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
