Sorry to begin in such a melancholic vein, but looking at recent economic commentary, I feel that, in the middle of this prolonged deadlock, an ephemeral wish which has taken leave of reality, or should I say a, “wishful thinking syndrome,” is going around at the moment.
The theory of expectantly waiting for a cheaper yen is also an example of this disease, where one only sees the parts one wants to see – a lower yen value means rising import prices with higher profits in the export industry, hopefully leading to an end to deflation; one can forget the adverse effects that one doesn’t want to see – a lower yen value meaning recognition of an economically decaying market, leading to washing away of capital (capital flight) and price slump of yen-based assets (shares and government bonds).Four and a half years ago in 1998, the yen fell as far as 147 to the dollar. The same hedge fund operators who drove the yen’s fall also devised short-selling for shares (so-called “yen carry trade”), causing stock prices to collapse at the same time, and the Long-Term Credit Bank of Japan went bankrupt (figure 1). If a market really believes a weak yen, then both domestic and foreign investors will run to dispose of yen-based assets in order to avoid a loss. Therefore, should the value of Japanese government bonds (JGBs) drastically depreciate today, for example, what will happen to the managements of Japanese “mega banks” that currently face serious trouble in their capital base?
There is also the thinking that it would be good if China, the “original exporter of deflation,” were to raise the value of the RMB. However, China is also afflicted by deflation, and besides, because of the the lack of competitiveness of their raw material industries and agricultural industries, if import prices were to fall that would be of great harm. If one turned to China and said, “Raise the RMB, because we are suffering your deflation exporting!” China would probably think it was being told to, “play with a losing hand,” and would not retreat more than was necessary.
In all seriousness, if one wanted to make China raise the RMB, what one should do is consider the logic behind persuading a change in the firmly-rooted Chinese obsession that “strong yuan = bad for China, weak yen = bad for China.” Or Japan should think of ways to demonstrate to China the merits that can be derived from a stronger national currency (for instance, recommending that China issue “samurai bonds” in anticipation of the RMB’s revaluation). Turning the full brunt of dissatisfaction towards China is not the answer.
This introduction has already gone on too long, but wishful thinking, as described above, is conspicuous in talk going on around China, and this is precisely because China is not properly understood. One could say that the, “theory on China as economic threat,” which boiled-up all of a sudden in 2001, was an example. People feel uneasy about China’s growth in which they see the “rise of a rival”; but the “threat theory” is nothing but whining and blaming others for one’s own problems.
Having accreted many failures in the past, the reason that China’s economy has in one area gained strength is the cumulative effect of unceasing endeavor, or to put it simply, not just because labor costs are cheap and the exchange rate is low. If a threat is sensed in a rival’s growth, rather than criticizing the other side, perhaps one should rouse oneself by turning the full force of the sense of impending crisis to oneself. That is to say, Japan’s fate is decided by the decisions that Japan makes or doesn’t make.
Before one’s very eyes, the key points of this decision are piling up. For example, in East Asia, which for some time now has come to be called an, “FTA (free trade agreement) vacuum,” cross-border economic ties are strengthening and FTA negotiations have begun. In order to maintain its presence in East Asia, Japan must by all means get to grips with FTAs. Neglect of this will result in a, “mishandling of grand plans for the long-term future of the nation,” to the very letter.
Also, it must not be forgotten that virtual economic integration rapidly advances regardless of an FTA framework. This is because, based on technical innovation and consolidation of infrastructure, the required time and cost of the flow of people, goods, services, money, information, and technology has been dramatically reduced. However, the only thing one hears about is the negative sides – the closing of factories in Japan, the transfer of operations to China, and so forth. If there are positive factors to the conclusion of an FTA, there must also be merits in de facto economic integration, but compared to the negative effects, these merits are hard to see and hard to grasp. Yet, the revelation of demerits which emerge from de facto economic integration proceed according to the rationale of economics, whether one likes it or not. When this is the case, so that the “account balance” under integration does not go into the red, there is no choice but to desperately grasp at the merits. Starting with China, Japan must from now on deepen economic relations with Asia, and draw upon whatever possible positive effects of integration; or to speak plainly, Japan must aim for a “win/win” economic relationship.
The blame for the loss of economic strength for the most part lies with Japan.Moreover, because this is what everyone felt, extensive discussions were made in the past 10 years on deregulation and other measures to change Japan’s high cost structure. But now, all of a sudden, an enormous chorus has begun to swell, blaming China for economic decay in Japan.
For example, the cost of the distribution of goods is a problem (figure 2). The expensive toll on freeways is one of the main culprits of Japan’s high-cost structure. The ongoing debates on the reform of public highway corporations heralded a good opportunity for change, but why on earth was the question of road tolls not discussed? No matter how much we worry about the problem of economic emasculation, if the question of road tolls is neglected, then the criminals driving on the hollowing-out of the economy are no one but ourselves.
