Japan as Number Three

KOJIMA Akira

The recent global financial and economic crisis, which had its epicenter in the United States, saw China assume a central role in the coordination of global economic policy. To overcome this "once in a century" crisis, the first-ever summit of the Group of Twenty was convened last fall in Washington, bringing together the leaders of the Group of Eight major developed nations with those of 12 emerging nations, including China, India, and Brazil. China showed itself to be an indispensable member of this expanded grouping, which met again in London this April and in Pittsburgh in September. It was the first major country to implement a large-scale economic stimulus package and is leading the way in achieving economic recovery. In stark contrast to the Chinese economy’s V-shaped rebound, the Japanese economy has slumped further than that of any other major nation. While the very worst of the slump may have passed in the spring of 2009, the pace of Japan’s recovery is slow, and this gap in speed makes it likely that China’s gross domestic product will overtake Japan’s in 2009 or, at the latest, 2010. What impact will this reversal have on Japanese society? It would be detrimental for Japan-China relations, for the development of the Asian region as a whole, and for Japan itself if Japanese society were to become excessively introspective or to witness a rise in anti-Chinese sentiment.

CHINA AS NUMBER TWO

Japan’s GDP surpassed that of West Germany in 1968 to become the second biggest in the world, topped only by the United States. This achievement was underpinned by Japan’s spectacular recovery from the devastation of World War II and by a national consensus that the country should focus strategically on economic growth. In the 1970s Japanese society witnessed a temporary backlash against this "economy first" mentality as some people reacted to severe pollution and energy crises by decrying economic growth with slogans like "Down with GDP!" Most Japanese, however, have been proud of their country’s status as the world’s second-largest economy over the past 40 years.

The first economic summit of leading industrialized nations—Britain, France, [West] Germany, Italy, Japan, and the United States—was convened in 1975 as an emergency measure to help rebuild the global economy in the wake of the 1973 oil crisis; with the addition of Canada the following year, this Group of Seven came to hold regular annual gatherings to facilitate policy cooperation among national leaders. It was the first time since its defeat in World War II that Japan became a founding member of a full-fledged international policy coordination forum. This was the Cold War era, and in the world at large the word summit denoted a meeting between the leaders of the United States and the Soviet Union; in Japan, however, such was the level of public and media interest in the forum of industrialized nations that this word became synonymous with the annual gathering of G7 leaders. (The G7 became the G8 after the end of the Cold War with the addition of Russia in 1997.) Politicians, moreover, spoke so often of Japan’s being "number two in the world" that the phrase became something of a cliché.

Japan will soon lose its status as number two in the world’s economic ranking. Although this depends to some extent on currency fluctuations, it is only a matter of time before China’s GDP passes Japan’s to become the world’s second largest. Kwan Chi Hung, who came to Japan from Hong Kong as a graduate student in 1979, settled here, and has since been an active economist, published a book titled Chaina azu nambâ wan (China as Number One) in September 2009. Having read Harvard University Professor Ezra Vogel’s Japan as Number One: Lessons for America, which was published in 1979, Kwan was keen to learn from Japan’s experience of economic development, which had enabled it to become the only Asian member of the club of developed nations, and to convey these lessons to China. "I never dreamed," reports Kwan, "that 30 years later I would write a book conveying China’s experiences to Japan."

In 1979, China was just embarking on the sweeping policy of reform and opening under the firm, enlightened leadership of Deng Xiaoping. Over the following 30 years, the Chinese economy grew at an average rate of 9.8% a year. To put this extraordinary figure into perspective, the average annual growth rates of the US and Japanese economies over the same period were 2.9% and 2.4%, respectively. During this period China faced such challenges as the economic sanctions imposed by various countries in response to the Tiananmen Square incident of June 1989, but in 1992 the country stepped up its drive to reform and open up in the hope of hastening its accession to the World Trade Organization. The WTO was the first truly global economic organization to be created since World War II; China’s accession to the body in December 2001 was an important historical event that symbolized the structural changes transforming the global economy.

A GROWING INTERNATIONAL PRESENCE

After joining the WTO, China revised or established numerous laws to meet the conditions for membership, making rapid progress toward becoming a state governed by the rule of law in the economic field. These efforts generated confidence and expectations among investors in other countries, spurring a dramatic increase in direct investment in China from around the world. This, in turn, created stores of capital and production and export capacity, which fueled the high economic growth that has today made China "the world’s factory." China’s harnessing of foreign capital to drive its economic growth contrasts sharply with the model of economic development followed in postwar Japan, under which foreign capital was shunned as much as possible in favor of nurturing Japanese industries by improving on technologies imported from overseas.

