Policy Innovations Digital Magazine (2006-2016): Briefings: A Realistic Japan Policy for the Obama Administration

Executive Summary

This memo aims to give U.S. President Barack Obama an overview of Japan and of the U.S.-Japan alliance, and to suggest policy options.

Five points are raised in the overview section. First, Japan is a nation with little appetite for military operations, and is disinclined to boost its military contribution to the alliance. Second, Japan is America's most credible major ally in Asia, and the most logical home for bases. Third, Japan is rich in technology that could benefit the United States.

Fourth, Japan suffers from political and economic structural problems. The collaboration between businessmen, politicians, and bureaucrats that drove the post-war economic miracle has decayed into paralysis. As an exporting nation, Japan has an incentive to see the yen undervalued, but the decline of the American market as an export destination might encourage Japan to review that currency policy and its associated purchases of U.S. debt. Demographic issues suggest an increased fiscal burden, meaning a declining capacity to contribute to international affairs. Despite the need for reform, both the ruling Liberal Democratic Party and the major opposition Democratic Party of Japan have been unable to present a blueprint for the future.

Finally, East Asia is in flux amid the rise of China and other factors, meaning that tension and collaboration will be the norm for the time being.

Given these realities, four recommendations are made here. First, rather than demanding that Japan step up its military contribution, the United States should encourage Japan to contribute in areas where it is strong, i.e., financial contributions and technology. Second, the United States should encourage regional security cooperation, including with China. Third, the United States and Japan should jointly map out a currency policy. Fourth, the United States should aim to treat Japan as a more equal partner to encourage a more proactive Japanese contribution to global economic recovery.

What President Obama Should Know About Japan

1. Japan is unlikely to step up its military contribution

Over the past decade, analysts and policymakers in Japan and the United States have scrutinized Japan's military contribution to global security and to U.S. military operations outside Northeast Asia. Japan got into the action with African peacekeeping in the mid-1990s. The heights of collaboration were the deployment of Japanese vessels in the Indian Ocean in support of Operation Enduring Freedom, and the dispatching of Japanese troops and aircraft to Iraq.

It is clear, however, that Japan has little interest in an expanded military role:

- Japan's contribution to U.S. operations has been minor, consisting of a few supply ships safely away from the ground war in Afghanistan, several hundred soldiers protected by the Netherlands and Australia in Iraq, and three C-130s based in Kuwait.

- There is no public support in Japan for higher defense spending. Over the past two decades, North Korea has developed missiles—and perhaps weapons of mass destruction—that can strike Japan. China's military capabilities have increased considerably. But Japan's defense budget has been flat to declining in recent years. No Japanese politician, even among the hawks, has come out in favor of increased military spending.

- Though dogmatic pacifism has largely vanished, the Japanese electorate remains extremely wary of the use of force overseas.

- The recent wrangling over a possible Japanese contribution to the naval operations against Somali pirates is telling. Japan has dithered even as such countries as Korea, China, and India have acted.

- The Japanese constitution restrains military action. Though theoretically there are ways to overcome this—including particular constitutional interpretations, new legislation, or simply ignoring the constraints—tiptoeing through this minefield is unappealing to leaders. As such, it is difficult for Japan to show the flag and put boots on the ground, except through very small-scale or symbolic operations.

Unless the Japanese establishment loses confidence in America's capability and willingness to defend Japan, the nation will continue to spend relatively little of its national income on defense, seek to avoid dangerous and large-scale military operations, and remain opposed to acquiring nuclear weapons.

2. Japan is the ideal U.S. ally in Asia

Japan is Asia's largest economy and its most stable society and is the ideal place to station U.S. ground, air, and naval assets. American forces require a home in Asia given the distance between the region and the United States, and the need to demonstrate America's commitment.

Guam is too small, and too far. Forces must be close to the heart of the theatre to show commitment and to allow U.S. forces to interact with their allies. Taiwan is unrealistic, given political realities with China. South Korea is relatively vulnerable to Chinese and North Korean pressure, is less stable socially and politically than Japan, and continues to harbor strong anti-U.S. sentiment, unlike Japan. Furthermore, U.S. troops are already stationed there. Southeast Asia is too far, and no state there is sufficiently stable except tiny Singapore. Australia and New Zealand are too far.

Meanwhile, Japan offers top-notch bases and a strong logistics infrastructure. Furthermore, it is by far the largest U.S. ally in economic terms, and the two nations have strong technological and industrial ties, with Japan the leading partner for the United States in many key industrial processes.

If the United States were to do away with the idea of having allies in Asia, this would not only undermine U.S. influence in the region, but also lead to broad instability, as the current security environment depends on the American presence.

