Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
The compound disasters that began with the magnitude 9.0 earthquake on March 11 have left Japan deeply traumatized. Rescuers, hindered by shattered roads, snapped rail lines, and downed telephone networks still struggle to reach survivors. Half a million people have lost their homes. The Bank of Japan has injected hundreds of billions of dollars of liquidity into the financial system, but sharp falls in the stock market and a steady rise in the value of the yen continue. The damaged Fukushima Daiichi nuclear plant, now offline, supplied Japan with some six percent of its electricity needs before the quake; now even Tokyo, far away from the hardest-hit areas, is suffering periodic power cuts. Global supply chains that depend on Japanese products are already feeling the pinch.
In a sign of the seriousness of the emergency, Emperor Akihito spoke directly to the country in an unprecedented televised address on Wednesday. He implored the Japanese people to "hand in hand, treat each other with compassion and overcome these difficult times."
Thankfully, there is reason to hope that his plea might bear fruit. Indeed, throughout the past, the Japanese have demonstrated an astonishing national capacity to rebound from traumatic events. A particularly destructive earthquake took place in 1855, right when Japan began opening up to the world on its way to becoming the first Asian power to pursue a comprehensive program of modernization. Perhaps the most brutal watershed of all came in 1945, when Japan responded to a crushing military defeat, all-encompassing devastation, and the loss of empire by setting out to build a new economic superpower that would become the envy of the world. Indeed, the events of 1945 turned out to be a blessing in disguise: many of the more backward aspects of Japan's old feudal system were swept away in the deluge, leaving a society better equipped to cope with the technological and social challenges of the twentieth century.
It would be wrong, of course, to downplay the national emergency caused by the most recent earthquake and the multiple tsunamis that followed. As of this writing, the country nervously awaits the outcome of the struggle by repair crews to bring the damaged Fukushima Daiichi nuclear plant under control. Whether they succeed has enormous implications for Japan's recovery. Meanwhile, the lack of functioning communications networks in the areas that were hardest hit still obscures the full dimensions of the damage. On Friday, the official death toll stood at 7,000, with another 10,000 unaccounted for; the ultimate count is likely to be much higher.
Yet even the most horrifying crises offer opportunities. However premature speculation about recovery might seem, Japan has plenty of resources -- both material and intellectual -- to fall back on. Estimates of the cost of rebuilding the areas destroyed by the combined natural catastrophes now range from $100 billion to $200 billion. This is a hefty price tag, but measured against an estimated GDP in 2010 of $5.39 trillion, it appears quite manageable. What is more, the northeastern region that was damaged the most is hundreds of miles north of Japan's industrial heartland, which extends from Tokyo to Osaka along the eastern coast of Honshu Island.
In recent years, Japan's economic stature has been overshadowed by China's rise. Yet the country's recent record is impressive: it still boasts the third-largest economy in the world (and very close to the second, a title it only just recently ceded to China), and over the past few years it has run trade surpluses with the United States and other countries that dwarf those of the 1980s, Tokyo's supposed boom years. Japan boasts vast industrial know-how, a well-educated technological elite, and excellent public services and infrastructure. It is not Haiti.
But surely, as The Wall Street Journal recently asserted, the dire state of Japan's public finances will not allow generous spending on reconstruction. After all, as one recent study by the Organization for Economic Cooperation and Development estimated, Japan's total government liabilities add up to a dizzying 204 percent of GDP. This figure, however, needs qualifying: most of that debt is actually held by the Japanese themselves (in many cases by Japanese government institutions that have borrowed from other ones), and unlike foreign lenders, they are unlikely to demand harsh refinancing terms. The central government still has enormous holdings of various financial assets (such as U.S. Treasury bonds) that balance out many of those liabilities. This is not to minimize the vast dimensions of Japan's indebtedness but simply to point out that, when measured against the total debt, the costs of reconstruction are unlikely to weigh as heavily as one might expect.
