Japanese Economic Policy toward Asia

International Pressure and Domestic Politics

Hidetaka Yoshimatsu, Graduate School of Asia Pacific Studies, Ritsumeikan Asia Pacific University [About | Email]

Volume 12, Issue 2 (Article 10 in 2012). First published in ejcjs on 13 March 2013.

Abstract

This article examines Japan’s economic policy toward Asia by taking into account the transformation of international political economy. It posits that while international factors provide background conditions that encourage Japan to adopt a new external economic policy, domestic politics determines the progress and content of such a policy. The two domestic political factors that this study highlights are a ruling party’s political interests and the institutional incorporation of business interests. The paper examines Japan’s free trade agreement (FTA) policy and the deployment of infrastructure systems overseas as well as the overall economic strategy in which these two concrete policies are incorporated.

Keywords: economic diplomacy, Democratic Party of Japan, free trade agreement, deployment of infrastructure systems.

In September 2009, Japan experienced a drastic power change from the Liberal Democratic Party (LDP) to the Democratic Party of Japan (DPJ), essentially terminating a half a century of one-party dominance. The change of government had crucial impacts on both domestic political configurations and external diplomatic relations. In the external domain, the new government has re-examined past diplomatic policies under the LDP governments, and sought to formulate novel diplomatic approaches toward East Asia. In line with such attempts, the DPJ government launched the New Growth Strategy (NGS) in June 2010 as a comprehensive strategy to revitalise the Japanese economy, and the Asian economic strategy became one of major pillars in the NGS.

This article examines external economic policies that the Japanese government adopts in evolving regional environments, and identifies characteristics in them with particular attention being paid to domestic political processes. It contends that while international factors provide background conditions that encourage Japan to take up new external economic policies, domestic political processes ultimately determine the progress and content of such policies. The two domestic politics factors that this study highlights are a ruling party’s willingness to legitimate its reign and the institutional incorporation of business interests. Different contexts in the ruling party’s commitments to and business representation in the policymaking process have led to diverse progress in external economic policy. Such contexts are examined through the frame of free trade agreement (FTA) policy and the deployment of infrastructure systems overseas, as well as the overall economic strategy in which these two concrete policies are incorporated. Before delving into concrete description of the policy process, the following section briefly explains the framework for this study.

The Analytical Framework

The central questions of this article are: what external economic policies does Japan adopt in response to evolving regional challenges? Furthermore, what external and domestic factors have influenced the formation of these policies? In order to address these questions it is essential to first look at the perspective of realism. The realist school argues that systemic factors resulting from the international distribution of power impose imperative constraints on a state’s foreign policy and relations, and that the state, a unitary and rational egoist, seeks to maximise power and the national interest under such constraints (Waltz 1979). Even neoclassical realism, which takes into account the value of domestic politics, regards unit-level factors as intervening variables at best (Rose 1998; Schweller 2003). This is reasonable for an analysis of foreign policy in the security field where a state’s policy and action in international politics are directly linked to its sovereign preservation and ultimately survival. However, this logic is less applicable to an analysis of foreign ‘economic’ policy in a straightforward manner.

As a state increases economic interdependence in intensive globalisation trends, the relative position of economic wealth for its national power rises sharply. However, economic activities are conducted mainly by non-state business actors, and thereby the interests of such actors are a driving force behind economic policy discussions, which are developed in the domestic arena. These domestic political processes cannot be ignored as factors that have an impact on the state’s foreign policy and behaviour. Namely, various elements in domestic politics influence how a state interprets its situation in the world and how it develops national preferences for responding to the evolving external environment (Moravscik 1997; Gourevitch 2002). Accordingly, this article posits that systemic factors constitute antecedent conditions that encourage a state to take some policy action, and the domestic politics factors condition the progress and content of the policy that the state subsequently adopts.

A crucial question is what elements in domestic political processes are important in shaping Japan’s external economic policy toward Asia. Past studies have highlighted political actors’ policy preferences, domestic political institutions, and societal actors’ demands as representative domestic factors influencing a state’s foreign policy (Ikenberry, Lake, and Mastanduno: 1988; Milner 1997). This article sheds light on two elements that are pertinent to external economic policy for Japan subsequent to the recent power transition. The first is government/regime vulnerability that is relevant to the degree of a state’s capability. The concept of government or regime vulnerability implies the extent to which the governing elite are faced serious challenges that could lead them to be removed from political office by opposing political parties and other powerful social groups (Schweller 2006: 49-50). This concept is also relevant to more general relationship between the ruling elite and the ruled public. The existing government is dependent on the public’s perception that it is legitimate. Accordingly, the ruling elite need to meet expectations and demands from the public, and thereby convince the public that the existing government has the legitimacy to maintain and exercise power. Such a need urges the ruling group to consider seriously the impact that an external policy will bring about on society. For instance, a trade policy to open up national borders to goods and services from the outside can bring wealth to competitive industrial groups while it can drive the ruin of uncompetitive producers. Accordingly, trade policy is particularly susceptible to accusations of illegitimacy (Meunier 2003: 76). Political leaders, vulnerable ones in particular, are disinclined to adopt a risky external policy that will invite an apparent opposition from major political and social groups. Thus, weak governments have less policy capacity to mobilise domestic resources to pursue an external policy.

The second is relevant to external policy in the economic sphere. External economic policy has a crucial impact on corporate activities and profits. When the government formulates external economic policy it needs to take into account interests and demands from business actors. It is crucial to set up institutional linkages through which business interests are and represented and acted upon in the policymaking process. Business actors can provide valuable information and ideas to state actors in formulating economic policy. Since businesses conduct tangible activities of trade, investment and financial transactions, they possess the exact information about desirable regulatory frameworks and international cooperation measures. As corporate activities are globalised and involve complex forms of commercial transactions, information from business groups has become even more indispensable for formulating effective external economic policies that would facilitate business activities and thereby augment the national economic welfare. For instance, trade negotiations, which cover not only tariff reductions but also technically complex affairs such as investment regulations and intellectual property rights, require practical information from business groups.