3. Japan is rich in technology

Japan is a leading country for advanced technologies; the United States can learn from and cooperate with Japan in these fields.

Energy conservation

Japan is believed to be about twice as efficient at energy conservation as the United States. The recycling industry is better established, with newspapers, bottles, cans, plastics, and appliances all processed. People drive through residential areas collecting newspapers in exchange for toilet paper and tissues, and also open trash bags in quest of recyclables. Many appliance makers compete over energy efficiency and product lifespan.

Japan is an ideal partner to help the United States launch a "Green New Deal" and combat global warming. Japanese energy-saving technologies can be introduced into fuel-efficient cars, appliances, and homes in the United States.

Eco-technology

The United States and Japan can collaborate to develop environment-friendly technology such as hybrid and electric vehicles, LED, biomass energy, photovoltaic power generation, and nuclear power. They can also jointly develop international operating and safety standards before they are developed by such players as the European Union, China, and South Korea.

High-speed rail systems and other infrastructure

Japan has built an outstanding nationwide public transportation network of trains and subways, which are operated with high punctuality and reliability. The Shinkansen bullet train is an established success, and the Japan Railway Maglev (312 miles/hour) will launch in 2025. Japan boasts excellent construction technologies, including anti-earthquake ones.

4. Japan has serious structural political and economic problems

The collapse of the post-war growth engine

After World War II, the "Iron Triangle" of business leaders, politicians, and bureaucrats was the driving force behind high economic growth. Government bodies such as the Ministry of International Trade and Industry (now the Ministry of Economy, Trade, and Industry) and the Ministry of Finance allotted raw materials, bank loans, and hard currency to firms according to ministry development plans. The domestic market was to a large extent closed off until industries grew strong enough to withstand competition. Business leaders directed donations and votes to politicians, in return receiving favors and backing against the bureaucracy. Though the three corners of the Iron Triangle sometimes disagreed, they mostly maintained good relations, sharing the goal of economic growth.

By the 1980s, the economy had grown too large and sophisticated to be managed by the bureaucrats, who were encountering difficulty in prioritizing industries. Firms took matters into their own hands. For instance, Toyota came to be known as the "Toyota Bank," as it was able to raise funds through debt and equity, breaking from the bank loans brokered by the bureaucracy. Japan reached the stage where the government should shrink its role to enforcing laws and regulations rather than acting as de facto central planner guidance, while it is too deeply entangled with vested rights to do so.

Business had been first to realize the need for structural change and the end of the Iron Triangle framework. Change then came on the political front, with the Liberal Democratic Party's rule interrupted in 1993–1994, the first time since 1955. Yet, political parties have been unable to provide a blueprint for the future of Japan, leaving politics in turmoil and prime ministers crashing and burning. Against this backdrop, the bureaucracy continues to exert heavy influence over policy, and maintaining the deadlock status quo.

The value of the yen

The Japanese economy centers on the import of raw materials and the export of manufactured products. The United States has traditionally been the largest market, with Japan racking up big bilateral trade surpluses.

The government has made efforts to weaken the value of the yen, particularly against the dollar, in order to assist exporters. This is achieved by buying up cash, Treasury bonds, and other dollar-denominated assets. Such intervention has been frequent, regardless of how high U.S. deficits are. In the 1980s, such yen-selling helped the Ronald Reagan Administration to hike defense spending and bankrupt the USSR. Earlier this decade, it helped the George W. Bush Administration wage war in Iraq without increasing taxes.

This structure meant that much of Japan's trade wealth made its way back to the United States, in turn reducing the capital available for domestic use. Despite this, the weak yen policy underpinned vital Japanese exports; it would have been hard to abandon this approach amid such success.

But now the importance of the U.S. market is declining to Japan. In 2006, China became Japan's largest trading partner. While the United States did return to its No. 1 position in 2007, and while it is true that many goods are shipped to China only for intermediate processing before being re-exported, it seems the single-minded focus on exports to the United States is softening.

Meanwhile, the economic downturn and the shrinking population have convinced some Japanese, including former finance vice minister Eisuke Sakakibara, who might again become finance minister should the Democratic Party of Japan (DPJ) take power, to review past trade policy, with a bias toward doing away with trying to suppress the yen's value.

A strong yen implies a shift from an export-driven economy to one driven by domestic demand, though such a change would likely be gradual. Japan would be able to import more products, including those from the United States, and might be able to use its market size to increase its say in the international arena. Meanwhile, the United States would lose some capital inflow, making it that much more difficult to fund wars and other excessive federal budget spending.

