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The sun also rises A survey of Japan l October 8th 2005

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C B M R Y G K W C B M R Y G K W The Economist October 8th 2005 A survey of Japan 1

The sun also rises Also in this section

Capitalism with Japanese characteristics Suddenly, shareholders are beginning to matter. Page 4

New politics, old politicians It will never be the same again. Well, not quite, anyway. Page 7

New East Asia, old enmities China’s growth has changed Japan’s region, but is also changing Japan’s politics. Page 9

The ambiguity of Yasukuni A private war shrine with imperial status. Page 11

Visions of 2020 Japan is at last ready to surprise the world by how well it does, not Japan’s next 15 years are likely to be a lot how badly, writes Bill Emmott, editor of The Economist sunnier than the last 15. Page 12 O COUNTRY in modern history has whose real achievements remain rather Nmoved so swiftly from worldwide hard to get your arms around. Moreover, adulation to dismissal or even contempt as the OECD recently rated Japan’s potential did Japan, in a process that began more or rate of GDP growth for the rest of this de- less as the temple bells were tolling in the cade at a mere 1.3% a year, on the basis of new year of 1990. In the 15 years that fol- poor productivity growth and a popula- lowed, amid crashing stock- and property tion that is shrinking and ageing. Politics markets, mountains of dud debt, scores of didn’t even come into it. corruption scandals, vast government def- But remember. During the 1980s, when icits and stagnant economic growth, Japan adulation (or fear) of Japan was at its peak, mutated from being a giver of lessons to a many observers made the mistake of as- recipient of lectures, all of which oered suming that because some things in the recipes for its reform and revival. Those country plainly worked extremely well, lectures, although received politely by a everything did, so everything must be newly self-deprecatory Japanese elite, worth emulating and the trend must be seemed to be ignored. Now, however, the ever upwards. That is why your present time for lectures is over. Japan is back. It is author named a book he published in 1989 being reformed. It is reviving. The Sun Also Sets. Japan’s sun does not Exchange rates Really? The very unJapanese event that only rise, the book argued; trends can also Yen, September 26th 2005 took place on September 11tha snap gen- bring about their own downfall. Since $1= 112 ¤1= 135 £1= 199 eral election called on a policy issue and 1990, the opposite mistake has been made: won in spectacular fashion by the reform- just because some things have gone badly ist prime minister, Junichiro Koizumihas wrong, so everything has been assumed to Acknowledgments changed perceptions of Japan as an irre- be wrong, in perpetuity or at least pending The author would like to thank the many people who gave deemable dud, but not much. After all, the a revolution. Hence the somewhat self-in- generously of their time and ideas for this survey. Particu- case for cynicism is compelling. dulgent title of this survey: the Japanese lar thanks for hospitality and help with arrangements and introductions are owed to Minoru Makihara, Shintaro Hori, There have been several false dawns sun does not only set, either. It also rises, Thierry Porte, Martin Hatfull, Yoichi Funabashi, Skipp Orr, during those 15 dismal years, most notably and looks likely to do so from now on. Yotaro Kobayashi, Alex Kerr, Keizo Takemi, Georey Tudor, in 1996-98 when an incipient recovery For the case for greater optimism is also Je Kingston, Tadashi Nakamae and the Freshelds Tokyo oce. turned into a fresh recession and produced strong. It is not based on any notion that both a banking crisis and an apparent en- Mr Koizumi’s victory represents the start A list of sources can be found online thusiasm for reform. Since then, Japan has of radical change. Nor is it intended to sug- www.economist.com/surveys suered a price deation that has still not gest that privatisation of the postal savings come to an end. Since 2001 it has had a systemthe reform issue around which An audio interview with the author is at prime minister, that same Mr Koizumi, September’s election was foughtwill www.economist.com/audio who has talked a lot about reform but somehow magically turn Japan from a1 2 A survey of Japan The Economist October 8th 2005

2 sloth economy to a growth one, for it of Japan’s economy and society. And al- people, including health care and con- won’t. Rather, it is based on the view that though there may not be one single reason struction, but has gradually become per- Mr Koizumi’s victory is the culmination of to expect a transformation, there may well mitted almost everywhere else. Canon, for a long period of incremental change, be one single eld of data that currently example, a successful electronics rm that bringing welcome conrmation that that holds the clue as to whether economic re- still rmly maintains a lifetime commit- change is not likely to be reversed. covery is going to be sustainable in the lon- ment for its core workers, employs fully Even after his landslide win, it is not in- ger term, as well as exemplifying some of 70% of its Japanese factory sta on such evitable that Mr Koizumi will get his way, the biggest changes that have taken place. non-regular terms, up from 50% ve for his party’s rules stipulate that he will That eld is employment and wages. years ago and 10% a decade ago, according have merely a year as leader to exploit his to Fujio Mitarai, Canon’s president. new mandate. Still, there is a chance that Lessons from the labour market This new labour exibility has contrib- the party will extend his term, but also a The Japan of old was known as the coun- uted to a boom in company prots and to likelihood that any successor will follow try of lifetime employment, a somewhat the paying down of debt. In 1998 workers’ the Koizumi script. This would mean that exaggerated but still important notion that pay equalled about 73% of corporate earn- the size and role of the Japanese state will in return for loyalty and exibility big em- ings. By 2004 the proportion had dropped shrink, in a slow but remorseless process ployers typically oered a lifetime com- to 64%. Other factors helped too, most no- over the next decade or so. That will gradu- mitment to their workers, with associated tably a big rise in exports to China in ally help improve the public nances, company unions, generous fringe benets 2002-04, which revitalised manufacturers which are in a mess; gradually help reduce and pay rising according to age and senior- of all kinds, whether metal-bashers or pre- the nancial distortions that have arisen ity. That also made for a fairly egalitarian cision engineers, and a series of bank na- from the state’s role in banking; and gradu- society. Shock therapy would have shat- tionalisations and mergers in 1998-2004 ally help reform politics, which had be- tered the lifetime notion, producing a big during which bad loans worth trillions of come dependent on state cash and power. rise in unemployment. So it never hap- yen came good or were written o. Gradually: that could be Japan’s watch- pened: most big companies chose to main- As a result, the gigantic pile of dud cor- word. The country has not had a revolu- tain their commitment, asking workers to porate debt for which Japan became no- tion, nor has it gone through the shock take pay cuts and waive bonuses rather torious in the late 1990s is now a lot therapy of reform that Margaret Thatcher than lose their jobs, but ceased to hire new smaller: from a peak of more than ¥43 tril- deployed in Britain in the 1980s or that graduates. Less than half as many new lion in 2001, non-performing loans held by some central European countries tried in graduates were hired in 2003 as in 1997. banks have more than halved to less than the 1990s, and it is not likely to go through But also, helped by changes to employ- ¥20 trillion (see chart 2 on the next page). that now. For this is not a country of revo- ment law, rms found exibility in an- The number is now also thought to be lutions, but rather one that tends to follow other way: by hiring part-timers and oth- more or less accurate, whereas until 2001 a course faithfully and steadily once it has ers on temporary contracts, both at far or so ocial gures for non-performing been agreed upon and set. lower cost than for regular workers. In loans were appallingly and deliberately For the past decade, although the main 1990 such non-regular workers made up underestimated. approach to the country’s immediate 18.8% of the labour force. Earlier this year, Labour exibility came at a price, how- macroeconomic and nancial woes has that gure reached 30%, which in Japan’s ever. Falling wages boosted prots but also been one of muddling through and hop- 65m-strong labour force means roughly weakened demand. In recent years, con- ing for the best, there has been a gradual 20m people. Those workers are predomi- sumption has been sustained only by process of reform, of setting new courses nantly women, the young and the fairly households choosing to save less of their and parameters for behaviour. This has low-skilled. Since 2003, the law has al- incomes: the Japan that in the 1980s was consisted of an accumulation of many lowed contracts to be counted as tempo- reputed to be a nation of savers now has a small changessome in politics, but also rary, and thus cheap, for up to three years. household saving rate of merely 5% of dis- in nancial regulation, in corporate law, in The use of contract workers remains for- posable income, one-third of its level in public opinion, in capital markets, in cor- bidden in some sectors that employ lots of 1990. New jobs have been created, but as porate mores. The two big questions have 2005 began most were still part-time or on been, rst, whether that process will en- temporary contracts. Part-time workers in dure; and, second, whether the burdens of Return to form? 1 Japan get on average less than half the full- the pastdebt, deation, corruption, la- Japan’s real GDP growth time hourly wage. The lowlier contract bour protectionwill continue to over- % increase on a year earlier workers, such as shelf-stackers in conve- whelm the benets that come from those 6 nience stores, can expect ¥600-800 per changes, or whether Japan might soon be * hour, which is well below the British legal in a position to grow and develop again as 4 minimum wage. Little wonder that an a normal country might. * economic commentator, Takuro Mori- September’s election answered the rst 2 naga, topped the bestseller charts in question. But to answer that second ques- + 2003-04 with a book on how to live on tion, it is no good speculating about poli- 0 ¥3m a year. So much for the idea of Japan tics, nor expecting the politicians to pro- – as a high-cost country. duce radical, invigorating reforms. They 2 As long as wages were falling and the have neither the power nor the capability 1970s 1980s 90 92 94 96 98 2000 02 05† new employment being created was the for that. The place to look is not in the fancy *Annual average †Forecast cheaper, less secure sort, there was little headlines of politics but deep in the fabric Sources: Thomson Datastream; Economist Intelligence Unit chance that economic growth could be-1 The Economist October 8th 2005 A survey of Japan 3

