Japans Decline

Japan's rise, more phenomenal than Europe's recovery after WW II, lasted less than two generations, between 1955, when the country finally surpassed its prewar GDP, and the late 1980s, when it was widely seen as an unbeatable economic Titan. This surge was all the more remarkable considering its near-total dependence on imported energy and the OPEC-driven oil price shocks of 1973-1974 and 1979-1980. At that time its admirable dynamism and enviable economic performance earned it widespread admiration and generated apprehension and outright fear regarding its future reach. Its rise was not derailed even by the Plaza Accord of September 22, 1985, by the G-5, the group of five nations with leading economies, which eventually led to near halving of the yen/dollar exchange rate (from 254 by the end of 1984 to 134 by the end of 1986) and to a spree of foreign acquisitions by Japanese companies and record purchases by the country's art collectors (Funabashi 1988).

As Japan's high-quality exports kept rising, Ezra Vogel, Harvard University's leading expert on Japan, published Japan as Number One (1979). Japan's expansive trend defied the revaluation of the yen in 1985 and accelerated during the next four years; the Nikkei index was at just over 13,000 by the end of 1985 and peaked at nearly 39,000 in December 1989 (fig. 3.9). But right after that, Japan's bubble economy burst in spectacular fashion (Wood 1992; Baumgartner 1995). History has no other example of a country whose standing switched so rapidly from that of a globally admired technical and manufacturing superpower to that of a deeply ailing economy.

Japan's GDP growth, unemployment, Nikkei stock index, and urban land prices, 1982-2006. Plotted from data in JREI (2006).

Japan's GDP growth, unemployment, Nikkei stock index, and urban land prices, 1982-2006. Plotted from data in JREI (2006).

As just about everything began to unravel, the critics of Japan's bubble, ridiculed during the 1980s, became the new prophets. By the end of 1990, as Nikkei index fell to less than 24,000, many experts still foresaw an imminent recovery. But the decline continued, and by 2002 the index fell to less than 8,600. Then it rose to about 11,400 by the end of 2004, and by the beginning of 2008, it was at 15,308, still 60% below its record level. In contrast, the Dow Jones index reached 13,624 by the beginning of 2008, 16% above its pre-9/11 peak of 11,722. Because so much of Japan's inflated stock market was propped up by a real estate price bubble, the slipping Nikkei index devastated property values. By 1995 the index of urban land prices in Japan's six largest cities fell to half of its peak 1990 level, and then it continued to decline; by 2005 it was 25% of its top bubble value (see fig. 3.9; JREI 2006). More important, Japan, previously the paragon of value-added manufacturing, began losing jobs to other East Asian countries. In 1989, Japan derived more than 27% of its GDP from manufacturing; by 2005 that share fell below 20% (Statistics Bureau 2006). Complaints about the hollowing-out of the economy, heard strongly in the United States for the first time because of the country's huge trade deficits with Japan during the 1980s, became common in Japan. And every passing year has failed to arrest, much less reverse, Japan's profound and long-lasting retreat from its place as a top economy and a leading technical innovator (Yoda 2001; Callen 2003; Hutchison and Westermann 2006).

Japan's stagnation has given rise to many unaccustomed sights, such as homeless men living in cardboard boxes in railway stations, parks, and side streets, and dismal statistical indicators. The unemployment rate, which was mostly 2%-2.5% during the 1980s, rose to 5.5% by the end of 2001; the suicide rate, traditionally higher in Japan than in Europe or North America, increased from 16.4/100,000 in 1990 to 25.5/100,000 by 2003 (Statistics Bureau 2006). And in 2007 the first large cohort of elderly baby boomers launched the country's mass retirement wave (typically at age 60). At the same time, increasing numbers of young people (more than 1 million) have opted out of the labor market. This NEET generation (not in employment, education, or training), which prefers just hanging out in strange clothes and hairdos, can be seen as a sign both of Japan's national decline and its continuing personal affluence.

But some things have not changed. Japanese women still live longer than women elsewhere (their average life expectancy at birth surpassed 85 years in 2003, compared to 83 in France and 82 in Canada), and the mean per capita GDP is (in terms of PPP) only marginally behind the French or Canadian level. There have even been some welcome gains. After two generations of very high savings, people began spending more freely, on air conditioners, bathrooms, cars, and flights to Thailand or Europe. To be sure, the savings rate plummeted, but more Japanese enjoy life in greater comfort at home and more of them spend their vacations (still short, even when compared to U.S. vacations) abroad. In 2005 more than 17 million Japanese tourists (or nearly every seventh person) left the archipelago.