In summary, this article sets up a framework that takes into account both international pressure and domestic political processes. It is assumed that changing international forces condition the initial policy that a state adopts in reaction to these forces. International and regional challenges encourage the state to take a specific set of external policies as countermeasures. At the same time, it is posited that the manner and effectiveness of such external policies are conditioned by the domestic political process in which actors concerned seek to realise their specific interests and preferences by using various measures and resources. The ruling party’s commitments to and business representation in the policymaking processes are considered as two key variables in the domestic political process.

The DPJ Government’s Strategy for Economic Growth

Japan’s declining economic capability

For a long time, Japan maintained a dominant position as the sole economic power in East Asia and was the main source of capital, technology, and foreign aid for the region. However, Japanese manufacturing and financial firms gradually lost their corporate power as a consequence of a decade-long recession after the burst of the bubble economy. Japan’s declining economic capability is shown in its declining position in terms of per capita gross domestic product (GDP). In 2000, Japan’s per capita GDP was ranked third while its position had declined to 23rd by 2008. Japan’s long-term economic stagnation derived from a failure to promote industrial transformation. Indeed, Japan’s economic power was sustained by industrial and technological strengths. However, such strengths have been heavily dependent on four manufacturing sectors; namely automobiles, electronics, machineries, and steel. These sectors have however been confronted with fierce competition in the global market, and few new industrial sectors emerged that would contribute to the expansion of added-value in Japan.

The decline of industrial dominance eroded Japan’s preponderant economic status in East Asia. For more than 20 years until around 2000 Japan accounted for roughly 60 % of total GDP in East Asia. Yet, its share had declined to one-third by 2008, and is projected to only be one-fourth in 2015. Particularly serious for Japan’s economic position in East Asia was the challenge from China as a regional economic hub. The Chinese economy has continuously shown high performance, achieving the GDP growth of 8.0 per cent or more in 2000-10, leading to it increasing its share in global GDP to 9.5 per cent by 2010. China’s economic growth has been accompanied by increased economic linkages with East Asian countries. This is typically shown in changes of trade values for parts/components in East Asia. While China’s exports to the newly industrialised economies (NIES) and ASEAN-4 increased by 5.5 times and 11.1 times between 1998 and 2008, its imports from the NIES and ASEAN-4 grew by 7.1 times and 9.5 times respectively in the same period (Table 1). The strength of China-centred trade linkages provide a sharp contrast to the stagnation of Japan-centred linkages. While Japan’s exports to the NIES and ASEAN-4 increased by 2.2 times and 2.3 times between 1998 and 2008, its imports grew by 2.7 times and 3.3 times in the same period.

Problems pertinent to the declining economic and industrial capabilities are shared by Japanese policymakers. For instance, the Ministry of Economy, Trade and Industry (METI) noted Japan’s declining locational competitiveness vis-à-vis China, Singapore, and India for attracting integrated bases, manufacturing bases, distribution centres in the Industrial Structure Vision 2010 (METI 2010b). Accordingly, how to revitalise the Japanese economy by taking into account economic dynamics in Asia is a vital issue for Japanese policymakers.

Table 1: Trade Values for Parts/Components in East Asia (US$ billion)
ExporterYearImporter
ChinaJapanNIESASEAN-4
China 19989.228.53.2
200850.4157.535.5
Japan199820.854.624.1
2008100.5117.454.3
NIES 199822.414.851.427.8
2008159.339.4121.684.6
ASEAN-419986.214.834.28.8
200858.648.396.333.4

Note: “NIES” denotes South Korea, Taiwan, Hong Kong, and Singapore. ASEAN-4 includes Thailand, Malaysia, Indonesia, and the Philippines.

Source: The author compiled from data in METI (2010a:171).

The Asian economic strategy in the NGS

As a consequence of the landslide victory in the general election on August 30, 2009, the DPJ gained power from the LDP, and Yukio Hatoyama was selected as the 93rd Prime Minister. Hatoyama tapped Masayuki Naoshima, Minister of Economy, Trade and Industry, to consider the formulation of Japan’s growth strategy by bringing the fast-growing Asia into view. After nine rounds of discussions at the Growth Strategy Deliberation Council in October-December 2009, the New Growth Strategy (Basic Policies) was announced in late December. The policies raised six strategic areas for economic growth: green innovation, life innovation, Asian economic strategy, a tourism-oriented nation, science-and-technology-oriented nation strategy, and employment and human resources strategies. It also raised numerical targets to ‘achieve average annual growth of over 3 per cent in nominal terms and over 2 per cent in real terms over the years through fiscal 2020’ and to ‘reduce the unemployment rate, today standing at more than 5.0 per cent to the 3.0–4.0 per cent range’ in the medium term.1 On the basis of the Basic Policies, the NGS Formulation Council continued deliberations on the NGS, and published the NGS in June 2010. The strategy identified seven strategic areas and 21 national projects. The science-and-technology-oriented national strategy was expanded to the science-and-technology and information technology (IT)-oriented nation strategy, and the financial strategy was added as the seventh strategic area.2

The Asian economic strategy was one of seven strategic areas, and five national projects were proposed: deployment of integrated infrastructure systems; reducing the effective corporate tax rate and promotion of Japan as an Asian industrial centre; fostering global talents and increasing acceptance of highly-skilled personnel; strategies for intellectual property and standardisation and exporting cool Japan; and economic partnership strategy through Free Trade Asia of the Asia-Pacific (FTAAP). These projects were managed with a timetable, and numerical targets to be achieved by 2020 were presented. In order to realise the above projects the Japanese government implemented concrete policies.

