of pensions and health care appeared prohibitive in the face of minimal economic growth and a national debt that was a crushing 240 percent of GDP. Japan’s high national savings rate had always enabled the country to finance its own debt internally, but with savings falling and debt rising, analysts were predicting that Japan would soon have to sell its bonds to foreign investors. This, it was felt, would drive interest rates up and soon have debt service payments alone eating up three-fourths of the national budget before any other expenses could be covered.
The once-great Japanese corporations of the 1980s had become mere shadows of their former selves, with some near bankruptcy. Sony, formerly dominant in the electronics industry, had been surpassed by Korea’s Samsung and America’s Apple, suffering loss after loss. In 2012, Japan’s third-largest employer, Panasonic, suffered a US$10 billion loss—the biggest ever by a Japanese manufacturer—which led to the layoff of nearly 40,000 workers. Once world leaders, Japanese semiconductor makers Elpida and Renesas essentially went bankrupt in 2012 and had to be rescued. In the auto industry, Honda had become virtually an American company and Nissan had been flying in formation with Renault of France since the mid-1990s. The important innovations of Japanese management, such as kanban just-in-time delivery, kaizen continuous improvement, and six-sigma quality control, had all become global standards, but new management concepts were slow to emerge. Indeed, many observers noted that Japanese managers seemed slow to adopt the flexibility, hybrid approach, flat organization, and emphasis on innovation of other global managers in Korea, America, Germany, Taiwan, and Singapore. In place of Japanese management techniques, global business schools had begun using case studies of Sony and other Japanese companies to teach how to avoid stagnation, decline, and failure.
Ironically, Japanese business leaders who had been in the habit of criticizing American CEOs for outsourcing and offshoring jobs were now doing the same thing. Similarly, just as the Americans of the 1980s and 1990s had complained that the dollar was too strong, Japanese businesses in the early 2000s were complaining that the yen was too strong. Some analysts wondered whether the whole Japanese economic miracle of the 1960s and the storied virtuosity of Japanese management had been mainly a matter of an undervalued currency and a protected home market. It seemed that Japanese industry was unable to compete on a truly level playing field. In particular, it seemed to be failing at innovation. With a few exceptions, such as Softbank and Rakuten, the hot new ideas and companies of the early years of the twenty-first century like Skype, Google, Huawei, and Samsung came not from Japan but from Europe, the United States, China, and Korea. Smart young people with an eye to learning new things and advancing their careers and ideas flocked to America, China, and even to India, but not to Japan. Meanwhile, young Japanese, instead of traveling or studying abroad or learning English or Mandarin, seemed to stay more at home and to know less about the world than their parents did. It was said that Japan was so comfortable and pleasant there was no need or attraction for Japanese to leave. But clearly this was at best a partial justification, because a large number of young Japanese had become hikikomori, people who isolate themselves and stay at home, locking themselves in their rooms, unable to cope with the pressures of living in Japanese society.
The terrible tsunami and subsequent nuclear-reactor radiation release of 2011 had dealt a hard blow to Japan. Not only were entire communities destroyed, along with much farmland, but all of the country’s nuclear reactors—accounting for 25 percent of its total electric energy supply—were shut down. While a few were restarted, most were not, and this meant that Japan’s dependence on high-priced oil rose dramatically in the years immediately following the catastrophe. With energy so expensive, the prospects were poor for production of anything requiring significant energy inputs.
To add insult to injury, between 2011 and 2012 China moved to humiliate Japan and to drive a wedge between it and the United States by taking quasi-military and even some overt military action against the Japanese-controlled Senkaku Islands (known in China as the Diaoyu Islands), which the Chinese claimed for themselves. In addition, China later encouraged and provided covert support for the independence movement in Okinawa, the site of most of the US military bases in Japan. Clearly China saw Japan as a state in terminal decline—one that could be pushed around as an example to others who might want to contest Chinese claims and power. The United States was bound by treaty to defend Japan against attack. Yet Washington desperately wished to avoid conflict with China, and tried to please all sides. On the one hand, the United States said that it took no position on the validity of the various historical claims to the islands. On the other, it said that it recognized the fact of Japan’s present administration and the importance of not settling the issue by force. President Obama stated publicly in April of 2014 that the islands fell under America’s defense umbrella. But many in Japan and in the rest of the world rightly doubted that the United States would actually go to war with China over anything that happened in the Senkaku Islands. And this doubt only further weakened Japan’s position.
In sum, the outlook for Japan in 2015 was extremely poor in every way. Certainly no one imagined the reality of Japan’s current position in 2050.
What happened? How did Japan change the trajectory of its future?
The purpose of this book is to answer those questions.
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