Not only are the roads a problem. At the moment, the competitive half of Japan’s economy is being washed away by the waves of price adjustment within East Asia. On the one hand it’s difficult for the entrepreneur, but on the other, enormous profits are being returned to the consumer. However, government-run enterprises, which constitute the other half of Japan’s economy, are making little progress. As a result, the Japanese economy as a whole is beginning to look like some “grotesque” dual construction. If comprehensive restructuring of the government-run enterprise sector does not continue and the government’s fiscal structure is not fixed, even the most competitive sectors will be suffocated and Japan’s economy will not be able to survive this age of regional integration.
The government’s coffer is in a critical state, financial assets continue to waste away, and Japan faces the pressing need to make decisions on FTAs. Judging from all these factors on many different angles, Japan is probably left with only two to three years to take action before its chance for rebirth is gone. If we fail to turn the rudder of the good ship Japan in time, then all that lies in the wake is decay and ruin. It is important that our generation become more self-conscious about our responsibility as to, “what sort of Japan will be passed on to future generations.”
I took the opportunity of my transfer to RIETI last summer to collect together the aforementioned thoughts into a book titled Chugoku Taito (The Rise of China, published by Nihon Keizai Shimbun Inc.).
The beginning of the book shows why the “China threat” theory is wrong and how a great deal of “common knowledge” on the Chinese economy and business with China contradicts the real facts. For instance, it points to the fact that Northeast Asia’s trade is generally balanced (figure 3), although some people say, “Japan’s trade surplus (with the rest of the world) is rapidly decreasing because of (increasing deficits with) China.” The book also points out weaknesses in and serious concerns for China’s economy; the intention was to appeal for looking at China from a fuller perspective. As part of this, I sketched a rough profile of China’s “private enterprises” which had rapidly come to attain real power in some areas.
Continuing, the book examines in what way Japan can make use of its strengths and what merits it should pursue in East Asia where de facto integration is progressing. In activating the economy, if we only, “wrestle more,” with conventional measures against the hollowing out of industries, we will accomplish nothing. There are a number of key measures that have been actively promoted by any other countries but not by Japan. To name a few, Japan can try to promote investments from other Asian countries, invite foreign tourists, lure capable and skilled laborers, and facilitate the reflux of capital (including returns on investments) from abroad into Japan. Meanwhile, a great many primary factors on the domestic side – the immigration policy which puts strict control even over the entry of personnel valuable to Japan, the corporation tax that is too high, and so on – prevent the attainment of these merits. I gaze at East Asia’s, especially China’s present condition, with new eyes, and using concrete examples as much as possible, argue that in the many available fields an effort to absorb the positive effects is necessary.
Going beyond my capacity, I devoted the latter half of the book for the discussion of political diplomacy. The rise of China did not only bring about the threat theory on the economic front. It was only about a dozen years ago that if a new power raised its head in the region there would have been a collision with the established order, and often war would have ensued. Even if one says this is not an imperialistic age, it is not such an easy task for East Asia, and the Asia-Pacific region in general, to peacefully remake the established order, “starting from scratch,” in response to China’s new status. From the point of view of politics and security, how should we react to and deal with the rise of China?
To begin with, Japan’s readiness is crucial. China will probably neither collapse, nor are there ways to stop their rise. There are too many unstable ingredients, but the fact that China does have a built-in stabilizer within itself is being overlooked. That is the painful memories held by the Chinese people themselves of how much misery and hardships they were forced to undergo in past divisions and disorder.
When it becomes obvious that China’s rise cannot be held back, the Japanese people should first change from the current recognized practice of looking linearly at international relations (that is, with regard to superiority and inferiority), and look at them laterally; that is, “seeing how countries of a similar standing can influence one another.” If not, then those who are now feeling discomfort at the pressure that China is putting on will sooner or later come round and begin to curry favor with China.
With its viewpoints renewed, Japan then needs to aim to stand together with China in a, “competitive and co-operative relationship.” Since the bubble burst, we have got weary of looking for a break to rouse ourselves, but we should desire and greet the appearance on the scene of our good rivals, China. We must seek a “win/win” Sino-Japanese cooperative relationship, competing positively and standing with a long-term outlook.
In coping well with the shock of China’s rise, it is indispensable to construct a framework for stratified dialogue and cooperation that encompasses not only bilateral relations but also multilateral relations such as those under the framework of the World Trade Organization or within East Asia, inter-regional relations within the Asia-Pacific region (Japan-China-US relations), and so on. In this regard, that China itself has begun to lay importance on regional integration is a good sign. In regional integration, not just commercial profits are important, but also the breeding of necessary mutual trust for “teaming up” in the areas of democracy, human rights, and security. Moreover, it is important to exert pressure on the US to participate positively in East Asian growth and integration. Since Japan and China are inseparable from America, we should work to ensure that the US does not fall into the trap of suspecting a “Japan-China axis.”
