From STRATFOR
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Forecasting Japan: A Slow-Burning Crisis
September 28, 2015
Summary
Japan is waking up. For two decades, the island
nation has been relatively removed from both regional and global affairs. Now
it is in the earliest stages of a push to re-establish itself as a leading
power in the Pacific Rim, a role that will require Japan to make some
significant internal adjustments. Over the past 150 years, Japan's political
order has undergone three such overhauls. Each came as a reaction to profound
changes in the international system: the entrance of European powers into East
Asia, the rise of fascism in Europe and the beginning of the Cold War.
As the Cold War ended, Japan began to stagnate.
Previously, Japan had managed to thrive by modeling its internal order to adapt
to regional geopolitics. This time, however, no coherent order emerged in the
Pacific Rim, so Tokyo maintained its Cold War status quo. Japan's maladapted
holdover order quickly entered a 20-year slow-burning crisis that has come to
be known as the "Lost Decades." It is this period of crisis that is
now coming to an end.
No single force will bring about the end of the
Lost Decades. Instead, a number of circumstances will coincide, ushering in a
new Japanese order. Over the next 10 years, the status quo will change as Japan
adapts to the rise of China and changing U.S. expectations for Pacific allies.
Meanwhile, economic and demographic pressures will mount on Tokyo. However, the
direct antecedents of Japan's coming break will be the contradictions that lie
within its current stagnant order. Understanding this situation is the first
step in forecasting the future of Japan.
Despite its strong economic performance in the
1970s and 1980s, Japan foundered in the immediate aftermath of the Cold War. A
succession of asset bubbles and financial crises in the 1990s and 2000s further
undermined the country's economic growth. But leaders had little incentive to
make the necessary reforms to political institutions or foreign policy: Despite
the sluggish economy, quality of life for voters was high and external threats
were few. For the first time in its modern history, Japan did not know what to
do, did not need to do much and therefore did nothing. The political and
economic order designed for an earlier era persisted and became Japan's new
status quo, gradually fraying at the edges, but stable enough to endure.
Japan's now-ailing Cold War configuration rests on
two pillars: integrated business groups known as "keiretsu" and an
autonomous, effective and powerful bureaucracy. Both of these interest groups
have maintained strong ties with the Liberal Democratic Party, which has
controlled the government for all but six of the past 60 years. The enduring
power of the party rests on its ability to mobilize keiretsu employees in
elections and its connections within the bureaucracy.
During the Cold War, Japan's political order leaned
heavily on the support of the United States, which needed a strong Japan to
serve as a key ally in the Pacific. To bolster Japan, the United States granted
it a variety of benefits including open access to U.S. markets while allowing
Tokyo to shelter its own market and implement policies to maintain artificially
low-cost exports. The United States also shared defense and computing
technology, fueling Japan's electronics and high-tech booms. When the Cold War
began to wind down, the U.S. approach shifted from support to quiet
containment.
The 1985 Plaza Accord embodied this shift. The
landmark agreement between the United States, France, West Germany and Japan
allowed the U.S. dollar to depreciate relative to the yen and deutsche mark to
bring the United States out of recession by curbing U.S. inflation and making
its exports more cost competitive. But the deal was a bad one for Japan. The
rapid rise in the yen's value against the dollar between 1985 and 1987
undermined the low-cost export sector and sparked an enormous asset price
bubble in Japan. When that bubble finally burst in 1990, it triggered a banking
sector crisis that sent Japan's GDP growth tumbling from an average of 5-7
percent annually in the mid-1980s to near-zero percent by 1993, initiating the
first of Japan's Lost Decades.
Fueled by newfound purchasing power, Japanese
investment began to move overseas into developed markets. Many companies also
moved operations to take advantage of low-cost labor in Thailand and China.
Such offshoring has continued over the past few decades, undermining the
domestic job market.
