Japan, the Global Financial Crisis, and the Stability of East Asia

EXECUTIVE SUMMARY

This chapter examines how the global financial crisis is affecting the major economic and strategic challenges facing Japan.

MAIN ARGUMENT

Even before the crisis, Japan’s foreign policy faced a difficult challenge. On the one hand, with an economy increasingly oriented toward East Asia, Japan had been seeking to promote regional initiatives, including ones that exclude the U.S. but include China. On the other hand, a rising China has also become a more formidable competitor, moving Tokyo to strengthen the U.S.-Japan alliance. Meanwhile, North Korea’s apparent determination to develop nuclear weapons and longer-range missiles has complicated some of the basic assumptions of the alliance.

The global financial crisis exacerbates these challenges. First, the crisis has reduced foreign demand for Japanese products, wiping out many of the meager gains Japan had made in shaking off its long domestic economic stagnation. Second, China is the sole major economy growing fairly healthily, accelerating the closure of the relative power gap with Japan. The crisis has also demonstrated the limits not only of the global financial architecture but also of the regional architecture Japan had been trying to establish.

POLICY IMPLICATIONS

• To minimize frictions resulting from the inevitable rise of China, Japan and the U.S. should seek to engage China in economic cooperation both regionally and globally.
• With U.S. economic credibility in East Asia severely weakened, Washington should support Japanese efforts to be a leader in creating a regional financial architecture along more or less liberal lines.
• The U.S. government must engage with politicians from all parties in Japan to demonstrate the continuing importance of U.S. bases and operational cooperation.