The Underappreciated Power

In an era of renewed great-power competition that Washington has framed as an all-out, zero-sum battle between “the free world” and a menacing China, East Asia’s other great power, Japan, has gotten short shrift. Japan does not aspire to superpower status, and its limitations are well known: demographic decline, a deflationary economy, and self-imposed restrictions on the use of force abroad. But it would be a mistake to write off Japan as a has-been. It boasts a resilient democracy and a successful track record of adjusting to economic globalization. For decades, Japan has been a leader in infrastructure finance in developing countries. And it has acquired sterling credentials as a leader on free trade. When it comes to the use of economic engagement as a diplomatic tool, Japan—not the United States—is China’s peer competitor. 

Today, Japan’s leaders are facing a number of tests. Can they safeguard public health, recover from the worst recession of the postwar era, and remain steadfast in defending a rules-based order? Among Japanese citizens, concern is growing that their country depends too much on China for its prosperity and too much on the United States for its security. The sudden resignation of Prime Minister Shinzo Abe in September has introduced new worries that stable domestic leadership and a proactive foreign policy may come to an end. In the whirlwind of today’s geopolitical rivalries and the disruption caused by the COVID-19 pandemic, it might be tempting to yet again dismiss Japan’s potential. But the country’s strategic choices are by no means foreordained, and they will affect not only its own future but also the course of the raging great-power competition now playing out between China and the United States. 

ISLAND OF STABILITY

Recent calls for a coalition of democracies that can rise to the challenge posed by China run into an immediate obstacle: all is not well in the democracies of the West, which are witnessing a loss of faith in globalization and the growing appeal of populist leaders. The United States stands out as the most poignant case of hobbled international leadership. And its populist experiment has gone awry; the Trump era has shown that illiberalism and protectionism aggravate rather than solve domestic problems and make it harder to counter China. 

In contrast, Japan’s political waters appear to be much calmer. The country’s relatively successful adjustment to globalization and its domestic stability have positioned it well for this moment. Over the past 30 years, Japan has weathered the two aspects of globalization that have proved to be the most destabilizing elsewhere: the offshoring of manufacturing and economic integration with China. In the mid-1980s, the sharp appreciation of the yen triggered a sustained wave of Japanese foreign direct investment in East Asia and across the world, with Japanese companies forging complex supply chains. Around half of all Japanese transportation equipment is now manufactured outside Japan, as are about 30 percent of all Japanese consumer electronics and general machinery. Japanese investment helped China become the world’s factory and a top trading partner for Asian countries. Indeed, China plays a larger role in Japanese trade than it does in U.S. trade: in 2019, around 24 percent of Japan’s imports came from China, and around 19 percent of its exports went there, whereas China accounted for only around 18 percent of U.S. imports and received around seven percent of U.S. exports.

Outsourcing and the loss of factory jobs attributed to Chinese imports have become political minefields in the United States. But the Japanese public has shown little buyer’s remorse for economic globalization. On the contrary, in a 2018 survey, the political scientists Adam Liff and Kenneth McElwain found strong support for free trade among Japanese respondents, who saw it as contributing to Japan’s economy, fostering post–Cold War peace and stability, and improving their daily lives.

One reason is that trade with China has had relatively benign effects on the Japanese labor market. The economist Mina Taniguchi has found job creation, not job destruction, in the regions of Japan most involved in the supply chains that shape the country’s trade with China. Another reason is that Japanese companies face steep legal hurdles to firing redundant workers, and so mass layoffs have been rare in Japan. What is more, employers are increasingly competing for new hires because, with an aging population, the supply of workers has decreased. In the past few years, Japan’s unemployment rate has hovered around 2.4 percent, and even at times of profound economic dislocation, unemployment spikes have been modest: up to around five percent in the aftermath of the 2008 financial crisis and up to 2.8 percent six months into the COVID-19 pandemic. 

It would be a mistake to write off Japan as a has-been.

Make no mistake, corporate Japan’s supposed solution to rigid labor markets—hiring nonregular employees, who lack job security and career opportunities—is a major driver of rising income inequality. And the Japanese public is frustrated by the inability of its political class to rekindle growth and address socioeconomic divides. Yet most Japanese citizens do not blame globalization or free trade for these troubles, and illiberalism has not found a foothold in Japan. The country is home to one of Asia’s most durable democratic systems, boasting robust electoral institutions and strong protections for civil rights. Its politics have not been convulsed by anti-immigrant parties, despite a doubling in the number of foreign workers in Japan in less than a decade, or by demagogues attacking the institutions of liberal democracy. 