Stifled Reforms
Since the 1990 banking crisis, Tokyo has made
several attempts to revive economic growth through fiscal stimulus and
structural reforms. All have failed; Japan's problems require much deeper
structural reforms. Though leaders have tried to make these reforms, they have
been constrained time and again by the alliance between business, bureaucracy
and the Liberal Democratic Party.
Japanese Prime Minister Junichiro Koizumi, for
example, pushed strongly for reform from 2003 to 2006. He attempted to break
Japan's Cold War-era order to clear the way for necessary change. His efforts
largely failed, as have those of other reformers, and Japan has remained
stagnant. Because the country has failed to alter its fundamental order, Japan
essentially has not grown since 1994. The country has managed to maintain high
levels of overall employment, but a growing share of these jobs are part time.
In the 1990s, part-time workers represented less than 20 percent of the
workforce, but by 2014, this number had risen to nearly 38 percent. Meanwhile,
Japan's sovereign debt has grown substantially since 1994 as Tokyo has borrowed
to maintain the bureaucracy, sustain infrastructure investment, cover social
services and healthcare costs and service past debts.
But the crisis of Japan's post-Cold War model is
relatively mild. Despite two decades without growth, Japan is still the world's
third-largest economy and maintains one of the highest GDPs per capita among
major economies. Meanwhile, a consistently strong yen has meant rising
purchasing power. Japan also has one of the world's highest research and
development expenditure-to-GDP ratios and remains one of the world’s most
innovative high-tech economies.
Battered, Not Broken
Recognizing that the Lost Decades have not led to
an earthshaking national crisis is key to forecasting the next step for Japan.
The country will only shift if it is forced to do so. If not, the status quo
will persist more or less intact, albeit fraying at the edges, for the
foreseeable future.
Two factors undergird the stability of the current
order: high living standards and a stable regional position. The Japanese
government, first and foremost, needs to guarantee that quality of life remains
steady or improves. Tokyo will need to keep Japan's GDP constant, or at least
declining slow enough to dovetail with its population decline, over the next
several decades. The government will also need to find a way to pay the costs
associated with the country's growing elderly population. Both will mean
improving worker productivity to offset a shrinking workforce while helping
Japanese industries remain globally competitive and effectively taxing overseas
economic activity. Extracting government revenue from Japanese businesses
abroad, which have used offshoring to keep themselves globally competitive,
will be possible with some political wrangling. It will also be a crucial move,
since the government will need to bolster domestic spending. Social security
and healthcare costs now account for over 35 percent of government
expenditures. At the moment, however, only 26 percent of the population is over
65. By 2040, the elderly will make up 36 percent of population. The government
will likely manage this by exploiting its close ties with the leading keiretsu.
Tokyo will also push for incremental labor reforms
and technological advances to improve worker productivity. To be politically
viable, these reforms will only need to be gradual enough to avoid
substantially increasing unemployment (currently just 3.4 percent) or
underemployment in the near term. This will be tricky. For the next 5-10 years,
Japan will see population aging and workforce shrinkage slow. Between 2015 and
2025, Japan's workforce will shrink by 5.5 million-5.6 million, down from its
loss of 7.7 million-8.3 million workers between 2005 and 2015. Steadier
population levels will raise the pressure on the government to maintain
employment.
After 2025, and especially after 2045, extreme
working age and overall population declines could force more fundamental
changes in the structure of Japan's economy. By 2060, Japan's total population
will fall by around 25 percent, while the working-age population will fall by
around 50 percent. This will almost certainly have profound implications for
the country's economy. Still, the population shifts will be gradual and it will
take some time before their full effects are felt. Without changes in Japan's
external environment, the Japanese government could make incremental policy
adjustments that address the impact of population decline on quality of life over
the next three to five decades, at least enough to stave off a catastrophic
change in the foundations of the current order.
