Yutaka Kosai

Chairman, the Japan Center for

Economic Research and

Professor, Toyo Eiwa University

　

Discussions of the best course for Japan for the new century are invariably argued in excessively broad and sweeping terms. "But it's much more complex than that!"is the inevitable reaction. Discussion in extremes can sometimes nevertheless, be useful. It helps organize conditions according to ideal type. Japan currently stands at a critical juncture, at which it badly needs to adopt a fundamental course to guide it in the coming decades. Here, I would like to set forth the options in the economic and foreign policy realms as I see them, hoping that this perspective will stimulate further discussion on the subject.

To be active in responding to globalization? Or to be passive? To maintain traditional Japanese economic practices and frameworks? Or to pursue reform?These are the questions.

　Partly occasioned by the disappointments of the World Trade Organization meeting in Seattle in late 1999, anti-globalist sentiment has been on the rise worldwide. In Japan, in opposition to the gov-ernment's campaign to advance structural reform aimed at deregulation, privatization, and the stimulation of market functions, the movement to harbor established systems and practices is deep-rooted.

　A proponent of globalization for my own part, I believe globalization has more advantages than otherwise in terms of economic efficiency and fairness.

　In its postwar process of catching up with the developed countries, domestic and overseas liberalization combined with regulation-oriented approaches set the tone of the Japanese economy, setting it on the path to rapid growth. Once the catch-up process was complete, however, Japan began to reveal an embarrassing inability, both in the government and private sectors, to accommodate to the changed circumstances of economic growth, whether in responding to technological advances or in dealing with the aftermath of the overheated"bubble" economy.

　This poor handling may stem from the difference in the importance of market competition between the catch-up process and the front-runner pursuit of further growth through trial and error. Or it may be because, due to different technological conditions, the economic system desirable for driving the era of information and computerization may be quite different from that which functioned dynamically in an era dominated by heavy and chemical industry.

　The notion of turning its back on the world has never been an option for the Japanese economy. Japan has no choice but to resolutely meet the challenge of globalization in order to revitalize its economy.

Globalization will ultimately create a borderless economy, or at least push the world economy in that direction. In that case, the difference between domestic and international (tradable) goods will shrink, in theory leading to factor price equalization. That will further increase the efficiency of the economy, bring down the prices of the goods that are comparatively higher than in other countries, as well as restrain excessive overseas investment, which will in turn prompt a rise in domestic investment opportunities and improvement in the national standard of living.

　During that process, of course, the industrial structure and people's lifestyles must change in accordance with the transformation of the price structure. The increasing number of countries catching up with Japan will mean higher standards of living in those countries and Japan and a reciprocal expansion of their mutual markets, accompanied by appropriate foreign exchange adjustments. Like Japan in the past, developing countries will probably not appreciate their own currencies until full employment is achieved, and so it is likely that Japan will face tough industrial adjustments during that period.

　Japan must further the process of industrial adjustments promptly, and in doing so, must strive to open its market wide and face competition squarely. To choose any other option would set the country on a demoralizing path of gradual economic decline.

　Many argue that to permit free competition will ultimately result in unequal distribution of income. I would call for more attention to be focused on the unfair and unequal distribution of income that has been the result of regulations and customary practices that favor vested interests.

　A Iook at wage premiums by industry after adjusting for factors of academic background and length of career, reveals that the premiums of the industries protected by government regulations are much higher than those in the industries that have tried hard to improve productivity in the face of fierce competition at home and abroad. Globalization will help to encourage information disclosure and expose hidden vested interests to healthy competition. In judging the fairness of income distribution, it is necessary to properly evaluate the element of risk taking, which is the true test of a front runner.

China, it is increasingly certain, will be a world economic, political, and military power in the twenty-first century. Although rarely referred to in Japan, the World Bank's estimation that China's gross domestic product in terms of purchasing power parity has surpassed that of Japan to become the second largest is well known in China.

　The anti-hegemony clause in the Japan-China Treaty of Peace and Friendship may have been targeted at Japan at the time the treaty was signed in 1978. Today, it is obviously China, not Japan, that is capable of becoming a hegemonist power (regardless of whether or not it intends to do so). To risk oversimplification, I would venture to ask: Will Japan stress its alliance with the United States?Will it seek to cooperate with China and Asia as a whole? Will it opt for"splendid isolation"?

　I personally believe that Japan's foreign policy should center on its relationship with the United States. The two countries share commitment to the principles of the market economy and liberal democracy and have achieved the ideals of both to a considerable degree. China, on the other hand, still maintains the single-party system and the future of its domestic system is not necessarily certain.

　While I would advocate the strengthening of Japan-U.S. ties, this should not be done in such a way as to cast China as adversary. The future outlook of China in my view is such that from the standpoint of national interests Beijing will adopt a diplomacy of peace and coexistence with its door wide open to the outside in order to sustain its economic growth and to go on building its national strength. As its economy grows strong, respect for human rights and liberal democracy will progress there. Given its traditional acumen in international affairs, there is a good possibility that China may pursue amicable relations with the United States. Japan's turn to be isolated in the international community may come around again. For Beijing to choose a path to hegemony and isolation, on the contrary, would be an unhappy choice for Japan and other countries and the possibility of China's sound growth would also decrease by that much.

Actual relations between Japan, the United States, and China may experience complex turns and twists. Even in such cases. Japan's basic stance must be to hold fast to the market economy and liberal democracy. That is Japan's only choice, and to maintain that stance it is vital to build sufficient national strength, economically and politically.

　At the same time, Japan will have to promote friendly ties with Korea, the ASEAN nations, Australia, New Zealand, Canada, and other countries, and welcome and facilitate EU and Russian contacts with Asia. Japan will thus have an important role to play contributing to the growth of Asia. With firm resolution Japan will have to be fully open to the global community, both in its economy and its foreign policy.