private spending, by households and by companies, is likely to follow a more stable path than one that depends solely on ex- port demand or public spending. What matters most, though, is how that spend- ing will be used. And that is a question of whether the incentives governing such spending have changed: the incentives for companies to waste the money or use it well, and the incentives for politicians and bureaucrats to abuse it, steal it or other- wise distort it.

A very stealthy revolution That is where the many other small changes come in. A simple way to under- Learning to spend again stand what happened to Japan in the 1980s and 1990s is that a country with 2 come truly sustainable. The cost-reduction to operating prots for large and medium- many strengths, especially a high average and exibility may have been a necessary sized rms is down to levels typical in the level of education, formidable technology condition of eventual recovery, but could 1980s, ie, less than 10%, compared with and powerful social co-ordination within not itself bring it about. Rather as in Amer- 15-20% at the peak in 1999. Smaller rms companies, came to lose its basic disci- ica during the Great Depression, declining still hold debt of nearly 15% of operating plines and incentives, particularly in the demand has helped to neutralise improve- prots, but that too is down from over 20% late 1980s when it experienced one of the ments taking place elsewhere in the econ- in 1999. Excess capacity is a particularly biggest asset booms in world history. omy. Moreover, there are limits to what ex- subjective matter: the capacity-utilisation Flushed with success and with seemingly port-led growth, the great hope of rate reported by the Ministry of Economy, costless capital, companies expanded and 2002-04, can achieve, given Japan’s al- Trade and Industry is back up to 1992 lev- diversied recklessly. Banks lent regard- ready large current-account surplus (3.6% els, and businessmen’s perceptions, as re- less of risk or business viability. Bureau- of GDP), the chance that the yen will ported in the Bank of Japan’s regular Tan- crats and politicians resisted calls for de- strengthen against the dollar and the dan- kan survey, are that excess capacity has regulation that could have extended ger of slower demand in Japan’s top for- largely disappeared. competition and encouraged innovation, eign markets, China and America. The important issues now, though, re- because they did not think it was neces- Since April, however, the employment volve around risk, stability and incentives. sary. Interest groups anyway blocked data have shown something new and During the 1990s, although Japan experi- change, chiey by bribing politicians. The more promising: full-time employment is enced only stagnation rather than col- mass media were largely suborned by the growing faster than the part-time sort for lapse, there was always a risk that collapse political and corporate establishment. the rst time in a decade, and although might come. With corporate debt cleaned The collapse of the stock- and property some of that growth is still in full-time con- up and banks reformed, that risk has gone. booms after 1990 and the ensuing reces- tract work, regular employment is rising Banks certainly think so: their lending has sion might have been expected to shake all too. Wages are also rising, at their fastest recently started to expand again for the this up. It didn’t, for two main reasons. The rate since 1998 (which mainly means they rst time since 1998. The alternative now rst was that the principal economic re- are simply rising, at last), and bonuses are seems to be either slow growth or faster sponse to the slump, ie, massive public- again being paid. growth, not growth or slump. Moreover, works spending, further enriched some It is still early daystoo early to tell how an economy that relies on increases in pressure groups and many politicians,1 strong this rise in employment and in- comes will prove to be. Probably, its eect will be gradual: people may try to rebuild The shape of better things to come 2 their savings rather than spending all their Japanese: gains, competition from low-cost China banks’ non-performing loans employment and India will help limit wage gains, and Fiscal years beginning April, ¥trn % change on a year earlier 50 8 rms scarred by the past 15 years are un- Part-time likely to embark upon an investment and 40 6 hiring binge. What this development does 4 suggest, though, is that the last of the three 30 excesses that have burdened the economy 2 20 + since 1990excess corporate debt, excess 0 capacity and excess labourmay now - – 10 2 nally be on the point of elimination. Full-time Elimination is probably too strong a 0 4 word, for whether something is excessive 1995 96 97 98 99 2000 01 02 03 04 1995 96 97 98 99 2000 01 02 03 04 05 is a subjective question. The ratio of debt Sources: HSBC; Macquarie Research 4 A survey of Japan The Economist October 8th 2005

2 making them even more able to resist rope. Still, compared with what might provided the discipline in the system change, and an expansionary monetary have happened in most other developed through their ability to intervene in their policy deadened the price mechanism that countries had they gone through the same big customers’ aairs when things went ought to have imposed discipline. The sec- prolonged experience, Japanese society wrong, but such interventions became ond was that for a mixture of social and has remained remarkably stable. rarer as the asset bubble inated, and then psychological reasons, neither bureau- Yet although society has been stable, rarer still once the banks got into at least as crats nor companies chose to admit what the appearance of policy paralysis is mis- much trouble as their customers. Then, was really happening. leading. Actually, bit by bit, step by step, a banks kept alive what became known as A 15-year gradual work-o of the ex- great deal has been changed, in what may zombie companies for fear of acknowl- cesses inherited from the 1980s would not come to look with hindsight like a sort of edging their bad loans, of creating unem- have been what most analysts would have revolution by stealth. The changes are still ployment or of upsetting the whole collec- recommended or even expected in 1990, continuing and being battled over, so it is tive applecart. whether they were rude foreign lecturers too soon to judge whether that word will This used to be called nancial social- or polite Japanese. And it has been a more in the end be justied. But what this revo- ism, which was meant as a compliment. painful period than any visits limited to lution-in-progress has already done is to al- That time has long gone. Now, a joke is cir- prosperous Tokyo would suggest. Provin- ter many of the incentives surrounding po- culating in Tokyo about Chinese students cial cities and rural areas have suered litical and corporate behaviour. on a course there. Someone asks them greatly, with shuttered-up streets and ris- It needed to, because in 1985-95 Japa- why they spend so much time with other ing levels of poverty. Suicides have soared, nese companies proved incredibly bad at Chinese rather than with Japanese stu- up more than 50% since 1990 to 34,500 in using their own moneyor rather, their dents. Their answer: because we are afraid 2003. By Japan’s standards, crime has risen shareholders’ money. Neither commercial the Japanese might teach us communism. too, though it remains low in comparison law nor the courts helped the sharehold- The way things are going, the joke might with America and most of western Eu- ers’ cause very much. Banks supposedly soon become obsolete. 7 Capitalism with Japanese characteristics