Section 2: Summary
Japan's current political order is a holdover from the Cold War, when the
country was buoyed by U.S. strategy in the Pacific. But when that configuration
changed dramatically after the fall of the Soviet Union, Japan continued to
cling to the old system – it had no other option. Tokyo is now looking ahead to
a future of demographic decline and increased government spending. While Japan
will likely be able to manage these issues, the country's slow-burning internal
crisis will begin to interact with broader regional shifts in the next 5-10
years, the most important of which is the ongoing transformation of China. The
external changes in Japan's region will ultimately cause the country's internal
political order to undergo an epochal shift of its own.
Analysis
Through the Cold War and beyond, Japan has been able to pursue a foreign
policy centered on economic competition and cooperation rather than defense and
security. External allies like the United States protected both the home
islands and Japanese economic interests overseas. But things are changing, and
Japan's mercantilist foreign policy will soon be insufficient to meet its
strategic needs.
China, of course, is the new factor. Since the end of the Cold War, Japan's
neighbor has transformed from an isolated and impoverished pariah state into
the world's second-biggest economy and Asia's largest. China has been the
demographic center of East Asia for millennia and, for most of its history, it
was also the regional hegemon. However, in the middle of the 19th century,
internal and external pressures drove China into one of its periodic cycles of
political fragmentation, social upheaval and introversion. Although China
reunified in 1949, the preceding century of chaos had left its economy in
tatters, preventing China from translating its demographic heft into regional
economic, political or military dominance throughout the 20th century. Now
Beijing is building on its economic strength to accrue diplomatic influence and
military power, and it has begun to pose a serious challenge to the U.S.-led
Pacific alliance structure of the Cold War era.
But China's newfound power rests on a shaky foundation. Beijing faces
mounting social, economic and political strain at home. A number of factors
have contributed to China's current crisis. Internally, there are profound
economic imbalances and intense regional tensions. China is also uniquely
dependent on overseas supplies of energy and raw materials to sustain its
industrial plants, and for the next decade, it will be heavily reliant on
foreign consumption of Chinese-manufactured goods. Historically, China enjoyed
a surplus of domestic natural resources relative to its economic needs. This
allowed generations of Chinese leaders, most notably Mao Zedong, to close the
country off in times of internal turmoil. Because China is now reliant on
imported inputs, the country has little choice but to press outward to protect
its overseas assets, interests and personnel and to ensure the security of
crucial sea lines of communication.
Consequently, the next 5-10 years will be a period of extraordinary strain
for China. The Communist Party of China will continue its attempt to transition
to a new economic model grounded in robust domestic consumption, high
value-added manufacturing and service industries. The process will require
Beijing to substantially change core aspects of its existing political and
economic model, and the Chinese government will need to implement all of these
disruptive changes amid a sustained slowdown in low-end manufacturing and
housing construction. The government has long relied on these two sectors to
maintain economic growth and employment. At the same time, the country will
need to metabolize the staggering levels of local government and corporate debt
accrued over decades of rapid investment-led growth and extensive capital
misallocation.
Beijing's task is not impossible, but it will need to perfectly coordinate
several complex maneuvers to achieve success. To manage these shifts, the
government will dramatically centralize power, essentially becoming a
dictatorship – a process that is already underway. China's new order might also
entail promoting nationalism as a means of maintaining social cohesion, likely
at Japan's expense. China shares its sea lines of communication with Japan, and
the Chinese military has already become increasingly proactive in defending its
territories. For Japan, this is a fearsome prospect.
Shifting U.S. Strategies
China's rise will coincide with a change in the United States' strategic
posture in the Pacific Rim. Since it became the leading superpower at the end
of World War II, the United States has enforced its position by securing global
sea-lanes, maintaining a permanent U.S. military presence along key regional
fault lines, and on occasion, directly intervening to maintain the balance of
power. The United States wants to prevent the emergence of a rival regional
hegemon anywhere in the world.
Washington's strategic imperatives in the Pacific will not change, but its
methods will. The United States will transition gradually in the coming years
toward indirect and less costly ways of enforcing its writ. This will mean
devolving responsibility to regional partners such as the Philippines,
Australia, Taiwan, South Korea and Japan.
