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by James Corbett
BoilingFrogsPost.com
September 18, 2012

Oh what a difference three decades make. Back in the 1980s, as Japanese companies began buying up prime real estate in the US, and the supremacy of Japanese cars and electronics made it seem like the country’s economic ascendancy was assured, sci-fi visions of the future imagined a United States dominated by Japanese culture, language and business.

Today, the economic stagnation that has gripped the Japanese economy for the past two decades make such visions of the future seem like the naive dreams of a bygone age, much like how futurists of the early 20th century extrapolated from their own time to imagine fleets of dirigibles carrying passengers across the Atlantic. Just as the trend-spotters of the early 20th century were caught off guard by the jet engine, so too were those predicting the rise of an unstoppable Japan caught off guard by the raising of interest rates and the popping of the bubble, the bailout of the banks, the life support of the zombie companies, and the lost decade.

Japan’s economy has been languishing since the real estate and asset bubble of the 1980s popped, but a number of events have combined to exacerbate Japan’s precarious financial situation.

The global slowdown has, of course, effected economies throughout the globe, but for an export-dependent nation like Japan the downturn in the US retail economy has been particularly painful, and the recent woes in the European Union have led to the largest trade deficit Japan has ever had with the EU. Its position as an import-reliant country also make it particularly vulnerable to rising commodity prices.

Amazingly, the Japanese economy was doing better than expected and had even posted a respectable 3% growth in GDP in 2010, but the Fukushima nuclear disaster dashed any hopes of a long-term recovery. The economy shrank by 0.5% in 2011 as a result of the crisis and the resulting manufacturing slowdown. The yen also strengthened as government foreign reserve holdings were repatriated to pay for the recovery, further weakening the export economy. With the shutting down of nearly all of Japan’s nuclear reactors, the country has had to rely on increasingly expensive fuel imports, creating a record 3 trillion yen trade deficit in the first half of 2012.

The country’s debt burden picture is equally bleak. Japan has long carried a disproportionately large debt burden, with government debt now running at 230% of GDP, the highest ratio of any country in the developed world. This has been supported by a Japanese citizenry that almost universally bought government bonds as retirement savings, but now that the Japanese demographic winter is beginning to kick in, and the population is gradually being overtaken by retirees, those regular bond purchases are dwindling. The largest pension fund in the world, the Japanese Government Pension Investment Fund, had to sell some of its Japanese bond holdings in order to meet their obligations this July.

Now, the opposition parties in the Japanese diet are preventing the government from issuing more bonds, and a political impasse has been reached over the government’s plan to raise consumption tax from 5 to 8 percent. As a result, the government is now holding off on transfer payments of tax moneys to local governments in one of the largest budget crises the country has seen since the second world war.

Such is the sense of crisis in this once-proud nation over these dire economic circumstances that this traditionally staid and conservative island nation is beginning to contemplate more seemingly radical ideas, including the fiscal conservatism preached by the American Tea Party movement. This movement, dubbed the Tokyo Tea Party, is arguing for libertarian principles of smaller government and lower taxes in direct opposition to the past 20 years of Keynesian spending and ever-growing government. Last month I had the chance to talk to Marc Abela of the Tokyo Tea Party about this movement, its aims, and the situation in Japan.

The economic situation in Japan is tenuous and volatile, and igniting real passions in a country that is genuinely worried about its abilities to maintain its current levels of debt in the face of an ever-greying population. But now, adding to Japan’s economic woes are a new military threat from the rising giant to the west: China.

That Japan is nearly universally reviled by its East Asian neighbours is neither new nor surprising. Decades of Japanese imperial aggressions, invasions, occupations and atrocities, combined with the general public’s ignorance of this history and its leaders unwillingness to apologize for these offenses have insured a certain amount of enmity from those around them. Indeed, these tensions play into a larger build-up of military tensions in the region, and specifically Japanese worries about the growing power and assertiveness of the Chinese navy.

Perhaps the most worrying trend in all of this is the tendency for this increasing unease to lead to more and more deliberately provocative and blatantly aggressive moves that can only increase tensions in the region. One such move took place this week when the United States announced they would be stationing a second X-band radar in Japan as part of a growing missile defense shield that is ostensibly aimed at North Korea, but everyone believes is partially aimed at Beijing.

Battered by nuclear, economic, and even military woes, Japan looks to be an island nation in dire straits. As bad as things look, however, it can’t be much worse than things looked for the land of the rising sun at the end of World War II, with the smoke still rising from Hiroshima and Nagasaki, its Emperor overthrown, its Imperial ambitions ended once and for all, occupied by its wartime enemy, the US. If the history of Japan teaches us anything, it teaches us that the Japanese are remarkably resilient and have an uncanny ability to bounce back from severe circumstances through hard work and perseverance.

What that form of “bouncing back” would look like in the current situation is anyone’s guess. 60 years ago it meant adopting an American outlook and building up a formidable industrial capacity. These days, it will likely mean the exact opposite; turning away from the American sphere of influence and resituating itself in the Asia-Pacific region as the American superpower looks to be entering its own “lost decade” from which it may or may not emerge. How that process will play out, or whether it will even be possible given the bad blood between Japan and its neighbours, is still up in the air at the moment, but as far removed as that idea is from the current economic and societal discourse, that Japan would be capable of such a transformation should not be doubted for a moment.