Suddenly, shareholders are beginning to matter

AKAFUMI HORIE is proof of the re- become famous as well as much admired, higher price for shareholders than it Twards of failureand of Livin’ on the according to opinion polls, for his willing- would otherwise have been paying. edge, which is what he called his com- ness to challenge old ways of doing things. The livedoor-Fuji battle, the Yumeshin pany until he bought an internet portal He even ran (unsuccessfully) for the Diet in bid and the mega-bank sumo-wrestling called livedoor and adopted its name. This September’s elections. And he is not alone match illustrate three important develop- 32-year-old’s daring takeover bid earlier in breaking taboos. Hot on the heels of his ments. The rst is a new willingness to use this year for the venerable media group Fu- bid, in July a young construction design the courts as arbiters in corporate disputes, jisankei Communications, via its radio rm, Yumeshin Holdings, launched a hos- which reects both changes in attitudes subsidiary Nippon Broadcasting System, tile tender oer for an older rm, Japan En- and changes in the law. Livedoor managed ended in defeat: Fuji found a white knight gineering Consultants. And last year Sumi- to get several of Fuji’s attempted defence to hold a blocking slab of its shares and tomo-Mitsui Financial Group, one of manoeuvres struck down by the courts be- forced Mr Horie to retreat with only a small Japan’s biggest banks, barged its way into a fore Fuji’s white knight came along. Yu- prot and a modest business deal between friendly merger deal between two other meshin failed to block Japan Engineering’s Fuji and livedoor. In July 2004 his bid for a mega-banks, Mitsubishi-Tokyo Financial defences of a stock split and an equity war- baseball team, the Osaka Kintetsu Bua- Group (MTFG) and UFJ Holdings, oering rant issue, but the Tokyo District Court laid loes, also failed. Yet the attendant publicity to buy UFJ for a specied price. That may down reassuring criteria for their use: that helped livedoor hugely: page views at its sound mundane, but to Japanese sensibil- they must not simply be in the board’s self- portal in June this year were more than six ities it was shocking, because UFJ’s board interest, and that they are subject to share- times higher than a year earlier, and the had already accepted the merger proposal, holders’ approval. company has raised its advertising rates even though no price had been set. Secondly, a change in the ownership twice in less than six months. It remains a A related bank, Sumitomo Trust, pattern of publicly traded shares is making distant third in the internet portal business weighed in too, seeking a court injunction transactions and challenges easier. In 1992, behind Yahoo! Japan and Rakuten, but its to block the MTFG-UFJ merger on the according to the Ministry of Economy, share price has stayed high despite stock ground that it violated a prior deal under Trade and Industry, 46% of all listed equi- dilution and the Fuji bid’s failure, and its which it was to buy a UFJ division. In the ties were held as cross-shareholdings by earnings multiple is higher than that of Ya- end, after a protracted battle in the courts related companies, and only 6% by foreign hoo! Japan. and the capital markets, MTFG prevailed, investors. In 2004, cross-shareholdings ac- The nail that sticks up, runs a hoary but only at a cost: cash compensation for counted for merely 24% of shares whereas Japanese saying, gets hammered down. Sumitomo Trust, a big cash injection into foreign ownership had risen to 22% of the Yet Mr Horie is an upstanding nail who has UFJ to help it deal with its bad loans and a total. However, that foreign slice is volatile,1 The Economist October 8th 2005 A survey of Japan 5

2 moving up and down along with investing Group; Lone Star; Cerberus; and several rie was able to mount his bid in ways that institutions’ perception of the Japanese others. By and large, though, it is the Japa- would be considered outrageous in Lon- market. Cross-shareholdings rst became nese upstarts that are acting most aggres- don or New York: he built up his 35% stake prominent during a fright about hostile sively, whereas the foreign funds try to in NBS in o-market trading, diluted his takeovers in the 1960s, so there is a chance stress how socially responsible they are. own investors’ shareholdings without that scared managements may now seek Both make up only a small slice of mar- consulting them and never oered a stan- to rebuild them. Against that, though, new ket activity. But no matter: in any business, dard price to all NBS shareholders. capital-adequacy rules due to take eect in pressure on the margin can inuence the 2006-07 will force Japanese banks to sell rest. To some degree, indeed, these ginger The wild west goes east more of their holdings. groups have been encouraged by people in Part of the problem is that takeovers and The third development is still small but the Japanese establishment with just that other pressures from shareholders were is emerging steadily. It is the arrival on the thought in mind. Mr Horie may be an out- long considered taboo or irrelevant. The scene of funds and partnerships willing to sider, but plenty of the activist funds are protective role of main banks and cross- use their investments to challenge existing run and staed by well-connected former shareholdings was enough to regulate managements or to act as intermediaries bureaucrats and by people in their 30s and matters. Now that both of those protec- to facilitate mergers and disposals. One ex- 40s who lost their jobs or their loyalty dur- tions are weakening, there is a fairly broad ample is M&A Consulting, a shareholder- ing the banking meltdown of the 1990s. consensus that the law and the regulatory activist fund that also proted from build- M&A Consulting, for example, is run by system need to be changed. But that ing a stake in Nippon Broadcasting System three partners, two of whom are former change is happening slowly. An optimistic earlier this year, and which has specialised bureaucrats and the third used to work for view is that the process is at roughly the in pressing managements to use their cash Nomura Securities. An early investor in the halfway stage. Still, some important pro- piles to raise dividends and make share rm, and a crucial provider of introduc- gress has already been made. buybacks. Another is Privee Zurich Turn- tions, was Toshihiko Fukui, before he be- One of the worst corporate sins of the around Group, a private-equity fund came governor of the Bank of Japan. Simi- 1980s was the use of subsidiaries to hide which despite its name is thoroughly Japa- larly, Ripplewood managed to recruit problems, park surplus sta or disguise ad- nese, and which has also irted with hos- several senior Japanese to its board, in- ventures: they did not have to be consoli- tile bids. A third is Advantage Partners, a cluding Minoru Makihara, then chairman dated into prot-and-loss accounts. New private-equity investor chiey in the busi- of Mitsubishi Corporation, the trading and holding-company and accounting laws in ness of acquiring assets from companies investment rm that epitomises the Japa- 1999-2001 changed that. A so-called big being split up or turned around. nese establishment. bang of nancial reform in 1998 was in Alongside these new Japanese species The livedoor bid for Fuji illustrated an- truth more like a slow drum roll, but it there are the larger and more familiar for- other point about Japanese capitalism: brought in a new regulatory body, the Fi- eign funds: Ripplewood Holdings, which that for a seemingly cosseted, conformist nancial Services Agency, with the job of with J.C. Flowers & Co made a fortune by activity, it is strikingly unregulated. When supervising nancial institutions and ac- buying Shinsei Bank, formerly Long-Term almost everyone obeys unwritten rules, counting practices. Credit Bank of Japan, from the govern- little attention needs to be paid to the writ- One obstacle to rms selling divisions ment in 2000 and transforming it; Carlyle ten ones. So the supposedly heroic Mr Ho- and subsidiaries to each other was a rule that required an appraisal of all the divi- sion’s assets by a court-appointed inspec- tor. In 2000 a new law abolished that rule for non-core business units, dened as small, underperforming ones. That does not go far enoughrms ought to be free to sell what they likebut it has stimulated a lot of trading in distressed assets. Another new rule has reduced the capital require- ment for new limited companies to just ¥1, down from ¥3m. Virtually the whole of the Japanese commercial code is being overhauled along similar lines. Nevertheless, with politicians afraid of instability and espe- cially foreign takeovers, and under pres- sure from big employers, many of the re- forms so far have been as helpful to corporate defence as oence. Laws already passed have permitted companies to oer shares with dierential voting rights, to grant stock acquisition rights through op- tions and warrants, and to set up such pro- visions as a poison pill to be deployed in Mr Horie is a livewire too the event of a takeover bid. 1 6 A survey of Japan The Economist October 8th 2005

