With Japan’s lackluster economic growth and seemingly relentless political turmoil, it’s easy to think that Tokyo’s relevance is falling with no end in sight. But Japan remains a vital part of Asia and it will be a major player in shaping the region’s future. The United States needs to remember Japan’s importance.  

It is true that the number of Japan optimists have thinned significantly over the last decade with their numbers ravaged by Japan’s persistent economic stagnation and looming demographic crisis. Others have been converted or distracted by China’s spectacular rise.

The reported disappearance of Japan’s once-hopeful champions even prompted JPMorgan economist Jesper Koll to suggest he might be the last remaining optimist leftover from the plethora of scholars and business leaders who praised Japan’s policies and accomplishments in the 1980s and 1990s. But Koll is not the last Japan optimist.

Optimists persist among U.S. manufacturers, investors, and farmers who exported over $110 billion worth of goods and services to Japan in 2011 (up about 28 percent since 2002). Japan optimists also dwell in America’s science and engineering communities, they occupy high positions at the U.S. Departments of State, Treasury, and Defense, and they roam the hallways of international and regional finance and political organizations.

One can forgive Koll for feeling lonely, but before the optimists are declared an endangered species, we should think more comprehensively about what it means for a country to succeed in Asia in the future. Being “number one” is less important than it used to be. More critical is how the states of the region interact to further common interests and protect public goods. As happened in Europe, the region is beginning to coalesce as a productive complement of economies, centers for innovation and finance, and military capabilities, but this is a fragile process.
 
Japan is essential for Asia’s success in this regard, while failure on this front could be devastating. Thus, a binary view of Japan as either “in decline” or “on the rise” is an unhelpful way for the United States to consider policy options in the future. The important point is how the two countries act as catalysts for cooperative strategies across a range of sectors.

Japan’s Troubles

There is no doubt that Japan is suffering on a number of fronts. Economic growth has been anemic for almost two decades—including five recessionary periods—and an aging population will continue to drag down growth and consume national wealth. These challenges are most acute in Japan’s countryside. The lack of opportunity has driven younger residents to big cities, feeding a vicious economic cycle for rural towns and prefectures.

Fiscal stimulus options for the central government are limited after years of deficit spending, and Japan now spends nearly one-quarter of its national budget on debt servicing (compared with about 7 percent in the United States).

Moreover, Japan’s tragic triple disaster—the earthquake, tsunami, and nuclear accident—in March 2011 will require taxpayer support for an extended recovery period. The country faces a chronic energy shortfall after the earthquake shook Japan’s faith in nuclear power and cut a quarter of its electricity production.

This is all made more difficult given the domestic political environment. Petty political gamesmanship and gridlock exacerbate these problems and delay effective solutions. 

Japan’s Strengths

But it’s not all bad news out of Japan, and the situation is not as black and white as it seems. After all, part of the reason that Japan will soon have the world’s highest median age is because it leads the world in life expectancy, thanks in large part to a solid healthcare system, low crime rate, and high per capita GDP. The demographics are both an economic challenge and a sign of success.

There is also sufficient fertile ground for Japan to reinvent itself economically. Japan continues to innovate in the fields of manufacturing, renewable energy, and healthcare. One sign of this is Japanese firms and individuals receive the most U.S. patents of any country outside of the United States, accounting for about one-fifth of the total and three times the number of its closest rival, Germany.

In addition, Japan boasts eleven Nobel Prize laureates since 2000, spanning chemistry, physics, physiology, and medicine. And basic research in areas such as advanced materials and stem cells could have dramatic economic and social impacts, provided Japan can keep making progress fostering entrepreneurship that capitalizes on this work.    

Japan’s economy is still the third largest in the world. It has a well-educated, productive population and an adaptive and globally connected corporate sector, despite the headwinds buffeting some of Japan’s most famous brands such as Sharp and Panasonic. Less well known are small but highly profitable Japanese firms created in the past two decades such as Axell and Simplex. Japan is also an important investor overseas, becoming the world’s second largest source of foreign direct investment outflows in 2011 and China’s biggest investor.

Such interdependence in East Asia is one of the few positive factors helping to mitigate regional conflict over long-standing territorial and historical disputes.

Vital Partner in Asia

A key question is how this interdependence will evolve and how actively Japan, the United States, and others will try to shape it in a coordinated and inclusive fashion. Declining trade barriers and the diversification of economic growth in East Asia could help bolster the sense of community, but only if the politics of regionalism can be managed effectively.

Regional networking and rulemaking strategies that smack of Chinese containment (or that dwell too much on military maneuvers) will be counterproductive, so a broader institutional approach that includes China will be necessary.

Japan can be helpful here as it continues to contribute significantly to global and regional institutions. It is the second largest contributor to the United Nations and the International Monetary Fund, and it contributes the most to the Asian Development Bank and other regional funds such as the Asian Bond Fund. Japan can also be an important U.S. ally for shaping and strengthening the emerging regional architecture that includes the ASEAN Regional Forum and the East Asia Summit.

Americans often underestimate how well respected Japan is in most parts of Asia, notwithstanding the territorial and historical disputes that are fueling regional tensions today. Many Southeast Asian nations in the 1970s, 1980s, and 1990s looked up to Japan as the “lead goose” in their flock of aspiring economies and they emulated Japanese industrial policies.

As the rest of Asia modernizes and grows wealthier, Japan might now be simply joining the flock, but it should maintain an influential voice given its democratic and free market traditions as well as its non-confrontational diplomatic approach. That is, of course, if Japan revives itself in a way that supports regionalism and continues to engender respect in the region.

Asia’s Future

Competition will always be fierce in Asia, but if the region is able to build institutions and cooperative frameworks to tackle common economic, environmental, and even political and security challenges, it is a good bet that Japan and the United States will be key players in that process. Economic and demographic factors might prompt Japan over time to become a relatively low-growth and high-tax nation similar to many in northern Europe, but it should remain a stable and well-connected leader in East Asia.

This is a formative time in Asia’s history, and now is not the time for Washington to overlook Japan’s potential to reinvent itself. Japan’s political and business leaders have a lot of work ahead of them to overcome the challenges facing the country, but Japan’s future is still brighter than its recent past if it can strengthen relations with its neighbors and foster more openness and entrepreneurship in the country.

Working in concert with others in Asia, Japan will remain a valuable partner for the United States as it not only adjusts to new geopolitical dynamics in the region, but also tries to shape them.