A shrinking and aging society

People over 65 now constitute a fifth of the population, while the fertility rate is around 1.3, well below the replacement level of slightly above 2. Should trends continue, GDP will shrink (barring dramatic technological breakthroughs or a dramatic change in immigration policy), while social security costs will surge. Japan's ratio of local and central government debt to GDP is expected to reach 157 percent by 2010, the highest among developed nations. Such trends imply less capacity to contribute to international efforts in the long run.

It is hard to foresee when necessary reforms might arrive. The LDP is in no position to lead the charge, given its vested interests in the current structure. The hopes of the public are thus pinned to the DPJ, but given that the party is a hodgepodge of ideologies, many fear that it would become bogged down or simply collapse once in power.

The lack of a vision for the future has led to a widespread lack of self-confidence among Japanese.

5. The rise of China is changing the status quo

The rise of China is changing the status quo, leading to tension and cooperation East Asia is evolving from one economic power to two, a transition that is also causing disruptions in the security, political, and social spheres. Both Japan and China are angling to shape regional integration, hoping to clarify where their influence lies. This dynamic has created both tensions and opportunities to cooperate in the region.

Since the end of World War II, Japan has been providing its neighbors with princely sums of money, first in the form of reparations and later as official development assistance (ODA). This capital has funded infrastructure and other development projects, and has provided opportunities for Japanese firms to sell products. Such interaction has also reduced risk, in turn encouraging Japanese firms to invest as well as facilitating consumer growth. By the 1980s, newly industrializing economies such as Taiwan, South Korea, Hong Kong, and Singapore were finding success, with China soon to follow.

Meanwhile, Japanese multinationals were developing networks across Asia, facilitating parts supply, production, and shipping. Economic integration deepened between firms, especially after the yen surged in the mid-1980s. But cooperation did not extend to the political realm at that time.

This story changed with the rise of China, particularly amid the 1997 Asian financial crisis. Though China opposed Japan's proposal for an Asian Monetary Fund, Japan's offer of $30 billion in aid was welcomed. After the crisis, governmental discussions on regional financial mechanisms led to the bilateral currency swap arrangement the Chiang Mai Initiative, which continues to expand today.

China offered to sign an FTA with ASEAN in 2002, beating Japan (signed in 2007), which dragged its feet on agricultural issues. While Japan played a pivotal role in creating APEC, which includes the United States and Australia, China helped create the East Asia Summit, which excludes those two nations.

Of course, there are not always tensions. Japan-Korea FTA negotiations have been launched (though currently suspended) and studies for a Japan-China-Korea FTA are in progress. Furthermore, in response to the current economic crisis, the central banks of those three countries have agreed to meet regularly to discuss responses. China, which traditionally used to be the largest recipient of Japanese ODA, still receives technical help from Japan in such areas as energy and environmental issues.

The dynamic of tension and collaboration is likely to continue until the balance of power reaches equilibrium; this will likely take some time. To Japan's consternation, China's defense budget has increased by double digits each year over the past decade (depending on the calculation method), about the same rate as overall economic growth. While Beijing claims it is only modernizing obsolete facilities and systems, it is clear that it views Japan and the United States as competitors. Regardless of this tension, Japan is dependent on China economically, which prohibits Japan from becoming more bellicose toward China.

Suggested Policies

1. Encourage Japan to cooperate with the United States in its areas of strength

Given the above, it would be wise for the United States to encourage Japan to be proactive in areas where it can contribute most effectively. As much as the Unites States may press Japan to contribute more militarily, Japan would only be able to send modest forces under very tight rules of engagement, offering little benefit to the United States. But the potential downside for Japan is enormous: Japanese fatalities or civilian deaths at the hands of Japanese personnel would create a backlash against the Self-Defense Forces and the alliance. Japan's recent military contribution to the Iraq and Afghanistan wars has been minimal despite the unprecedented personal relationship between Bush and former Prime Minister Koizumi.

Instead, Japan could help the United States by:

- Readying capital to stabilize fragile U.S. allies, such as Iceland, the UK if necessary, some Latin America and Central European nations, perhaps as part of an IMF plan;

- Introducing the high-speed Shinkansen to the United States, for example with Boston-New York-Washington and New York-Chicago-Los Angeles lines. Such a system would require new tracks and stations across the country, which would create jobs. (Air travel between Capitol Hill and the UN costs $200–300 and takes 2.5–3 hours, including travel to and from airports. Amtrak costs $100–200 and takes 4–5 hours door to door. A Shinkansen trip would cost $150–200, taking less than 3 hours door to door.) Such a train system would also be easier on the environment.