2 On the other hand, the law has dened alties for breaking the law from 6% of af- the proper purposes of such measures as Up, from a low base 3 fected sales for most large rms to 10%, well as the need for shareholder meetings Average dividend yield for Japanese non-financial with surcharges for repeat oenders; the to approve them. And it has made proxy listed companies, fiscal years beginning April, % introduction of a new incentive for cartel votes against such measures easier. All 1.5 members to blow the whistle by oering that has helped boost the role of the courts. 1.4 discounted nes for those who come clean Earlier this year the Tokyo District Court re- 1.3 early; new powers for the Fair Trade Com- jected a crude poison pill proposed by Ni- 1.2 mission, Japan’s trust-buster, to make raids reco, an instrument-maker. 1.1 and seize documents; and new powers for The role of shareholders has been 1.0 the FTC to issue cease-and-desist orders boosted too: at the spate of annual meet- 0.9 before holding a hearing rather than wait- ings on June 29th shareholders rejected 0.8 ing until afterwards. poison-pill proposals at several big rms, 0.7 That all sounds robust, and the new including Tokyo Electron, Fanuc and Yoko- law was passed despite opposition to its 1998 99 2000 01 02 03 04 05* 06* gawa Electric. Many other similar propos- rst draft from big businesses. Yet those Source: Goldman Sachs *Forecast als passed, but signicantly even some penalties remain lower than those used in Japanese institutional investors took part the European Union and America. And in in anti-management votes. Previously months of this year, according to the Ni- the past Japan has been none too assidu- they had been quiescent. hon Keizai nancial daily, 1,735 M&A deals ous in enforcing what legislation it had in One provision the Diet (parliament) were completed, 28% up on a year earlier. this area. The OECD notes that there have considered too hot to handle was a reform As James Abegglen, a veteran consul- been only 13 criminal antitrust cases in Ja- to allow foreign rms to use their own tant and scholar in Tokyo, observes in his pan since 1950, and that no one has ever shares as currency in acquisitions in Japan, recent book, Redesigning the Kaisha, the gone to jail for breaking competition law. whether hostile or friendly. This would consolidation of whole industries during Until 2002 the FTC was a small body bring the rules for foreigners into line with the past decade has been impressive: from with a low status, rmly under a minis- those already in place for Japanese compa- 14 oil companies to four; from seven big ce- try’s thumb. However, one of the less no- nies. But in April the measure was post- ment rms to three; from 14 pulp and pa- ticed moves of the prime minister, Mr Koi- poned for a year. Unless there is a big per companies to three; from seven indus- zumi, was that he shifted the FTC so that it controversial cross-border battle in the trial gas rms to three; from ve big steel now reports directly to the Cabinet Oce, meantime, however, it stands a good rms to four; from 15 big banks to just and gave it a new boss and a bit more chance of being passed in due course. three. And big companies have traded or money. Whereas in 1995 the FTC had 220 Another area of law that needs further closed thousands of subsidiaries. investigators and a budget of ¥5.24 billion, renement is the denition in corporate last year it had 331 investigators and a bud- governance of outside directors: they have More competition, please get of ¥7.82 billion. been given an enhanced role, especially in Neither the lawyers nor the nancial ad- There are some omens that bode well big rms that choose to adopt an Ameri- visers have been idle. Many of Japan’s big- for stronger enforcement. Just as the courts can-style board committee system, but gest and most internationally famed rms have played a bigger role in securities dis- there is no requirement that they be are now more focused and ecient than putes, so the Tokyo Stock Exchange acted wholly independent. Seibu, a railway and before. Their scale and new concentration decisively when Seibu’s frauds were dis- property giant whose autocratic boss, will make it easier for them to compete closed, forcing the rm to delist in Decem- Yoshiaki Tsutsumi, was charged with fraud abroad. But for them, and even more for ber last year. The FTC too has become earlier this year, held no board meetings the huge array of domestic rms, there is more active. In March it ned six steel for seven years. It did have outside direc- another, more important question: is there rms a total of ¥6.8 billion for price-xing. tors, but they all had business relation- enough competition at home to keep them Barely a week goes by without an FTC raid ships with Mr Tsutsumi. all on their toes? or an indictment of a construction com- For all the fuss over hostile takeovers, Deregulation during the 1990s, in elds pany or a member of sta of the Japan however, such battles are rare even in such as telecoms, transport, energy, - Public Highway Corporation, a soon-to- America, which sees barely one each year. nance and retailing, beneted consumers be-privatised government agency, for rig- Even the theoretical possibility of such an to the tune of 4.6% of GDP in 2002, or so ging bids for bridge contracts. In May, the event, though, helps put pressure on man- the Cabinet Oce claims. This certainly FTC led a criminal prosecution of eight agements to improve their prots as well helped, though the OECD reports that Jap- such companies. as to pay dividends to shareholders. Japa- anese electricity and telecoms prices, for It could be argued, though, that the TSE nese corporate prots are at a record high example, remain the highest among that acted only once the game was up for Seibu. mainly for other reasons, but market pres- organisation’s rich-country members. But The bridge scandal too has been conve- sure has literally paid dividends: in the perhaps the biggest issue now is whether nient for the government: Mr Koizumi past seven years the dividend yield for Japanese anti-monopoly laws stand a wanted to show that privatisation will rms listed in Tokyo has almost doubled chance of being enforced. make a big dierence, and to discredit the (see chart 3). There is certainly some political will to agency’s top bureaucrats suciently to en- Even so, the most important sort of do so. Amendments to antitrust law sure that they cannot scupper the plan. Yet transaction, in Japan as in America, is the passed by the Diet in April and due to if competition enforcement is simply a friendly sort, whether involving whole come into eect early in 2006 will bring product of the political winds, what if the rms or divisions of them. In the rst eight four main changes: an increase in the pen- winds change? 7 The Economist October 8th 2005 A survey of Japan 7

New politics, old politicians

It will never be the same again. Well, not quite, anyway

N SEPTEMBER 1998 the cover of The the LDP, not Mr Koizumi. Mr Takenaka has beavered away more IEconomist carried the headline Japan’s That raises a crucial question: might it quietly. But the outcomes have been simi- amazing ability to disappoint, comment- all be just a mirage? That thought is raised, lar: such reform as has occurred has been ing on the government’s bungling of yet rst, by how exceptional Mr Koizumi looks heavily watered down. In the case of Japan another bank-rescue plan. It attracted a when you compare him with other LDP Post it was even rejecteduntil Mr Koizumi petulant protest from the Japanese em- politicians. He has already lasted longer in won his landslide. bassy in London. Motoo Shiina, a veteran oce than any prime minister since Yasu- Diet member, oered a more thoughtful hiro Nakasone (1982-87), who was himself No rush dissent: the correct headline, he said, the longest-serving since the postwar re- Now, Japan Post will indeed be reorgan- would have been The Japanese people’s cord-holder, Eisaku Sato (1964-72). Al- ised and sold obut over a period of amazing ability not to be disappointed. though Mr Koizumi has been a career more than a decade. This reform, like that Not so snappy, perhaps, but he had a party member and comes from a political of the highway agency, matters chiey be- point: surely in no other democracy would family, in politics he is a loner. He is said to cause the postal savings bank has been the same party that had been running the have no real party friends and no political responsible for huge distortions in the allo- country continuously since 1955the Lib- support group. Once he is out of power, cation of funds, and with it a great deal of eral Democratshave been left in govern- which could be in September 2006, or at political corruption. It also matters be- ment following a nancial crash and an the latest one or two years later, most peo- cause, after a decade of high public spend- economic slump to which they had found ple expect him to leave politics altogether. ing, the national gross public debt has no solution. They did lose power for all of The concern is reinforced if you exam- reached 170% of GDP, just when the popu- ten months in 1993-94, but then returned ine Mr Koizumi’s record of pushing his lation is ageing rapidly, opening up the to government, albeit leading a series of supposedly bold reforms through the Diet prospect of lower tax revenues and higher coalitions. And they have just been re- in the past four years. To get his way medical and pension costs. turned to power once again in a landslide, against a lot of opposition from bureau- Moreover, Japan Post, with subsidised giving them their biggest parliamentary crats and from inside the party, he broke deposits and insurance policies worth majority since 1986, despite having pre- with tradition by using non-politicians to ¥330 trillion, taking 30% of all personal de- sided over 15 years of stagnation. front his schemes: Naoki Inose, a historical posits and 40% of life insurance, has sat That account, of course, leaves out Jun- writer, for the privatisation of the Japan like an elephant in the middle of the nan- ichiro Koizumi, who since 2001 has led the Public Highway Corporation, the agency cial-services business, skewing the market LDP and served as prime minister, and in charge of building roads and bridges against the commercial banks and insurers whose early slogan was change the LDP that has been at the heart of the country’s and distorting the price mechanisms that to change Japan. His electoral genius at corrupt and wasteful public-works would otherwise direct money ows to rst looked as though it might be limited to schemes; Heizo Takenaka, an economics the best advantage. So Messrs Koizumi and his photogenic long wavy hair and clever professor and, since 2001, his main econ- Takenaka are reorganising the elephant marketing techniques, including his Lion- omic-reform minister, for the privatisation into four separate parts arranged under a heart e-mail magazine. The election result of Japan Post. Their styles have been very joint holding company, handling mail de- on September 11th, though, proved that dierent: while Mr Inose has shot from the livery, post oces, savings and insurance there is rather more to him than that. By lip in the eort to discredit his opponents, respectively. Each will have a prot-and- calling a snap general election over a single loss account, but all will remain publicly issue of economic reform, the privatisa- owned until at least 2017. Savings deposits tion of Japan Post, which had been op- Back in front 4 have already lost their subsidies, though, posed by rebels in the LDP but also, cru- Japanese parliamentary election results and the banking and insurance divisions cially, by the main opposition party, the Main parties’ share of vote, % will now have to pay more attention to risk Democratic Party of Japan, he managed 50 and returns. the seemingly impossible: to cast the LDP, Liberal Democratic Party Similarly, the highway agency has the ultimate guardian of the status quo, as 40 been split into six, with eect from Octo- the party of change. No, you might object, 30 ber 1st, but will remain in public owner- he cast himself as the bringer of change, ship for the time being. The main hope not the LDP. Yes, but under the party’s 20 there, too, is that by giving the new roads rules Mr Koizumi has only one more year Largest opposition party agencies the obligation to service and re- to serve as leader. Then, unless the rules 10 pay an accumulated ¥40 trillion of debt, are changed to extend his term, someone 0 they can be made to act in a more business- else will inherit the powerful position he 1986 88 90 92 94 96 98 2000 02 05 like and disciplined fashion. has just built for his party. The long-term Sources: Centre on Democratic Performance, Binghamton The direction of policy under Mr Koi- winner of the September 11th election was University; Gerald Curtis; electionguide.org; electionworld.org zumi is thus clear: state lending and spend-1 8 A survey of Japan The Economist October 8th 2005

