How Can Japan Compete in a Changing Global Market?
A Roundtable Report
By Clara Gillispie
Today, Japan has the world’s third-largest GDP and yet carries a budget deficit greater than any other developed nation.  This current state of affairs is due in no small part to several emerging challenges—a rapidly aging population, rising energy costs from the reduced use of nuclear energy, and tightening international markets—but also builds on and exacerbates longer-term structural questions about how to stimulate greater investment and build consumer confidence.
To address the question of how Japan can compete in a changing global market, the National Bureau of Asian Research convened an intimate roundtable discussion with senior experts Edward Gresser (Progressive Economy) and Toshikazu Okuya (Japan’s Ministry of Economy, Trade and Industry), along with other researchers, industry experts, and policy practitioners from the Asia-Pacific. Participants were asked to assess the factors influencing Japan’s overall economic profile and the decision points facing leaders on how to strengthen the country’s trade and economic policies. This report outlines the major findings of this roundtable.
Over the past half century, Japan has developed a reputation for having a successful economic model, driven by achievements in fostering innovation and high levels of labor productivity. During the discussion, Edward Gresser noted that Japan alone is responsible for 8% of global GDP, despite having only 1.8% of the world’s population, and that its contributions to the global economy are even more impressive when broken down by sector.  In 2011, Japan was responsible for 13% of the world’s manufacturing output by value added and more than 12% of global investment in research and development.  In that same year, over 40% of international patent applications filed in the United States came from Japan.  Japanese companies are also among the most successful firms in the auto industry and consumer electronics sector, as well as in developing a range of IT products and services.
Yet while Japan experienced phenomenal levels of economic growth from the 1960s to the 1980s, its economy slowed during the 1990s. Japan has also since faced both regional and global financial crises. Deflation has exceeded desirable levels, and policymakers and industry leaders continue to struggle with how to stimulate consumer spending. Roundtable participants noted that while Japan’s actual 2012 GDP growth was stronger than early predictions, the country’s growth was still weak compared with other group of eight (G-8) countries. One participant further highlighted that consumer prices in Japan also declined in 2012 and that such declines can be correlated with decreasing consumer confidence. For Japan, and in particular for the administration of Prime Minister Shinzo Abe, discussants agreed that the road ahead poses a distinct challenge: how to bolster the domestic economic climate and identify growth strategies that capitalize on Japan’s strengths in innovation and human capacity.
The very makeup of Japan is changing, complicating its economic outlook. The country is currently undergoing a major demographic shift with a population that is rapidly shrinking and graying. Expectations are that by 2025, Japan will have less than two workers per retiree.  Such demographic changes have immediate implications for not only economic growth and the demand for greater productivity but also expected increased demand for government services.
During the discussion, one senior Japanese official highlighted that a critical challenge facing the Japanese government is how to address the budgetary challenges raised by a rapidly aging population. In particular, policymakers will need to confront the question of whether the government can do more with less.
A key policy recommendation under consideration is for Japan to start shifting a greater share of existing resources toward areas experiencing increased demand—specifically toward health and welfare services related to elder care—and match these changes with decreases elsewhere. However, such action would require a number of complementary efforts. One participant noted that large-scale rebalancing might be prohibited by statutory regulations, which require that individual agencies or the Diet first review, revise, or waive these provisions. This suggests the need for a broader strategic discussion about the government’s long-term goals to ensure that changes in one area do not negate efforts in another. In particular, Japanese policymakers are acutely aware of the danger of Japan losing its global competitive edge if domestic demand becomes the sole focus of government investments. Participants agreed that addressing the country’s emerging demographic changes will require a broader review of its fiscal priorities and what policy and structural reforms might be needed to enable changes in the budgeting process.
Maintaining a healthy Japanese economy will also require addressing hard questions about Japan’s energy future. As one participant noted, Japan’s energy supply insecurity is not just an energy problem; it is a macroeconomic problem.
Traditionally, nuclear energy has made up one-third of Japan’s energy mix and is one of Japan’s few sources of domestic energy supply. With nearly all of the country’s nuclear power plants offline since the 2011 Fukushima nuclear disaster, the country has experienced substantial energy shortages and a dramatic rise in energy costs. In 2011, Japan saw its first trade deficit in more than 30 years, and discussants largely agreed that the leading contributing factor was increased demand for oil and gas imports to fill the void left by nuclear power.  Because the net price of these imports is also more expensive than the net price of the supplies being replaced, one industry representative stressed that this supply shift has implications for Japanese consumers and for the ability of Japanese products to compete in the global marketplace. Increased operating costs could push some companies to either restrict operations or raise prices. In turn, both actions could further counter efforts to bolster GDP growth and improve the global competitiveness of Japanese exports.
