Japan: Recovery and Renewal

After its lost decade of stagnation, Japan faces two immediate priorities: how to sustain its economic recovery and how to resolve simmering disputes with its neighbours Korea and China. Essential to addressing these challenges are reform and leadership. Economic rebound should not be mistaken for renewal. Japan has to continue to pursue a raft of structural reforms, including initiatives to reduce its huge fiscal deficit. This will require innovative solutions such as more open immigration and the employment of the elderly beyond traditional retirement age. Implementing such policies will require a break with tradition, a change of mindset, and strong political leadership.


“For a long time, we placed priority on equality of results. Maybe we should shift to equality of opportunity.”

- Sadakazu Tanigaki, Minister of Finance of Japan

“When everyone said the Japanese economy was bad three or four years ago, I wasn't that pessimistic, but now, when people say the economy is getting better, I don't really feel optimistic… What we face now is whether [Prime Minister Junichiro] Koizumi’s successor really can take over his reforms.”

- Heizo Takenaka, Minister for Internal Affairs and Communications and for Privatization of the Postal Services of Japan

“Competition is happening in Japan.”

“The Japanese government does not wish to meddle into the affairs of the private sector, particularly in the age of the Internet.”

- Nobuyuki Idei, Chief Corporate Adviser, Sony Corporation, Japan



After a decade of debate over whether stagnating Japan was heading for recovery or relapse, the conclusion is clear: the second biggest economy in the world is back. Participants at the World Economic Forum on East Asia in Tokyo in June heard tales of a more dynamic Japan – a country with a high level of energy efficiency and environmental consciousness, deep penetration of broadband services, and a growing entrepreneurial spirit despite government constraints and cultural impediments. They also heard of a more assertive, outward-looking Japan, a nation more engaged in global affairs, as demonstrated by its military contingent in Iraq, but also locked in tense disputes with neighbours.

The concern today is how Japan can sustain its recovery and temper its new self-confidence to resolve disagreements with China and Korea. The two priorities are linked. An economically stronger Japan will more confidently project its image and promote its interests abroad. To sustain and expand its economic recovery over the long term, Japan must somehow deal with lingering enmities that cloud its ties with the rest of Asia. “For the further development of the Japanese economy, we have to think of how Japan can transform itself while jealously guarding the dignity of the nation,” said Charles D. Lake II, Vice-Chairman and Representative, Aflac, Japan. “The Japanese people have not fully realized what they need to do given the international situation.”

During Japan’s lost decade, global conditions changed dramatically – China emerged as a formidable global manufacturing platform thanks in part to Japanese investment, India became a force in business process outsourcing and the IT services sector, and Korea rebounded from the Asian financial crisis to turn into one of the most tech-savvy economies in the region. As for Japan, some important economic and political reforms have gone through, but the restructuring agenda remains long. “Japan has changed enormously in the last five years, but did we change sufficiently?” asked Heizo Takenaka, Minister for Internal Affairs and Communications and for the Privatization of the Postal Services of Japan. “No. The world is changing very fast and proactive reform is in order. We have only begun.”

Economic rebound should not be mistaken for renewal. “The old economy is leading the current recovery,” Takenaka pointed out. Meanwhile, the “New Japan” is struggling to emerge. There have been notable successes. According to Nobuyuki Idei, Chief Corporate Adviser, Sony Corporation, Japan, the spread of broadband at low cost to users and the proliferation of 3G mobile technology are the result of cooperation between the private sector and the bureaucracy which together agreed that competition should be allowed to drive growth in the IT sector. Moreover, the banking system was overhauled, with non-performing loans sharply reduced. The unwinding of cross-shareholdings has meant that companies are turning more and more to the capital markets for financing, spurring entrepreneurship. “We’re about to go through a core transformation,” declared meeting Co-Chair Junichi Ujiie, Chairman, Nomura Holdings, Japan.

Not everybody is convinced that the creative destruction that structural reforms can unleash is good for Japan. “People’s mentalities haven’t changed that much,” said Masao Hirano, Director, McKinsey & Company, Japan. “Many Japanese managers feel reform will destroy the Japanese business regime.” Some companies have slowed efforts to increase transparency standards and accountability. But the recalcitrant appear to be a dying breed.

The enormity of the challenges posed by Japan’s ageing demographics should be enough to convince all but the most diehard of the need for strong action and new, possibly radical approaches. For example, tackling Japan’s huge fiscal deficit, with debt equivalent to about 170% of GDP, is essential to paying the costs of the growing ranks of retirees. “From an economic perspective, the solution is that Japan must raise its productivity and, in particular, the productivity of capital, “ said Jesper Koll, Managing Director and Chief Economist, Merrill Lynch Japan Securities Co., Japan.

Two ways to increase productivity would be to allow in more immigrants and to harness the energy of the elderly. “One hundred years ago, we created wealth with manual labour, but that’s not how wealth gets created anymore,” meeting Co-Chair Henry A. McKinnell, Chairman and Chief Exeuctive Officer, Pfizer, USA; Vice-Chairman of the Foundation Board of the World Economic Forum, explained. “The assumption that an older society can’t create wealth is wrong. You just can’t have people being old and disabled; you need to have them in the workforce.”

But this would require a change in cultural norms. Some have half-jokingly called Japan the world’s only successful communist country. It is time that Japan shed that image and mindset. “For a long time, we placed priority on equality of results,” Sadakazu Tanigaki, Minister of Finance of Japan, remarked. “Maybe we should shift to equality of opportunity.”

The appointment of Shinzo Abe to replace Junichiro Koizumi suggests that the zeal for sustaining crucial reforms will continue. Abe will early on signal how Japan is likely to manage its relations with its closest neighbours and its growing role in world affairs. How Japan squares national dignity and economic resurgence with its global responsibilities and the need to build bridges with the rest of Asia will be its people’s biggest challenge ever. “We know what must be done,” Takenaka concluded. “The question is whether there is the leadership.”