Back to Normal? The Promise and Pitfalls of Japan's Economic Integration

EXECUTIVE SUMMARY

MAIN ARGUMENT

• Japan finally appears poised to return to sustained economic growth. Growth depends on an end to deflationary expectations, the stimulation of domestic demand, and continued progress in economic reform.
• Though Japan has drawn closer to the U.S. in the past five years, even deeper relations with the U.S. may raise expectations unreasonably and may complicate Japan’s regional relationships.
• Over the past decade Japan has become more integrated economically into East Asia; at the same time, however, Japan’s political and security relations with key neighbors have worsened.
• Regional economic interdependence is, on balance, a positive factor in regional security but cannot be counted on to resolve regional conflicts or to forestall rivalry between Japan and China.

POLICY IMPLICATIONS

• As Japanese economic growth is in the national security interest of the U.S., Washington would benefit from encouraging continued economic reform.
• The maintenance of a healthy and stable U.S. economy has a significant positive impact on regional stability in East Asia.
• The U.S. is a pivotal player in the China-Japan rivalry. A U.S.-Japanese alliance that is too aggressive alarms China, whereas one that is too weak raises abandonment anxieties in Japan.
• Given the high economic and security stakes, remaining deeply engaged in East Asia is critical for the U.S., notwithstanding the formidable challenges the country faces elsewhere in the world.