Recovering Nation: Battered Japan Searches for Bearings

In the weeks since a shockingly destructive earthquake and tsunami wreaked havoc in Japan’s northeast Tohoku region and spread turmoil throughout the country, it’s often seemed as if the stunned nation is fighting for recovery on three fronts. The clearest is against the sometimes enormously-destructive power of nature itself―in this case the tragic deaths, devastation, and dislocations caused by the tsunami, and the knock-on effects especially at the Fukushima Daiichi nuclear power facility. The second is the debilitating stereotype, prevalent both at home and abroad over the past several years, of a dysfunctional political-economic culture that has put the nation on a bullet train destined for decline, and which―the false label has it―would inevitably render the government incapable of effectively responding to the crisis. The third, just now coming into renewed focus, is the array of genuine, often self-imposed economic and political log jams that in recent decades have been slowly sapping the country of vitality, and which, if left in place, could ultimately undercut even the best-laid plans for post-tsunami reconstruction.

Economists are generally optimistic that Japan’s economy can return to pre-earthquake output levels by late this year, or early next. Nuclear energy experts tend to agree that efforts to stabilize Fukushima Daiichi will be marked by occasional setbacks, but that the crippled facility is much more of an industrial catastrophe than a serious health risk to the general population. Japan faces the long, arduous, and hugely expensive task of cleaning up and disposing of the plant.

Meanwhile, the response of the Japanese government, while perhaps not a model of management efficiency and communication skill, hardly matches the cartoonish combination of obfuscation and incompetence often portrayed in parts of the U.S. and Japanese media.

Even the degree of competence shown by the government since March 11, and a palpable spirit of unity in the country, is an indication that political gridlock and instability could begin to ease sooner than generally believed, potentially also putting closer the day when Japan more confidently comes to grips with long-standing economic and demographic challenges.

Nothing is guaranteed of course, and gridlock could still prevail. Continuing aftershocks, including the one that hit April 11 north of Tokyo, only complicate matters. But the response of the government and average citizens to the crisis is pretty strong evidence that a lot more has been going on in Japan over these past two supposedly “lost” decades than is captured by popular notions of a nation “stuck in a rut,” “paralyzed by malaise,” and burdened with hapless leaders.

Short-term outlook

Economists are optimistic about the overall economy, short-term, because natural disasters tend to be restricted to geographic areas. While the disaster’s human toll is beyond measurement, the Tohoku region makes up only a small portion of Japan’s overall economy. Retail and other necessary parts of daily life will spring back. Debris estimated to be the equivalent of 23 years of normal garbage will have to be discarded. Reconstruction of roads, bridges, and other infrastructure will begin. Employment will pick up. Production will rise.

The two complicating factors will be disruptions in production supply-chains, already quite evident in the auto and electronics industries, and shortages of electricity, especially harmful to the heavily-concentrated Tokyo area. Authorities have announced rolling blackouts in the area will end in late April, contingent on a 25 percent reduction in consumption―no easy task, and one filled with inevitable inconveniences that will hurt the economy. Imported portable generators will help ease the pain, but by how much is very unclear.

“By the end of calendar year 2011, the economy should be growing normally, or perhaps better,” says Michael Smitka, a specialist in Japan’s economy at Washington and Lee University.

A more open Japan

Trying to manage this crisis is Prime Minister Naoto Kan, and his Cabinet from the still-fledgling Democratic Party of Japan (DPJ). From the outset, Kan seemed determined to break the mold of past ineffective government responses to crises, characterized by indecision, bureaucratic rivalries, poor communication, rejection of outside help, and secretive protection of cozy ties between the political and business communities.

The scale of the crisis was unparalleled in Japan’s postwar history: thousands dead and missing; hundreds of thousands homeless, with scant access to food, clean water, medicine, and shelter; a dangerously-crippled nuclear facility; the huge Tokyo metropolitan area hit by downed train and telephone systems. Simply collecting information from the devastated areas, including the Fukushima nuclear site, was difficult. Disseminating information and advisories to the public was even more difficult.