As for intellectual property and standardisation, Japanese firms had developed high-level technologies in several crucial industrial fields such as next-generation automobiles and energy conservation. However, they were not necessarily successful in developing the technologies into innovative business models and diffusing them to firms in other countries as common platforms. This fact was recognised as a crucial problem given that management of technologies and business models was increasingly linked to international competitiveness. The government regarded global standard-setting as an indispensable issue to sustain Japanese firms’ international competitiveness, and deepened debates on standardisation. In April 2010, the government decided to set up a taskforce on the strategy for international standardisation, and the outcomes of discussions at the taskforce were delivered to the Strategic Headquarters of Intellectual Property. In October 2010, an Action Plan for International Standardisation was formulated, and seven industrial fields were designated as the target of global standard-setting: advanced medical care, water, next-generation vehicles, railways, energy management, contents media, and robots.

The Japanese government also developed institutional frameworks to implement projects for domestic reforms to invite globally operating companies and skilled human resources to Japan. In September 2010, the government set up the Meeting of the Roundtable on the Promotion of Inward Investment, which comprised ministers of relevant ministries, private representatives from major industrial associations and labour unions, as well as the American and European business associations. The meeting set forth the Inward Investment Promotion Program two months later. The program proposed that the government build an open, global-standard investment environment through the reduction of the effective corporate tax rate and the review of regulations and systems hindering inward investment. The program also encouraged the enhancement of Japan’s capability as a pivotal industrial base for Asia. For this objective, it proposed the development of incentives and subsidies for locating in Japan and special immigration treatment. The acceptance of high-level foreign human resources was particularly important, and the government adopted new systems that include preferential treatments such as an approval framework with a point system, simplification and prioritisation of entry/stay procedures, and easier conditions for permanent residency.

Several policies were implemented to materialise the above policy prescriptions. The government contained measures to lower the effective corporate tax rate for combined national and local taxes by 5 per cent in the 2011 Tax Reform. The tax reform also contained a new tax measure allowing a 20per cent deduction from income for approved companies, which aimed at encouraging global companies to establish Asian headquarters and research and development (R&D) bases in Japan. Furthermore, the government planned to enact the Law on the Promotion of Japan as an Asian Industrial Centre, which would provide further measures to support the advancement of global companies into Japan.

The Japanese government and business avoided substantial structural reforms of their political economy in response to overwhelming force of globalization by extending Japanese production and administrative networks to developing Asia (Hatch 2010). However, such closed, patchwork responses gradually robbed the Japanese economy of innovative ideas and industrial dynamism. The above policies could be regarded as Japan’s attempts to face global economic challenges directly and to draw benefits from globalization that facilitates freer moves of global companies and skilled human resources.

The influence of domestic politics

Since the DPJ gained power under the slogan of ‘politics for people’s livelihood’ the government has paid scant attention to the supply-side strategy as an economic policy due to strong interest in demand-side policy measures. Accordingly, the opposition parties criticised the DPJ government for not having a concrete policy to sustain economic growth from the demand-side perspective. Moreover, Prime Minister Hatoyama gradually lost support from the nation largely because of his awkward handling of the Futenma US base issue in Okinawa.3 As a crucial measure to counter against such situations and to maintain legitimacy as a ruling party, Hatoyama announced the NGS (Basic Policies) in December 2009, which was not included in the DPJ’s manifesto. Indeed, the NGS contained outstanding perspectives in the employment and human resources fields such as the realisation of decent work and a healthy work-life balance (Miura 2011: 42-43). The NGS as a whole ultimately looked like an amalgam of assembled policies that the various individual ministries had already deliberated on without thought being given to a grand strategy to revitalise the Japanese economy. In the Asian economic strategy, for instance, stereo-typed slogans such as ‘Japan as a bridge nation to Asia’ and ‘the income doubling of Asia’ were incorporated. This characteristic of the NGS stemmed from the constraint that the Hatoyama cabinet had decided on for the formation of the NGS (Basic Policies) rather, and time for deliberation was not enough: only two and half months.

An additional characteristic of the NGS was that it reflected the DPJ government’s preference for politician-led policymaking. For a long time, the DPJ had criticised bureaucracy-dominant policymaking during the LDP era, and appealed to the public that the party would change this character when the people give power to the party.4 After the DPJ gained power in September 2009, it established new administrative bodies such as the National Policy Unit and the Government Revitalisation Unit, and strengthened posts for politicians such as senior vice-ministers and vice-ministers in order to realise politician-led policymaking. However, politician-led politics led to the exclusion of bureaucrats from policymaking rather than effective control and management of them for attaining desirable and transparent policymaking. In the deliberation on the NGS, the NGS Formulation Council and the NGS Investigation Team were established. While the former comprised of ministers, the latter contained ministers, senior vice-ministers, and vice-ministers. The individual ministries, like external experts, delivered their views and opinions in formal hearings organised by the NGS Investigation Team.

The economic strategy has significant influences on various segments of the industry as well as political and economic relations with other states. These influences require in-depth and systematic deliberations by paying attention to various policy areas under the integrated framework. In so doing, information and expertise of bureaucrats in various ministries are indispensable. However, the DPJ government adhered to the politics-oriented policymaking that party leaders believed would impress on the people the meaning of the political power shift.

Politician-led policymaking also led to weak incorporation of business interests. Business actors had no routes to communicate their interests in the NGS (Basic Policies). Accordingly, the Basic Policies was weak in terms of the consideration of supply-side factors. In developing the Basic Policies into the final NGS, the NGS Formulation Council undertook hearings from individual business executives. Nippon Keidanren (Japan Business Federation, thereafter Keidanren) also published a position paper entitled ‘The Keidanren’s Proposal: Growth Strategy 2020’ in April 2010 so as to reflect business requests regarding the NGS. However, such commitments were indirect and ad hoc, and there was a risk that representation of business interests remained marginalised.

