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President Clinton's two visits to Japan in 1993 and 1996 bracket a period of crisis that has transformed all dimensions of Japan's national life: governance, the economy, society, international relations and security. The establishment that ruled the country for decades has been profoundly shaken; the regulatory system credited with Japan's soaring economic successes has turned into an albatross; and Japan's sense of security has been shattered by external and internal threats. Emerging from this critical period is a more sober country, with a less-than-miraculous economy, trying to live in greater harmony with its neighbors.
When the President met former Prime Minister Kiichi Miyazawa three years ago, his chief goal was to redress the trade imbalance. Little attention was paid to security or political affairs. By 1996, the Administration's priorities were reversed: the themes of the visit became strengthening security ties and repairing a relationship strained by trade tensions.
In 1993, the Japanese economy was already in recession, but Americans still saw the country as a formidable economic rival. Decades of rapid growth had made Japan the world's largest creditor and its leading manufacturer of semiconductors and automobiles. Continuing advances in technology and seemingly superior management techniques led to predictions that Japan would surpass the United States as the world's largest economy early in the next decade.
Miyazawa was the last representative of Japan's old political system, under which the Liberal Democratic Party, conservative and pro-business, had been in power for four decades. Opposition parties, with no hope of winning, seemed merely to provide the electorate channels for letting off steam. Factionalism within the LDP assured a succession of different faces in top jobs, but the policies of government changed little. Japanese followed the ins and outs of political intrigue in great detail but scratched their heads if asked why they mattered.
At the heart of the Japanese system of governance was an "iron triangle" of high-level bureaucrats, LDP leaders and top business representatives. Their close communication and cooperation allowed the system to work smoothly in support of Japanese producer interests, albeit at considerable cost to consumers, whose real standards of living remained quite low. The business community provided the LDP with political funds primarily through Keidanren, the Federation of Economic Organizations. Bureaucratic leaders, a superelite culled mainly from top graduates of Tokyo University, were held in great esteem and wielded vast power over a relatively docile public.
Public opinion polling, a near-obsession in Japan, showed that most people were content with their lives. They felt that their country was orderly, well-run and safe. They looked abroad through their media and saw endless evidence of social decay 2Dviolence, drugs and ethnic tensions 2Dto which they felt their society was immune. They showed a strong sense of national pride, bordering at times on arrogance, and many believed that their country was truly becoming "Number One."
Fast forward now to 1996. The economy, mired in deep recession for nearly five years, is just beginning to crawl back. The LDP's monopoly of power is ended. It now governs in coalition with its former ideological rivals, the Democratic Socialists, and a small splinter party ("Sakigake"). The coalition is under challenge from a strong opposition group led by Ichiro Ozawa's New Frontier Party. Keidanren no longer dispenses political money; and with the business community dividing its support between the LDP and the opposition, the "iron triangle" metaphor no longer applies. At the same time, Japan's bureaucracy has been gravely weakened by scandal and its failures to solve major problems.
In addition to political change, the Japanese have faced domestic terrorism in the form of poison gas attacks in the Tokyo subways, natural disaster in the form of the Kobe earthquake and even the threat of man-made disaster from nuclear accidents. They are also living with the fear of unemployment for the first time in over a generation. Little wonder that the sense of safety and confidence so evident a few years ago has been shattered.
What brought Japan's multi-dimensional crisis about? The bursting of the financial bubble in 1991, engineered by the Bank of Japan's tight money policy, precipitated the process of change. However, it was not the bubble bursting that had the greatest long-term impact. An end to the speculative excesses of the eighties was widely seen as necessary and desirable, however painful it might be in the short run. The challenge to the old system developed gradually over the following years as the bureaucracy and political leadership proved unable to pull Japan out of the recession they had created. The result was a loss of public faith in the system which, in turn, created an opportunity for major change.
The opportunity was perceived and exploited by Ichiro Ozawa, one of Japan's rare break-the-mold politicians. Though steeped in traditional LDP "money politics," Ozawa recognized the public demand for systemic reform and was enough of a maverick to turn against his own party. Demonstrating great skill, Ozawa engineered the revolt that brought down the LDP government, pushed through political reforms that loosened the ties between big business and the LDP and restructured the electoral system. The new system, which eliminates multi-seat political districts, is expected to contribute to more hotly contested, issue-oriented campaigns.