Boston University Japan specialist Thomas Berger points out that the DPJ came to power promising greater openness and transparency in government, and that the government’s actions have been consistent with that pledge. Most notable are the numerous press conferences held each day by Kan’s right hand man, Chief Cabinet Secretary Yukio Edano, the acceptance of extensive assistance from the United States military and U.S. government nuclear specialists, and the unprecedented mobilization of Japan’s long-overlooked Ground Self Defense Forces (GSDF) for disaster relief operations.

The close military-to-military cooperation in Tohoku is more extensive than any the two allies have engaged in before, and could set the stage for joint U.S.-Japan humanitarian relief operations throughout East Asia in the future.

Also unprecedented is the coming together of Japanese, U.S., and international nuclear specialists (including U.S. Army and Navy personnel) to share and review data and consider the best steps to bring the Fukushima facility under full control. Without surrendering its sovereignty, Japan in essence has voluntarily broadened the management of the Fukushima crisis into an international endeavor.

To some extent this was inevitable, given the global stakes involved in such a nuclear crisis. But there were few if any signs of parochial resistance on the part of Japanese government leaders, despite the implicit diminution of power of the influential Ministry of Economy, Trade and Industry (METI).

In the early days of the Fukushima crisis, there was understandable skepticism about the willingness of Tokyo Electric Power (Tepco) to fully share sensitive data. The company had a history of covering up safety lapses. But with so many U.S. and international experts working side-by-side with Japanese counterparts, it is hard to imagine Japanese officials could be withholding data, even if they wanted to.

To the contrary, data about radiation flows from the Fukushima facility continue to back the Japanese decision to enact a 19 mile evacuation zone, even if a few individual towns a bit further out are soon included. Overall, Japan’s zone is far smaller than the 50-mile radius recommended for U.S. citizens in Japan by the U.S. Nuclear Regulatory Commission.

The nuclear crisis has certainly further undermined already-shaky public tolerance in Japan of the close ties among business, bureaucrats, and political leaders. Prime Minister Kan created his own task force of non-governmental nuclear specialists to advise him independently from Tepco and officials of the Nuclear and Industrial Safety Agency, an arm of METI. If anything, Kan has been criticized for pushing the bureaucracy too far aside, failing to utilize its considerable brain power. But that problem appears to have eased.

In any case, the evident loosening of trilateral business-bureaucrat-politician ties during the Fukushima crisis could have huge implications for Japan’s economic policies, and broader national strategies.

Also notable is the public-minded reaction of Japanese youth to the challenge of reconstruction. Many are volunteering to raise money and work with nongovernmental organizations to help ease the crisis.

This raises doubts about the accuracy of analyses that Japanese youth have become self-centered and inward-looking, with little interest in traveling or studying abroad. “That analysis became a fad, but I never believed it,” says Yuichiro Yamagata, a veteran journalist whose daughter happened to be in Italy when the earthquake struck. “Kids get stuck at home because the job search starts so much earlier these days and companies take a ridiculously long time to hire.”

None of these trends necessarily work in favor of the DPJ, which is more the beneficiary of public disaffection than it is a popular vehicle for change.

“People still don’t trust the government, even with the DPJ,” says Tokyo journalist Minoru Nakamura. “But their response to the crisis shows they believe in themselves.”

For the time being, Kan will remain in office, mostly because the public sees little benefit in yet another change of prime ministers. But Kan stands little chance of winning broad-based public support. He is widely seen as a proponent of reform, but is also seen as inconsistent, and lacking the strength to discipline his own fractious party.

It remains very unclear whether the DPJ will be able to convince the public during this crisis period that it has the competence to be a stable, effective ruling party. For the first time, there is considerable talk that the party’s most influential figure, former Chief Cabinet Secretary Yoshito Sengoku, might shed his role as senior statesman and mentor to the next generation, and assume the top job himself.

Meanwhile, speculation continues that the opposition Liberal Democratic Party (LDP), which still can’t quite believe it was unceremoniously dumped by voters 18 months ago after almost 50 years of continuous rule, will temporarily join a “crisis Cabinet.” The LDP rejects the idea for now, but many say that’s not the party’s final answer.

Either way, the government will soon have to draft reconstruction plans for the Tohoku region, and to figure out how to raise the estimated $300 billion that will entail.

Economists generally believe that raising the money, through a combination of tax increases and issuance of new debt, will not pose a big problem, in the short term. The DPJ wants to avoid new debt for as long as possible.

