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Japan in the 21st century

A Note by the Director (Ditchley 2003/07)
 
9-11 May 2003
Over the weekend of  9-11 May we met at Ditchley to consider the future of Japan in the 21st Century.  We were fortunate to have as our partners the Keidanren and the Keizai Koho Centre.  We were equally fortunate to have as Chairman, Judge Hisashi Owada, with a wealth of experience of Japan’s place in the world.  We looked at Japan from the points of view of its political development, its economy and its foreign and security priorities.
At the outset we took stock of the mood in Japan today.  We were told that there was a sense of post-war achievement.  There was no longer a feeling of inferiority in relation to the West nor a sense of superiority vis-à-vis Japan’s Asian neighbours.  We were also told that, to the surprise of some foreign observers, the Japanese were focussing more on their security than on their economy.  There were groups who were identified as military realists who could be described as conservative or more nationalist in their thinking and civil society groups who were more liberal in their outlook.  Human security and the value of the individual had become more important.  We also examined the general question which was to become a major theme of the conference – how would, or could, reform come to Japan.  Would it come as a result of an economic or political crisis or would it come as an accumulation of incremental steps?  We were advised that, although from the outside it might appear that nothing was happening and the traditional disinclination of the Japanese for radical change had prevailed, seen from within Japanese society it appeared that a great deal of change was in train.  One participant commented that the key question for Japan was whether it would be given enough time to make the necessary changes to its political and economic systems before a crisis occured.  Another observed that political and economic reform were interdependent and that, notwithstanding years of difficulty, Japan had shown remarkable stability.
In a closer look at the domestic political situation we noted that although the LDP was losing support there was, in effect, no opposition which could mount a credible challenge.  Politics appeared to be dominated by personalities rather than ideas.  The 1994 change to the electoral system had reduced competition among various factions in the LDP.  The demise of the JSP had also removed a powerful influence on the LDP to redistribute resources to the regions.  That consensus had now disappeared, and with it, the strength of the connection between the voters and the political class which was contributing substantially to voter disaffection.
We tried to analyse where Prime Minister Koizimi’s reform programme was going.  Some thought that resistance from a variety of stakeholders coupled with the bureaucracy who were thought to be intellectually more able than the politicians, meant that reform had been sidetracked by events and political expediency.  The comment was made that the biggest opposition to Koizimi’s reforms lay in the LDP.  Power was the main concern of the LDP.  Under the influence of the media, particularly television, the tendency was towards celebrity politicians and chat-show politics.  Others thought, however, there had been quiet progress.  The Prime Minister’s Office had been strengthened and, in places, local government had made advances in delivery of some services – but at the cost of increasing their indebtedness, commented another participant.  In general there was a widespread belief that preserving social harmony was more important than tackling problems forcefully. There appeared to be no appetite in the public for reform – a fools paradise perhaps?
We noted an increase in activity in Civil Society.  NGOs were on the rise but often with a local focus.  Anti-authority movements or protest, unlike the 1970s, was less evident.  Women were beginning to express their dissatisfaction with the present social arrangements more forcefully.  Immigration was considered as a practical answer to a declining birthrate but there was still deep resistance to large-scale immigration, partly on grounds of national identity and partly for fear of social disruption.  Immigration was currently associated with criminal behaviour.  In spite of all these contrary signals it was pointed out that Japan’s post-Meiji history was full of examples of a society willing to absorb new strands of thinking and to go through periods of great change.  Currently, the most effective advocates of change could more often be found among senior people in business or academe than among the young and frustrated.
We had a particularly vigorous discussion about Japan’s economy, the reasons for its present difficulties and its future prospects.  Economic theory was tested against “political” obstacles and against possible market reactions to any sudden change.  We also looked at the cost of doing nothing.  Overall we were convinced that the correct definition of the situation in Japan was that it was a demand (demographics, strong prospensity to save etc) and not a supply problem.  Possible remedies, however, all brought with them serious difficulties.  Printing money leading eventually to a fall in value of the yen would also cause rising current account surpluses which had previously given rise to so much difficulty with Japan’s major trading partners, including the USA.  Further easing of fiscal controls would increase debt levels which already stood at 140% of GDP.  At some point the bond market would break under that strain.  Other solutions, such as inflating the value of stocks or real estate to cope with the Non Performing Loans (NPLs) were though to be unlikely to succeed.  And, as one participant pointed out, NPLs  were mainly the result of Non Performing Companies.  Japan needed a period of structural reform to enable its small and medium sized companies, which were largely protected from global competition, to achieve the same level of competitiveness as the best of Japan’s major businesses which were world-beaters.  We looked at the political context within which economic reform might come about and thought overall that the political system was a “barrier” and not a catalyst for change.  The Ministry of Finance was powerful but characterised by bitter infighting.  Some participants thought, however, that the picture had been painted in more sombre colours than was really necessary.  Japan was still investing some 3½% of GDP in research and development.  Japanese businesses were taking increasing advantage of China’s vast market and supplies of labour, Japan’s large debt was not owed to external creditors, it was all internal, incremental changes in the economy were underway etc.