As China and other emerging economies developed rapidly and their share of the global economy increased, the limitations of global economic coordination centering on the G8 gathering of developed nations became apparent. The collapse of the major US investment bank Lehman Brothers in September 2008 triggered a financial crisis that sent America’s real economy into free fall, causing a sharp drop in US imports that precipitated a global economic crisis. The G20 Leaders Summit on Financial Markets and the World Economy was convened in Washington DC in November 2008 to coordinate action to overcome this crisis, and it was a historical inevitability that China, India, and other emerging nations experiencing rapid growth would play a central role in the discussions.

Just before the Washington summit, China stole a march on the rest of the world by announcing a huge, 4-trillion-yuan economic stimulus package, a move that dramatically boosted the country’s presence in the international discussions on the global economic and financial crisis. This stimulus package is already bearing fruit. At the end of April 2009 a senior official at China’s central bank, the People’s Bank of China, declared that the Chinese economy had bottomed out in the October–December 2008 quarter and was already recovering. While most countries’ economies bottomed out in the spring of 2009 and are also now improving, China’s recovery not only began sooner but has so far been sharper than those of other economies. Accordingly, international institutions have substantially raised their forecasts for China’s growth rate. In April 2009 the International Monetary Fund was predicting Chinese growth of 6.5% in 2009 and 7.5% in 2010, but just a few months later, in September, it revised these forecasts upward to 8.5% and 9.0%, respectively.

For comparison, the IMF’s September 2009 forecasts for Japanese economic growth were –5.4% in 2009 and 1.7% in 2010, while for the United States it predicted figures of –2.7% and 1.5%. Although the IMF expects both Japan and the United States to return to positive growth in 2010, the gap between the level of expected growth and the 9.0% predicted for China is striking.

LAND OF OPPORTUNITY

How have China’s improving economic fortunes been received in Japan? There are signs that the Japanese public’s opinion of China, which was by no means high to start with, is deteriorating further, although this may be partly due to China’s having taken over from the United States as the world’s largest emitter of carbon dioxide, rather than economic factors. While it is quite natural for people in Japan to worry about the continuous—and largely opaque —expansion of China’s military budget, Japan should welcome the fact that the Chinese economy is open to the world, growing steadily, and enabling large swathes of the Chinese populace to overcome poverty. China’s development furthers the economic development of the Asia- Pacific region as a whole, and the sharing of prosperity among the countries of Asia has major benefits for regional peace and stability. Japan can and should set out a win-win scenario of cooperation with China that assists the development of both countries.

Japanese industry may be feeling the effects of increasingly fierce competition from Chinese companies, but the warnings of a "Chinese threat" that were heard frequently around the turn of the millennium have died down, and China has increasingly come to be viewed as a source of business opportunities for Japanese firms. China, for its part, appears determined to become "the world’s market," as well as "the world’s factory."

Statistics show that while Japanese exports to both the United States and China declined in January–June 2009 compared with the same period a year earlier amid a contraction in global trade, the share of Japan’s total exports destined for China rose by about 3 percentage points to 18.5%, surpassing for the first time the share destined for the United States, which dropped by around 2 points to 16.1%, making China Japan’s biggest export market.

The Japanese automobile industry, which is being forced to make drastic adjustments in the face of plummeting exports to the United States, is also stepping up the shift of its focus toward China. This is because of the consistent, dizzying growth in the Chinese automobile market, which can no longer be ignored by any carmaker anywhere in the world. Some 6.10 million new vehicles were sold in China in January–June 2009. Annual car sales in the country have risen at an extraordinary rate from 2.09 million vehicles in 2000 to 5.07 million in 2004 and 9.38 million in 2008; the figure is expected to reach 10 or 11 million in 2009. If this forecast proves correct, more new vehicles will be sold in China than in the United States this year, making China the world’s biggest automobile market.

The automobile industry has always been one of the core industries symbolizing the advanced industrialized nations, but in 2003 China leapfrogged Germany to become the world’s third-largest car producer, and in 2006 it overtook Japan to move into second place. China is more than just an export market for Japanese automakers. As early as 1998 Honda Motor purchased a factory from which Peugeot had withdrawn and began producing its Accord model there in a joint venture with Guangzhou Automobile Industry Group, while Toyota Motor followed suit by tying up with First Automobile Works Group in 2000 and later entering a joint venture with GAIG. Nissan Motor, too, has bolstered its production in China, and its combined sales of imported and locally manufactured vehicles in China in the first seven months of 2009 came to just over 400,000—some 50,000 more than the firm sold in Japan.

Such reversals in the shares of Japanese companies’ business done in the Japanese and Chinese markets are occurring in other sectors, too. Construction equipment manufacturer Komatsu, for example, saw its Chinese sales overtake those in its home country in the April–June 2009 quarter, while Hitachi Construction Machinery’s Chinese sales caught up with its Japanese sales in the same quarter. Factory robot manufacturer Fanuc, too, saw the value of its sales in Asia, principally China, rise to almost the same level as its domestic sales.

