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CHAPTER 2

2016–Year of Crises

In 2016, new population estimates for Japan painted a sobering picture. The 2010 census had estimated that Japan’s population of 128 million would fall to 95 million by the year 2050, with all of Japan’s forty-seven prefectures suffering population loss. In the hardest-hit prefectures such as Akita, Aomori, and Kochi, it was estimated that the population would decline by as much as a third. But even Tokyo was warned to expect a decline of nearly 7 percent. The new 2016 projection showed a much more dramatic decline, with the total population dipping below 88 million by 2050. Even worse was the projection for the aging of the population: in 2010 it had been expected that by the year 2040, people older than sixty-five would make up more than 30 percent of the population in each prefecture, with Akita, Aomori, and Kochi prefectures reaching a proportion of over 40 percent. But the new projection was that 40 percent of Japan’s population would be over age sixty-five by the year 2050.

The social, economic, and national security implications of these numbers were almost unimaginable. Many Japanese had been comforting themselves with the thought that a smaller population would not be a problem. Indeed, it was often suggested that Japan would be less crowded and thus more comfortable and livable with fewer people. But a cold, hard look at the projections showed a rapidly approaching disaster. Within a very short time, one active Japanese worker would be supporting not only himself, but also one elderly person, as the size of the workforce fell from 87 million in 2010 to only about 52 million in 2050. The implications for pensions were dire. The pension system had been assuming returns of about 4 percent on investment. In fact, the actual returns had for some time been only about 2 percent, and there had already been the possibility that pension reserves would be entirely used up in about twenty years. But by 2016 it looked as if the cost of supporting the elderly would rise sharply. Between 1991 and 2000, social spending rose by about 50 percent. The new projections showed that the increase between 2000 and 2025 would be near 100 percent. With the population shrinking by almost 1 percent annually, productivity gains would have to be in the 3 percent annual range to achieve GDP growth of just 2 percent annually. Yet this level of productivity had not been achieved in the past twenty years. Slow or zero GDP growth could not support the increased government spending that would be necessitated by rising retirement, health care, and elder-care payments.

Beyond the domestic economic consequences, these numbers had huge international and security implications. Could an elderly and frail Japan respond adequately to the challenges posed by a resurgent China? Could it continue to be an adequate ally to the United States or to the ASEAN countries? Could it even maintain its presence among the G7, G8, or G20 countries?

No matter how one looked at the numbers and the trends, they were disheartening. It seemed that Japan would be unable to avoid becoming older, poorer, sicker, and less secure while paying higher and higher taxes for fewer and fewer benefits. Japan appeared to be a dying country.

LIGHTS OUT

In the spring of 2014, the militant Sunni Muslim group known as the Islamic State in Syria and the Levant (ISIS, ISISL, or ISIL) broke out of its base in northeast Syria and quickly overran northwestern Iraq up to the very gates of Baghdad, while also threatening northern Saudi Arabia, Jordan, and parts of Turkey. At the same time, the United States and Iran appeared to be making rapid progress toward an agreement that would allow Iran to continue developing its nuclear-energy capability while still being barred from acquiring sufficient capacity to produce nuclear weapons. The combination of these two developments resulted in an unexpected shift in Middle East alliances. Because of its seminal role in the creation of the Shia Muslim state of Iraq after deposing the dictator Saddam Hussein, the United States felt a strong obligation to prevent the collapse of the new state. It also wished to maintain good relations with Tehran in order to conclude the nuclear deal. But longtime US allies Saudi Arabia, Israel, and Jordan all shared an existential fear of Iran and its surrogate Hezbollah forces in Syria, Lebanon, and northern Saudi Arabia. They deeply believed that Iran was bent on the overthrow and destruction of each of their governments. Consequently, in late 2016, Jordan and Saudi Arabia opened their airspace to Israeli bombers, which launched massive attacks on suspected nuclear facilities all over Iran. Tehran struck back by unleashing Hezbollah rocket attacks on Israel from Lebanon, sinking vessels, and planting mines that closed the Strait of Hormuz to all outbound oil shipments. They also encouraged sabotage by Shia Muslims who, despite being a small minority of Saudi Arabia’s mainly Sunni population, held the majority of the kingdom’s vast oil fields and refineries along the western edge of the Persian Gulf. Overnight, the price of oil soared to US$300 per barrel, threatening to push Japan into a massive trade deficit and to completely stall the Japanese economy.