Against that background we looked at possible policy scenarios.  Boosting money supply would need extremely careful and skilful management both within Japan and internationally.  Muddling through, was, we thought the most likely course but, given the rising debt level, would not prove a lasting solution and unless corrected would eventually lead to uncontrolled devaluation and inflation.  But, given the large pool of domestic savings, muddling through might persist for quite some time.  We examined a variety of alternative policies but found it easier to see the problems associated with each of them than the likelihood of their success.  Notwithstanding the short term gloom, when we looked at Japan’s prospects in a 10-15 year timeframe, there was a surprising degree of optimism.  A declining population would mean that Japan would have to make constant increases in its productivity.  This, coupled with the innate strengths of Japan’s human capital, social cohesion and corporate capabilities could lead to an economic renaissance. 
When we looked at Japan’s foreign and security challenges, some of us were inclined to see a major difference between the attitude of the world towards Japan 15 or 20 years ago and now.  Before, there had been deep interest in Japan, its achievements and policies.  Now the attitude was, unfortunately, sometimes one of indifference.  China and India attracted more attention.  We looked in some detail, at Japan’s relationship with China.  We noted that the rise of China, both economically and militarily – nuclear power, permanent member of the UNSC – posed a real challenge to Japan.  There appeared to be no consensus in Japan as to whether China was more of a threat (inter alia, a possible source of instability) or an opportunity (given Japan’s massive investments in China).  We thought it essential that Japan should devise a coherent policy towards China which would also take account of the significance of Taiwan.  We posed the question of who would maintain order and stability in an area of the world which contained a number of countries with divergent interests.  This led us on to the centrality for Japan of its relations with the USA.  USA assertion of its pre-eminence in the world post-9/11 had evoked  strong support from Japan, seen most explicitly in the UN debate on Iraq where Japan had been openly critical of France and Germany’s opposition to the US.
North Korea was seen as another strategic challenge for Japan where again the USA was considered to be the key player.  Japan’s preference was, we thought, for a multilateral solution but it accepted that the Americans would have to take the lead given North Korea’s insistence on the USA as its preferred interlocutor.  The hope was that the USA would be able to forge a common position with China, South Korea and others, including Russia, to put pressure on North Korea to do a deal.  But commented one participant, it was not certain how far China would be prepared to cooperate.  Japanese participants pointed out that North Korea was not just a regional, but also a world, problem.  The Europeans present were inclined to agree and used it as an illustration of one of a number of issues in Asia which were of security concern to them whereas in current circumstances, they could imagine few issues of security concern for Japan in Europe. 
The EU was, however, seen as an important partner for Japan which had been disappointed by rifts within the EU over Iraq.  Japan would prefer to see a united EU play a part as another pole of influence in the world in addition to USA.  Some participants thought that the EU and Japan could cooperate on a range of issues from the Middle East to world trade, to exert a moderating influence for multilateralism on the USA.  Together Japan and the EU accounted for 40% of world GDP and 28% of the world’s aid flows.  They were in a position to exert considerable influence.  One participant thought that an attempt to include Japan in the Quartet of powers putting forward the Road Map for Peace in the Arab/Israel dispute, would be a signal that Japan would be welcome to contribute more on the world stage.  We looked at Japan’s policy of investing in human security and the recent reform of its overseas aid policy to support this, and concluded that Japanese and EU aims in this area had grown perceptibly closer.  Given Japan’s enormous contribution to the UN, most of us agreed that Japan was entitled to a permanent seat on the UN Security Council.  We were told, however, that there was little public enthusiasm for this in Japan. 
Looking back at the ground we had covered, we considered that times of rapid change in Japan had normally come from an external intervention – “the black ships”.  Globalisation which tended to bypass national boundaries, was seen as such a challenge.  Japan had been relatively resistant to the forces of globalisation which had resulted in a sheltered, uncompetitive domestic economy which, although good in the short term for employment, carried significant longer term dangers.  Equally, the US had shielded Japan from external risks.  But these now went beyond the traditional threats from states and included international terrorism, ecological dangers, illegal immigration and infectious diseases.  This required a strengthening of Japan’s intellectual and analytical capacity to formulate policies to deal with these new challenges on a global basis. 
In a final comment it was claimed that the Japanese had succeeded in creating a harmonious social system but, in a sense, it was a closed circuit system separate from the outside world.  This closed-circuit mentality made the pursuit of policy in the modern world more difficult.  For Japan it was important that its partners should exert consistent but gentle pressure for Japan to link up more with the rest of the world.  The UK, and the EU generally, would be important partners in this endeavour. 
I am grateful to those who participated in our discussions for the honesty and openness of the debate.  Our thanks go to the Keidanren and the Keizai Koho Centre for their support for the conference and for the influential Japanese participants who travelled a long way to be with us.  And my thanks go to Judge Owada for chairing our discussions. 
This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression
PARTICIPANTS
Chairman :  HE Judge Hisashi Owada
Judge, International Court of Justice (2003-);  formerly:  President, The Japan Institute of International Affairs (1999-2003);  Permanent Representative to United Nations;  a Governor of the Ditchley Foundation
CANADA
Mr Eric Nordin