Disappointment with the main political parties has led voters to elect a number of maverick candidates over the years. But none were populists who claimed to represent “the will of the people” in a bid to undermine the courts, the legislative process, or the free press. Japanese politics have escaped the populist wave; if anything, the establishment looks stronger. Before his resignation, Abe had become the longest-serving prime minister in Japanese history. During his tenure, his Liberal Democratic Party triumphed in six national parliamentary elections, and Abe consolidated decision-making powers in the prime minister’s office and moved to control the appointment of senior civil servants to ensure bureaucratic compliance with his policy priorities.

Abe’s political longevity, despite a number of scandals that tarnished his administration, can be traced back to his pragmatism (downplaying his conservative agenda to emphasize pocketbook issues), his ability to portray himself as a steady hand in a turbulent world, and a weak and fragmented opposition. His track record on domestic economic reforms was uneven, and he failed to achieve some of his most ambitious goals (a revision of the constitution, the return of the Japanese abductees in North Korea, and a peace treaty with Russia). But more than any previous prime minister, Abe elevated Japan’s diplomatic standing. He transformed the country into a global leader on free trade (partly by outmaneuvering Japan’s powerful agricultural lobby), revamped the way Japan approaches foreign policy (with the establishment of the National Security Council in 2013), and supplied a vision for the region—the so-called Indo-Pacific strategy—that other Western powers, including the United States, are now trying to emulate. These are legacies that will serve Abe’s successors well.

A TRADE POWERHOUSE

The world largely stopped paying attention to Japan after the country’s mismanagement and dysfunction seemed to suddenly switch off an economic engine that had appeared poised to dominate world markets. First came the burst bubble of 1991, when stocks and real estate values dropped sharply; a period of protracted deflation followed. Tight budgets meant less funding for economic assistance programs, and Japan soon lost its place as a top foreign-aid donor. By 2010, Japan had been demoted to third place in global rankings of GDP, overtaken by China’s prodigious growth. Japan appeared to have lost its mojo.

But this familiar story is at best incomplete and at worst misleading. Over the years, as the corporate strategy expert Ulrike Schaede has shown, the Japanese private sector has refocused on core competencies and captured niche segments in the global value chain. Japan’s lead in producing high-tech components and advanced materials, Schaede has observed, is usually invisible to the consumer but quite real: Japanese companies capture between 50 and 100 percent of the market share of more than half of all the high-tech products surveyed by the Ministry of Economy, Trade, and Industry. 

And far from retreating from the global economy, Japan rivals China in terms of investment and the financing of infrastructure projects abroad. In the decade after the global financial crisis, Japan’s outward investment averaged $122.4 billion per year; China’s, meanwhile, averaged only $109.5 billion per year, according to UN statistics. Japan even outranks China as a foreign investor in Southeast Asia, the region where China’s economic influence and political designs are felt most acutely. 

China’s ambitions to finance foreign development are vast, as evidenced by the launch of the Asian Infrastructure Investment Bank, with 109 members, and the promise to channel $1 trillion to infrastructure projects through its landmark Belt and Road Initiative. Japan, cognizant of the limits of trying to compete with China dollar for dollar, has developed alternative strategies to ramp up its influence despite its more limited resources. In 2015, for example, the Abe government launched the $200 billion Partnership for Quality Infrastructure, which offers transparent financing to promote long-term development without creating debt traps for recipients. Another example, the Free and Open Indo-Pacific initiative, seeks to link countries across a vast area stretching from East Africa to the South Pacific and involves a mixture of capital to finance physical infrastructure, trade rules to facilitate economic integration and the expansion of the digital economy, and assistance in building up coast guard capacity—all with the implicit aim of resisting Chinese pressure.

Tokyo cemented its lead in economic diplomacy when it filled the vacuum left by Washington’s abandonment, in 2017, of the Trans-Pacific Partnership (TPP). As the largest remaining economy in the pact, Japan deftly prevented the trade agreement from unraveling, preserving its ambitious requirements on tariff elimination and taking a surgical approach to suspending a number of rules that the United States had championed. 

Japan’s stepped-up game on trade negotiations has also been evident on other fronts. It has brokered two other huge trade deals, one with the EU and another, which is nearing completion, with 14 other Asia-Pacific economies. Japan has worked with the United States and the EU on modernizing the World Trade Organization’s rules on subsidies, campaigned to set standards to help balance the free flow of data with privacy and cybersecurity safeguards, and helped stabilize British trade policy by quickly conducting bilateral negotiations with the United Kingdom after it exited the EU and shepherding a future bid for British admission to the successor to the TPP. 