Because 80 percent of the oil and half of the liquefied natural gas (LNG) bound for Japan passed through the Strait of Hormuz, the closure of this passage threw Japan into a desperate situation. The government requested help from Russia, but Moscow replied that it had already committed to supplying China and had no additional capacity. Efforts to obtain increased supplies from Indonesia and Malaysia were also unsuccessful, as these countries wanted to ensure that they and their ASEAN colleagues would have a sufficient supply. In desperation, Tokyo turned to the United States in hopes of obtaining emergency imports of shale-gas-based LNG and shale oil. But despite having become energy independent as a result of the development of shale deposits, the United States did not yet have sufficient infrastructure to export substantial quantities of LNG.

To partially offset the loss of oil and LNG-fueled energy, the Japanese government began to accelerate the restart of its nuclear power reactors. These had nearly all been shut down in the wake of the 2011 tsunami-induced partial meltdown of the Tokyo Electric Power Company’s (TEPCO) nuclear reactors at Fukushima. This action, which was necessary in order to carry out safety inspections, had automatically cut Japan’s electric power production by more than 25 percent. Despite growing public opposition to nuclear power, by mid-2014 the government had completed most of its safety inspections and had begun the process of reactivating fifty-four closed reactors.

In early September of 2014, a panel of nuclear regulators had ruled that the Sendai power plant in southern Japan faced no risk from the several dormant volcanoes in its vicinity. On September 27, 2014, however, nearby Mount Ontake unexpectedly erupted, leading University of Tokyo professor and volcanologist Toshitsugu Fujii to warn that no one could accurately predict volcano eruptions, and that Japan was in danger of experiencing further volcanic disturbances that would endanger a number of nuclear power stations. Sure enough, in late 2016, Mount Sakurajima unexpectedly released a hot, fast-moving flow of gas and sediments that quickly knocked out both reactors at Sendai. This created overwhelming grassroots pressure to shut down any reactors even remotely under the threat of volcanic eruptions. Thus, Japan returned to a state of severely restricted nuclear power supply.

THE END OF THE PAX AMERICANA IN ASIA

The years 2012–2016 brought a fundamental shift in the balance of power in the entire Asia-Pacific region. China’s economy had become arguably the world’s largest. Previously, China had been content to pursue economic growth while largely ignoring geo-political issues and ambitions. But all that started to change with its 2012 occupation of the Philippine-claimed Scarborough Shoal near the Philippine coast. Thereafter, China began to extend its growing power into the seas around it by asserting the “nine-dash line” of control (the sketched line segments on an old map now used by China to determine its area of rightful control), which included nearly all the islands and shoals of the South China Sea. In reaction to the 2012 purchase of the Senkaku Islands by the government of Japan, China asserted its own claim to the islands and began to challenge Japan’s administration of them by sending fishing boats and other vessels into the islands’ waters, as well as by practicing air-force fighter maneuvers in the area. In early 2014, China suddenly established a new Air Defense Identification Zone (ADIZ) that included the Senkakus, as well as reefs and islands claimed by South Korea. Later in the same year, it began oil-drilling operations in waters also claimed by Vietnam. These actions were accompanied by a rapid buildup of Chinese military forces, particularly shore-based anti-ship missile batteries aimed at eventually denying the US Pacific Command and allied forces committed to defending and maintaining stability in the region access to the waters within China’s “first island chain” (Japan, Okinawa, the Ryukyus, the Senkakus, Taiwan, the Paracels, the Spratleys, and the Strait of Malacca).