Vice President, Bain & Company (2001-);  formerly:  Bain & Company, San Francisco (1993-97);  Tokyo
Mr Paul Summerville
Regional Head Asia-Pacific, T D Securities, Managing Director, T D Securities (2000-);  Director and Chief Economist, RBC Dominion Securities, Toronto (1996-2000)
Mr James H Taylor OC
Chancellor Emeritus and Member of the Advisory Board, Bertrand Russell Research Centre;  Department of External Affairs (1985-89)
FEDERAL REPUBLIC OF GERMANY
Dr Volker Stanzel

Ministerialdirigent – Foreign Ministry, Federal Republic of Germany
Ms Angelika Viets
Secretary General of the Japanese-German Center Berlin (2002-);  Ministry of Foreign Affairs, Federal Republic of Germany (1985-2002)
FRANCE
Mr Nicolas Thiriet

Japan Korea Desk Officer, Ministry of Foreign Affairs
JAPAN
Mr Tetsuron Kikuchi

Chief Editorial Writer, The Mainichi Newspapers
Mr Seiji Kojima
Minister-Plenipotentiary, Japanese Embassy, London
Mr Akira Kojima
Senior Managing Director and Editorial Page Editor, Nihon Keizai Shimbun (NIKKEI) (1994-);  Member, Trilateral Commission
Mr Yoshiji Nogami
Senior Visiting Fellow, Middle East Programme, The Royal Institute of International Affairs;  former, Vice-Minister for Foreign Affairs
Mr Takashi Oka
Journalist
HE Masaki Orita
Japanese Ambassador to the UK
Mr Keizo Takemi
House of Councillors:  Executive Member:  Committee on Health, Welfare and Labor, and Research Commission on the Constitution (2002-);  Member, Committee on Budget (2002-);  formerly:  State Secretary for Foreign Affairs
Mr Masami Tashiro
Managing Director, Keidanren;  Special Adviser to Ambassador, Japanese Embassy, Washington DC (1987-89);  Deputy Director, Corporate Philanthropy Department, Keidanren (1991-2003)
NETHERLANDS
Mr Ian Buruma

Author
UNITED KINGDOM
Sir John Boyd KCMG

Master, Churchill College, Cambridge (1996-);  Trustee:  RAND (Europe) UK Ltd (2001-);  HM Diplomatic Service, retired;  Ambassador to Japan (1992-96)
Professor Marie Conte-Helm
Director, The Daiwa Anglo-Japanese Foundation
Professor Ron Dore
Senior Research Fellow, London School of Economics and Political Science
Mr Andrew Fraser CMG
Senior Adviser, the Mitsubishi Corporation
Sir Stephen Gomersall KCMG
British Ambassador to Japan (1999-)
The Rt Hon Lord Howell of Guildford
House of Lords Opposition Spokesman on Foreign and Commonwealth Affairs;  Chairman, UK-Japan 21st Century Group (1984-);  Columnist, The Japan Times
Dr Christopher W Hughes
Senior Research Fellow and Deputy Director, Centre for the Study of Globalisation and Regionalisation, University of Warwick
Mr Anatole Kaletsky
Economics Editor and Associate Editor, The Times
Mr Anthony Loehnis CMG
Director: J Rothschild Assurance Holdings plc (1993-);  St James’s Place Capital plc (1993-);  Bank of England:  Executive Director (1981-89);  Director, UK-Japan 2000 Group (1990-);  a Governor and member, Council of Management, The Ditchley Foundation (1992-) (Chairman, F&GP Committee 1993-)
Mr Nicolas Maclean CMG
Chief Executive, MWM Consultancy (1999-);  Senior Fellow for International Affairs, The International Institute for Strategic Studies (2000-)
Dr Rosalind Marsden
HM Diplomatic Service;  Director, Asia-Pacific, Foreign and Commonwealth Office
Mr Simon Smith
Head of North East Asia and Pacific Department, Foreign and Commonwealth Office
Mr Andrew Smithers
Chairman, Smithers and Co
Professor Arthur Stockwin
Director, Nissan Institute of Japanese Studies
Mr Steve Tsang
Director of Asian Studies, St Anthony’s College, Oxford
Mr Adam Ward
Senior Fellow for East Asian Security, The International Institute for Strategic Studies;  Editor, Strategic Comments
Sir David Wright GCMG LVO
Vice Chairman, Barclays Capital;  Non-Executive Director, Balfour Beatty Group;  Chairman, Daiwa Anglo-Japanese Foundation;  Board member UK-Japan 21st Century Group;  HM Diplomatic Service retired:  Ambassador to Japan 1996-99;
UNITED STATES OF AMERICA
Professor Kent E Calder

Associate Professor of Politics and International Affairs;  Director of the Programme for US/Japan Relations, Princeton University
Professor Carol Gluck
George Sanson Professor of History, Columbia University;  member of the Board of Directors of the Japan Society, the Board of Trustees of the Asia Society
Dr Edward J Lincoln
Senior Fellow, Council on Foreign Relations;  formerly:  The Brookings Institution