Ozawa's professed goal is to make Japan a "normal country"--one with a real political process, a bureaucracy brought down to size, and an end to that peculiar aloofness symbolized by Japan's nonparticipation in U.N. peacekeeping efforts. Last December, Ozawa stepped out from his behind-the-curtain role to take over the presidency of the New Frontier party. In that capacity he will challenge the LDP's Ryutaro Hashimoto, probably later this year, in what promises to be Japan's first issue and personality-based election.
Prime Minister Hashimoto entered office in January with a reputation burnished by his success as Minister for International Trade and Industry when he stood up to the Clinton Administration's demands for "managed trade" arrangements in cars and auto parts. But public support for his cabinet plummeted from over 54 percent in January to just 37 percent in early March as a result of Mr. Hashimoto's support for the bureaucracy's plan to rescue the specialized (and sometimes shady) mortgage lenders known as jusen. The public is outraged over political contributions to LDP leaders from the jusen, some of which have close links to the yakuza underworld. Perhaps more importantly, it is fearful that the $6.5 billion government plan for the jusen is just the down payment on a massive rescue plan of a banking system burdened with an estimated $700 billion in bad loans.
Japan's bureaucracy is bleeding from many wounds. It is blamed not only for the country's economic problems but also for a host of other foul-ups including a slow response to the Kobe earthquake and an alleged effort to cover up an accident in Japan's experimental breeder reactor last December. The latest blow is news that the Ministry of Health allowed the sale of HIV-tainted blood when safer supplies were available from abroad. The bureaucracy has been hurt also by numerous internal scandals, some tinged with politics and some with personal greed. Scandals in the bureaucracy are seen as far more serious than those in the political world. Japanese politicians are expected to play it close to the line, but the elite bureaucracy was generally perceived as whistle-clean and wholly dedicated to the nation's welfare.
The center of bureaucratic power is the Ministry of Finance (MOF), which combines the functions Americans associate with the Treasury Department and the Office of Management and Budget (OMB), not to mention the Securities and Exchange Commission and various bank regulatory agencies. But MOF has been weakened by its failure to take effective action on the economy and banking as well as by a series of internal scandals. Highly embarrassing to the Ministry was the Daiwa Bank case, in which MOF was involved in covering up serious losses in Daiwa's New York subsidiary. That prompted a rare public rebuke for MOF from the U.S. Treasury as well as stiff fines for Daiwa Bank and termination of its right to do business in the United States.
MOF's problems have led to demands that it be broken up into smaller, less powerful components. The Ministry has fought back with a flurry of new plans to deal with economic problems, but it continues to lose ground. Acknowledging the Ministry's poor performance, two Vice-Ministers of Finance took responsibility by resigning in the course of last year.
On the international front, Japan faces a far more challenging regional environment. New threats on the Korean peninsula and the recent war of nerves between Beijing and Taipei have made the Japanese more aware of external danger. But Japan's relationship with its chief ally has been troubled. Trade tensions with the United States, culminating in last year's confrontation over autos, undermined public support, in both countries, for security and political cooperation. Those tensions contributed to the explosion of feeling unleashed last year by the rape of a 12-year-old girl on Okinawa, a small island that is home to two-thirds of the 47,000 U.S. forces in Japan. The incident rekindled Japan's long dormant debate over the U.S.-Japan security treaty, which commits the United States to defend Japan in return for the right to deploy forces there (with the Japanese paying 70% of the cost).
What is the likely outcome of Japan's multidimensional crisis? On the whole, it appears surprisingly benign or indeed positive. The government is likely to remain weak until the new electoral system takes hold, but Japan is rapidly becoming the kind of "normal country" that Ichiro Ozawa envisions. Inter-nationally, assuming rationality prevails, the U.S.-Japan security relationship should continue and the overall relationship should improve even as both countries strengthen their ties with other Asian countries. Of course, the assumption of rationality depends upon managing the relationship reasonably well--and that means considerably better than we have been doing in recent years.
