Japan in transition

The country should exploit its fast-growing neighbourhood

The recent Japanese elections have dislodged the Liberal Democratic Party (LDP), which had been in power for almost a half-century, in favour of the Democratic Party of Japan (DPJ). The DPJ has won 308 of the 480 seats in the House of Representatives and, in coalition with a couple of smaller parties, can reach the two-thirds mark of 320—which would give it legislative dominance, despite the lack of a majority in the House of Councillors, which has some veto powers. International commentary on the policy platforms of the two parties has focused on the apparent lack of significant differences between them, raising doubts about whether the change in regime, in and of itself, will help Japan deal with the significant economic challenges it faces with respect to an extremely sluggish economy and a rapidly aging population. Certainly, the DPJ manifesto tries to address this with its proposed subsidy for children, which may encourage more births, but this can hardly be expected to offset the strong demographic trend. Other proposals, such as those for bureaucratic reform, are being viewed as mere tinkering in circumstances that cry out for radical reform. So, does the change of regime really hold out hopes for a significant change in the trajectory of what was till recently the world’s second largest economy?

Perhaps not. Japan has generally been seen as putting an enormous premium on stability and continuity. When it came to making political choices, it would have been unrealistic to expect that, even in the economic circumstances that have prevailed, voters would see radical change as an option. Even during the stagnant 1990s, the LDP faced no real threat to its hegemony because as a party it completely dominated the centre of the political spectrum. In fact, the emergence of the DPJ as a serious threat was itself the result of its emphasis on making improvements in the current system rather than on disruptive change. Consequently, the overall domestic environment can hardly be expected to be transformed by the new regime.

Rather, the future of the Japanese economy is much more likely to be determined by the neighbourhood in which the country happens to be. Asia is unquestionably going to be the engine of global growth as China, India, Indonesia and some of the small, young countries are in or close to their peak growth phases. Japan’s products and, perhaps more importantly, its technological and organisational capabilities, which served it so well during its own high growth phase, will play a significant role in the growth of the neighbourhood. Perhaps the greatest contribution that the DPJ government can make to sustaining the Japanese economy, even with all its domestic compulsions, is to broaden and deepen its linkages and relationships with its high-performing neighbours. The new government has given some indications of its intent to rebalance its external focus towards the region. If this works out, Japan could well have its sushi and eat it too.