The final part of my book discusses the future of “Japan-China” relations. Leaving the current mutual distrust and mutual hatred between Japan and China as it is at the moment, no matter how loudly we exalt the bright future of a “win/win” economic relationship, the chorus will resound hollowly.
These ten years, Japan’s comments towards China have clearly come to place the country at a distance. In addition to fatigue for the deep-rooted anti-Japanese sentiment, I believe that this is the fault of the spreading of a disappointment and the pessimism that, “no matter how much effort is put into Sino-Japanese amity, it will all be in vain in the end.” However, shocked by the antipathy towards them that has quickly spread throughout Japan, China has recently begun to avoid inciting Japan and turned the emphasis of its regional diplomacy towards us, greatly amending previously unbalanced political measures with respect to Japan. Japan’s manner of objecting was not smart, but it did for the time being get good results.
The problem lies after that. If the mood on the other side experiences such a change, dealing with that in itself is a task for adults. But since 1998, Japan’s comments regarding China have continually lacked equilibrium, and even abuse of China has recently become an ingrained habit of the media. Nonetheless, taking the long view we really should take more care of relationships with our neighbors, who we are mutually and interminably bound to by geography. Should today’s generation of Japan, having already committed a huge blunder with the economy, hand over the country to the future generation and tell them to, “stay enemies with China forever,” it would be too cruel for those destined to inherit such, “troubles both at home and abroad.” If we continue to seek an outlet for this resentment in disregard of its consequence, in the end Japan’s own national interests will be harmed.
The reason why this uneasiness is felt much more is that in China now a change is taking place, which is thought will have a great influence on Sino-Japanese relations from hereon. Over the past 150 years China has painful memories of being invaded in the midst of chaotic divisions, and experiencing hardships that are beyond description.The spiritual scars have up until now, in the form of great historical and anti-Japanese taboos, covered Chinese society.
Especially as old Japan was seen to shine. Many Chinese have been tormented by inferiority complexes and unreasonable bitterness, feeling that, “while the invader grew so much, so did the invaded equally trail miserably behind.”
But then, as China later experienced amazing economic growth and the admiration of the world, it was the Japanese whose flame burnt out and became dumbfounded in “the lost decade.” As their mental scars have begun healing, the Chinese are coming to be able to look at the Japanese more objectively than before. Historical and anti-Japanese taboos are still ingrained, but there has recently been an increase in intelligent people who, accepting the domestic shower of jeers, are appealing for the improvement of political measures towards and relations with Japan. So, the “lost decade” was not all bad; because it also marks the “predawn” of Sino-Japanese relations.
Looking from the other side, however, what the “lost decade” means is that this time it is the Japanese who have been spiritually damaged. The Japanese are becoming sensitive to racial pride, and there are growing feelings of finding it hard to accept the official version of history as laid down by the victorious nation. In pre-War Japan, there was a just cause and a case for the nation’s actions – objection to Caucasian supremacy, liberation of Asian colonies, and so on. However, when one insists that, “there was fair reason and a just cause,” one must also recognize at the same time many errors of judgment and gross egotism. In taking such a stance, one has no choice but to admit the undeniable fact that pre-War Japan sinned against China and various other Asian countries.
While it is important to preserve national pride, to choose “honey words” over the bitter pill of truth will not in the end serve Japan’s cause. Therefore, it is crucial that Japan is accommodating to injured Asia and prepares an environment for walking the path of cooperative prosperity.
As regards this question, I think our generation has an obligation to rise above the changes in mentality of both Japanese and Chinese people, and reach for a new Sino-Japanese understanding formed by a partnership of frank reflection and expression of one’s true feelings.
The attainment of such an understanding concerns not only the future interests of Japan and China. Many other Asian countries are anxiously waiting for the two great powers – which have a significant influence on the future of the region – to reconcile, shaking off this relationship of mutual distrust and hatred. The 21st century Asian theme is about heading for cooperative prosperity and mutual trust through endeavors in regional integration, and it is Japan and China that hold the key to this.
What is needed for the tasks ahead are Japan’s inspiration, courage, and mental fortitude. Let the refrain of “To hell with it!” inspire our souls once more, and let us have the courage for “change.” Let us see the advancing China as a worthy rival, and let flower again a Japan which has amassed fresh Sino-Japanese amity.I began writing about China, but my final words are for Japan – “Come on Japan!”
Dear Readers, should you find any errors in what I say, I beg you point them out to me.
Research and Review)