All eyes had been on the United States to see how the long-time hegemon and guarantor of stability might respond, and a palpable unease could be felt in the region when Washington did not react strongly. In response to the Chinese occupation of the Scarborough Shoal in 2011, the White House had sent the secretary of state to Beijing and Manila to urge negotiations, but had taken no concrete steps to prevent or reverse the Chinese occupation. In what initially appeared to be a success for US diplomacy, China had agreed to talks with Manila. But as the talks dragged on and produced no result, China continued its occupation, and Washington continued to watch. In the case of Japan’s long-disputed—and then, in 2012, openly challenged—sovereignty over the Senkaku Islands, the United States had always held a nuanced position. It had several times stated that it recognized Japan’s present administration of the islands and that it therefore was obliged to defend them as part of Japanese territory under the US-Japan Mutual Security Treaty. In other words, the Senkakus were considered to be under the US nuclear umbrella. At the same time, however, Washington said that it had no opinion on whether China or Japan had rightful sovereignty over the islands, and that such final sovereignty should be determined by negotiation between those two countries. When China announced its new ADIZ, the US Air Force sent two B-2 bombers through the zone without giving prior notice to Chinese authorities, thereby indicating that Washington did not recognize the legitimacy of the zone. However, Washington also advised US airlines operating in the region to abide by the new Chinese ADIZ.

To be sure, Washington had announced it was “pivoting to Asia” in 2012, but in view of these developments, many in the region wondered what the “pivot” really meant. This concern was only heightened when word leaked out of the Pentagon in late 2013 that, in order to avoid a confrontation with China that might pose a direct threat to the United States, as well as to cut costs and avoid excessive US federal budget deficits, the US was considering a possible withdrawal of US forces to China’s “second island chain” (Tokyo Bay, the Bonins, the Marianas, Guam, Palau, and the Sunda Strait). No one in the region was sure whether America really intended to maintain its dominance in the Asia-Pacific region or not.

Then, in late 2016, warning shots from Japanese Self-Defense Force pilots aimed at Chinese fighters overflying the Senkaku Islands accidentally resulted in the downing of one of the Chinese planes. China responded by occupying Uotsuri Island, the largest of the Senkakus. Washington condemned the action and sent ships from the Seventh Fleet to patrol the vicinity, but took no action to dislodge the occupying Chinese. Instead, it urged Japan to negotiate with Beijing for a deal to share administration of the islands. Nor did Washington respond strongly to intelligence leaks pointing to Chinese support for an Okinawan independence movement. Clearly, the US-Japan Mutual Security Treaty had its limits in the case of confrontation with China.

Adding to Japan’s concerns was the growing quasi-alliance between China and South Korea. By 2014, China had become South Korea’s largest trading and investment partner, and South Korea’s largest chaebol corporate conglomerates were now heavily dependent not only on the Chinese market, but also on the country’s technology and skilled labor. The United States, which still had formal command of the South Korean army under the terms of the US-Korea Mutual Defense Treaty of 1953, had been scheduled to transfer command to South Korean generals in 2015. But it advanced the transfer by a year to 2014, thus indicating that it wanted to be less directly responsible for the defense of South Korea. While these shifts were taking place, the relationship between Japan and South Korea was becoming more and more troubled. Korea continued to occupy the Takeshima chain of islets that Japan considered to be rightfully Japanese. Seoul continually rejected Tokyo’s proposals for negotiation. A treaty negotiated in 2013–2014 to enable sharing of national security information by the two countries was rejected by Seoul at the last minute, meaning that the South Korean army could communicate with its putatively allied Japanese army only through the offices of the Pentagon. Underlying the growing coolness of the South Korea-Japan relationship were lingering issues from World War II, such as the drafting of Korean women by the Imperial Japanese Army to become sex slaves, or “comfort women,” for Japanese troops. The flames of this and other wartime issues were fanned each time Japanese prime minister Shinzo Abe or his close associates paid homage at Tokyo’s Yasukuni Shrine or appeared to be discussing the negation or rewording of Japan’s apologies for the war.