mainly as networking groups rather than power centres. Mr Koizumi’s second change has been to concentrate power in the hands of the party’s secretary-general (who is ap- pointed by him) and, within the govern- ment, in the prime minister’s oce. Public funding for political parties had already added to the secretary-general’s role, be- cause the money (a total of ¥30 billion a year for all parties) is channelled through each party headquarters. Since 2003 the same has been true for political funding supplied by Nippon Keidanren, the em- ployers’ federation. That stronger party role was on display in August when Mr Koizumi ordered the expulsion of 37 LDP members of the lower house who had op- posed his postal privatisation bills. Under this new regime, advancement within the party depends on loyalty to the One of them stands out leadership more than to the factions. With- in the government, too, the leadership has 2 ing needs to be given new constraints and For now, though, the DPJ’s defeat has been strengthened. For decades, Japanese incentives, he thinks, and ultimately to be destroyed the long-held dream of many prime ministers have been fairly weak g- shrunk. Later this year, Mr Takenaka says, political pundits: that Japan would de- ures, with party power diused by the fac- he will turn his attention to eight other velop a two-party system and have alter- tions and governmental power dominated state-owned banks. There was also talk in nating governments. The LDP has regained by the ministries. That worked, you could the LDP’s election manifesto of reforms to its traditional dominance. If its coalition argue, because informal co-ordination be- the public health-care system and to pen- with a small Buddhist-backed party, New tween the elites in the bureaucracy, the sions, though few details were given. Komeito, survives, then the pair’s two- LDP and big business was strong, though Resistance to shrinking the state is sti, thirds majority in the Diet’s lower house that also led to corruption and a lack of however, not so much on ideological will henceforth allow it to get its way on accountability. As in other countries, a grounds as from interest groups: the con- everything bar a revision to the constitu- blend of economic and social change, struction industry, the bureaucrats, the tion (which also requires a two-thirds ma- scandals and public hostility has discred- medical profession, postal workers, all of jority in the upper house, where the LDP is ited that old-boy network (which in Japan whom have cultivated politicians to fur- weaker, and a simple majority in a na- was called the iron triangle), requiring its ther their cause, particularly in the LDP. tional referendum). partial replacement by more formal, rule- That is why Mr Koizumi and his front men But is it the same LDP, or has Mr Koi- based structures. from outside politics have struggled to zumi succeeded in changing it, as he prom- Under Mr Koizumi that process of re- make headway. But it also should prompt ised? Essentially, he has changed it in three placement has been accelerated, with reection on the paradoxical nature of the ways, none of which is guaranteed to sur- more money and sta for the prime minis- election result: that Mr Koizumi won his vive his retirement but all of which stand a ter’s oce and a reorganisation of minis- apparent mandate for change against an chance of doing so. The rst is that he has tries to establish a new hierarchy. One opposition party, the DPJ, whose mani- severely disabled the system of factions main tool of that new control is the Coun- festo actually proposed much more radical which had long run the party. The factions cil of Economic and Fiscal Policy, which is reforms, including a more rapid shrinking existed primarily to raise money and to chaired by the prime minister and steered of the state. Yet the DPJ was crushed, losing hand out jobs. The introduction of public by his economics supremo, Mr Takenaka. one-third of its seats. Its dull but very wor- funding for political parties in 1994 weak- In theory at least, that council can boss thy leader, Katsuya Okada, resigned. ened the fund-raising function, as did an even the nance ministry about. electoral reform at the same time that re- In theory is an important qualica- In the Lionheart’s lair placed multi-member constituencies (for tion, for much depends on how these new That paradoxical result is testament both which party factions therefore competed) powers are used, and by whom. The third to Mr Koizumi’s tactical brilliance and to with a mixture of single-member seats way in which Mr Koizumi has changed Mr Okada’s fatal mistake in getting his and proportional representation. Mr Koi- politics could determine that, although it is party to oppose postal privatisation in the zumi demonstrated that the factions were the most uncertain of all. What he seems Diet. He did that because the DPJ is an awk- weakening by winning the party’s leader- to have shown is that the way to gain and ward collection, created only in 1996-98, of ship election in 2001 against a candidate hold power is by appealing to the public, former LDP members, former socialists from the richest and supposedly strongest by making gestures of leadership and by and young, genuinely liberal newcomers; faction, and rubbed in the lesson by ignor- favouring change. Budding successors the socialists among them retain close ties ing the factions when appointing his cabi- who would like to continue in that vein, ei- to the postal workers’ union. net. They still exist, but for the moment ther by choice or because that is the way to1 The Economist October 8th 2005 A survey of Japan 9

2 win elections, should thus be expected to paign supporters even if they have no di- mechanism for involving citizens on judi- follow Mr Koizumi’s lead in disabling rect knowledge of them. These changes cial panels in criminal cases. party factions, centralising party power have not eliminated corruption by any As Je Kingston, a professor at Temple and strengthening the prime minister’s of- means, but they have constrained it. University in Tokyo, writes in his excellent ce. But will they? A two-thirds majority in Meanwhile, the voice of public opinion book Japan’s Quiet Transformation, the Diet, with an enfeebled opposition, has been getting gently but steadily stron- what is happening is that the old system of could cause them to move the other way: if ger. Disappointment with the old guard rule by law, with wide administrative you feel untouchable, why bother with has long been coming through clearly in discretion and limited legal redress, is be- public opinion? local elections for city mayors and prefec- ing replaced by something more akin to tural governors, where all sorts of maver- rule of law. It is the same trend as that ev- Voice of the people, voice of law icks and outsiders have gained power. Sep- ident in policy co-ordination by elites and By continuing a policy begun in 1998 by an tember’s vote demonstrated at least a the evolution of corporate law: old meth- earlier prime minister, Ryutaro Hashi- desire for change at national level too. ods of discretionary power based on un- moto, of cutting public-works spending, Also, though, it has become easier for non- written rules are fading away, with new and now reinforcing it through reforms to party groups to inuence policy outside structures and new written rules rising to Japan Post and the highway agency, Mr the Diet. Until 1998, individuals could not take their place. Koizumi has probably put an end to pork- readily form lobby groups or associations Not surprisingly, not everyone feels barrel politics. The demographic squeeze to promote their particular hobby-horses, comfortable with this increase in the role on public nances will make that almost because such non-prot organisations had and number of lawyers. But the increasing impossible to reverse. The successors to Mr no legal basis. Since then, more than role for public opinion is causing some dis- Koizumi most often mooted within the 20,000 have been recognised under a new quiet too. Being popular and campaigning partyShinzo Abe, a fairly right-wing for- law. Crucially, they do not yet benet from publicly for change, as Mr Koizumi does, is mer LDP secretary-general who is both the sort of tax exemptions that help ex- all very ne and democratic, but alongside youthful and telegenic, and Yasuo Fukuda, plain why America has more than 1.4m such virtues has also come a possible vice: a respected former cabinet secretarysug- non-prots. But even this small vanguard anti-Chinese nationalism. Mr Koizumi is gest that the old stued-shirt politics might is beginning to have an impact on policy no sophisticate in foreign aairs, but in his also be in abeyance. But in a newly victo- debates, though mainly at local level, and four years in oce he has achieved a rious party, personal support could shift to launch legal challenges to companies steady expansion of Japan’s constitu- rapidly. That makes it premature to make and to the government. tionally limited military role, for example assumptions about the succession. That public pressure is now more easily by sending troops to Iraq, and a steady de- There are, though, more lasting signs applied thanks to a freedom-of-informa- terioration in Japan’s relationship with that inspire some condence about the di- tion law which was passed in 2001, and to two of its neighbours, China and South rection and durability of change. The basic quite sweeping judicial reforms that be- Korea. Until September’s election, those incentives surrounding politicians were came law in 2002-04. These have resulted worried by such developments could altered not by the exceptional Mr Koizumi in the opening of 68 new professional comfort themselves with the hope that the but by those electoral and campaign-- schools designed to double the number of opposition, the DPJ, which adopted a nance reforms back in 1994. Political ethics qualied lawyers over the next decade or much less assertive, more diplomatic for- laws from that same period have sought to so; in the imposition of a two-year time eign stance, could either become the next crack down on corruption, as has a 1994 limit on all rst-instance trials of criminal government or else restrain the LDP. No provision that made candidates legally and civil cases; in the creation of a new longer. Like its old foes in China, Japan is responsible for illegal actions by their cam- intellectual-property court; and in a new now back to one-party rule. 7 New East Asia, old enmities

