Letter from Tokyo

I often bore people with my list of the 10 cities you have to see before you die. Cities like Rome and Paris, Istanbul and Rio de Janeiro, New York and Jerusalem. But no one would include a Japanese city in a list like that. Most of them were bombed to ashes during the closing stages of the Second World War, not least Tokyo. It was reduced to rubble.

Yet today modern Tokyo is a triumph. Its modern buildings are elegant, it has the best public transport system in the world, it is perfectly clean, the huge population is astonishingly polite. And the restaurants are stunning. No, Tokyo isn’t one of the 10 cities you have to see before you die but it is one of the world’s most under-rated cities. Travel outside of Tokyo and the countryside is stunning. Wonderful trees, rolling countryside and looming over all is the symmetrical elegance of Mount Fuji. So when I think of what I love about Asia, Japan is a big part of it. It’s also a country of strategic importance to Australia. Japan is democratic, liberal with a free press and it’s a democracy. What is more, Japan and Australia are America’s two most important allies in the East Asian hemisphere. And then there’s trade. Japan is our secondly largest export market. Yet there was almost no reporting in Australia of Japan’s general election on December 16. That would be fine if the result had been the re-election of the government. But it wasn’t. The opposition Liberal Democratic Party led by Shinzo Abe won in a landslide. The new government will face serious challenges. For a start there’s the economy. Japan has suffered from a prolonged period of economic stagnation coupled with a staggering level of public debt. Greek public debt has reached 150 percent of GDP. That’s pretty much brought the whole economy down. In Japan, public debt is over 200 percent of GDP. Unlike the Greeks, the Japanese government funds 90 percent of its debt by borrowing from its own people. The Japanese are big savers, unlike Greeks. But still, a level of debt which is twice the size of GDP is a huge burden. For years, Japanese governments have been borrowing from the public at an ever growing rate in order to stimulate the economy. It’s an interesting case study of how government spending is seldom the answer to economic stagnation. Structural reform is. A few years ago, Japan elected one of its most impressive post-war prime ministers, Junichiro Koizumi. He had the courage to make structural reforms to the economy. But since his time, nothing much has happened – with one exception. The outgoing left of centre government legislated to increase the rate of GST. That’s not going to stimulate growth. The Japanese economy certainly needs a dose of liberalisation. The rigid labour market needs to become more flexible and the financial sector needs to be opened up. For the casual visitor to Japan, financial transactions can be primitive and confusing. That’s a symbol of a creaking, old fashioned banking system. And a banking system lies at the heart of the economy, as the world now knows. So far, there’s been no indication from the new Prime Minister that he wants to make reforms of that kind. On the contrary; he seems to prefer looking for still more novel ways of stimulating the economy through looser monetary policy. But Japan has another fundamental problem. It has a shrinking population. So do the maths. To generate economic growth, productivity has to grow pretty fast if the population is declining. Aggregate working hours in Japan have fallen by 15 percent over the last two decades. One obvious solution might be immigration. But that has never been popular with the Japanese public. They prefer to maintain the country’s striking homogeneity. If the economic challenges for the incoming government weren’t great enough, it also has to deal with the strategic implications of a rising China. Don’t under-estimate the task. Added to the historic distrust between the Japanese and Chinese people is the dispute over the ownership of the Senkaku or Diayou islands in the East China Sea. Both Japan and China are vigorously defending their claims to these uninhabited islands and incoming Prime Minister Abe says he will be uncompromising on this issue. Now Japan is a long way from Australia. But it has a significant impact on our economy and if the relationship between China and Japan becomes unstable that will affect us as well. After all, China and Japan are the world’s second and third largest economies. And public sentiment in Japan is changing. Nationalism is becoming more pronounced and the public remain resistant to economic reform and immigration. Watching and working with Japan should be one of Australia’s top foreign policy priorities.