The fact that China shared South Korea’s resentment of Japan, and resented Abe’s statements as much as—if not more than—Korea did greatly strengthened the growing bond between those two countries. The bond was further reinforced by the growing sense in South Korea that China was more important than the United States for keeping North Korea under control and for eventually opening that country to investment and production by South Korean firms. Thus, news from the Pentagon in late 2016 that the United States was planning to remove its troops from Korea virtually sealed the new China-South Korean alliance.

ABENOMICS IS NOT ENOUGH

By mid-2016, it was becoming clear that the economic policies of Prime Minister Abe—“Abenomics”—were not going to revive the Japanese economy from more than twenty years of stagnation and deflation. This bold program consisted of what Abe called the “three arrows.” The first arrow was aggressive quantitative easing, under which the Bank of Japan essentially created huge quantities of money; the second arrow was increased fiscal stimulus through greater government spending on infrastructure; and the third arrow was structural reform aimed at opening the agricultural sector to greater competition, increasing and elevating the role of women in society and in the economy, stimulating start-up of new businesses through deregulation, and reforming stultified corporate structures and practices. This had all been aimed at generating an inflation rate of at least 2 percent while raising GDP and productivity growth. The success of this policy depended on economic growth surpassing the hoped-for level of inflation. Otherwise, rising interest rates in the wake of rising inflation would expand the interest payments on government bonds to such an extent that they would eat up virtually the entire government budget.

Initially Abe’s strategy seemed to work, at least to some extent. The yen fell by 25 percent and exports surged, along with export-related employment and corporate profits. The Nikkei stock average rose higher than it had been in many years. What looked like the beginnings of a construction boom seemed to be underway, and a wave of hope coursed through the Japanese public. But problems arose as time passed. In order to reduce the huge government fiscal deficit that was threatening to undermine the health-care and retirement systems, consumption tax was increased, which had the unfortunate effect of undercutting the growth dynamic. In addition, the weak yen gave rise to retaliatory action. The South Korean government intervened frequently and massively in the global currency markets to offset the impact of a weaker yen on Korean exports. To a lesser extent, Taiwan, Singapore, Malaysia, and China did the same, while the US Congress threatened to pass legislation aimed at providing offsets to currency-related import surges. Suffering from a continuing euro crisis that saw unemployment in countries like Italy and France rise above 15 percent, the EU also undertook a series of tough actions against import surges related to currency movements.

More fundamental were two additional problems. Government spending on public construction in Japan no longer provided significant stimulus to growth or a very good return on investment. So much of such construction had been done over the years that, with a few exceptions, essentially only low-payoff projects were left. Even more important, however, was the increasingly apparent failure of the “third arrow” of structural reform. While the Abe proposals had been bolder than anything put forward in Japan in the preceding forty years, they were not bold enough, or at least not implemented in a bold enough way. Reducing corporate taxes, eliminating corporate cross-shareholdings, rationalizing the electricity production and distribution system, deregulating much agricultural production, reducing agricultural and a wide variety of other subsidies, increasing after-school activities for children so that mothers could work full-time, and trying to establish wages based on output rather than hours worked were all groundbreaking and necessary measures. Yet they proved difficult or impossible to achieve, and it was increasingly apparent that they would be insufficient to meet the goal of revitalizing the nation. Inflation had indeed risen, but there was little increase in real GDP growth, household incomes, or standards of living. New investment, production increases, and job growth remained sluggish. Citizens faced with rising costs and stagnant incomes were not happy. They began to fear that the aim of the government was to use inflation to reduce the cost of national debt. Because a large portion of citizens’ wealth was invested in government bonds, this would threaten the real value of their savings and their retirement.

Fear caused pension funds, mutual funds, and other investors to sell off their holdings of Japanese government bonds and other yen-denominated assets. The government was reluctant to raise interest rates to stem the outflow, because with interest payments on public debt already eating up roughly 30 percent of government revenue, higher interest rates could threaten the government itself with bankruptcy. Instead, introduction of capital controls became a topic of discussion. Unfortunately, this had the effect of spurring further capital flight. The unthinkable possibility was becoming a reality: Japan would have to rely on borrowing from the International Monetary Fund (IMF) and put its economy effectively under IMF control.

