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Japan's tough times ahead

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Japan's future looked pretty bleak even before it was struck down by the triple crisis of earthquake, tsunami and nuclear disaster.  Right now, its future looks even more bleak.

But in the darkest hour, there is always a light at the end of the tunnel.  This is the moment to forge ahead and create a full fledged East Asian Economic Community which has the potential to create a much brighter future for Japan and the rest of East Asia.

Let's examine the situation.


Japan has a very rapidly aging and even declining population.  This is clearly a drag on dynamism, and a massive cost in terms of pensions and health care.  Even though the triple crisis is forcing many Japanese families to stay at home, it is unlikely to lead to a rise in birth rates.  On the contrary, this triple crisis is likely to sap national confidence, and produce even lower birth rates, further shriveling up the nation.

Economic stagnation has been with Japan for some two decades now.  Reconstruction after the triple crisis will lead to an increase in measured GDP.  But this is not a new source of sustainable economic growth.  It will merely be an attempt to rebuild Japan's capital stock and get the country back to where it was.

Japan has one of the world's highest government budget deficits and it holds the world record for public debt, at 200 per cent of GDP.  Reconstruction after the triple crisis will only massively worsen its public finances.

Korea and Taiwan have become fierce competitors of Japanese enterprises in world markets, especially in the fast growing markets of China and India.  As many of Japan's large enterprises become absorbed in post crisis reconstruction, Korean and Taiwanese enterprises could leap even further ahead in global markets.

Japan has been able to give financial markets the impression of strength through its longstanding current account surplus.  In reality, this surplus is not a sign of strength.  One part of it has been the savings of its rapidly aging population.  These savings are now rapidly disappearing as the aging population is dissaving (consuming its savings).  The other part of this surplus has been high corporate savings reflecting the growing conservatism (not dynamism) of Japanese enterprises.

The rise of East Asia's middle class has become a source of market growth for Japan, especially for tourism.  Now, Chinese and other tourists will flee Japan for many months, if not years.

Japanese Prime Minister Naoto Kan was showing signs of political courage, something his predecessors lacked.  He was pushing the idea of Japan joining the Trans Pacific Partnership, as a new source of growth, and finally biting the bullet on agricultural protection.

As political sympathy and kindness become the order of the day, it is unlikely that Kan will pursue with any great vigor the proposal of agricultural reform.  Farmers and fishermen from north east Japan have suffered more than most other citizens.  With some agricultural lands now out of action, and others suffering the threat of nuclear contamination, Japanese will surely believe that their farmers deserve more protection.

A source of almost hidden dynamism in the Japanese economy has been the growing number of Asian immigrants, especially from China, many of whom are illegal.  A large number of these immigrants have now rushed back home, and it is not clear when or if they might return.

It is widely believed that twenty years of crisis, and the rise China, Korea and Taiwan as competitors, have provoked an insularity, a lack of confidence and inward-looking character in Japan, just as the rest of the world has been globalizing.  This triple crisis could well exacerbate these characteristics, as Japan tries to understand what happened, and has to work hard to get back to square one.

Is there anything positive that we can say?

Some Japanese leaders have been promoting the idea of creating an East Asian Economic Community.  And the time may have come to transform this aspiration into a reality.

Japan's East Asian neighbors, many of whom bear historical grudges against Japan, have been amazed and impressed by the courage of Japanese nuclear workers, and by the resilience and patience of Japanese citizens.  The immense outpouring of sympathy and assistance from most countries in the region, especially China, (as well as the rest of the world) has also demonstrated that there is a great spirit of community in East Asia.

Now is the moment to seize this spirit, and create a full fledged regional community.

In its deep past, following the Meiji Restoration and World War 2, Japanese politicians showed great leadership.  Apart from the brief Koizumi interlude, such leadership has been lacking for too long.

The Japanese people are waiting to be led out of this triple crisis.  Prime Minister Naoto Kan should seize the moment and help Japan and East Asia reinvent itself through the creation of an East Asian Economic Community.