China’s growth has changed Japan’s region, but is also changing Japan’s politics

MONG the forces pressing upon Japan, decades, that threat is no more. Where Ja- Yet it is not really together with its new Anone has changed more since the pan was then a rarity as an East Asian de- friends either. For one thing has, if any- country’s asset-bubble burst in 1990 than mocracy, with just the young Philippines thing, got worse: Japan’s argument both its own neighbourhood. Where 15 years democracy and the dictatorial sort in Ma- with itself and, more painfully, with its ago China was merely a pariah with econ- laysia and Singapore as company, now it neighbours about its 20th-century history. omic potential, having recently massacred has been joined by South Korea, Taiwan, This year, there have been mass demon- protesters in Tiananmen Square, it now Thailand and Indonesia. Where then Ja- strations in both communist China and has a better international reputation and a pan depended on exports to America and democratic South Korea against Japan, ac- much admired (and two and a half times western Europe, now trade with other cusing it of refusing to face up to its past. Ja- larger) economy. Where the Soviet Union Asian countries makes up 45% of the coun- pan’s eorts to gain a permanent seat on was then Japan’s principal military con- try’s total. In both economic and political the United Nations Security Council if cern, as it had been for the previous four terms, Japan is no longer alone in Asia. there is a broad reform of council member-1 10 A survey of Japan The Economist October 8th 2005

750 km

CHINA RUSSIA Sapporo Hokkaido Beijing NORTH PACIFIC KOREA Sea of 2 ship have been set back. Pyongyang Japan Honshu (East Sea) OCEAN Perhaps this doesn’t matter much, ex- Seoul Sendai cept to diplomats? Japan has lived with ar- SOUTH JAPAN guments about history ever since 1945, Yellow KOREA Nagoya Tokyo without suering too much harm. Two fac- Sea Hiroshima Kyoto 5 tors, however, make that sanguine re- Osaka Integrating Japan’s merchandise trade with Asia sponse look unwise. One is that there is a Shikoku as % of total Japanese merchandise trade new threat in the region, or at least a more Nagasaki Kyushu 50 worrying old threat. That is North Korea, East 45 which gave Japan the jitters in 1998 when it China 40 tested a long-range missile by sending it Sea PACIFIC ying over Japan; which caused great an- 35 guish and anger in 2002 when it admitted 30 Taipei Okinawa OCEAN at last to having abducted Japanese citi- 1990 92 94 96 98 2000 02 04 zens over several decades; and which now Source: IMF TAIWAN claims to have made several nuclear weap- ons. Japan is one of the ve countries tak- ing part in joint talks with North Korea front Taiwan, which would give Japan an That would injure Japan’s national about these issues (the others are China, almighty headache. But in that case Japan pride but could also hurt its national inter- Russia, America and South Korea), and would not be the only one reaching for the ests. For Japan, too, would like to be the stands shoulder to shoulder with its Amer- aspirin. In regional politics, moreover, rule-setter, the top dog in the region. In that ican ally in urging a tough line on the her- other Asian countries are as suspicious of regard, what is in prospect is just a resump- mit kingdom. But Japan is in a weak posi- China as they are of Japan. They may like tion of a natural historical rivalry that has tion to convince China and South Korea to China’s market, but none is dependent on lasted a thousand years or more. Like Brit- be tough too, because of its poor relation- it: in 1999-2004, according to BNP Paribas, ain in relation to France and Germany, Ja- ship with both countries. South Korea was the Asian country with pan as an oshore island has always The American alliance, rst formalised the strongest trade links to China, but wanted to retain its independence from in the US-Japan Security Treaty in 1960 and China still accounted for only 10% of its im- the continental power. But, also like Brit- strengthened several times since, bolsters ports and 14% of its exports. ain, it has an interest in gaining inuence Japan’s condence in the face both of Nor does China represent an immedi- over trends in its neighbourhood, lest they North Korea and of those poor neighbour- ate economic danger for Japan. The two become harmful to it. That wasn’t neces- hood relationships. Participation in Amer- economies are strikingly complementary, sary for 45 years after 1945. Now, the same ica’s missile-defence plan, while remain- with Japan hogging the sophisticated end trends that are making such inuence nec- ing under America’s nuclear umbrella, of the electronics, engineering and vehicle essary are changing Japanese politics in may well be Japan’s best form of insur- industries and China occupying the ways that risk making it harder to attain. ance. Nevertheless, with public opinion cheaper end. Competition from South Ko- sensitised by North Korean provocations, rea for Japan’s top companies is much Soft nationalism or hard? the government has exploited the situa- stier than that from China: Samsung in The combination of North Korean prov- tion to give itself a bit more autonomy in electronics, POSCO in steel, Hyundai in ocations and Chinese bullying over his- military and intelligence matters: it has cars and ships have all given Japanese tory are pushing Japanese politics further launched its own spy satellites and has rms more pause for thought than have to the right. Even the once slavishly pacist been shifting its defence spending away Chinese companies. That, alas, helps to ex- left-wing daily paper, the Asahi Shimbun, from tanks and towards advanced war- plain why Chinese competition has not has adopted a more strident line especially ships and submarine-detection techno- yet shocked Japan into economic reform. on North Korea but also on China’s recent logy. And in the longer term, North Korean China is not as big a concern for high-tech anti-Japanese demonstrations. And a dis- collapse may be as much of a threat as the Japan as it is, say, for mid-tech Italy. pute over the rights to oil and gas in an area current regime’s sabre-rattling, for unica- The real worry is not about present of the East China Sea claimed by both tion on the Korean peninsula would create threats at all; it is about a future that ap- countries has provided a test-case of Ja- a still-larger neighbour with whom Japan pears to be unfolding with disconcerting pan’s determination: if Japan gives way to has rocky relations, and might force a re- speed. If China’s economy, its regional Chinese pressure over the Chunxiao gas think about America’s military deploy- clout and its defence spending all continue eld, it is said, then where will China’s ex- ments in Asia. to grow at something like their current pansionism end? The dragon is hungry for The second anti-sanguinity factor is rates, then China threatens to overshadow resources and will always push for more. China. It is not that China poses a big threat the whole region and, more pertinently, Ja- Lines must be drawn. to Japan now, in military, political or econ- pan, during the next quarter-century or so. The sort of nationalism being exhibited omic terms. It is expanding its defence As that happens, other Asian countries in Japan in response to such disputes is spending rapidly, by 12.6% in the past year, might feel forced to swallow their distrust much milder and less worrying than that but its armed forces remain less advanced of the Chinese dragon and seek friendship shown in either China or South Korea. Jap- than Japan’s constitutionally constrained with it for fear of something worse. And anese nationalist fringe groups go around self-defence forces. The main threat China could come to set the rules for re- in loudspeaker vans touting their ideas, as China’s defence build-up currently poses gional deals, whether in trade, investment, they always have, but ordinary Japanese is that it might get strong enough to con- the environment or even security. have not matched their neighbours by1 The Economist October 8th 2005 A survey of Japan 11

2 marching or rioting. And there is no con- Japanese uncomfortable, especially busi- small number of Japanese history text- sensus about how best to react: whereas nessmen wanting to sell their goods in books that whitewash the country’s war LDP hawks want to deal with territorial China. Some debate has taken place about conduct now seem to strike more Japanese disputes by sending drilling ships and risk- whether alternative memorials might be as unfair. Japan has apologised for the war ing confrontation, plenty of politicians nurtured or created (see box), or how the on many occasions, runs the argument, would still prefer a quieter response. history issue might otherwise be defused. but the neighbours will never be satised. What seems to be happening, though, But whereas similar Chinese and South This new rmness in Japan’s foreign is that in response to Chinese pressure Ja- Korean protests at ocial visits to the policy, or at least in its opinions about it- pan’s position is hardening. The annual shrine in the 1980s by Yasuhiro Nakasone, self and its region, has coincided with a de- visits made since 2001 by the prime minis- Japan’s most recent openly nationalist bate among diplomats and politicians ter to the Yasukuni shrine in Tokyo, long Ja- prime minister, led speedily to a consen- about the right approach to East Asia. For pan’s principal memorial to its war dead, sus that the visits should be stopped, the many years, Japan has been leery of eorts are a case in point. They have made many protests about the shrine and about the to establish Asian regional institutions, for1

