from Asia Unbound

Robert Madsen: Japan Leading the West?

December 05, 2012

Buildings are silhouetted against the setting sun in front of Mount Fuji in Tokyo December 2, 2009
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This blog post is part of a series entitled Is Japan in Decline?, in which leading experts analyze Japan’s economy, politics, and society and give their assessment of Japan’s future.

In absolute terms Japan’s national power has not declined over the last two decades. The economy is larger today than it was in the early 1990s, and its military capabilities have expanded due to copious investment and steady technological improvements. But power is only meaningful in a relative sense. What matters is whether a government has the means to persuade other peoples or states to do what it wants. By this standard Tokyo’s influence has diminished markedly and will continue to do so. But Japan is not an anomaly in this regard; it is, rather, the harbinger of changes that are now undermining the position of the entire Western world.

How the Mighty Have Fallen. It is easy to forget the fear Japan inspired abroad in the late 1980s and early 1990s. Dysfunctional political parties, fragile governments and a pacifistic constitution prevented Tokyo from offering much international leadership, but the country’s spectacular economic performance led many to believe that it had evolved a superior form of capitalism and would presently overshadow the United States and other traditionally dominant countries. It appeared, in short, that Japan was moving toward superpower status and hence that the geopolitical balance was tilting in favor of East Asia.

That facade of strength, however, rested on a sandy foundation. The collapse of an enormous asset bubble between 1989 and 1991 initiated a process of household and corporate deleveraging that eviscerated demand and produced the modern equivalent of a depression. As the private sector started to pay down its debts, the Japanese government stepped in and ran ever-larger deficits in order to preclude economic contraction. The upshot was two decades of very slow growth, a tripling of the gross national debt as a proportion of GDP, and the gradual erosion of popular confidence in the state, business and financial institutions and even Japanese culture. It is difficult to see how a country thus enfeebled can build the political consensus necessary to reform the economy and forestall an eventual fiscal crisis—let alone marshal sufficient political, diplomatic and monetary resources to play the international role to which it aspired two decades ago.

Leading the Way. By the late 1990s the West had lost its fear of Japanese superiority and begun criticizing Tokyo for its evident failure to revivify its economy. The irony was that even as they confidently proposed their various nostrums, the United States and other Western countries were unwittingly following in Japan’s footsteps. Debt levels in almost all of the OECD economies had been rising steadily from about 1980 onward, and now the Federal Reserve and other central banks were holding interest rates too low and thereby inflating the greatest asset bubble the world had ever seen. Turmoil in the U.S. subprime market in 2007 and 2008 burst that bubble, and the ensuing collapse in wealth triggered the worldwide crisis of 2009–2010.

Having learned at least some things from Japan’s Lost Decades, several central banks and governments reacted with aggressive fiscal and monetary measures that, they assured the world, would allow their countries to avoid Japanese-style stagnation. Yet those assurances were too optimistic. In broad brushstrokes, the experience of the Western economies over the last five years resembles that of Japan in the 1990s fairly closely. The extraordinary stimulus enacted during the Great Recession has not produced impressive GDP growth—the average rate of expansion in the United States since 2007, for example, has been comparable to Japan’s in the early 1990s—and unemployment rates remain stubbornly high. By precipitating the current problems in the euro zone, furthermore, the depression of global demand has sapped the vitality of many governments and is now jeopardizing the territorial integrity of the Spanish state.

Slower GDP growth, high unemployment, massive government intervention, and the weakening of centrist political parties have already constrained the ability of Western governments to act wisely and assertively abroad. That pattern is likely to persist for at least another decade. For once the OECD economies have achieved the requisite degree of private-sector deleveraging, they must immediately embark on a process of fiscal retrenchment that will take a heavy toll on GDP growth rates long into the future. Defense and diplomatic budgets will consequently shrink and Western influence around the world decrease.

The Tilt to the East. The relative decline of the West was to some degree inevitable. Having lifted many of the regulatory and other burdens that previously encumbered their economies, China, India, and other rapidly developing nations were almost certain to achieve faster GDP growth than the United States, Japan, and Western Europe. Over time that would have enhanced their international stature at the expense of the established powers. But economic and financial mistakes have accelerated that transition. The Great Recession has already reduced Western rates of GDP growth, discredited the Anglo-Saxon economic model, vitiated political parties and governments, and prevented national leaders from focusing on world affairs as much as they would otherwise have done.

Moreover once the European mess has been negotiated, the single biggest political issue in the advanced industrialized economies will be the redefinition of the social contract as governments hike taxes and slash entitlement spending in an attempt to balance their budgets and forestall eventual financial crises. This fraught process and the resulting social strains will preoccupy Washington, Tokyo and the European capitals for many years, limiting their ability to promote Western interests and values and giving China and other rising powers somewhat more freedom to pursue their strategic goals.

So this time the geopolitical balance really has shifted toward East Asia. That has happened, however, in a way that few envisioned two decades ago: for rather than benefiting from the relative rise of the East, Japan is now watching from the sidelines, a bystander at best and a victim at worst.

Robert Madsen is a senior fellow at the Center for International Studies at MIT, a member of the executive council at Unison Capital, and an adviser to several international investment groups.