Forecasting Japan: China Rises, September 29, 2015

Forecasting Japan: China Rises

Japan's current political order is a holdover from the Cold War, when the country was buoyed by U.S. strategy in the Pacific. But when that configuration changed dramatically after the fall of the Soviet Union, Japan continued to cling to the old system – it had no other option. Tokyo is now looking ahead to a future of demographic decline and increased government spending. While Japan will likely be able to manage these issues, the country's slow-burning internal crisis will begin to interact with broader regional shifts in the next 5-10 years, the most important of which is the ongoing transformation of China. The external changes in Japan's region will ultimately cause the country's internal political order to undergo an epochal shift of its own.

Through the Cold War and beyond, Japan has been able to pursue a foreign policy centered on economic competition and cooperation rather than defense and security. External allies like the United States protected both the home islands and Japanese economic interests overseas. But things are changing, and Japan's mercantilist foreign policy will soon be insufficient to meet its strategic needs.

China, of course, is the new factor. Since the end of the Cold War, Japan's neighbor has transformed from an isolated and impoverished pariah state into the world's second-biggest economy and Asia's largest. China has been the demographic center of East Asia for millennia and, for most of its history, it was also the regional hegemon. However, in the middle of the 19th century, internal and external pressures drove China into one of its periodic cycles of political fragmentation, social upheaval and introversion. Although China reunified in 1949, the preceding century of chaos had left its economy in tatters, preventing China from translating its demographic heft into regional economic, political or military dominance throughout the 20th century. Now Beijing is building on its economic strength to accrue diplomatic influence and military power, and it has begun to pose a serious challenge to the U.S.-led Pacific alliance structure of the Cold War era.

But China's newfound power rests on a shaky foundation. Beijing faces mounting social, economic and political strain at home. A number of factors have contributed to China's current crisis. Internally, there are profound economic imbalances and intense regional tensions. China is also uniquely dependent on overseas supplies of energy and raw materials to sustain its industrial plants, and for the next decade, it will be heavily reliant on foreign consumption of Chinese-manufactured goods. Historically, China enjoyed a surplus of domestic natural resources relative to its economic needs. This allowed generations of Chinese leaders, most notably Mao Zedong, to close the country off in times of internal turmoil. Because China is now reliant on imported inputs, the country has little choice but to press outward to protect its overseas assets, interests and personnel and to ensure the security of crucial sea lines of communication.

Consequently, the next 5-10 years will be a period of extraordinary strain for China. The Communist Party of China will continue its attempt to transition to a new economic model grounded in robust domestic consumption, high value-added manufacturing and service industries. The process will require Beijing to substantially change core aspects of its existing political and economic model, and the Chinese government will need to implement all of these disruptive changes amid a sustained slowdown in low-end manufacturing and housing construction. The government has long relied on these two sectors to maintain economic growth and employment. At the same time, the country will need to metabolize the staggering levels of local government and corporate debt accrued over decades of rapid investment-led growth and extensive capital misallocation.

Beijing's task is not impossible, but it will need to perfectly coordinate several complex maneuvers to achieve success. To manage these shifts, the government will dramatically centralize power, essentially becoming a dictatorship – a process that is already underway. China's new order might also entail promoting nationalism as a means of maintaining social cohesion, likely at Japan's expense. China shares its sea lines of communication with Japan, and the Chinese military has already become increasingly proactive in defending its territories. For Japan, this is a fearsome prospect.

Shifting U.S. Strategies

China's rise will coincide with a change in the United States' strategic posture in the Pacific Rim. Since it became the leading superpower at the end of World War II, the United States has enforced its position by securing global sea-lanes, maintaining a permanent U.S. military presence along key regional fault lines, and on occasion, directly intervening to maintain the balance of power. The United States wants to prevent the emergence of a rival regional hegemon anywhere in the world.

Washington's strategic imperatives in the Pacific will not change, but its methods will. The United States will transition gradually in the coming years toward indirect and less costly ways of enforcing its writ. This will mean devolving responsibility to regional partners such as the Philippines, Australia, Taiwan, South Korea and Japan.

The United States' shift is already beginning to push its allies in East Asia to become much more proactive in defending their security interests. Japan is at the forefront of this movement. In late 2012, Japanese Prime Minister Shinzo Abe launched an initiative to revive Japan's regional economic, diplomatic and military standing. Since that time, Japan has made strides in regional diplomacy and military expansion and normalization. Still, to be successful, Japan will need to dramatically expand its efforts.

Throughout history, economic power and military power have been intertwined. In the 20th century, industrialization, combined with the technological limitations of ballistics, placed a premium on volume. However, since the final years of the 20th century, the quality of weaponry has become more important than the quantity. Vast fleets of large military vessels traveling long distances will continue to decline in significance, while precision-guided weapons platforms supported by space-based guidance systems will become increasingly important.

Meeting Japan's Military Needs

To play a role in 21st-century Pacific regional security, Japan will need to cultivate and sustain a cutting-edge domestic computing industry. To do this, Tokyo could start by increasing spending and public-private partnerships in defense research and development. It could also increase cooperation, intelligence sharing and technological connections with the United States. But Japan will also need to form a broader fabric of innovation and experimentation in computing technologies upon which the state can draw in times of need.

Although Japan has long excelled at advanced manufacturing and is still at the forefront of robotics, the country has struggled to gain a comparable footing in Internet-based computing. Japan's enduring Cold War order — an order defined by the close relationship between the government and major business groups, the keiretsu — is part of the problem. Keiretsu have hampered the efforts of successive Japanese leaders to open Japan to greater outside competition and investment, a factor that will need to change if the country is to encourage innovation in computing. Tokyo will also need to foster Silicon Valley-style tech startups, cultivate entrepreneurship and educate its workforce in the relevant disciplines.

Maintaining and widening its technological edge against regional rivals will require Japan to make significant changes to its domestic job market, changes the country has avoided thus far because of the mildness of its current economic stagnation. Tokyo will need to address the stark rise in underemployment Japan has seen in recent years. The total portion of Japanese employed in part-time jobs rose from 29 percent of the workforce to nearly 38 percent between 2002 and 2014. The offshoring of Japanese manufacturing activity over the past two decades has only added to the country's employment problem. Anecdotal evidence indicates that over the past 20 years, many major Japanese electronics and advanced manufacturing companies that once dominated Japan's economy (and accounted for a sizable chunk of domestic employment) have downsized their domestic workforces, at least in manufacturing, while expanding their share of overseas employees.

The Japanese economy will not necessarily have to grow for Japan to buffer against China and play a leading regional role, but it will need to become much more dynamic. This will mean channeling the nation's dwindling working-age population into cutting-edge industries, something that will also be critical to maintaining domestic political order as the shrinking workforce bears the burden of caring for an aging population. How Japan responds to external pressures, and whether its response is adequate, will be determined largely on the basis of what happens to its economy over the next 5-10 years, the period in which Japanese Prime Minister Shinzo Abe's reforms will play out.