METI shared concern with the business circle that the DPJ government put too much emphasis on demand-side measures and paid inadequate attention to supply-side ones that were important for sustaining the economy in parallel. Accordingly, the ministry began to deliberate on the issue of ‘how Japan will gain profits and create employment’ by taking into account demands and interests from the business circle (METI 2010c: 116). METI decided to formulate the Industrial Structure Vision 2010, and a new deliberative panel – the Industrial Competitiveness Committee – was established under the Industrial Structure Council in February 2010. The 21-member committee contained three Keidanren executives and additional presidents of major Japanese firms. The vision, announced in June 2010, contained new ideas such as a comprehensive strategy to make Japan Asia’s industry centre, corporate tax reforms aiming at international standards, and IT to support the advancement of the overall industry (METI 2010b). These points were incorporated in the NGS. Thus, business groups could deliver their interests through a METI-affiliated advisory committee.

Japan’s Engagements in FTAs

Intensive Global FTA Competition

In the 1990s, many states showed a growing interest in FTAs in order to secure economic benefits through expanded trade liberalisation due to perceived slow progress in multilateral trade negotiations. The number of regional trade agreements notified to the WTO increased from 184 in May 2003 to 489 in May 2011 with 297 agreements in force.5 In East Asia, ASEAN became the centre of trade networks, forming ASEAN+1 FTAs with Japan, China, South Korea, India, and Australia/New Zealand. In the region, further FTA initiatives such as the East Asian Free Trade Agreement (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA) were suggested and studied.

A particularly serious challenge for Japan in this context was South Korea’s FTA commitments. As of December 2010, South Korea had ratified FTAs with five countries and regions and concluded negotiations on FTAs with an additional three partners. As South Korea’s FTA partners include three regional groupings, the total number of countries with FTAs with South Korea reached 45 and contained major trading partners such as the United States and the EU. Consequently, the ratio of trade with FTA partners as a proportion of total trade reached 35.8 per cent for South Korea. Japan and South Korea hold international competitiveness in similar industrial sectors represented by electronics and automobiles. Since South Korea’s main FTA partners – the EU and the United States – provide crucial markets for the Japanese manufacturing sectors, differences in tariff imposition are deemed to be serious handicaps constraining Japanese firms.

The gap in FTA commitments between Japan and South Korea provoked concern among government officials and business executives (Genba 2011). METI (2011: 247) admits that Japan’s FTA commitments were delayed in relation to South Korea, and that several Japanese products would incur more than a 10 per cent tariff gap in large markets due to the Korea-EU FTA and the Korea-US FTA. Keidanren has warned in its position papers that South Korea’s pro-active FTA policy would lead to a widening gap in conditions of competition, placing Japanese firms in a disadvantageous position in third markets.6 Thus global and regional moves on FTAs have showed rapid progress and present a significant challenge for the Japanese government and business.

The development of FTA policy

In the late 1990s the Japanese government began to shift its relative emphasis on trade liberalisation from multilateralism to regionalism and bilateralism. In line with this shift Tokyo signed an FTA with Singapore in January 2002. The government then entered into negotiations on FTAs with Mexico in November 2002, South Korea in December 2003, and Malaysia in January 2004. Major progress in FTA policy was seen in 2006-07. In July 2006, the Koizumi cabinet adopted the Basic Policies for Economic and Fiscal Management and Structural Reform 2006. The document noted that ‘the value of trade with countries having concluded EPAs with Japan is expected to account for 25 per cent or more of Japan’s total trade value by the year 2010’.7 This decision adopted a numerical target for FTA policy for the first time. The formulation of the new FTA policy contributed to the expansion of FTA partners. The government subsequently entered into formal FTA negotiations with Vietnam, Australia, India, and Switzerland in the first half of 2007.

Although it more than ten years has passed since the Japanese government changed its emphasis in trade policy, outcomes in FTA formation have been rather modest. By the end of 2010, Japan ratified FTAs with 11 partners mainly in Southeast Asia and Latin America (Table 2). Its FTA partners did not include major trading partners such as the United States, China, and the EU. Consequently, the ratio of trade with FTA partners as a proportion of total trade was just 17.6 Per cent. This figure is small compared with other countries such as the United States (38.0 %), China (21.5 %), and the EU (27.2 %, excluding intra-regional trade) (METI 2011: 247).

In order to change this situation the Japanese government adopted further measures. In November 2010, the second DPJ government under Prime Minister Naoto Kan adopted a cabinet decision, the Basic Policy on Comprehensive Economic Partnership, which stipulates that the government will ‘promote high-level economic partnerships with major trading powers that will withstand comparison with the trend of other such relationships,’and that the government would ‘press ahead with fundamental domestic reform.’8 After adopting this decision the government resumed negotiations on an FTA with Australia, and searched for the opening of those with Mongolia and the EU.

Table 2: Chronology of Japan’s FTA/EPAs (as of May 2011)
partnerstart of negotiationsbasic agreementsignedin force
Singapore2001/012001/102002/012002/11
Mexico2002/112004/032004/092005/04
South Korea 2003/12
Malaysia2004/012005/052005/122006/07
Philippines2004/022004/112006/092008/12
Thailand2004/022005/092007/042007/11
ASEAN2005/042007/082008/042008/12: Singapore, Laos, Vietnam, Myanmar; 2009/01: Brunei; 2009/02: Malaysia; 2009/06: Thailand; 2009/10: Cambodia
Indonesia2005/072006/112007/082008/07
Chile2006/022006/092007/032007/09
Brunei2006/062006/122007/062008/08
GCC2006/09
India2007/012010/092011/022011/08
Vietnam2007/012008/092008/122009/10
Australia2007/04
Switzerland2007/052008/092009/022009/09
Peru2009/042010/112011/05

Source: Compiled by author from various government documents.

