OPINIONS;Face up to stark reality that Japan is nothing but a medium-size state: prof. Fukagawa

February 16, 2011

fukagawa.jpgThe following are some remarks made by Yukiko Fukagawa, a professor of economics at Waseda University's School of Political Science and Economics, during a recent interview by Genron NPO Representative Yasushi Kudo. Part of the interview was aired recently during a weekly FM radio program, titled ''ON THE WAY Journal.''


I predict that in 2011 the shape of the world's ongoing structural changes will become more obvious. All the so-called G-7 industrially advanced countries are deeply mired in economic distress with no exit in sight for their fiscal rehabilitation. It is quite rare for the economies of Japan, the United States and Europe to be in such bad shape simultaneously. In such circumstances, some major emerging economies are coming to the fore as great powers. In particular, Brazil, Russia, India and China in the group called BRICs are extremely conscious of their image as a great power and share a great deal of historical resentment over the international order sustained by the G-7 nations.

Some smaller newly developing countries share the same emotional sentiment, increasing the risk of South-North confrontation. The South-North conflict is not only affecting the multinational trade talks under the World Trade Organization and the negotiations at the United Nations Climate Change Conference (COP 16) but also is likely to trigger disputes over currencies, territories and the interpretation of history. Moves to change the conventional world order, which has hitherto been managed by the G-7 leaders, are coming to the surface. I sense that the respect for the sovereignty of states, which remains immersed in the advance of globalization, will be attracting renewed attention.

The financial crisis may force some European nations to seek support from China while the structure of the U.S. reliance on China for capital infusion will remain intact. The change in the balance of power between the emerging economies and the G-7 will become increasingly obvious. If such is the case, continued economic stagnation will accelerate the ongoing downfall of Japan, whose sole source of power has been its economic might.

Naturally, the rules of the international survival game differ between great powers and small countries. To date, Japan has been indisputably a great "economic" power. Japan's financial contribution to the United Nations is the world's second largest, behind only the United States, for instance. While the Japanese economy continues to stagnate, the aging of the population advances so fast. Nonetheless, Japan has not worked out a voluntary national strategy to "downsize" the country from the status of an economic superpower. As a consequence, Japan is saddled with heavy obligations externally and internally, and the Japanese people are obsessed with an outdated image of their country, namely, a self-portrait from the previous century. Therefore, the major challenge for Japan in 2011 is to create a new self-portrait of Japan as a "country of medium scale," and to wipe clean the remnants of its residual image as a "big country." Put differently, Japan must cut itself down to size, strive to find a place in the world where it will be able to become a winner and build a national consensus on its new self-portrait.

Playing old maid

While Japan is no longer a superpower, the European Union is facing extreme difficulties. With no end in sight to the fiscal crisis, the EU has yet to work out a new growth strategy and is unable to innovate industrially or technologically. Frictions have emerged with immigrants who have served as a ''buffer'' to adjust to the ups and downs of economic cycles. The EU is built on a ''welfare society'' foundation and because the bloc cannot discard this basic value, it will continue to face many severe adjustments.

Meanwhile, the United States, which is much stronger that the EU, is saddled with high unemployment, and it is shaking its society. Nobody knows which will come first, the financial crisis or the collapse of the dollar as the key currency. There is a chance that both crises will arrive together. There is no need to refer to Japan's crisis. As if playing the game old maid, Japan, the United States and the EU are waiting to see who will be the first to fall.

The integrated EU would fall apart, should Iceland, Ireland and Greece fall into a state of de facto default all at once and the financial crisis spread to Spain and Portugal. If such should happen, it may be difficult to maintain the bloc's unity. The small member countries of the EU would be able to devalue their currencies once they break away from the EU. At issue then will be the political will of the member countries to dissolve the bloc or maintain the solidarity. At present, Germany is fighting a lone battle to preserve EU unity. Once the German public opts to abandon efforts to sustain the EU, internal and external pressure would mount on the EU to dismantle its integration. If dismantled, some member countries would return to their earlier status as "nothing but a small country." For instance, Greece and Ireland would find their currencies tumbling upon secession from the EU, compelling them to promote external trade and tourism. Freeing the EU from bad debts in the region would be crucially important for the EU at large; however, it is quite ironic that the member countries are taking charge of their own finances now that a monetary union has been achieved.

Japan's challenge

When it comes to the downsizing of Japan, it does not matter whether the size of Japan's gross domestic product becomes smaller than China's. What is important is stopping Japan's per capita GDP, or income per person, from decreasing further. Japan's per capita GDP was ranked second by the Organization for Economic Cooperation and Development before the collapse of the bubble economy. Today, Japan is in the middle ranks among the OECD's 30 member countries. We should not allow per capita GDP to plunge further. To this end, we must strive to boost productivity and create jobs, and the ultimate premise is to end deflation once and for all.

More specifically, I am convinced that the combination of a sweeping structural reform of the Japanese economy and economic partnership agreements with Asian neighbors will hold the key.

If we look back on the process of boosting European nations' per capita GDP, we will see that the creation of a single market with a populace of 500 million people under the wing of the EU and the ensuing expansion of intraregional business activity free from exchange risks were major contributing factors. If we are to learn anything from Europe's experiences, Japan should pursue much deeper economic integration with our Asian neighbors who share similar political systems and values, such as South Korea, Taiwan, Hong Kong and the highly advanced member states of the Association of Southeast Asian Nations (ASEAN). In addition to the reduction of tariffs, Japan must open up its agricultural market to foreign partners, and ease regulations on the transfer of services and human resources. In theory, there could emerge a huge integrated market in this part of the world, whose combined population is about 500 million, the size of the EU. Such deep economic integration should be made with partner countries whose social systems are similar to Japan's to some extent and who could sign agreements on crime prevention, so as to mitigate Japanese worries about social unrest resulting from the freer flows of human resources across national borders. China and India would join this market later, adding 1.3 billion and 1.0 billion people to its population.

Regarding China, Japan and other Asian countries have deep economic bonds with China. Despite differing systems, it is too late for Japan and China to break off their economic relations. At the same time, Japan needs to maintain good relations with the United States to check China's unilateralist inclinations based on its ever-growing desire for self-assertiveness. This is because Japan is no longer the world's second-largest economic superpower and is nothing but a "medium-size" country. The problem is that Japanese people have not yet faced up to this stark reality.