Japan's prospects are discouraging. Despite the prolonged economic shock, the country still has not made sufficient adjustment to its peculiar banking, management, and decision-making systems, which are generally considered the preconditions of a new beginning (Carlile and Tilton 1998; Lincoln 2001; Grimond 2002; Tandon 2005). Prolonged recovery has become much harder because of a combination of economic and political factors: the relentless rise of China and its confrontational style of foreign policy, increasingly precarious dependence on the grossly overextended United States, and the perennial danger of irrational North Korea. By

2005 there were many signs of a real turnaround, and a key question seemed to be: If Japan's rise during the 1980s was uncritically hyped by most of the country's admirers, are not the country's detractors now repeating the same mistake in reverse by degrading Japan to a category of lasting underperformer?

The editor of The Economist argued that this is precisely the case and concluded that the country "is at last ready to surprise the world how well it does, not how badly" (Emmott 2005, 3). There has been no shortage of statistics to buttress an optimistic case. By 2003 Japan's annual GDP growth rose again to more than 2%, and many large companies became profitable again (some because of their links with manufacturing in, China, others thanks to growing worldwide demand for Japan's well-known brands of manufactures). By 2005 newly available jobs nearly matched the number of applicants (the ratio was below 0.5 in 1998), and in July

2006 seven years of deflation (as high as -0.9% of the consumer price index in 2002) came to an end as the Bank of Japan raised its interest rate from 0 to 0.25% (the rate was 6% in 1990).

There are at least three major reasons that I do not foresee Japan's regaining a status comparable to its position during the 1980s. The first reason is perfectly captured in Donald Richie's perceptive Japan diaries, in his entry for February 12, 1999. When Karel van Wolferen, who authored a book on the enigma of Japanese power (Wolferen 1990), remarked that the only way out of Japan's dilemma was some kind of revolt that he could not imagine, Richie (2004, 429) told him "that Nagisa Oshima had said that this occurred only three times in Japan's history; the

Tempo Reforms, the beginning of Meiji, and in 1945. And each time the structure recrystallized, and petrified." This may be dismissed as too deterministic, but no diligent student of history can deny the existence of national predilections.

The second reason is that the signs of Japan's domestic renaissance have been accompanied by unsettled relations with its three western neighbors, by their deepening distrust and dislike of Japan, whose manifestations include mass demonstrations in China's cities, South Korea's frequent diplomatic protests, and the undisguised hostility of North Korea that provoked the government to contemplate a future possibility of a preventive defensive strike. These seemingly intractable external factors are the main reason that even if a widely discussed change in its constitution removed the restrictions on Japan's military actions (Nippon Keidanren 2005), the country would remain no less dependent on its strategic ties with the United States.

The third reason is Japan's declining population. By far the most fundamental obstacle to Japan's reincarnation as a great power of the twenty-first century is the fact that the country's partial economic recovery came so late that it merged with the onset of Japan's depopulation and with a globally unprecedented aging of its people. Two generations of decreasing total fertility rate—from a post-WW II peak of 2.75 in the early 1950s to about 1.3 (well below the replacement level of 2.1) by the early 2000s—have made it inevitable that Japan's total population will decline. Only a massive, Canadian- or Australian-style immigration that would admit at least half a million people per year could reverse this, but such a policy change is most unlikely. Consequently, the only uncertainty concerning Japan's aging is the pace. Its many socioeconomic consequences should be similar to those that will be affecting other countries (England 2002; McMorrow 2004; MacKellar et al. 2004).

The medium variant of the best Japanese projections of the early 2000s expected peak population in 2006, at 127.74 million (NIPSSR 2002), but the preliminary counts of the 2005 census (held on October 1) showed that the total population of 127.76 million was about 19,000 below the estimate for October 2004. Apparently, Japan has already entered a long period of depopulation. If there are no dramatic changes in Japan's fertility rate, the country's population would decline slowly at first, to about 121 million by 2025, then to only about 100 million people by the year 2050 (NIPSSR 2002). For comparison, the latest United Nations (2005) forecast sees only a marginal decline by 2025 (nearly 125 million) and the total of about 112 million by 2050. But these differences matter less than what the absolutes hide:

it is virtually certain that by the middle of this century Japan will become the most aged of all aging high-income societies.