In Japan’s past FTA negotiations, two issues have constituted serious impediments to smooth development of negotiations: agricultural protection and labour migration. Agricultural groups have maintained internal cohesion and constitute the base for strong voting machines and retain close linkages with supportive Diet members. The interests and pressure of such groups are significant influences on the progress of FTA negotiations (Mulgan 2008). In the labour migration field, the Japanese Nursing Association opposed the introduction of foreign healthcare workers on the ground that foreign workers would compete with them and depress their wage level (Er 2010: 151). Accordingly, Japan accepted only small numbers of foreign nurses under its FTAs with the Philippines and Indonesia. The Kan Cabinet searched for clues to resolve problems in these two fields by deepening discussions at newly established institutions. In November 2010, the cabinet established the Headquarters to Promote the Revitalisation of the Food, Agriculture, Forestry and Fishery Industries in order to promote high-level FTAs and improvement in food self-sufficiency. The government also set up the Working Group on Movement of Natural Persons to discuss the issue of nurses and healthcare workers from overseas. The identification of major stumbling blocks and concrete actions to remove such blocks indicate the government’s positive will.

The Kan Cabinet had to make a grave decision on FTA policy. This was because the Trans-Pacific Partnership (TPP) Agreement became a critical policy agenda at the Asia-Pacific Economic Cooperation (APEC) summit held in Japan in November 2010. The cabinet initially showed willingness to announce participation in the TPP negotiations at the summit. However, the final decision on whether to join was somewhat vague. Kan committed Japan ‘to act through gathering further information, and Japan, while moving expeditiously to improve domestic environment,will commence consultations with the TPP member countries.’9

The influence of domestic politics

The DPJ showed a positive attitude toward FTAs in its election manifesto. It said ‘it would promote negotiations on an FTA with the United States, and advance trade and investment liberalisation’ (DPJ 2009: 22). Prime Minister Hatoyama, in his speech on Japan’s Asian Policy in Singapore in November 2009, stated that “Going forward, we will accelerate EPA negotiations with the Republic of Korea, India and Australia and pursue the possibilities of EPA negotiations with other countries as well.”10 However, the DPJ did not establish a firm stance on trade policy. The reference to an FTA with the United States provoked a fierce protest from agricultural groups, and the wording in the manifesto was changed to accommodate agricultural sensitivities. While Ichiro Ozawa, a top leader and the campaign strategist of the DPJ, adhered to the reference to conclude an FTA with the United States, Hatoyama and Kan adopted a flexible stance, capitulating to agricultural interests (Mulgan 2011: 25-26).

As participation in TPP negotiations became a critical part of the policy agenda, agricultural groups intensified opposition activities. In October 2010 the Zenchu (Central Union of Agricultural Cooperatives of Japan) adopted a special resolution regarding the formation of the basic EPA policy. The resolution expressed adamant opposition to participation in TPP negotiations, stating that the conclusion of a TPP agreement without exceptions would wipe out Japanese agriculture.11 As the government began to deliberate on the TPP issue seriously, agriculture-sympathetic DPJ politicians increased resistance against such moves. In October 2010 the first meeting of the anti-TPP study group was held, and 110 DPJ members joined the meeting.12 The group was headed by Masahiko Yamada, former Agriculture Minister.

During the LDP period agriculture-sympathetic politicians undertook strong opposition to agricultural liberalisation. A critical difference from opposition during that time was that opposition to the TPP was linked to the DPJ’s internal politics: a struggle between the pro- and anti-Ozawa groups. Masahiko Yamada, the head of the anti-TPP study group, was a former member of the Liberal Party and thereby very close to Ozawa. Roughly 70 per cent of politicians who attended the study group’s first meeting were members of the Ozawa group.13 Moreover, Akihiro Ohata, METI Minister, showed a cautious stance on the TPP, stating that the participation in the TPP should be decided by autumn 2011 when the cabinet sought to come to a conclusion around June over whether Japan will join the negotiations.14 Ohata belonged to the Hatoyama group that intensified partnership with the Ozawa group after the start of the Kan Cabinet.

The DPJ, like the LDP, needed political support from a wide range of social segments including agriculture, and proposed an income compensation program for individual farm households as the primary policy for agricultural support. The program partly aimed to drive a wedge between agricultural groups and farm members, and thereby the party has been able to keep its distance from the agricultural groups compared with the LDP, which had cultivated institutionalised connections with the groups during its long reign. Despite basic differences in agricultural policy, real policy on FTAs did not show substantial differences largely because of the lack of determined political leadership.

The major characteristics of the DPJ government’s linkages with the business sector over the FTA policy become clear in comparison with those in the LDP era. The LDP and Keidanren proposed the establishment of a new government body to deal with external economic policy during the Koizumi era (Yoshimatsu 2008: 157). However, Prime Minister Koizumi himself did not adopt such a proposal. Instead, the Council on Economic and Fiscal Policy (CEFP) gradually played an important role in leading FTA promotion and agricultural reforms.15 In particular, the council’s four expert members – two business representatives and two economists – pushed forward on the promotion of FTAs. They submitted independent reports that encouraged the government to adopt a pro-FTA policy and showed concrete measures to realise it. For instance, the expert members submitted a report entitled ‘Basic Directions in Promoting FTAs’ at a council meeting in April 2005. The report emphasised the acceleration of the conclusion of FTAs, proposing that the government adopt an objective of making the proportion of trade with FTA partners more than 25 per cent of total trade in the coming five years, and more than 50 per cent in the long run. The cabinet decision, the Basic Policies for Economic and Fiscal Management and Structural Reform 2006, reflected the proposal in the report.

The CEFP’s discernable presence was heavily dependent on political leadership. The start of the DPJ government put an end to the CEFP’s distinctive presence in policymaking. One of the eye-catchers of the DPJ government was the establishment of the National Policy Unit, and the CEFP suspended its activity with the unit’s establishment. Consequently, the business circle lost institutional linkages to reflect their interests and opinions in the policymaking process.

The Council on the Realisation of the NGS, which included nine expert members among 16 members, gradually played a crucial role in formulating economic policy.16 The council began to perform a similar function to the CEFP. For instance, Prime Minister Kan stated that the government would decide on the basic principles on FTAs by the APEC summit in November 2010 at the council’s meeting in early October. This statement was sustained by expert members’ strong support for participation in TPP negotiations during the council meeting.17 However, unlike the CEFP that had a legal status as a decision-making boy, the Council on the Realisation of the NGS was just a consultative body whose influence was limited.