A private war shrine with The ambiguity of Yasukuni imperial status

F YOU visit the Yasukuni shrine in cen- of state himself, the emperor. No em- the Japan Focus website, the Yushukan is Itral Tokyo, as Junichiro Koizumi has in- peror has visited the shrine personally not like most other countries’ ocial war sisted on doing once a year to loud since 1975, but every year, during the two museums: it is a museum without men- protests in China and South Korea, it is principal rites at the shrine in the spring tion of any enemies. hard at rst to see why this memorial to and the autumn, an emissary from the Its sole purpose is to glorify Japan’s Japan’s war dead is so controversial. Ev- emperor plays the central role. The ar- dead, but in doing so it tells a clear story ery country commemorates its military chive at the shrine, which is where the about Japan’s conquests in Korea, Taiwan dead; this shrine dates back to 1869 and is names of the war dead are logged, was and China and about the Pacic war in dedicated to the 2.5m Japanese who have built with a private donation from Em- general: that they were heroic eorts to died in wars or civil wars since 1853. Its peror Hirohito (now Showa) in 1972. liberate Asia. And it features a large ex- name, bestowed upon it by Emperor The museum has no such direct link to hibit about the one judge at the Tokyo Meiji in 1879, means peaceful country. the emperor. But, as John Breen of Lon- war-crimes tribunal, Radhabinod Pal Only once you hear that among the spir- don’s School of Oriental and African from India, who considered the tribunal its venerated at Yasukuni are 14 class A Studies wrote in June in Yasukuni illegitimate. On the shrine’s website, war criminals who were executed after Shrine: Ritual and Memory, an article for when you click for the museum, a slogan the Tokyo war tribunal in 1948, and appears: The truth of modern Japanese whose names were added to the roster at history is now restored. the shrine in 1978, do worries start to set Ocially, that is not the government’s in. But it is the shrine’s war museum, the view. Japan accepted the verdict of the tri- Yushukan, which really sets foreign eye- bunal when it signed the San Francisco brows rising: this is no mere place of peace treaty in 1951, and insists that de- prayer, but puts over a controversial view bate about the war is an inevitable part of of Japanese history. being a democracy. But the fact that this To concern expressed about the pres- debate is being conducted not just by ex- ence of those 14 spirits, the government’s tremists but by a shrine associated with response is that, yes, this is regrettable but the prime minister and many other LDP Yasukuni has been a private religious en- politicians as well as with the emperor tity since 1945 and Japan’s post-war, makes this ambiguous, to say the least. American-drafted constitution separates One obvious solution would be to state and religion, so the government can have another ocial memorial. Yet one do nothing about it. Besides, in the Shinto already exists: a war cemetery at Chidori- religion, the kami, or spirits, at a shrine are gafuji in Tokyo. There is also a big cere- thought to be indivisible: the war crimi- mony on August 15th every year at the nals have been put among the 2.5m oth- Nippon Budokan, Japan’s martial-arts ers rather like 14 drops of water might be centre, to commemorate the end of the put into an ocean. second world war, which is attended by The aw in that claim of constitu- the emperor and the prime minister. The tionally mandated impotence is that Ya- real problem lies at Yasukuni. For, private sukuni retains a strong tie with the head No ordinary shrine or not, it has a special status. 12 A survey of Japan The Economist October 8th 2005

2 equal and opposite reasons: it has feared China’s economy continues to grow, there that its natural leadership of such entities, is no chance that Japan will be able to beat given its economic weight, would be re- it in an outright contest for regional leader- sisted for historical reasons; and it has shipand any such contest would risk be- been concerned that as such entities de- coming destructive for both countries. A velop they could come to limit its freedom better strategy will be to use regional insti- of manoeuvre. Its most important Pacic tutions and treaties to dilute China’s inu- alliance being with the United States, it has ence, establishing a framework of rules not wanted any commitments to evolve and procedures within which both coun- that could ever complicate that alliance or tries will have to operate but which also of- diminish America’s role in the region. fers the chance for Japan to build alliances China’s rise has, however, changed the with other Asian democracies. situation, and promises to do so even more When comparisons with the European in future. If any sort of East Asian commu- Union are made, it is often assumed that nity analogous to the European Union the right analogue for Japan is Germany, emerges, then Japan cannot aord to since both were defeated in 1945. But that watch it becoming a platform for Chinese does not feel quite right. Japan’s situation power. Moreover, the case for more re- is akin to Britain’s in many ways, being in gional co-operation and even integration Asia but not entirely of it, and having a is increasing with the rising interdepen- closer relationship with the United States dence of the region’s economies. So, at the than with its neighbours. Yet during the same time as its politics and public opin- Unfriendly neighbours next few decades, Japan’s ambition ion are becoming more assertive and more should arguably be to do what France once independence-minded, Japan is also be- will be held in Malaysia in December. It did successfully in Europe: to be the Asian coming more interested in taking part in will also be the rst big regional meeting in country that aims to use regional institu- and (it hopes) leading regional institu- which America has not been a participant. tions to give itself a greater voice in world tions. The rst East Asian Summit, bring- That fact makes many Japanese dip- aairs, and to prevent its hefty neighbour ing together government heads from lomats almost as nervous as the Ameri- from pushing it around. Except, of course, South-East Asia, China, South Korea, Ja- cans. But nurturing regional institutions that it will want to remain on friendly pan, India, Australia and New Zealand, must surely be the right policy for Japan. If terms with the Americans. 7 Visions of 2020

Japan’s next 15 years are likely to be a lot sunnier than the last 15

VERY so often, a slogan rings out: Wel- pany. Anyone know the Japanese for plus take Japan over, say, the next 15 years. But Ecome to the new Japan! It comes from ça change, plus c’est la même chose? some guesses can be made. any pundit or panjandrum wanting to As this survey has argued, however, The easiest place to start is with demog- claim that, in a country that to many seems that too is misleading. Those incremental raphy. With birth rates having plummeted so unchanging, some dramatic new trend adjustments, in politics, corporate law, since the baby-boom of the 1950s and life can be seen. But it is usually misleading, or capital markets, nancial regulation, la- expectancy having lengthened every year, exaggerated, for Japan doesn’t do drama bour law and practices, and much else be- the trend is pretty much xed for at least (and that is not a comment on Kabuki and sides, have altered the incentives guiding the next 15-20 years: the government Noh), except when it feels under threat of society, the economy and politics. In part, thinks the total population may have be- invasion, as in the 1860s, or suers a war- the eect has been to reduce the distor- gun to shrink in the rst half of this year, time defeat, as in 1945. The stock- and prop- tions, misallocation of capital and indisci- and it is certain to do so from 2007 on- erty-market crashes that began in 1990 pline that have for about two decades neu- wards. That shrinkage will be slow, but were dramatic for those caught up in them, tralised Japan’s long-standing economic with fewer children already entering the and certainly produced a sharp change in and social strengths: excellent education, labour force and more people retiring, the perceptions of Japan in the world as well co-operative relations inside companies working-age population (ie, aged 15-64) as in Japan’s perception of itself. But the and advanced technology. But also, over will fall by about 0.7% a year, says the Min- social and political response was totally the longer term, such a gradual accumula- istry of Health, Labour and Welfare. undramatic. The country muddled tion of many small reforms will lead the If you extrapolate current trends well through, at rst in denial but later with a country in new directions, especially beyond 2020, you get quite startling num- host of incremental adjustments. Fifteen given the recent changes in East Asia and bers. The health ministry’s central projec- years on, the same party is in government the world economy as a whole, and given tion suggests Japan’s population could fall with a big majority, society remains sta- its own changing demography. No one can from nearly 128m now to about 100m in ble, and Toyota is the world’s best car com- really know where those directions might 2050. Peter Morgan, chief economist in To-1 The Economist October 8th 2005 A survey of Japan 13