The United States' shift is already beginning to push its allies in East
Asia to become much more proactive in defending their security interests. Japan
is at the forefront of this movement. In late 2012, Japanese Prime Minister
Shinzo Abe launched an initiative to revive Japan's regional economic,
diplomatic and military standing. Since that time, Japan has made strides in
regional diplomacy and military expansion and normalization. Still, to be
successful, Japan will need to dramatically expand its efforts.
Throughout history, economic power and military power have been
intertwined. In the 20th century, industrialization, combined with the
technological limitations of ballistics, placed a premium on volume. However,
since the final years of the 20th century, the quality of weaponry has become
more important than the quantity. Vast fleets of large military vessels traveling
long distances will continue to decline in significance, while precision-guided
weapons platforms supported by space-based guidance systems will become
increasingly important.
Meeting Japan's Military Needs
To play a role in 21st-century Pacific regional security, Japan will need
to cultivate and sustain a cutting-edge domestic computing industry. To do
this, Tokyo could start by increasing spending and public-private partnerships
in defense research and development. It could also increase cooperation,
intelligence sharing and technological connections with the United States. But
Japan will also need to form a broader fabric of innovation and experimentation
in computing technologies upon which the state can draw in times of need.
Although Japan has long excelled at advanced manufacturing and is still at
the forefront of robotics, the country has struggled to gain a comparable
footing in Internet-based computing. Japan's enduring Cold War order — an order
defined by the close relationship between the government and major business
groups, the keiretsu — is part of the problem. Keiretsu have hampered the
efforts of successive Japanese leaders to open Japan to greater outside
competition and investment, a factor that will need to change if the country is
to encourage innovation in computing. Tokyo will also need to foster Silicon
Valley-style tech startups, cultivate entrepreneurship and educate its
workforce in the relevant disciplines.
Maintaining and widening its technological edge against regional rivals
will require Japan to make significant changes to its domestic job market,
changes the country has avoided thus far because of the mildness of its current
economic stagnation. Tokyo will need to address the stark rise in
underemployment Japan has seen in recent years. The total portion of Japanese
employed in part-time jobs rose from 29 percent of the workforce to nearly 38
percent between 2002 and 2014. The offshoring of Japanese manufacturing
activity over the past two decades has only added to the country's employment
problem. Anecdotal evidence indicates that over the past 20 years, many major
Japanese electronics and advanced manufacturing companies that once dominated
Japan's economy (and accounted for a sizable chunk of domestic employment) have
downsized their domestic workforces, at least in manufacturing, while expanding
their share of overseas employees.
The Japanese economy will not necessarily have to grow for Japan to buffer
against China and play a leading regional role, but it will need to become much
more dynamic. This will mean channeling the nation's dwindling working-age
population into cutting-edge industries, something that will also be critical
to maintaining domestic political order as the shrinking workforce bears the
burden of caring for an aging population. How Japan responds to external
pressures, and whether its response is adequate, will be determined largely on
the basis of what happens to its economy over the next 5-10 years, the period
in which Japanese Prime Minister Shinzo Abe's reforms will play out.
Section 3 : Summary
As the strategic situation in the Pacific changes, Japan will be forced to
adapt. Tokyo will need to pull the Japanese economy out of stagnation and
cultivate a dynamic set of new industries while luring back businesses that
have gone overseas. Current Japanese Prime Minister Shinzo Abe has an ambitious
plan to do just that – but the strategy has so far foundered, and in the long
term it will likely fail.
Analysis
"Abenomics" aims to revive Japan's economy through three
measures: monetary easing to devalue the yen, fiscal stimulus, and structural
reforms. By devaluing the yen, the prime minister hopes to revive consumer
spending by reversing consumer expectations of continually falling prices after
years of stagnant-to-negative inflation. A weaker yen would also make Japanese
exports more globally competitive and increase the value of overseas corporate
earnings repatriated to Japan. Fiscal stimulus will include direct government
investment into infrastructure development, defense and other sectors. The
measures would also include corporate tax cuts and reforms aimed at stemming
the flow of investment overseas while attracting greater foreign investment.
