Why we shouldn’t underestimate Japan’s economy

This article is published in collaboration with Project Syndicate.

As Shinzo Abe sits down this week in Seoul with South Korean President Park Geun-hye and Chinese Premier Li Keqiang, he does so as the leader of a country that many people around the world now seriously underestimate. That dynamic certainly will be felt during the three Northeast Asian powers’ first summit since 2012.

Three decades ago, many erred in the opposite direction in their assessments of Japan. Many Americans feared being overtaken after Japanese per capita income surpassed that of the United States; Japanese manufacturing set the international standard; and some books even predicted an eventual war with a Japanese nuclear superpower. Such views extrapolated from Japan’s impressive postwar economic growth; today, after more than two decades of malaise, they simply remind us of the danger of linear projections.

That danger remains with us. In response to China’s rapid rise and the assertiveness of its Communist Party leadership, the current conventional wisdom portrays Japan as a country of secondary importance – which is equally mistaken.

Despite its economic slowdown, Japan retains impressive power resources. It is a democracy that has been at peace for 70 years, with a stable society and a high standard of living. Its per capita income is five times that of China, and Beijing residents can only envy Tokyo’s air quality and product safety standards. Its economy remains the world’s third largest overall, sustained by highly sophisticated industry.

While China has nuclear weapons and more soldiers, Japan’s military is better equipped in some areas (and obviously has the technological capacity to develop nuclear weapons very quickly). Moreover, Japan’s culture (both traditional and popular), overseas development assistance, and support of international institutions are impressive sources of soft power.

Yes, Japan faces severe demographic problems, with the population projected to shrink from 127 million to below 100 million by 2050. The current birth rate is 1.4 (well below the replacement rate of 2.1), and the Japanese are resistant to accepting large numbers of immigrants.

When Abe became Prime Minister almost three years ago, he vowed to restore Japan’s standing as a “first-tier country” by implementing an economic stimulus package, dubbed “Abenomics,” and reinterpreting Japan’s constitution to stiffen the country’s defense posture. But, whereas Abenomics was enacted quickly, the Diet enacted the defense legislation only recently – and after more than a year of effort.

Many in Abe’s Liberal Democratic Party would have preferred fundamental reform of Japan’s defense doctrine, by removing the constitution’s limits on the country’s armed forces. But public opinion and Abe’s coalition partner, Komeito, did not allow it.

Nonetheless, Japan’s interlocutors at the Seoul summit, China and South Korea, which suffered enormously from Japanese aggression in the last century, have protested loudly. Both are suspicious of Abe, who exacerbated tensions with nationalist rhetoric and a visit to the controversial Yasukuni Shrine early in his current administration. Indeed, Chinese President Xi Jinping has resisted meeting with Abe, as has Park, who will do so for the first time at the Seoul summit.

On the other hand, Abe has repaired the strained relations with the US that Japan had under his predecessors, and President Barack Obama reiterated the strength of the bilateral alliance during Abe’s state visit to the White House last April. Under the new defense guidelines, US and Japanese forces are able to plan and exercise more effectively, and the alliance is in its best condition in decades.

Abe has thus been relatively successful in terms of foreign and defense policy. But the situation on the economic front is more mixed. Inflation and unemployment are low, but growth is largely flat, and few experts I spoke with in Tokyo recently expect it to accelerate significantly.

The first two components (or “arrows”) of Abenomics – loose monetary and fiscal policies – helped to restore demand. But the third arrow of structural reform has remained in the quiver. Since his success in the Diet election last year, Abe has talked about liberalizing electricity markets, improving corporate governance, and undertaking tax reform. In addition, he hopes to use the recently concluded Trans-Pacific Partnership trade agreement to force reform of the inefficient agriculture sector.

One important constraint is labor supply. Abe has proposed relaxing visa conditions for expatriate workers; but immigration on a scale that would make a major economic difference is unlikely, given the homogeneity and insularity of Japan’s traditional culture. The difficulty of loosening limits on immigration will require Japan to mobilize its underused female human resources.

But that effort, too, must overcome formidable cultural obstacles. Abe has spoken frequently (including at the United Nations) about opportunities for women, and has called for women to make up 30% of Japan’s managers. But today they account for less than 10% of managers and about 1% of senior executives. The World Economic Forum’s index of gender inequality gives Japan a low rating. Government measures like family leave and more nurseries for working mothers can help, but traditional attitudes change slowly.

Unless it is addressed, the labor constraint implies that Japan will not reach its full potential economically – and thus in regional and global affairs as well. Japan is a successful, comfortable society, which has much to contribute to the world. The danger is that it is so comfortable that it will look inward and prove the conventional wisdom right.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Joseph S. Nye, Jr. is a University Professor at Harvard University and a member of the World Economic Forum Global Agenda Council on the Future of Government.

Image: Businessmen walk behind a Japanese national flag at a convention centre. REUTERS/Toru Hanai.