Tokyo’s free-trade credentials have suffered in other areas, however. In 2019, it caved to pressure from the Trump administration and assented to a narrow, bilateral U.S.-Japanese trade agreement that lacked any American commitments to eliminate tariffs on automobiles. Also last year, as Japanese–South Korean relations sharply deteriorated in the wake of a disagreement over compensating South Koreans who were forced to work by occupying Japanese forces during World War II, Tokyo abruptly tightened export controls on chemicals that are critical for South Korea’s semiconductor industry—a stern rebuke of Seoul that sat uneasily with Japan’s desire to be a champion of free trade. And during the pandemic, Japan has been missing in action when it comes to coordinating an international response to curb export protectionism when it comes to essential medical supplies.

Consolidating Japan’s role as an international economic powerhouse will test the mettle of Abe’s successors. Their success or failure will have broad implications: it will help settle the question of whether middle powers can shore up an open international economic system. The task is enormous, as the World Trade Organization nears irrelevancy, Beijing and Washington become further entrenched in a trade war, and a likely future of fragmented digital ecosystems approaches. 

A TOUGH NEIGHBORHOOD

The security challenges facing Japan are also daunting. Recent years have witnessed North Korean missiles flying over Japanese territory, regular Chinese incursions into the waters surrounding the contested Senkaku Islands (known in China as the Diaoyu Islands), and Beijing’s relentless pressure on democratic Taiwan. And Tokyo has nagging doubts about Washington’s commitment to alliances thanks to the Trump administration’s decision to withdraw troops from Germany and its over-the-top demands for South Korea to pay five times as much for U.S. military support as it currently does. 

In navigating these choppy waters, some fundamental parameters of Japanese security policy will remain firmly in place: the reliance on the United States as security guarantor, the identification of China as Japan’s largest security threat, and strong domestic opposition to acquiring offensive military capabilities and deploying Japanese troops to war zones. But Japan’s relations with China and the United States have seen important adjustments in the past few years, and Tokyo has charted its own path in managing great-power competition. 

In the short span of a decade, China and Japan moved from a sharp deterioration in bilateral ties, due to a flare-up of tensions in the East China Sea, to a pragmatic rapprochement that has enabled high-level official visits. Chinese President Xi Jinping’s state visit to Japan, scheduled for this past spring, would have marked the culmination of such progress. But COVID-19 made the visit impossible, and the pandemic has halted the warming of ties, thanks to China’s initial mismanagement of the crisis, the severe disruption to some Japanese industries caused by the Chinese economic lockdown, and an abrasive turn in Chinese foreign policy as Beijing has pushed back against criticism of its response to the outbreak. Two developments in particular proved to be too much for Tokyo: a record-breaking 100-plus consecutive days of Chinese naval incursions into the contiguous zone of the Diaoyu/Senkaku Islands and China’s imposition this past summer of a repressive national security law in Hong Kong that violates the “one country, two systems” arrangement that Beijing had promised to respect until 2047. 

Top leaders in Japan now speak openly about the risks of relying too heavily on China to power Japan’s economic growth. Last April, the Abe government launched a $2.2 billion fund to restructure Japanese supply chains in sectors in which production is heavily concentrated in China. These subsidies are modest compared with the existing stock of Japanese investment in China; they are not meant to bring about decoupling. Rather, they represent an attempt to manage risks by reshoring some of the production of Japanese goods and relocating other parts of it to Southeast Asia. 

Consolidating Japan’s role as an international economic powerhouse will test the mettle of Abe’s successors.

China’s military buildup and its coercive diplomacy have provided a strong incentive for Tokyo to reinvest in the U.S. alliance. In 2014, Abe’s government officially reinterpreted the Japanese constitution to give Japan the right to use force alongside other countries in collective self-defense. The move was intended to make Japan a more valuable ally, one that could help the United States if it were under attack (albeit only if Japan itself also faced an existential threat and no other alternative were available). The cultivation of Japan’s security partnerships with Australia and India and the reactivation of the Quad—an informal group that includes those three countries and the United States—are designed to strengthen the alliance through defense and security cooperation with fellow democracies. But they also provide Japan with a diversification plan in case the United States continues its inward turn.

More recently, concerns about China’s bid for technological hegemony have become a focal point for the allies. Aware of the cybersecurity risks, Japan has declined to use Chinese telecommunications equipment to build its 5G network and has tightened its screening criteria for foreign direct investment to make it harder for China to get its hands on critical technology. But Tokyo is not a believer in wholesale decoupling, does not support unilateral tariffs, and has worried about Japanese companies getting caught up in the American export controls intended to weaken China. Washington recently banned U.S. agencies from awarding contracts to any businesses that use products or services from five Chinese technology companies, a step that will reportedly compel hundreds of Japanese firms to replace equipment to avoid losing access to business from the U.S. federal government.