UNADVENTUROUS YOUTH

Because it was a country with few natural resources and relatively little cultivatable land, modern Japan had been forced to fully exploit its human resources in order to achieve its position as one of the world’s most advanced economies. Thus heavy emphasis had always been placed on education and maximum development of human capacity. As a result, Japanese students had always tended to do well on the standardized tests that are often used to make international educational comparisons. The best known of these tests was the Program for International Student Assessment, or PISA, which was taken every three years by fifteen-year-old students in many countries starting in 2000. In 2012, Japan placed seventh out of the seventy-eight entities where the PISA was administered. These included city-states or micro-states with very small populations such as Shanghai, Singapore, Hong Kong, and New Zealand; however, if these were discounted, Japan placed third. This was far better than, for example, the United States at number seventeen. Moreover, the United States had seen its position decline over the years, while Japan’s had remained steadily near the top.

Yet, in 2015, as Japan approached a quarter century of economic stagnation, and the iconic Japanese companies and industries of long standing disappeared or paled into shadows of their former selves, many Japanese began to wonder whether the schools were teaching and measuring the right things. In short, was the education system preparing young people to deal successfully with the world they would face? Some astounding surveys and statistics suggested that the answer might well be no. For instance, in early 2015, the Institute of International Education found that the trend toward fewer and fewer Japanese going abroad to study was continuing. In 2008, the number of Japanese studying in America (30,000) was only about 60 percent of the number that had been there ten years previously. In 2015, this number fell by 50 percent. In other words, compared to the 50,000 Japanese students who had been studying in America in 1998, there were now only 15,000. This was not because more Japanese students were going to places like Australia or China; those countries also reported declining numbers of Japanese exchange students. The fact was that in an age of increasing internationalization and globalization, the young generation had less and less interest in learning about the outside world, and was not as well-equipped to deal with it.

Research between 2000 and 2010 by university analysts for publishers like Benesse indicated that Japan’s young people were now less adventurous and less willing to take risks than their elders. There seemed to be fear that with widening gaps in society between rich and poor, making a mistake at a young age could prevent one from moving up or could even push one disastrously down. Thus ambition was muted.

Furthermore, as media strategist Mariko Sanchanta wrote in 2013, quoting a top executive of a Japanese bank, “It is impossible to persuade young bank executives to study abroad even if they are fully funded by the bank. They’re concerned about falling behind their peers if they go overseas.” Young people also seemed to think of Japan as safe and of other countries as dangerous. Books like Mitsuko Takahashi’s Don’t Let Your Daughter Study Abroad, published in 2007, fanned this fear. In a survey completed in 2012, the Ministry of Education, Culture, Sports, Science, and Technology had found that fully 60 percent of Japanese students were not interested in studying abroad. The main reason, cited by 52 percent of the students surveyed, was insufficient foreign language capability. This was closely related to the second reason, cited by 31 percent of students—inability to make friends and concern for the safety of the environment in which they might have to live. Thus, despite their high PISA scores, it seemed that a generation of Japanese students was being educated in such a way as to make them less capable of dealing with the outside world on which Japan’s future depended.

This contrasted dramatically to the trends in most other countries, where the number of students studying abroad was multiplying rapidly. Thus, in 2011, even as the number of Japanese students in America was declining, the number of Chinese students there rose by more than 40 percent to 156,000. The total number of international students in the United States in that year was 723,000, an increase of about 5 percent from the previous year. Japan seemed to be going against the flow. Significantly, the decline was more pronounced among male than female students, reflecting the fact that corporate sponsorship of overseas study had declined sharply. Men were led to view overseas study as a greater risk to their careers than did women, perhaps because the women knew that the big corporations were not going to hire them in any case.

