which Japan holds and calls the Senkaku islands. These are tiny places, but their effect on Japan’s relations with South Korea and China is mighty. So Beijing and Seoul will be watching closely Mr. Abe’s take on the past and on the territorial disputes, the more so as he is notorious for his hawkish views. Even his symbolic acts and choice of words will matter.

Japanese increasingly see China as the principal long-term threat. Japan could form a countervailing coalition to balance China, but it has no reliable friends in northeast Asia: aside from its problems with China and South Korea, a territorial dispute, again over a small clump of islands, bedevils relations with Russia. Japan is part of the “Quadrilateral Initiative,” along with the United States, Australia and India. But the latter two are faraway states with which Japan lacks a history of robust military cooperation. And while the foursome have held consultations and naval exercises, just what their embryonic coalition — it was formed in 2007 — will amount to remains unclear.

So Japan faces big challenges. Mr. Abe’s last stint as prime minister lasted all of one year (2006-7) and was a flop. Let’s hope he lasts longer this time — and does better.

Rajan Menon is a nonresident senior fellow at the Atlantic Council and a professor of political science at City College of New York. This piece first appeared on The Huffington Post.

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