Public discontent with the bureaucracy is bringing about a power shift that may well favor elected leaders. Many question whether the politicians, with their endless scandals and inexperience in practical aspects of policy making, are up to taking on real responsibility. But the decline in respect for the bureaucracy creates an opportunity for the politicians to show their mettle.
The forthcoming election will be between strong candidates with real policy agendas--Hashimoto representing traditional LDP conservatism against Ozawa in the role of bureaucracy-bashing reformer. Both have real problems. Hashimoto's difficulties over the jusen issue are balanced by Ozawa's image problems as a back-room power broker and by public concern over his political alliance with a party (Komeito) created by a controversial religious group.
The contest between Hashimoto and Ozawa could lead to a real two-party system though it is too early to say whether it will. Political power in Japan tends to reflect loyalty to individuals rather than to ideas or institutions. This makes the strength of existing coalitions questionable. On the other hand, thanks largely to electoral reform, a return to the old LDP monopoly of power, or the old "iron triangle," appears almost out of the question.
The shift of power away from the bureaucracy is overdue. An influential book last year argued that the present economic regulatory structure is basically a continuation of the wartime mobilization system. Although the bureaucrats deserve much credit for Japan's accomplishments, the regulatory system they represent now stands in the way of progress. Today's global economy is too complex and changes too rapidly for bureaucrats to deal with effectively. The Japanese economy needs to be freed from the heavy hand of regulation if it is to grow again. It also needs to become more responsive to consumer interests. Deregulation and consumer orientation are much more likely to come from strong political leaders than from the regulators themselves. Such changes will serve Japanese interests and also increase market opportunities for U.S. businesses.
Although the Japanese economy now shows signs of recovery, future growth will probably be more like that in the United States or Europe rather than what Japan enjoyed in the 1980s. America has now reclaimed its leadership in the production of automobiles and semiconductors, and it is ahead or gaining on Japan in many previously contested areas of science and technology. The hollowing out of much of Japanese industrial production, rapid aging of the population and growing competition from Asia, not to mention the high yen, dim the prospects for a general resurgence of Japanese manufacturing. At the same time, largely because of overregulation, Japan appears to have missed the boat in the financial sector (which is moving to Singapore, among other places) and key information technologies.
However, pessimism about the Japanese economy should not be overdone. The fundamentals remain strong: the population is well educated, cohesive and industrious, and Japan's industrial and social infrastructures are highly developed. Japan is likely to retain its position as the world's second largest economy for many years to come.
In foreign policy, Japan is making quiet progress toward more effective international engagement, as shown by the recent dispatch of Japanese Self Defense Forces to participate in U.N. peace-keeping activities on the Golan Heights. Japan has the world's largest foreign aid program and has "untied" virtually all of its concessional lending, meaning that developing countries can use Japanese loan funds to procure goods or services from any source. Japan's stewardship of the APEC summit in Osaka last November, though little noted in U.S. media, was considered a signal success by most Asian governments. Japan's relationships with Asian countries have shown real improvement notwithstanding setbacks caused by a rash of insensitive remarks by conservative Japanese politicians.
The United States-Japan relationship is frayed, but its underpinnings remain strong. The strains in the first half of the "90s can be traced to the collapse of the Soviet Union, which raised questions about the U.S.-Japan security relationship, and bilateral trade tensions. They were exacerbated by the Clinton Administration's inexperience in foreign affairs and a narrow ("It's the Economy, Stupid") focus that constrained bilateral cooperation. However, recent regional tensions have helped refocus Americans and Japanese on the underlying reasons for what former Ambassador Mansfield frequently described as "America's most important bilateral relationship--bar none."
The U.S.-Japan security relationship rests on a combination of shared democratic values and sound geopolitical logic that did not disappear with the end of the Cold War. As Henry Kissinger stated in Diplomacy:
The domination by a single power of either of Eurasia's two principal spheres--Europe or Asia--remains a good definition of strategic danger for America, Cold War or no Cold War. There was a time when Japan threatened to achieve hegemony in Asia, a threat that led to war between Japan, on one side, and the United States and China on the other. But that era is long over. As long as China is strong and united, it is the only country in the post-Soviet world that could aspire to hegemony in Asia. That is not to say that China has such aspirations, but the rational course for the United States is to deter any possible hegemonistic ambitions from arising by bolstering the nations on the Asian periphery. The U.S.-Japan security treaty is central to that strategy.