The Deployment of Infrastructure Systems as a New External Policy

Growing importance of infrastructure projects

In East Asia, newly emerging economies represented by China and Indonesia have exhibited robust economic growth. The continuous economic growth has produced growing demand for the development of infrastructure. According to the Asian Development Bank (ADB), infrastructure investment in energy, telecommunications, transport, and water/sanitation in Asia is estimated to reach $8 trillion in 2010-20 period (ADB 2009: 167). Infrastructure development is conducive to producing substantial economic benefits by upgrading industrial clusters and the networking of industrial corridors.

In the new millennium, a growing number of countries have found new business opportunities in the development of infrastructure in other countries. South Korea, China, and Russia, in addition to nations in the West, gradually intensified their commitments to winning bids for infrastructure development in developing countries. These countries have strengths in competitive price offerings and also have their government’s intensive support. The support from the government is important because the bidding for infrastructure projects tends to adopt an integrated style of combining a master plan, design, procurement, construction, finance, and operational management (Maeda 2011: 44).

Given the prospect of a long-term decline in domestic demand due to an aging population combined with a dwindling birth ratio, the Japanese government and business have found common interest in infrastructure projects in newly emerging economies. However, Japan has been confronted with from the pressure of intensive competition in its bidding for infrastructure projects. Two incidents have had a significant impact on Japan’s policies toward the deployment of infrastructures overseas. In December 2009 South Korea was victorious over a joint Japan-U.S. consortium (Hitachi-GE) and a French group in a bidding battle for a $20 billion contract to build nuclear reactors in the United Arab Emirates. The following month, Japan was hit by a second shock. Russia earned a win against Japan in a bidding battle to become a partner in the construction of two reactors at the first new power plant site in Vietnam. Other countries strengthened their commitments to infrastructure projects in newly emerging economies. For instance, the Korean Ministry of Knowledge Economy revealed a plan to export 80 nuclear reactors units by 2030 through KEPCO (Korea Electric Power Corporation).18 Singapore has also conducted intensive top-level diplomacy, which was typically seen in its success in the Tianjin Eco-City Project in China. These incidents and moves encouraged the Japanese government to consider the deployment of infrastructure systems overseas earnestly and adopt strategic policies to sustain Japanese firms’ advancement in offshore infrastructure projects.

Policies to support the deployment of infrastructure systems

As already explained, the DPJ government formulated the NGS in June 2010, and one of seven strategic areas in the NGS was the Asian economic strategy. The deployment of integrated infrastructure systems overseas became a concrete measure to strengthen the Japanese industry’s integration with the Asian economy. The NGS stipulates that ‘Japan will establish a framework for strenuously supporting private companies’ initiatives in the field of infrastructure with “one-voice and in a united front” approach,’ aiming to expand the market of exports to ¥19.7 trillion by 2020.19

The Japanese government developed institutional frameworks to advance policies and measures to support Japanese firms’ advancement in infrastructure projects. The central institution is the Ministerial Meeting on Deployment of Integrated Infrastructure Systems that was established in September 2010. The eight members of the meeting discussed possibilities and strategies for Japanese firms’ overseas deployment by focusing on specific fields such as railways, nuclear power generation, and coal-fired power generation, or specific countries such as Vietnam and Indonesia. The meeting, headed by Chief Cabinet Secretary, had strength in making decisions by going beyond ministerial sectionalism. Moreover, a working-level liaison meeting was organised under the ministerial meeting.

Individual government agencies strengthened organisations that deal with the deployment of infrastructure systems overseas. The Ministry of Foreign Affairs set up the Promotion Headquarters on Deployment of Integrated Infrastructure Systems in October 2010. The Ministry of Land, Infrastructure, Transport and Tourism tried to set up a new bureau, the International Bureau, in order to advance integrated policy formation for supporting the deployment. This intent was not realised, but the ministry set up a new senior post of Director-General for International Affairs as well as two new sections within the Policy Bureau. METI took the lead in establishing a new corporation called International Nuclear Energy Development of Japan (JINED). JINED, whose stock holders are nine nuclear power station operators and three nuclear power manufacturers such as Toshiba and Hitachi, aimed to create proposals to support nuclear power plant projects in emerging countries.

On the basis of discussions at the Ministerial Meeting on Deployment of Integrated Infrastructure Systems, the Japanese government adopted several measures that were conducive to the deployment of integrated infrastructure systems. The Japan Bank for International Cooperation (JBIC) was separate from the Japan Finance Corporation in order to strengthen functions of export finance to developed nations, and the provision of funds for Japanese firms’ merger and acquisition (M&A) of foreign enterprises. Nippon Export and Investment Insurance (NEXI) was also allowed to make the total amount of important overseas loans by private financial institutions the target of trade insurance. Furthermore, the Japan International Cooperation Agency’s (JICA) overseas investment loans were resumed for specific cases through the verification and improvement of a new implementation system, as well as a pilot approach that works out the rules for selection. These new measures adopted in the government-affiliated organisations aimed to strengthen financial environments to assist Japanese firms’ advancement in infrastructure projects overseas. The government also adopted measures to strengthen the operations of institutions overseas. In 2010, ‘a special official for infrastructure projects’ was appointed in 56 diplomatic establishments overseas in order to collect and analyse local information. Moreover, systematic linkages and information sharing were promoted among overseas offices of relevant government-affiliated bodies such as the JBIC, JICA, JETRO, and NEXI.