Among Japanese security analysts, there is palpable unease about the ability of the United States to devise an effective long-term China strategy. The disquiet precedes the Trump administration. President Barack Obama’s “rebalance” to Asia was hobbled by domestic political polarization that left the TPP unratified and defense spending capped by a budget sequester. The identification of China as a “strategic competitor” in the Trump administration’s 2017 National Security Strategy pleased Japanese security planners. Abe tried to appease a transactional U.S. president with promises of increased investment in the United States and weapons acquisitions. But Donald Trump’s “America first” approach to foreign policy weakened the alliance network, to Tokyo’s dismay. By demanding that partners pay far more for their own defense and imposing “national security” tariffs even on allies, Trump has scotched any hope for a coordinated effort to stand up to China. 

At a more fundamental level, the Trump administration’s embrace of comprehensive competition with China presents a challenge to Japan’s grand strategy. Washington has been assertive in the South China Sea, has applied tariffs and sanctions to coerce Beijing into dropping what the Americans see as unfair trade and investment practices, and has defined the contest increasingly in ideological terms. Japan, meanwhile, favors selective competition that plays to its strengths in economic statecraft, hoping to reduce the risk of overreliance on China but without renouncing interdependence and still leaving room for selective cooperation with Beijing on climate change and regional trade. If former Vice President Joe Biden wins the U.S. presidential election and his administration continues with comprehensive competition—minus Trump’s harassment of allies—Tokyo may find its room to maneuver increasingly curtailed.

STAYING SAFE, STAYING STRONG

In the meantime, the botched U.S. response to the pandemic has profoundly shaken Tokyo’s confidence. American political dysfunction has led to an enormous loss of life, severe economic hardship, and an abdication of international leadership. In Japan, it has led to rising alarm about overdependence on a hapless United States and provoked a search for ways for Japan to do more to protect itself. Tokyo’s abrupt cancellation this past summer of the $4.2 billion, U.S.-developed Aegis Ashore missile defense program could be a harbinger of things to come. To explain the decision, Japanese Defense Minister Taro Kono cited technical flaws that would be too costly to fix. But the move came as a complete surprise to the Americans and was swiftly followed by deliberations in Tokyo on acquiring counterstrike capabilities that would give Japan, for the first time, the ability to strike an enemy base to preempt an imminent attack.

Japan’s response to the pandemic will be a determining factor in its strategic future. So far, even without resorting to the mass testing and extensive lockdowns that other countries have used to combat the virus, the country has escaped an out-of-control outbreak, with 75,909 cases and 1,453 deaths as of mid-September. Health crises reveal not only the quality of governance but also the fabric of society. In this regard, the contrast with the United States is stark: in Japan, mask wearing is almost universal, and the pandemic has produced hardly any political or social polarization. 

The economic fallout, however, has been devastating, with the Japanese economy shrinking by 7.8 percent in the second quarter of this year—the largest economic contraction of the postwar era. The government’s fiscal response has been robust, centered on a $298 billion supplementary budget. But the government has lacked a coordinated strategy and has at times appeared tone-deaf—for example, in picking a losing fight to extend the appointment of the public prosecutor in the middle of a pandemic. 

In selecting Abe’s chief cabinet secretary and right-hand man, Yoshihide Suga, as the next party leader and prime minister, the Liberal Democratic Party prioritized continuity. The public appeared to concur, responding to Suga’s selection with high levels of support for his candidacy. No one expects radical departures in domestic or foreign policy in the Suga administration. Recovery from the economic crisis dictates loose monetary policy and spending, and Suga’s signature priority for structural reform—digitizing more of the economy—is a natural outgrowth of the pandemic. With no diplomatic experience of his own, Suga will likely embrace the already well-institutionalized Indo-Pacific strategy. But Japan’s new chapter will begin only when its leadership articulates a revitalization strategy that can deliver resilient and equitable growth and offers a vision of Japan’s post-pandemic international role.

The eclipse of Japan that many predicted three decades ago never happened. Japan adjusted to globalization, achieved political stability, and engaged in robust economic statecraft. Whether the country can retain its position and prosperity in the years to come will depend on whether Japan’s coming leaders can find a way to keep COVID-19 at bay, stay the course in providing public goods, and maintain Japan’s enhanced role as a defender of the rules-based international system. It is a tall order, but past dismissals of Japan have proved premature.