Discussants overwhelmingly agreed that to sustain healthy domestic economic activity, Japan will need to restructure its energy policies. As of this writing, an announcement about a new energy policy is expected in summer 2013. Prime Minister Abe has strongly advocated that the use of nuclear energy is critical for lowering Japan’s energy costs and moving toward a sustainable energy mix. On the latter point, roundtable participants largely agreed with Prime Minister Abe’s assessment. However, several noted that the core challenge for Japan is not making the executive decision to restart its nuclear plants but increasing public confidence that nuclear energy can be managed safely. Many stated that strengthening nuclear regulatory and safety regimes will continue to be a critical task in the near term and constitute a step that must be taken in tandem with other efforts to engage the public. Like the issues surrounding Japan’s demographic challenges, Japan’s energy concerns will ultimately play a significant role in shaping the country’s future economic outlook.
ABENOMICS: THE DEBATE AND EVIDENCE SO FAR
Prime Minister Abe’s government has advocated a series of policies to bolster Japan’s economy in the near term while also being mindful of the medium- and long-term challenges mentioned above. These policies have centered on three core pillars: fiscal policy, monetary policy, and structural reforms to promote private investment. Often dubbed “Abenomics,” specific policies have sought to boost economic growth through lowering interest rates, initiating stimulus projects focused on infrastructure and public works, and revising Japan’s banking regulations, among other programs. The overall goal of these combined efforts has been to inject new capital into the market and encourage consumers and investors to do the same.
As a whole, the results of Prime Minister Abe’s economic policies appear to be positive. Indeed, several roundtable participants were surprised at the extent to which Japan’s economy has responded. In particular, one member of the U.S. policy community noted that in early 2013 the Japanese economy showed signs of improvement in a number of critical areas, including industrial output, and that these improvements seemed to be driven by merely the announcement of new policies. Similarly, recent reports suggest that in the first quarter of 2013 the Japanese economy grew at an annualized rate of 3.5%, putting it on track to potentially double its 2012 growth rate.  Still, discussants noted that this period of stronger growth largely occurred before Prime Minister Abe’s policies could be implemented, and in some cases even before specific details were announced.
Consequently, several participants suggested that a key element of why Japan’s economy has been steadily improving in 2013—and how we should assess Abenomics—is greater public confidence rather than other individual macroeconomic features of the newly introduced policies. Indeed, an article by Reuters recently noted that in March 2013 consumer confidence in Japan was the highest on record in the past six years and that consumption again appears to be on the rise compared with 2012.  In explaining why these policies might be producing such a result, one roundtable participant described a sense that Prime Minister Abe has offered a bold vision that has struck a chord with the public. In announcing and following through on reforms such as installing a more activist leadership to the Bank of Japan, Prime Minister Abe filled a critical leadership void that many perceived in recent administrations. His efforts to break perceptions of stagnation and indecision in government policymaking have created an environment more conducive to economic growth and helped magnify the effects of the government’s stimulus policies.
Still, participants were quick to highlight that assessing how sustainable this momentum is will require greater detail on how policies are to be executed. In terms of policies to observe, discussants were especially curious about the role that proposed public-private sector funds will play in Japan’s development strategies. Many participants held nuanced views of these funds and argued that it is not possible to judge whether a strategy of fostering greater partnerships between the public and private sectors should be viewed as simply good or bad. As noted by one participant, the challenge will be to define what the role of public-private funds is, because although it is not good for the government to intervene in the economy too much, the reason for starting these funds is that there is a lack of risk capital in Japan. This same participant went on to note that while there is an abundance of risk capital in the United States, the same is not true in Japan; as a result, Japan has confronted a significant bottleneck when attempting to stimulate new industrial growth. By allowing the government to invest public capital in private industry, public-private funds may allow businesses to access necessary, early stage capital. With this in mind, participants stated that striking a balance between too much and too little intervention will be a key challenge for the government and is an issue that has yet to be fully scoped. As the policies of Abenomics are further tested and evaluated in the second half of 2013, studies assessing the management of public-private funds are likely to draw attention not only from the Japanese public but from competing industries in the Asia-Pacific and beyond.
Japan’s economic health has a significant international dimension to it as well. As noted by Gresser, defining what constitutes Japan’s economy has become an increasingly complex question: “Is it Japan’s $6.1-trillion domestic market, or is it that $6.1-trillion domestic market plus its $1-trillion economy around the world?” Gresser went on to comment that while many observers are familiar with the moniker “Made in China,” what is often buried within this discussion is that 30%–40% of the value of products made in China returns to Japan in the form of royalties on patents and licenses and other income from contributions to China’s supply chain. Consequently, participants strongly agreed that an important part of Japan’s economic outlook is the country’s role in global markets and supply chains and its ability to bolster trade relationships.
Undeniably, Japan’s economic growth has been driven by exports. This has traditionally enabled Japan to avoid large trade deficits despite the country’s reliance on imports to satisfy many of its raw material needs; and yet it raises questions about the current global environment for Japanese goods and services. Several participants pointed out that global demand has been weak over the past few years, and in some sectors the outlook is becoming even weaker. While the United States and others are recovering from the 2008 financial crisis, participants were quick to note that many consumers still do not feel confident making major purchases, which affects the demand for imports of Japanese goods. Conversely, China—traditionally Japan’s largest trading partner—has continued to have solid economic growth over the past five years. However, Sino-Japanese relations have deteriorated during this period, particularly as a result of ongoing territorial disputes. Frayed political relations have led to a drop in trade between the two countries, with Japanese exports to China falling by 9% in March 2013 alone. 