The last set of initiatives, structural reforms, aim to improve worker
productivity by loosening the regulation of full-time workers, deregulating
protected sectors such as agriculture and power to increase competition
domestically, and expanding international free trade agreements, including the
Trans-Pacific Partnership. In addition to the "three arrows," the Abe
administration is trying to encourage the autonomy and competitiveness of
Japan's different regions and cultivate a startup culture.
Abenomics is still in its early stages. The next two years will be critical
in determining whether Abe's plan will succeed. But there are numerous factors
that will constrain Abenomics and could derail the program completely.
The Japanese economy's most serious problem for the next decade will be
high and rising underemployment. For 20 years, this has been the key driver
behind declining average household consumption and a drag on consumer spending.
Weak consumer spending, combined with expected population decline, limits the
Japanese government's ability to boost corporate investment at home.
Each of the arrows has aspects meant to raise employment. Monetary easing
seeks to boost the value of Japanese corporate earnings overseas to raise
earnings for major conglomerates and free up bandwidth for them to invest
domestically if they choose to do so. As part of fiscal stimulus, Abe aims for
corporate tax cuts to create stronger incentives for these conglomerates to
invest capital domestically rather than put it into savings or reinvest it
abroad. Finally, structural reforms seek to ensure that when companies invest
domestically, they are free to do so in ways that will maximize productivity
and profitability, even if it means cutting back on long-standing workforce
privileges.
Insufficient, Unpopular Measures
This strategy will fail for a number of reasons. The simplest is that
Abenomics will not compel Japanese companies to sufficiently expand domestic
investment. Companies went abroad to avoid the extremely high cost of
manufacturing in Japan, much of it due to high labor costs. China is both a key
market for the products produced by these companies and has a strong production
base with low labor costs.
To date, Abe's policies (particularly monetary easing) have done as much
damage to ordinary Japanese consumers as they have helped, simply because they
have raised prices. The main reason that this damage has not politically
crippled the administration is that low energy prices have given consumers a
boost. Large corporations with overseas operations have benefited from a weak yen,
but ordinary Japanese consumers and small businesses with domestic operations
have only experienced rising costs. Base-pay hikes at major Japanese companies
will help boost consumer spending in the second half of 2015, as will the
recovery from last year's consumption tax hike, but given Japan's employment
situation it is unlikely that these wage hikes will make a significant, lasting
difference in consumption levels. At the same time, demographic decline will
drive down the number of potential consumers more quickly each year.
Abenomics will also likely fail to boost domestic investment by Japan's
industrial conglomerates. One solution would be to bring in investment from
non-Japanese companies overseas. This would require the deep deregulation of
long-protected industries, a relaxation of labor controls and the uprooting of
deep cultural norms. It would also require Japan's accession to the
Trans-Pacific Partnership and the rapid development of a Japanese Silicon
Valley. Together, such radical moves could be enough to draw substantial
investment away from the United States, Europe, South Korea and China in just
over a decade. Such a scenario, however, would need measures much broader by
far than anything Abenomics has considered. It would mean a revolutionary break
with the post-World War II order and truly profound adjustments. Such changes
would encounter substantial opposition from the industrial keiretsu (Japan's
powerful integrated business groups) and key electoral constituencies. More
likely, overseas investment into Japan will remain around current negligible
levels: $2.3 billion in 2013 compared with $135 billion in outbound investment.
Laying aside the need for more ambitious measures, several short-term
factors could undermine even the basic reforms that Abe wants to roll out. The
Bank of Japan is currently purchasing bonds at a high rate. It is unclear how
much longer this can continue before the market tightens to the point of
dysfunction. If the Bank of Japan is forced to pull back before inflation
reaches the 2 percent target, Japan could experience a return to deflation. If
the Bank of Japan's rapid purchase of debt leads to a debt default or some
other catastrophic event, it could well trigger the fundamental break in
Japan's current order that Stratfor anticipates. However, a default is
unlikely.