The government’s intensive commitments to the deployment of infrastructure systems led to success in gaining bid for infrastructure projects. When Prime Minister Kan made a formal visit to Hanoi in October 2010, Kan and Vietnamese Premier Nguyen Tan Dung signed an agreement to select Japan as a partner for a construction of two reactors at the second new power plant site.20 This achievement had significant implications as a successful example of public-private collaboration in infrastructure projects. In June 2011, the Electric Power Development Co (J-Power) and Itochu Corp, in partnership with Adaro Energy, an Indonesian leading coal miner, got a tender to develop a $3.2 billion coal-fired power plant in Central Java, Indonesia.

The influence of domestic politics

After 2010, the deployment of infrastructure systems became a core area in Japan’s economic diplomacy, and administrative institutions and policies for supporting it advanced rather quickly. Such advancement was sustained by political will. There was one key politician who took the lead in advancing governmental action: Yoshito Sengoku. When Sengoku was Minister of State for National Strategy he began formal deliberations on the policy by organising a working-level meeting for promoting the packaged deployment of infrastructure systems overseas in April 2010. Two months later, the meeting published an interim report, which provided the basic guidelines on the following discussions and policies. In May Sengoku made a formal visit to Vietnam with his close cabinet colleague Foreign Minister Seiji Maehara, and other corporate executives. The objective of this visit was to make an appeal for the sale of Japanese nuclear units to Vietnam. After returning from Vietnam, Sengoku rallied members of the public-private team tasked with winning the nuclear plant project, urging them to finalise a deal before the prime ministers meet in October.21

In June 2010 Sengoku transferred to the post of Chief Cabinet Secretary after a cabinet reshuffle. He continued to make efforts to promote the deployment of infrastructure systems overseas. The Kan Cabinet appointed Tadashi Maeda, chief of the Corporate Planning Department of the JBIC, as a special advisor to the cabinet. It was exceptional that a mere departmental chief of a government-affiliated organisation was appointed to such a crucial post. Maeda had close linkages with Sengoku for more than 20 years, and Sengoku invited Maeda as an advisor.22 Maeda, a specialist in the deployment of infrastructure, played an important role in Japan’s winning of the nuclear plant projects in Vietnam. In March 2010, he visited Hanoi, and made an appeal to Ho Doc Viet, Secretary of the Central Committee of the Communist Party of Vietnam, promising that Japan would provide an efficient and comprehensive plan to enable Vietnam to engage nuclear power plants.23 Two months later, Sengoku made a formal visit to Vietnam. The establishment of the Ministerial Meeting on Deployment of Integrated Infrastructure Systems was decided at the first meeting of the Council on the Realisation of the NGS in September 2010. Sengoku became the Chairman of the Ministerial Meeting and led deliberations at the meeting.

The deployment of infrastructure systems is neo-mercantilist in nature in that it puts emphasis on export expansion under state support. While this outward-looking policy does not impose burdens on some segments of the society, it enables ministries to find interests as a means to increase their budget and jurisdiction. The DPJ, led by Sengoku, could raise the profile of its efforts to sustain the Japanese economy by gaining support from major government agencies.

Importantly, the deployment of infrastructure systems reflected strong demands from the business community. In November 2009, Keidanren issued a position paper in which the federation emphasised the need to promote broad regional infrastructure development by taking advantage of the full range of development financing measures, including the investment capacity of the NEXI, JICA, and JBIC.24 Keidanren lobbied Economic Minister and Foreign Minister to realise policies in the position paper.25 Moreover, Keidanren required, in its position paper in December 2010, the strength of financial functions to support the deployment of integrated infrastructure systems. In the same month, Keidanren requested a direct meeting with Sengoku where the federation executives exchanged views on various domestic and external economic issues. Such intensive commitments successfully incorporated business interests in concrete government policies.

The development of close government-business linkages for the deployment of infrastructure systems has equivocal effects. On the one hand, some aspects of the deployment require close government-business linkages. Since businesses in infrastructure are normally substantially involved with the government, commitments by the private sector alone are limited in their ability to win bidding. Additionally, since businesses in infrastructure require huge capital, the private sector cannot provide such capital and take on the risk accompanying it. These are reasons why the Japanese government searched for new public-private partnerships involving top-level diplomacy, the formation of consortiums, and the adoption of the package assistance. On the other hand, political commitments that are too strong and ignore the preferences of the private sector are at risk of decreasing corporate power and benefits. Some government officials and politicians stress the need to form ‘all Japan systems’ – a return to the development state – for promoting the deployment of infrastructure systems. Yet, it is not so easy for private companies in rival relations to set up cooperative fronts in undertaking concrete projects. In the current globalised environment major Japanese multinationals have formed cross-border corporate alliances and engaged in M&A.26 The state logic of national interests often run counter to firms’ logic of corporate profits that are created in borderless markets.

Conclusions

In this article, I examined Japan’s external economic policies after the formation of the DPJ government. It posited that while international factors have provided background conditions that urged Japan to adopt new external economic policies, domestic political processes have conditioned the progress and content of the policies. This article highlighted a ruling party’s political interests and the institutional incorporation of business interests as key factors in the domestic political processes.

In the new millennium global and regional challenges to the Japanese economy and Japanese industry have intensified. As a consequence of its 20-year period of high economic performance for more than 20 years, China has taken over Japan’s status as the primary economic power in East Asia. South Korea has aggressively promoted a globalisation strategy through FTAs and advancement in infrastructure projects in the world. These challenges were seriously recognised by Japanese government officials and business executives.

The DPJ government adopted measures in order to revitalise the Japanese economy. Originally the government paid scant attention to supply-side growth strategies due to a strong interest in demand-side policy measures. In order to maintain its legitimacy as the ruling party due to declining support from the nation, Prime Minister Hatoyama ordered the formation of the NGS. As the TPP became a critical item on the policy agenda at the 2010 APEC summit in Japan, the Kan cabinet showed a positive commitment to it. However, strong opposition occurred within the DPJ, and the cabinet failed to coordinate the interests among it. As for the deployment of infrastructure systems, Yoshito Sengoku, an influential DPJ politician, took the lead in advancing the policy. Sengoku began formal deliberations on the deployment by organising a working-level meeting, and advanced policy discussions as the chair of the ministerial meeting. Thus, the DPJ’s internal politics and political considerations regarding legitimate its power holding had a strong influences on the initiative and the development of Japan’s external economic policy.