In this context, discussants wholeheartedly agreed with the Japanese government’s strategy of diversifying trade relationships and increasing opportunities for new market access. One participant observed that Japan has been particularly interested in expanding its relations with India and Southeast Asian states.
New and more dynamic trade agreements are also an essential part of this economic calculus. Specifically, participants noted that Japan, South Korea, and China have begun negotiations for a regional free trade agreement (FTA) with ASEAN and other important economies such as Australia, India, and New Zealand. It was also noted that Japan and the European Union have separately entered into their own FTA negotiations, and further progress on these discussions is expected in mid-2013. Many participants further observed that the Trans-Pacific Partnership has big expectations to live up to and that progress on Japan’s participation in this agreement is a positive development. While each set of agreements has its own distinct limitations, roundtable attendees highlighted the overall net gains for Japan: in some cases, gains that can be measured in terms of raw export values; in other cases, gains in basic opportunities for dialogue on sensitive issues such as standards for protecting intellectual property rights. Moreover, discussants found that the gains in either of these columns should not be treated as part of a zero-sum equation. While deepening and expanding trade relationships is an important element of Japan’s strategy to compete in a changing global market, these same relationships are also an increasingly integral part of other countries’ efforts to improve their competitiveness, as they likewise seek access to new markets and innovative products.
Participants in the roundtable were ultimately optimistic about Japan’s ability to compete in a changing global market. Although Japan faces a number of formidable challenges, experts noted that the country possesses an incredible capacity for innovation, as well as a wealth of human resources. With this in mind, strengthening Japanese competitiveness will require a dedicated process of both restructuring domestic policies and bolstering international partnerships. Critical issues to watch in the coming months include progress on the decision to restart some of the idle nuclear reactors; the outcome of the Upper House elections in July, which will serve as a barometer of public support for Abenomics; and Japan’s active trade diplomacy.
This report was prepared by Clara Gillispie, Assistant Director of Trade, Economic, and Energy Affairs at The National Bureau of Asian Research.
 “Japan Is Poised for Expansion but Must Curb Government Debt,” Organisation for Economic Co-operation and Development (OECD), April 23, 2013, http://www.oecd.org/economy/japan-is-poised-for-expansion-but-must-curb-government-debt.htm; and OECD,
OECD Economic Surveys: Japan 2012 (Paris: OECD Publishing, 2013), available at http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-surveys-japan-2013_eco_surveys-jpn-2013-en.
 See World Bank data on GDP, available at http://data.worldbank.org/indicator/NY.GDP.MKTP.CD; and UN Department of Economics and Social Affairs, “World Population Prospects: The 2012 Revision,” http://esa.un.org/wpp/unpp/panel_population.htm .
 See the UN Industrial Development Organization’s statistical country brief for Japan, available at http://www.unido.org/resources/statistics/statistical-country-briefs.html; and OECD, Main Science and Technology Indicators 2012, no. 2 (2013), available at http://www.keepeek.com/Digital-Asset-Management/oecd/science-and-technology/main-science-and-technology-indicators/volume-2012/issue-2_msti-v2012-2-en.
 “Patents By Country, State, and Year—Utility Patents,” Patent Technology Monitoring Team, U.S. Patent and Trademark Office, December 2012, http://www.uspto.gov/web/offices/ac/ido/oeip/taf/cst_utl.htm.
 For more information on this topic, see Lynann Butkiewicz, “Implications of Japan’s Changing Demographics,” National Bureau of Asian Research, October 2012, http://www.nbr.org/downloads/pdfs/ETA/ES_Japan_demographics_report.pdf.
 Kaori Kaneko and Tetsushi Kajimoto, “Japan's First Trade Deficit since 1980 Raises Debt Doubts,” Reuters, January 25, 2013, http://www.reuters.com/article/2012/01/25/us-japan-economy-idUSTRE80O01120120125.
 Tetsushi Kajimoto and Kaori Kaneko, “Japan's First-quarter Growth Spurt Shows Early Benefits of Abe's Policy Gamble,” Reuters, May 16, 2013, http://www.reuters.com/article/2013/05/16/us-japan-economy-gdp-idUSBRE94F01020130516.
Stanley White and Kaori Kaneko, “Japan Household Spending Surges as ‘Abenomics’ Gains Momentum,” Reuters, April 30, 2013, http://www.reuters.com/article/2013/04/30/us-japan-economy-idUSBRE93T03R20130430.
 Ben McLannahan, “U.S. Becomes Japan’s Top Export Market,” Financial Times, April 18, 2013, http://www.ft.com/intl/cms/s/0/c1440782-a7c1-11e2-9fbe-00144feabdc0.html.