As these developments show, China is an increasingly important economic partner for Japan, and for many individual companies the vision of mutual prosperity for Japan and China is already a reality. How, though, is China’s rise as a major economic power, and the prospect of its GDP surpassing that of Japan, being received by Japanese society as a whole? The challenges facing Japan make this an issue of national and social identity.

SEEKING A NEW IDENTITY

At the end of September 2009, shortly after taking office, Prime Minister Hatoyama Yukio traveled to New York to speak at the United Nations General Assembly and meet various world leaders. In his first talks with Chinese President Hu Jintao, he put forward his vision of an East Asian Community in the form of a regional economic cooperation and security framework in which people, goods, and money could move freely. Just what form any such community might take depends on the outcome of talks with China and other Asian countries, but it is clear that the new Hatoyama administration is placing strong emphasis on Asia in its foreign policy. This is not, however, as some in the US media have portrayed it, a manifestation of anti-Americanism; it is rooted in a desire to achieve balance in the trilateral Japan-US-China relationship and in the relationship between the United States and Asia. It means combining Japan, the United States, and China (or Asia and the United States) for common benefit, not deserting any particular country.

What is the sentiment among the general public? Japan’s status as the world’s second-largest economy has been part of the national identity for more than 40 years, so there is a slight sense of disorientation at the prospect of losing this spot. Japan undoubtedly needs to rebuild its national vision and identity.

In truth, Japan has needed to embark on a new round of nation building since the beginning of the 1980s. It was then that Japan completed the process of catching up with the advanced industrial countries, which it had pursued since the war through a national strategy focusing exclusively on the economy, and the completion of this task necessitated the construction of a new "post-catch-up" model of development. In the late 1980s, however, Japan was riding the waves of the bubble economy. The bubble’s illusory wealth deceived people into thinking that the Japanese development model had triumphed once and for all, and this arrogance blew away any sense that the nation faced major problems. The collapse of the bubble at the start of the 1990s heralded a prolonged period of economic stagnation. Arrogance turned to pessimism as a listless Japan drifted through what has become known as the "lost decade" or, more recently, the "lost decade and a half." On top of that, 1993 brought the collapse of the "1955 system" under which the Liberal Democratic Party had monopolized the reins of government for 38 years, since when a bewildering succession of unstable coalition governments have come and gone. So it has been a "lost decade and a half" in politics, too.

Many of these administrations lasted one year or less —enough time to begin to debate the task of nation building but not enough to map out a clear vision. While Japan was losing 15 years in the economic and political fields, the world surrounding it was changing beyond recognition. The Cold War ended, and the Soviet Union disintegrated. Countries around the world undertook sweeping institutional reforms, conceiving new development models to facilitate higher economic growth. This process took on such momentum that it became what might be described as a global reform race. As one of the entrants in this dynamic competition, China embarked on an aggressive program of institutional reforms that has undeniably produced results.

The challenge for Japan is to face up to the reality of these sweeping structural changes affecting the world as a whole. China did not suddenly emerge from nowhere as a major economic power; in fact, it is not accurate to say that China has "emerged." Until the beginning of the nineteenth century, China—and, indeed, India—had for many centuries been among the world’s great economic powers, as long argued by European experts on economic history such as Angus Maddison and Andre Gunder Frank, author of the 1998 work ReOrient: Global Economy in the Asian Age. Seen through the lens of the country’s long history, in other words, China’s rapid economic growth over the past 30 years has been a process by which it has returned to its long-term development track after a relatively short "lost century." It is not so much an "emergence," therefore, as a "reemergence."

Japan should take into account its own and China’s history and the reality of the major geopolitical and geoeconomic changes that have taken place since the 1990s as it finds its place in the world. We must not be distracted by emotional arguments as we consider the task of future nation building.

Prime Minister Hatoyama’s pledge on the international stage that Japan would reduce its greenhouse gas emissions by 25% from 1990 levels by 2020 could become a basis for building a Japan that is environmentally responsible and leads the world in environmental and energy-saving technology. As one of the most swiftly graying societies in the world, Japan also faces the unique challenge of devising various systems to cope with its aging population.

Professor Ônuma Yasuaki of Meiji University asserts: "Coolly accepting the reality of China’s reassumption of superpower status, waking up to Japan’s and China’s economic inseparability, and harnessing Japan’s intellectual power, including science, technology, and academia—if Japan adopts an approach like this, it will be able to enjoy a complementary, fruitful relationship of mutual benefit with China. The government and the public should take a long-term, multifaceted perspective of this sort." I agree with Professor Ônuma. It is not as if there has been a switch from a G2 of the United States and Japan to a G2 of the United States and China. The reality of this dynamic world is much more complex than that.

Translated from an original article in Japanese written for Japan Echo.

© 2009 Japan Echo Inc.