But more pressing than these financial considerations is the potential
erosion of public support for Abenomics and for the administration itself.
Without a surge in corporate investment and a hike in full-time jobs to
counterbalance it, Abenomics will have primarily negative effects on the
population's quality of life. The initiatives would reduce the value of
savings, raise the cost of living, contribute to perceptions of rising
inequality and leave the workforce vulnerable to layoffs. The last of these
will most acutely harm the very corporate employees that form the backbone of
the Liberal Democratic Party's "organized vote." The electorate is
already uneasy about the prime minister's reforms and many voters have
continued to support the Liberal Democratic Party only because the opposition
is hopelessly fragmented. Their negative perceptions will only grow given the
outlook for corporate investment and consumer spending. Thus, Abenomics in its
current form probably will not last beyond 2017.
Section 4: Summary
In the coming years, Japan will transition out of its slow-burning state of crisis as it seeks to make a
radical break with its current, decaying Cold War political order. The
transformation will take place against the backdrop of significant demographic
changes. Since 2005, Japan has seen its 65-and-over population grow by more
than 33 percent, faster than any past or future forecast rate. Over the next
decade, this rate of aging will slow substantially, as will the decline in
Japan's working-age population. These trends will persist until around 2040,
when most of those born in the country's 1968-1976 baby boom will have entered
retirement. Then, between 2035 and 2045, the rate of the working-age
population's decline will pick up slightly, increasing pressure on the system.
By 2060, the situation will become dire. Even under constant fertility
conditions, Japan's population will fall to around 86 million; if fertility
declines, population levels will drop further still to 79 million. As a
result, Tokyo will likely be increasingly confronted with internal issues
related to economic and social management in the years after 2040.
Analysis
In the next five years, Japan's break from the post-Cold War period will
begin. Tokyo will start to dismantle key elements of its current political
order and the reforms that have made that order more democratically
accountable. The process will require substantial changes in the relationships
between the Liberal Democratic Party, civil service and keiretsu, and Tokyo
will have to find some way to curb or eliminate the electoral strength of
economically non-competitive public utilities while offsetting the growing
power of the over-65 voting population. Meanwhile, the Japanese government will
need to make reforms to improve the productivity, efficiency and
competitiveness of Japanese businesses. Only these changes will ensure that
Japan can cope with the acute population aging and workforce shrinkage it will
face in the decades after 2020 while guaranteeing the country's national
security.
Over the next two years, Tokyo will focus on achieving Japanese Prime Minister
Shinzo Abe's "virtuous circle." Each of Abe's proposed economic
reforms aim to address the root causes of underemployment, with the hope that
higher employment will drive up domestic consumption, thereby boosting the
economy and raising employment levels even further. This cycle will need to be
in place before the Bank of Japan pulls back on monetary easing or the central
government is forced to improve its fiscal position by raising the national
sales tax or increasing corporate taxes. The bank's current rate of bond
purchasing is unsustainable, and Stratfor expects that the Bank of Japan will
cut back on its bond purchases, perhaps significantly, before 2017.
While the prime minister's "Abenomics" measures will make some
progress before 2017, the administration's efforts are not extreme enough to
put Japan back on the path toward sustainable growth within the next two years.
The weak economies of both China and Europe – key destinations for Japanese
exports – will make this outcome even more unlikely. Therefore, when the Bank
of Japan inevitably pulls back on its bond purchases, Japanese companies with
extensive overseas operations will see repatriated funds decline in value,
which will reduce their incentive to invest domestically. The cost of Japanese
goods will also rise yet again, eroding the country's competitiveness with
China and South Korea.