The institutional incorporation of business interests impinged on Japan’s external economic policy. As for the NGS, business actors were excluded from the policymaking process. They merely communicated the interests of the business circle through hearings at the NGS Formulation Council and the submission of policy recommendations. The business actors in collaboration with METI attempted to implement business interests by formulating the Industrial Structure Vision 2010. The business actors had a strong interest in FTAs. But, they did not have a route to involve themselves in the FTA policy formation during the DPJ government. This was serious regression from the LDP era when the private experts of the CEFP could direct the government’s FTA policy. As for the deployment of infrastructure systems, the business community emphasised the importance of deployment through a series of policy recommendations. They also directly promoted the policy’s importance through meetings with senior government officials including Sengoku. While effective involvement of business interests underpinned positive external economic policy, the lack of such involvement led to rather reactive one.

Japan’s economic diplomacy is adrift largely due to immature policymaking under the DPJ government. It may need some time to formulate integrated and systematic economic diplomacy under more skilful decision-making systems. However, political and economic transformations in globalisation trends are pressing, and Japanese politics requires committed political leadership to react to such transformations.

References

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Notes

[1] ‘On the New Growth Strategy (Basic Policies)’, December 30, 2009, Cabinet Decision. Available at <http://www.npu.go.jp/policy/pdf/1230sinseichousenryaku_e.pdf>.

[2] ‘On the New Growth Strategy’, June 18, 2010, Cabinet Decision. Available at <http://www.npu.go.jp/policy/policy04/pdf/20100706/20100706_newgrowstrategy.pdf>.

[3] The supporting ratio dropped from 72 % in September 2009 to 56 % in December 2009.

[4] The DPJ raised, in its manifesto, ‘a shift to politicians-led politics from bureaucrats-dominant one’ as the first of five principles for the election promise (DPJ 2009).

[5] ‘World Trade Organisation, Regional Trade Agreements’. Available at <http://www.wto.org/english/tratop_e/region_e/region_e.htm>.

[6] Nippon Keidanren, ‘Proposals for Japan’s Trade Strategy’, April 19, 2011. Available at <http://www.keidanren.or.jp/english/policy/2011/030/proposal.html>; and Nippon Keidanren, ‘Call for the Start of Negotiations on Japan-EU Economic Integration Agreement’, November 17, 2009. Available at <http://www.keidanren.or.jp/english/policy/2009/099.html>.

[7] “The Basic Policies for Economic and Fiscal Management and Structural Reform 2006,” July 7, 2006, Cabinet Decision. Available at <http://www5.cao.go.jp/keizai-shimon/cabinet/2006/decision060707.pdf>.

[8] ‘Basic Policy on Comprehensive Economic Partnerships’, November 9, 2010, Cabinet Decision. Available at <http://www.npu.go.jp/pdf/20101109/20101109_en.pdf>.

[9] ‘Basic Policy on Comprehensive Economic Partnerships’, November 9, 2010, Cabinet Decision. Available at <http://www.npu.go.jp/pdf/20101109/20101109_en.pdf>.

[10] Address by Yukio Hatoyama, Japan's New Commitment to Asia - Toward the Realization of an East Asian Community, November 15, 2009. Available at <http://www.kantei.go.jp/foreign/hatoyama/statement/200911/15singapore_e.html>.

[11] Zenchu, ‘A Special Resolution Regarding the Formation of the Basic EPA Policy’. Available at <http://www.zenchu-ja.or.jp/pdf/ketsugi1018_02.pdf>.

[12] Asahi Shimbun, October 22, 2010; Nihon Keizai Shimbun, November 10, 2010.

[13] Nihon Keizai Shimbun, November 10, 2010.

[14] Sankei Shimbun, December 1, 2010.

[15] The CEFP was established in January 2001 within the Cabinet Office as a consultative body to facilitate Prime Minister’s leadership in economic and fiscal policy formation. The council comprises the Chief Cabinet Secretary, the Minister of State for Economic and Fiscal Policy, other relevant ministers (Ministers for Internal Affairs and Communications, Finance, and Economy, Trade and Industry), Governor of the Bank of Japan, and four private-sector experts.

[16] The council was established in September 2010 in order to promote and accelerate the realisation of the NGS.

[17] The second meeting of Council on the Realisation of the NGS, October 8, 2010. Available at <http://www.npu.go.jp/policy/policy04/archive02.html>.

[18] Shukan Daiyamondo, August 27, 2011: 46.

[19] ‘On the New Growth Strategy’, June 18, 2010, Cabinet Decision. Available at <http://www.npu.go.jp/policy/policy04/pdf/20100706/20100706_newgrowstrategy.pdf>.

[20] At the meeting, the Vietnamese government also expressed a decision to select Japan as a partner to develop rare earth elements.

[21] Nihon Keizai Shimbun, November 2, 2010.

[22] Nihon Keizai Shimbun, July 15, 2010.

[23] Sankei Shimbun, May 29, 2010.

[24] Nippon Keidanren, ‘Toward Realisation of the Action Plans for Asian Economic Growth’, November 17, 2009. Available at <http://www.keidanren.or.jp/english/policy/2009/098.html>.

[25] Nippon Keidanren, Business Report 2009. Available at <http://www.keidanren.or.jp/japanese/profile/soukai/201005/houkoku/iinkai.html>.

[26] For instance, Toshiba, Hitachi, Mitsubishi Heavy Industries are rivals in nuclear reactor manufacturing who have different partnerships with western companies.

About the Author

Hidetaka Yoshimatsu, PhD, is a professor of politics and international relations at Ritsumeikan Asia Pacific University, Japan. His recent research interests include Japan’s external economic policy and regionalism in East Asia.

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