SONY MERGES WITH SAMSUNG

Throughout the 1990s and the first decade of the twenty-first century, the once-fabled companies of Japan, Inc. had steadily lost ground to competitors in Asia, the United States, and Europe. Number two Japanese automaker Nissan had to be rescued by bringing in a foreign CEO and forging a close joint venture and partnership with France’s Renault. In 2012, once-mighty Panasonic recorded the biggest losses of all time for any Japanese company. Sharp and Toshiba also recorded record losses; while Hitachi managed to revitalize itself, it did so only by dramatically downsizing. Former semiconductor stalwarts Elpida and Renesas came close to bankruptcy, and had to be rescued by some of their US competitors, along with the Japanese government.

Most significant, both symbolically and substantively, was the merger of Japan’s fabled Sony with Korea’s Samsung Electronics late in 2016. This was a huge shock for the Japanese public. Sony had for years epitomized Japanese industrial and technological leadership. While many old-guard Japanese companies had grown by establishing dominant positions in the relatively protected Japanese market and then branching out overseas, Sony had been global from the beginning. Its CEO and chairman, Akio Morita, had become fluent in English and prominent as an international statesman-CEO. While he had not always been in Japan’s inner circle, he had always been in the world’s inner circle; Sony, like Apple in its heyday, became synonymous with bold innovation, style, and quality.

By 2013, however, Sony had been looking and acting a lot like previously failing American companies such as Kodak and Motorola. It sold its headquarters building and began investing in new fields such as medical technology. It lost money in its traditional digital electronics, game, video, and mobile phone businesses, while making money on financial services and music. Traditionally regarded in the same way as a company like Apple, priding itself on the regular introduction of new hit products that created whole new industries, Sony hadn’t had a hit in eighteen years, and seemed to be moving in a less global, more parochial, and less innovative direction.

A few hundred miles across the Sea of Japan in Korea, the situation was just the opposite. Whether it was smartphones, television sets, components, or flat-panel displays, Sony simply couldn’t compete with the super-aggressive Korean giants. Rather than continuing to try to fight them, Sony decided to join them. In September of 2016, the company announced it was being taken over by Samsung and would henceforth be known as Samsung-Sony, or S&S for short.

INERTIA INTO ACTION

Since the Meiji Restoration in 1868, when Japan opened up to the West for the first time, the Japanese political system had evolved to resemble that of France. In both countries, a powerful central bureaucracy had come to monopolize taxation, spending, and regulatory powers at the expense of the regional prefectures over which it ruled. Indeed, the centralization in Tokyo was such that, in addition to central government and political parties, virtually all major business, labor, academic, and media organizations maintained their headquarters in the city.

While Japan’s economy was collapsing, its energy supply disappearing, and its security becoming increasingly uncertain, life at the local level was also ever more difficult and unbearable. Changing the location of a stop sign in Osaka, for example, could require obtaining permission from several Tokyo-based agencies. Parents spent half the day getting their young children to and from the very limited number of government-approved child-care facilities available. Older children in elementary, middle, and high schools were not being well prepared for the modern world because centrally regulated curriculums were outdated. On top of all this, the fear of nuclear accidents in vulnerable local areas sparked a grassroots political reaction that quickly evolved into a broader movement opposing the central government.

Clearly Japan needed a fundamental revitalization program. Could it develop such a program in the face of deeply rooted inertial forces? No one really knew the answer to that question, but history suggested that it was possible. Twice in the past century and a half, Japan had reinvented itself: once in the Meiji Restoration of the 1860s, when Japan had been forced to open up by Commodore Matthew Perry and his Black Ships; and again in the wake of World War II and the US occupation of Japan.

The crises now facing Japan were every bit as existentially threatening as those of the Meiji and post–World War II periods. Thus any renaissance program would have to be as revolutionary as the two forerunners, if not more so. It had become clear that half measures and delay were only exacerbating the problems. In light of this consciousness, after the national elections of 2016, the Diet legislated the creation of a kind of new Iwakura Mission, the Meiji-era task force that traveled abroad to find ideas for reinventing Japan. To this body, called the Extraordinary National Revitalization Commission, were appointed representatives from all elements of Japanese society—political, business, academic, regional, media, social, agricultural—and even some foreigners familiar with Japan. Their task, like that of the Iwakura Mission, was to develop a program for revitalizing the country.