The drawdown in bond purchases and declining investment will lead to fiscal
deficits for the Japanese government, putting pressure on Tokyo to raise taxes
on either companies or individuals. Whichever Tokyo chooses, by the start of
2017, it will once again find itself facing a dilemma after a short period of
economic growth.
But Abenomics will not implode. The Japanese government will likely find a
way to avoid defaulting on its sovereign debt and the Bank of Japan will manage
to implement a modest amount of monetary stimulus without undermining the
country's sovereign debt markets. Inflation may hit 2 percent, wages may rise
and Japan will likely succeed in attracting some foreign investment into
long-protected sectors and new industries. Abenomics is fundamentally sound and
economically rational, but its economic benefits in the long term will be
preceded by hardship for individuals. In 2016, as Japan's growth picks up,
these side effects will become slightly less glaring, but if the Bank of Japan
pulls back on bonds and the government raises taxes, they will resurface.
Life will not substantially deteriorate for ordinary Japanese people, but
events will hurt the prime minister and his administration at the polls. Abe
survived the December 2014 elections because of an incoherent opposition, but
Japan's fragmented playing field will not last forever. By 2017,
dissatisfaction among older voters, especially those with ties to the
agriculture lobby or to other keiretsu, as well as middle-aged and older small
business owners, will begin to undermine Abe's electoral position.
A Quiet Revolution
The fate of the Abe administration will have relatively little bearing on
whether the core policies of Abenomics persist. Over the next five years, two
trends will emerge, the first being the rise of a new generation of bureaucrats
dedicated to the reforms necessary to ensure Japan's long-term security. At the
same time, an older population averse to those reforms, especially military
normalization, will come to dominate the electoral system. Since avoiding
reform is not an option, the government will move away from a system of
electoral democracy.
China's Continued Rise
Over the next five years, the regional security situation will become
increasingly volatile; economic dislocation and political turmoil within China
will combine with China's expanding military power. Urged on by the United
States, Japan will become more proactive not only in its own maritime
patrolling and reconnaissance activity but also in deepening cooperation with
Southeast Asian partners. The sheer quantity of vessels and aircraft deployed
in the region will raise the risk of short, sharp crises. Such incidents will
ultimately serve to bolster popular support within Japan for a defense posture
against Chinese aggression.
Greater volatility in the Pacific will fuel the rise of the new generation
of activist bureaucrats and keiretsu leaders by underscoring the need for
reform. By 2020, these rising civil servants and business leaders will have
made significant headway in consolidating their influence within key
ministries. Meanwhile, Japan will seek to capitalize on the increased
integration of the Association of Southeast Asian Nations to expand Japanese
influence in Southeast Asia and nearby India. Japan will pursue these goals
with an eye toward containing Beijing, but they will yield benefits independent
of China.
Forecast After 2020
Japan will enter the 2020s in a relatively strong position. Despite growing
opposition from an electorate dominated by older voters, the government will be
more successful than previous administrations in implementing reform. Breaking
up the agricultural and other lobbies in the late 2010s will expedite the
process. As the generation born before World War II leaves politics and tensions
with China grow, nationalist sentiments in Japan will surge, allowing the
government to more actively mobilize support for defense reforms.
The reform measures initiated under Abenomics will slowly come into force
after 2020 but will fall short of generating sustained annual GDP growth above
1-2 percent. Demographics will undergird this poor performance: Between 2015
and 2020, Japan's workforce will shrink by 3.3 million, or about 4 percent,
increasing the pressure on the economy's productive capacity. Reform measures,
however, will help ensure relatively stable GDP, improved efficiency and
productivity as well as constant quality of life. This will provide a workable
basis for the government's efforts to revamp the country's regional and global
image and extend its political, military and economic reach.
From 2020 to 2030, Japan's working-age population (ages 20-64) will fall by
around 4.8 million to 5.6 million. This drop will be well below the decline of
7.7 million-8.3 million people from 2010 to 2020, but it will be substantial
nonetheless. To maintain a constant GDP, Japan will need to ensure average
annual productivity growth of at least 2 percent. Doing so will require
securing labor reforms. It will also depend on the Japanese government's ability
to stimulate higher value-added services (such as financial services) and
computer technologies industries at home.