- Launching a study group on advanced technology that might benefit the United States. Possible areas for cooperation include such fields as energy conservation and eco-technology. The group could draft a plan for related investments in the United States.

2. Address regional security issues through talks and sea-lane defense

Amid the current adjustment in the balance of power in East Asia, it is in the U.S. interest to ensure that tensions do not develop into military conflict. Although Japan and China should lead the overall dialogue, the United States is in position to take the initiative in the security arena.

Meanwhile, the United States might find that its Asian military bases are becoming a financial burden. Besides Japan, the United States has forces stationed in such nations as Korea, Singapore, and the Philippines, as well as on Hawaii and Guam. Such a presence helps secure peace and the safety of the sea-lanes, including from the Middle East, which is appreciated by Japan and other energy importers like Korea, China, and India. Although Japan and South Korea provide generous host nation support, they are burdens the past American administrations have committed to and would be needed in the future as well.

Given this burden, the United States should consider a new framework for coordinating sea-lane security among the principal users, and should consider working toward regional arms reduction, particularly vis-à-vis China. If the sea and air power of the Chinese military were to be frozen at current levels (or even reduced), this would relax tensions a great deal among nations within striking distance of such weapons.

Arms reductions do not necessarily have to be the symmetrical. But it could take the form of setting ceilings, as is done in the Treaty on Conventional Armed Forces in Europe, or the selective reduction of systems or troop placements per each side's preferences. Another idea is to transform the Six Party Talks into a permanent organization like the OSCE.

In regards to sea-lane security, China claims its incipient blue water navy is intended to provide for maritime defense that does not depend on the United States. Yet, given the lack of transparency on the part of the Chinese military and given mutual distrust, Japan is wary of Chinese intentions.

It would be ideal to let China share the burden of protecting sea-lanes along with the United States, Japan, and South Korea in the context of a multilateral framework. Such a measure would have several rationales: It would lighten the U.S. Navy's burden; it would likely be the only security-related endeavor Japan would be interested in; it would increase interaction with the Chinese Navy, providing the United States, Japan, and Korea with a better understanding of that organization; it would build mutual trust; it would foster Japanese self-reliance; and it might serve to contain the Chinese naval presence by allowing the Japanese Maritime Self-Defense Force to balance Chinese dominance in the South China Sea, which is the only access to the open ocean for several Southeast Asian nations.

The economic turmoil provides a golden opportunity to attempt these measures, as the various parties might be more willing to temper defense spending. Given its long-term fiscal issues, Japan in particular would appreciate a security environment that allows for a smaller defense budget.

3. Discuss currency policy

The United States and Japan should work out a plan for the dollar-yen relationship. If Tokyo is unable or unwilling to maintain its cheap yen policy, the parties must communicate on the proper speed of appreciation, so as not to cause undue economic disruptions. Major stakeholders such as China, Europe, and the IMF should be involved in such discussions; the G20 might be a good forum to hash this out.

Given a stronger yen against the dollar, a U.S.-Japan FTA would help further facilitate American exports to Japan. U.S. exporters have an ideal destination in the developed Japanese market, where high-quality brands, once established, enjoy strong sales. Future demand will likely be particularly high for medicines and medical appliances, as well as nursing, educational, and financial services.

4. Give Japan more credit

It would be advisable to be sensitive to Japan's fragile ego; a little respect would go a long way. Secretary of State Hillary Clinton made a good impression by making Japan the initial stop on her first overseas tour. The Obama Administration might choose Japan as the first country to consult with on regional issues. Encouraging Japan to take more initiative is also important. In the past, the United States has made many demands, which Japan subsequently resisted or accepted apathetically. A different approach would prompt Japan to get its own strategy in gear. But given the glacial speed of decision-making in Tokyo, this might best work for less critical issues.

As tempting as it may be for the United States to take a top-down approach, as bothersome as it might be to wait for Japan to get its act together, the United States would be wise to let Japan develop as a more dynamic partner. Once it makes up its mind, Japan is capable of effective implementation. The United States would benefit from Japan being more independent and more strategic with its policies. That sort of Japan would provide the United States with higher potential for collaboration and would strengthen American influence in the international community. The stronger the ally, the better—particularly in a multipolar world.

About the Tokyo-Reischauer Group

This memo was prepared by members of the Tokyo-Reischauer Group, a discussion forum launched by the Tokyo Foundation and by the Reischauer Center, which is based at the Johns Hopkins School of Advanced International Studies. The group brings together young professionals, including bureaucrats, congressional staffers, and academics, to discuss U.S.-Japan issues.