Some analysts of Japan's postwar economic policies fret that Japan's policymakers might use the reconstruction effort as an excuse to pour public funds into the sort of big-ticket, pork-barrel projects that characterized the postwar political system. Under the Liberal Democratic Party (LDP) -- the party whose cadres ruled Japan almost continuously from the party's formation in 1955 to its defeat in a general election two years ago -- politicians, bureaucrats, and corporate leaders developed a powerful web of patronage and interconnected interests, which ended up funneling taxpayer money into public works projects of dubious justification.
But such a fear is misplaced today. Japan's political culture began to change ten years ago, when Junichiro Koizumi, then LDP's leader, won a remarkable election victory by vowing to dismantle his party's entrenched establishment and the vested interests that propped it up. (On the eve of the election, Koizumi famously declared that he would "destroy the LDP.") He pushed through a vital restructuring and privatization of Japan Post, which is not only Japan's postal service but the world's biggest savings bank by assets and the source of much of the funding for public works.
Among its other effects, Koizumi's reforms expanded the political and cultural space for a genuine two-party system -- an opening that was seized by the Democratic Party of Japan, which had gradually evolved into a credible force since its formation in 1998. The DPJ is now led by Prime Minister Naoto Kan, who since the start of the current crisis, has failed to give an entirely convincing performance. He has oscillated between forceful displays of leadership and indecisiveness. For example, Kan formed a commission to look into the handling of the nuclear mess but granted a leading position to the plant's operator, Tokyo Electric Power Company (TEPCO), which has been widely criticized for its poor handling of the disaster.
But there is still reason to hope that the DPJ can use the crisis to cement its position as the alternative to the defenders of the stagnant status quo ante embodied by the LDP. As horrible as it is, the devastation of the earthquake presents Japan and its political class with the chance to push through the many reforms that the DPJ has long promised and the country so desperately needs. The public anger directed at TEPCO provides momentum for improving the accountability of Japan's murky public institutions. Meanwhile, a restrictive tax code has long stifled the formation of nongovernmental organizations. Yet it has been Japan's NGOs, such as the Japanese Red Cross, that have responded to this latest crisis with the most élan -- which could, in turn, provide a good argument for implementing needed reforms.
Seizing upon such opportunities for change will go a long way to restoring the country's vital spirits. Japan does not just need a functioning two-party system that ensures genuine political competition; it also needs a more vibrant civil society that allows its citizens to have a more active voice in their own lives. There is already some anecdotal evidence that the survivors of the catastrophe have been admirably quick to organize themselves rather than passively awaiting the help of rescuers. That spirit of self-reliance, which the Japanese have so often demonstrated in the past, is precisely what the country could use a bit more of in the years to come, as Japan struggles to come to terms with the main challenges to its economic dynamism and sense of national self-confidence: the rise of China and the steady aging of its population.
Above all, it would be inspiring to see a new spirit of genuine public service -- in contrast to the cynical political careerism that postwar Japan knows so well -- rise from the rubble of Sendai and its neighbors. Going forward, Kan should declare the shattered coastal regions of the northeast a new enterprise zone, a place where businesspeople with bright ideas can start new companies without the stifling culture of red tape and seniority that conspire to suppress innovativeness and business creation.
For precedent, Japan should look to the urban enterprise zones in the London Docklands or to various parts of the United States where tax breaks and regulatory relief (especially loosened conditions for hiring) have boosted development in areas suffering from urban blight. Or policymakers in Tokyo could look even closer to home, to the special economic zones that have contributed enormously to the economic rise of neighbors such as China, South Korea, and Taiwan. No one in Japan has yet to propose such a plan -- but that is precisely the point. Unconventional thinking will be necessary in order to revitalize communities that have already seen the traditional components of the local economy -- such as fishing and rice farming -- fall into steep decline before the quake. Under the present circumstances that will probably sound utopian -- yet what better time to recall how Japan has pulled off similar miracles in the past.