Fixing employment problems will be critical for supporting Japan's growing
elderly population. Compared with the years between 2010 and 2020, when the
country's over-65 population grew by 7.5 million, the rate of population aging
will slow considerably in the 2020s. Still, the absolute burden of caring for
Japan's elderly population will only grow. By 2030, people over 65 will account
for 32 percent of Japan's population, as opposed to 56 percent of the
population at working age.
Tokyo will make tangible progress throughout the 2020s in cementing reforms
and encouraging the kinds of industries needed to improve the overall
productivity of Japan's economy. But the Chinese and European economies will
remain weak through the early 2020s, and Japan's internal changes are unlikely
to generate enough taxable income to reverse Tokyo’s reliance on deficit
spending. Japan probably will not default on its debt, given the high rate of
domestic ownership, but the amount of debt will grow, as will debt servicing
costs.
Japan's relations with China will be in flux between 2020 and 2030. Even as
China's economy slows between 2015 and 2018 and the Chinese government
struggles with rising unemployment and social dislocation at home, the United
States, Japan and their partners in broader Asia will pull closer together to
balance against the perceived Chinese threat.
Beijing will continue to invest in its military and maritime expansion, and
the world will continue to expect an imminent Chinese economic recovery. This
will fuel integration efforts by the United States and Japan. But before 2025,
the limits to China's economic trajectory and military capabilities compared
with those of the U.S.- and Japan-led coalition will have become unmistakably
clear. This will coincide with the unleashing of long-suppressed social and
political energies within China, a process that could reach a climax before the
scheduled 2022 generational leadership transition. The extreme centralization
of political power before 2020 will have thoroughly undermined the system of
checks and balances within the Communist Party of China and will make for a
tumultuous transition process.
Up to 2025, Japan's neighbors will continue to view it as the leading
counterbalance to China. Before long, however, internal political turmoil and
continued economic dislocation within China will start to put the breaks on
this dynamic. Stratfor expects China's ongoing economic slowdown to bottom out
sometime around 2020. Throughout the early 2020s, China will be engaged in a
process of restructuring and rebuilding its economy, a process that will weigh
on annual GDP growth through the late 2020s. It will not be until the end of
the decade that China's painful restructuring comes to fruition and domestic
consumption by the urban middle class emerges as a genuine driver of national
economic growth. As a result, China will exist in a state of economic
dysfunction between the leadership transition of 2022 and perhaps as late
as 2029-2030, likely increasing regional economic fragmentation.
The United States will realize the state China is in and will begin to
slowly adjust the U.S. position in the region. Washington will move to prevent
a complete Chinese political and economic collapse, fearing that such an
outcome would cause extraordinary disruption across East Asia and provide an
ascendant Japan a chance to move beyond the United States. To prevent its
displacement, the United States will move to constrain Japan while avoiding
open displays of friction with the Japanese.
Thus, Japan will find itself in the second half of the 2020s caught between
a recovering China and a United States more amenable to assist in that recovery.
This strategic bind, combined with Japan's deepening demographic decline, could
well pave the way for another period of relative introversion in the 2030s.
The rates of workforce decline and population aging will both remain
moderate in the 2030s before picking up precipitously in the 2040s. Efforts to
boost fertility rates in the late 2010s and 2020s may help counteract the
effects of working-age and population decline after 2040, but by and large,
their effects on Japan's workforce will not be felt in the 2030s. If fertility
does improve, Japan's workforce (by 2040, only 52 percent of the population)
could find itself even more financially strained than in the previous decade.
By 2060, Japan's workforce will have declined by 50 percent since 2015, while
the country's total population could fall by as much as 25 percent. With this
in mind, the years after 2040 are likely to be increasingly dominated by
internal economic and social management-related issues.