According to the medium variant of the latest Japanese projections (NIPSSR 2002), the country's median age will reach 50 years by 2025. Whereas in 2005 one out of five people was 65 years or older (the highest share worldwide), by 2025 the share will be nearly 30%, and it will reach 35% by 2050. Japan's age-gender population structure will assume a cudgel-like profile, in contrast to today's barrel-shape and the classical pyramid of the early 1950s (fig. 3.10). The share of adults of economically active age will drop from 66% in 2005 to 53% by 2050, when astonishingly, about one out of seven people will be 80 years or older. This would mean that there would be more very old people (80+ years) than children (0-14 years; their 2050 share is projected to be less than 11%), a situation that would create the world's first truly geriatric society (United Nations 2005).

Japan's depopulation is already starkly evident in many of the country's rural areas, where entire villages are abandoned and shrinking municipalities are merging to boost their tax base. This trend is evident not only in remote areas. A few years ago I was offered (if I'd move in) a large, well-built house overlooking a lovely valley in a small village only a little more than one hour north of Kyoto that had already lost its post office, its school, and all but a few of its inhabitants. The implications of this continuing depopulation and the aging trend would be far-reaching, and some are difficult to imagine. There has been never a society, much less a major nation, where octogenarians outnumbered children.

The absolute drop would push Japan from being the world's tenth most populous nation in 2005 (after Nigeria and ahead of Mexico) to thirteenth place by 2025 and to seventeenth place by 2050, behind Vietnam and ahead of Turkey (United Nations 2005). And because most Japanese companies still have a minimum mandatory retirement age at 60, there will be a wave of retirees between 2010 and 2020 as the high-fertility cohort of the 1950s quits working. A new law passed in 2004 raised the minimum mandatory retirement age to 65 by 2013. While many people will want to work past 60, none of these adjustments will provide more workers for occupations that require more demanding physical exertions, which will be in greater demand as both Japan's infrastructure and its population age rapidly.

Reconstruction of crumbling highways (air hammers, concrete pouring, laying down reinforcing steel bars), repairs of buildings damaged by earthquakes, or the care of bedridden patients cannot be done by octogenarians. Japan's much admired robotization has often been offered as a partial solution of the aging challenge:



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From a pyramid to a cudgel: Japan's age and gender population structure in 1930, 1950, 2000, and 2050. From NIPSSR (2002).

instead of importing foreign labor Japan leads the world in using industrial robots. By 2005 the country had about 356,000 robots, more than 40% of the worldwide total and nearly 90% of the combined stock of these machines installed in Europe and North America (IFR 2005). The country's many makers of robots include such leading producers as FANUC, Fujitsu, Kawasaki, Mitsubishi, Muratec, Panasonic, and Yaskawa. But the actual gap between Japan and the rest of industrialized world is not that large because Japanese statistics also include data on simple manipulators that are controlled by mechanical stops, and these machines would not pass a stricter definition of industrial robots used in the United States and the EU.

Moreover, Joseph F. Engelberger (who in 1956, with George Devol, established the world's first robot company, Unimation) has been very critical of the direction taken by Japan's leading robot researchers: "Nothing serious. Just stunts. There are dogs, dolls, faces that contort . . ." (cited in Cameron 2005). Instead, he advocates, as he did for the first time in the late 1980s (Engelberger 1989), an intensive development of household service robots to help the elderly and infirm, an advance that would particularly benefit the world's soon-to-be most geriatric nation.

I do not see robots saving Japan, and I do not see, as Pyle (2007) clearly does, the 15 years since the end of the Cold War as a time of transition, with the country now standing on the verge of new triumphs as it reasserts not only its economic power but also its military capacity. Of course, Japan will not—as so dramatically portrayed in a recent sci-fi bestseller (Komatsu and Tani 2006)—become a victim of mighty geotectonic forces and sink into the ocean, and the Japanese will not become refugees in Papua New Guinea, the Amazon, and Kazakhstan, but even if there were a newly assertive Japan, its immediate impact and its long-term global influence will not be anything like its achievements up to the 1980s.

If the odds do not favor either Europe or Japan filling the roles of strong, dynamic, nimbly adaptive great powers of the first half of the twenty-first century, we are left with four choices. Can resurgent Islam realize an oft-stated goal of some of its militant leaders and establish a caliphate even more extensive than that of the Umayyad dynasty (661-750), whose power reached from the Iberian Peninsula to Afghanistan and from Armenia to Yemen? Can Russia, strategically downsized by the collapse of the USSR, regain its superpower status? Can China translate its economic power into a wider strategic dominance? And is it possible that the United States can successfully cope with many signs of advanced decay and retain its place on top for at least another two generations?

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