The same logic applies from the Japanese side as well. Japan needs a security relationship with the United States to ensure its own safety and independence. There is no rational alternative. Alliance with China would be an absurdity: the two countries face no common threat; and, as traditional rivals, neither would be comforted by the other's strength. The idea of an autonomous Japanese defense is even more irrational. It would alarm Japan's neighbors, provoke China, and destabilize the Pacific region. While Japan can do more for its own defense, it is essential that it do so in the context of its alliance with the United States.
In recognition of the importance of non-economic issues, President Clinton is making reaffirmation of the U.S.-Japan security relationship the principal theme of his state visit. That reaffirmation is valuable, but it is important that the U.S.-Japan relationship not devolve into a naked security pact. That would not be politically sustainable in either country, and it would be needlessly provocative to others. The goal, after all, is Pacific stability and prosperity, not Cold War-style containment of China or any other country. In sum, security considerations combine with other positive reasons for the United States and Japan to strengthen their overall relationship while also developing constructive relationships of their own with China.
It is of great importance, also, that the United States and Japan cooperate in strengthening Asia Pacific Economic Cooperation (APEC). By linking the United States, Japan and China, as well as other Pacific Rim countries, in a cooperative framework, APEC plays a most important role in both the security and the welfare of the region.
The intensity of bilateral trade friction over the past several years reflected three principal elements: the American view of Japan as a closed market, the large trade imbalances, and fear that Japan would dominate and buy up the U. S. economy. But the underlying realities are changing rapidly. Japan is now far more open than it was at the beginning of the Clinton Presidency, thanks largely to the high yen and changing Japanese consumer attitudes. The trade numbers are moving down rapidly, and Japanese investment in the United States, which set off high anxiety a few years ago, has been at a standstill for several years.
Japan's current account surpluses have been declining for some time in real terms, though until recently that was masked by the dollar's depreciation against the yen. The OECD now predicts that Japan's global current account surplus will decline to about $90 billion in 1996, down from $135 billion in 1993. Japan's surplus with the United States declined by 17 percent in 1995, and a further reduction can be expected this year.
Although the Japanese economy continues to be highly regulated, a lot is changing. The long recession brought a bumper crop of discounters selling cheaper imported goods. New distribution channels have developed to circumvent the traditional system. Consumers are starting to demand and get more value for their money.
None of this suggests that the trade imbalance will be totally eliminated or that disputes over particular industries will not arise. (U.S.-Japan trade friction remains a cottage industry in Washington and will not easily fade away). But there is another factor that will help keep U.S.-Japan trade problems in perspective, namely the recent and spectacular rise in the U.S. trade deficit with China. In coming years, trade friction between the United States and China is likely to overshadow U.S.-Japan trade problems by a considerable margin.
Japan has been undergoing a crisis in all phases of its national life, and new directions are beginning to emerge. Political and economic life will be much bumpier than in the past as the "iron triangle" breaks down and bureaucratic leadership declines. At the same time it is likely to become more democratic and consumer-oriented.
The U.S.-Japan relationship has suffered real damage from trade disputes, and much rebuilding is required. For their part, Japan's new leaders need to demonstrate that they are serious about the deregulation that has been promised for the last several years. More effective measures are also needed to develop domestic demand-driven economic growth. In addition, they should continue to expand their participation in international peace-keeping and development assistance.
On the U.S. side, it is essential to develop a Japan policy that is responsive to the new realities. The Clinton Administration's preoccupation with Japan as a trade and economic threat is outdated, and its proclivities for managed trade are likely to retard rather than promote further opening of the Japanese economy.
The improving trade picture should help the two countries get on with the positive aspects of their relationship. These include not only ensuring regional stability but also contributing to the solution of major international problems. Good examples are the cooperation now quietly under way in research on AIDS and the environment and in support for democratization in Eastern Europe.
Japan's gradual emergence from crisis, America's resurgence and the changing international environment create the opportunity for a new and more positive bilateral relationship. With the importance of that relationship now clearer in the minds of both Japanese and American leaders, the time is ripe to articulate the terms of a new and comprehensive partnership.
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