But deciding what economic reconstruction of Tohoku should look like, and how to place reconstruction financing in the framework of Japan’s wobbly, long-term fiscal woes, quickly raises vexing longer-term economic, social, and political challenges, such as the rapid aging of Japan’s population, the deterioration of rural communities, an unsustainable growth trajectory of government debt, continuing lags in Japan’s overall productivity, and when the political system will be sufficiently stable to guide the country through desperately needed reforms.

Long-term reform

The fact that Japan has averaged an anemic 1 percent annual economic growth over the past 20 years, and has suffered the instability of 6 prime ministers in the past 5 years, often masks that fact that the country has undergone far-reaching economic and political reform, especially over the past 10 years.

Steven Vogel of the University of California, Berkeley points out, for example, that Japan has seen big changes in corporate governance, with revisions to the commercial code, financial sector reforms, accounting system changes, and labor market reforms.

Ulrike Schaede, Professor of Japanese Business at the University of California, San Diego, emphasizes that many major corporations in Japan have shifted strategies to focus on higher profit high-tech components, such as circuit boards, laser heads, and advanced adhesives, rather than lower-profit but more visible consumer products, such as flat panel displays and DVD players.

Stanford University researcher Bob Eberhart points to the growing role of innovative start-up firms in Japan’s overall economy.

But Richard Katz of the Oriental Economist argues that, while very important, the changes thus far in corporate governance and corporate strategies have yet to reach the critical mass required to boost productivity in Japan.

The bulk of Japan’s corporate sector consists of small, domestic-oriented firms that lag woefully behind global productivity standards. And without a productivity boom, Japan will have an increasingly difficult time paying for the care of its rapidly aging population. Net national debt, already in the range of 100 percent of GDP, will increasingly be a drag on economic growth.

Meanwhile, conditions throughout Japan’s rural communities, which are still over-represented in the Diet, continue to deteriorate. Politically-influential farmers receive expensive subsidies from Tokyo, and resist plot consolidation and other measures to improve efficiency. Young people have fled farms in droves, leaving behind a wealthy but vulnerable population of senior citizens. It’s little talked-about, but the elderly were hit disproportionately hard by the March 11 tsunami.

Youth arriving in the cities find that tough economic times―especially the prevalence of ‘temporary’ jobs with lower wages and fewer benefits―make marriage, not to mention child-rearing, a difficult proposition. The aging of the population worsens.

The DPJ, largely free of the ties to special interests that have immobilized the LDP, was supposed break through this political log jam. And the DPJ has often promoted a genuine reform agenda. But to cobble together a majority of Lower House Diet seats, which it won in 2009, the DPJ wound up over-promising economic assistance to various constituencies, especially farmers, thereby undercutting its own strategy for economic change.

Prime Minister Kan is promoting a forward-looking agenda, which he labels “The Third Opening of Japan,” involving participation in regional trade talks known as the Trans-Pacific Partnership (TPP), rural revitalization to include agriculture reform, and a long-term plan to stabilize the country’s retirement and fiscal systems. But Kan finds himself strongly opposed by a big portion of his own party.

All of these problems come together when reconstruction of Tohoku is considered. Many of the small fishing and farming villages wiped away by the tsunami may never be rebuilt, begging the question of whether political leaders in Tokyo will champion genuine rural revitalization.

More broadly, the Fukushima nuclear crisis brought on by the tsunami has raised a big question mark over Japan’s national energy strategy, and plans to curb global warming. Both were to rely heavily on expanded use of nuclear power. Japan is in no position to abandon nuclear power, but nothing short of bold leadership will make possible the construction of additional plants.

As things stand now, it is possible that the Great Eastern Earthquake will catalyze desperately-needed political reforms. For the past 50 years, Japan has had no experience with effective competitive politics, in which battling parties recognize when it’s time to govern. Since coming to power, the DPJ has been busy fighting its own demons, while the LDP has been little more than obstructionist. Smart people in both camps know the problem, and may be able to leverage the current crisis to accelerate progress toward a dynamic two-party system. Still, it is also possible that a lack of reform will work to inhibit effective reconstruction.

Meanwhile, Japanese voters want to hear an inspirational narrative of national renewal. They may hear it soon, but they haven’t yet.