2 kyo for HSBC bank, reckons the ministry is Another solution that is often mooted the same time many companies hoarded being over-optimistic about birth rates, to deal with both low fertility and scarce labour rather than laying o workers. given that more and more women are mar- labour is immigration, which in conform- Now, with public-works schemes slashed, rying later or not at all. He thinks that a ist, homogeneous Japan has so far been bank bad-debt accounts honest, share- prudent projection for 2050 is actually a tiny, except to take up the nastiest of jobs. holders and other ginger groups pressing drop to 86m people. As Mr Morgan knows, Most people’s chief candidate for a bigger public companies to boost prots and divi- however, demography is not destiny be- immigrant workforce has been health dends, and the over-diversication of big yond 15-20 years. France, Scandinavia and care, where a government desperate to re- companies a thing of the past, capital is above all America have shown recently duce state medical costs ought to welcome bound to be allocated more eciently. that falling fertility rates can start to rise cheaper Filipina nurses with open arms. There is much catching up to be done in again. That could happen in Japan too. The medical profession, protective of its capital investment in any case that should The trouble is that the possible policy own pay, has blocked that up till now. boost productivity, and a much tighter la- responses to boost the workforce and re- Eventually, cost pressures combined with bour market will force companies to seek vive population growth could end up a stronger economy are likely to break that ways to boost it even more. contradicting one another. With the la- resistance. But beyond nursing, nobody One way that is already being talked bour force shrinking and ageing, compa- should expect a big rise in immigration. about at the bigger manufacturing compa- nies and the government are both likely to The social and cultural fear of it shows no nies is the use of robots. Japan has long try much harder to bring more women sign of changing. gone further than other developed coun- into the labour force and to use them in tries in replacing workers with machines. skilled and responsible positions. But the The potential of robots An alternative is to replace Japanese work- more that eort succeeds, the fewer babies The opening article of this survey cited the ers with Chinese ones by opening fac- are likely to be born. If the government OECD’s recent estimate of Japan’s poten- tories in China, and some of that has been tries to encourage women to have more tial annual growth rate in 2004-10: just done. But the big electronics rms, for in- children, on the other hand, fewer will be 1.3%. That number anyway looks low, as stance, are leery of that and others may be- in the workforce in their 20s and 30s. even during the country’s stagnant decade come so too: Chinese workers’ productiv- The way to meet both of those objec- of 1993-2003 the annual average growth ity is lower, they are harder for the tives would be to spend a lot more public rate was 1.1%. What it reects, though, is an Japanese to manage, there is a big risk of and corporate money on child-care facili- arithmetical calculation based on two intellectual-property theft, and political re- ties, which are currently in short supply. numbers: the shrinking labour force just lations between Japan and China are The old way was to use granny, but today’s described; and the slow annual growth in likely to remain scratchy. All this could and tomorrow’s grannies want to spend productivity in the 1990s of about 2%, a well make robots and other machines their retirements travelling the world, and whole percentage point less than in the increasingly attractiveespecially if capi- young women are not keen on having 1980s. But the OECD’s projection for pro- tal costs stay low. them around the house in any case. So ductivity growth until 2010 is only a miser- No one can know, in an economy as there is bound to be some increase in able 1.7% a year. large and diverse as Japan’s, which indus- spending on child care. Here is a prediction, made with no tries are going to grow the most during the Awkwardly, the pressure for that arithmetic but much condence: Japan’s next 15 years. The game of picking winners spending will come at the same time as the growth rate for the rest of this decade, and became obsolete long ago. It is safe, public nances are being tortured in other quite possibly for much of the following though, to say that technology will still ways. Ideally, you would not want to start decade too, will be a lot higher than 1.3% a play a big part in investment and output dealing with all these problems when the year. The country saw its productivity growth in Japan. The country has been budget decit is already at 6.4% of GDP growth drop during the 1990s because it spending 3.1% of GDP on research and de- and gross public debt is 170% of GDP, as misused huge amounts of capital, and at velopment even during the stagnant years, they have been in 2004-05. That is why the compared with 2.8% in America and an av- trend that Mr Koizumi has been busy ac- erage of 1.9% in the European Union. Much celerating, namely cutting back state Demographic destiny 6 of that is in advanced electronics, a eld in spending, especially in wasteful public- Japanese: which Japanese rms still lead the world. works schemes and subsidised lending, is total population, m In future, there will be plenty too in nano- † bound to continue. Space needs to be fertility rate* working-age population, m technology, which takes the Japanese skill made in the public purse for child care, 2.4 240 in miniaturisation down to the molecular FORECAST pensions and medical costs. 2.0 200 level. Big eorts will also be made in bio- A shrinking labour force, with eorts to technology, though Japanese rms have a give women a bigger role, also means that 1.6 160 meagre record in that eld so far. the great worry of the past ve yearsthat A serious problem in the past 15 years the rise of part-time and contract workers 1.2 120 has been slow growth in services busi- was producing a two-tier workforceis 0.8 80 nesses, which have failed to provide likely to fade. There may be some more enough jobs and income to make up for trimming of the protections given to regu- 0.4 40 those lost in metal-bashing. Deregulation lar workers in order to keep things exible, has improved matters, but costs for tele- but with labour scarce the new shifting 0 0 coms and electricity remain high relative 196070 8090 200010 2030 40 50 army of irregulars, now 30% of the total, to those in other countries and there is still † will surely fall in numbers. Source: Lehman Brothers *Children per woman 15-64 too little competition. A prime example is1 14 A survey of Japan The Economist October 8th 2005

15 years. With the important exception of the public debt, the excesses from that per- iod now look to be gone. Politics and pub- lic policy will again face up to the demands of auence, of labour shortages, of rising environmental concerns, of faltering uni- versities and, above all, of a changing East Asian neighbourhood. Given its huge electoral success on Sep- tember 11th, much of that political debate can now be expected to take place within the Liberal Democratic Party, just as it has for the past half century, rather than be- tween the twin poles of a two-party sys- tem. But it would take a brave man to pred- ict that the LDP will still be in power in 2020. The lessons from Mr Koizumi, that Rare and precious electoral success requires charisma, a clear message and the promotion of change 2 the vast wholesale-supply business: Jesper tions of companies. He thinks that young rather than the old ingredients of money, a Koll, chief economist at Merrill Lynch in entrepreneurs like livedoor’s Takafumi family name and a party machinewill Tokyo, points out that of Japan’s 380,000 Horie, the notorious hostile bidder, are too not be lost on the younger generation in wholesalers, two-thirds trade with each greedy for money. the opposition. Their time will come. other rather than directly with a retailer or Over the next 10-15 years, Japan will It might even come over the issue of for- a producer. The squeeze on those middle- have to begin to deal with the conse- eign policy. The LDP’s hawkish response men has begun. Seven-Eleven, for exam- quences of population decline. Faced with to Chinese bullying has stoked up some ple, recently cut soft-drink prices at its con- that burden, the country’s GDP growth nationalist feelings in Japan, but this re- venience stores by more than 20%, at the will never again reach the dizzy heights of mains a pacist nation at heart. A bigger wholesalers’ expense. the 1960s, 1970s and 1980s, nor be any- role in peacekeeping and humanitarian Another services business that will thing like as exciting as China’s. But the operations can be expected in future, but need a kick up its bottom line is travel and more important measure is GDP per head, short of a grave international crisis there is tourism. All those pensioners are going to for that gauges living standards: if moder- little likelihood of Japan revising its con- want to do more and more sightseeing, ate GDP growth can be maintained along- stitution to unshackle its armed forces, nor and rural areas are going to need the jobs side a slowly shrinking population, then of the country going nuclear. that tourism brings. Although transport in GDP per head will rise quite nicely. Hence a nal prediction for the Japan of Japan is top-notch, it remains pricey, how- Just as neither the politics nor the eco- 2020. In 15 years’ time Japan will be a lead- ever, and hotels are poor. An even bigger nomics of America after 1945 could sensi- ing member of some sort of pan-Asian un- problem is that job-creation through pub- bly be predicted on the basis of trends dur- ion, which will help it to keep China at bay. lic works has made so much of the coun- ing the Great Depression of the 1930s, so But it will still huddle closest to the United tryside so ugly, thwarting job-creation the politics and economics of Japan ought States, which will still have bases on Japa- through tourism. There are the beginnings not to be projected from its depressed past nese soil. Some things never change. 7 of a movement among local authorities to tidy up their areas, dealing with what have Future surveys become known as keikan mondai, or view Oer to readers Reprints of this survey are available at a price of problems. But there will have to be a lot £2.50 plus postage and packing. Countries and regions more of that sort of thing if tourism is go- A minimum order of ve copies is required. Canada November 19th ing to grow, especially from abroad. Italy November 26th Corporate oer Saudi Arabia December 17th Back to the politics of auence Customisation options on corporate orders of 500 Business, nance, economics and ideas If the government is to become serious or more are available. Please contact us to discuss Intellectual property October 22nd about raising productivity growth, which your requirements. Micronance November 5th it surely must, competition will have to be Send all orders to: The evolution of man December 24th strengthened, whatever the objections. The Rights and Syndication Department Still, even with stronger antitrust enforce- 15 Regent Street, London SW1Y 4LR ment and fresh deregulation to encourage Tel +44 (0)20 7830 7000 more entrepreneurs, Japan is not going to Fax +44 (0)20 7830 7135 become an American-style, free-market e-mail: [email protected] economy. You can tell by listening to one of its leading venture-capitalists, Yoshitaka Previous surveys and a list of forthcoming Kitao of Softbank Investment. Despite his surveys can be found online brash braces and combative manner, Mr www.economist.com/surveys Kitao talks a lot about the social obliga-