9-11 and Japan: how the terrorist threat is affecting Tokyo's thinking - Brief Article

International Economy, The, Nov-Dec, 2001 by Yoshihiro Sakai

The terror attacks may well have driven Japan into a deeper recession than all the other countries in the world. Already, the Japanese Nikkei Index fell to 9,504 yen, a seventeen-year low. The decline of exports, mainly electronics, has deepened and the order reductions in every industry have been very serious. Almost all economists have been pessimistic about Japan's future.

PRE-9/11. To better understand the situation in Japan now, a brief look at Japan's history is necessary. The last 150 years of the 250-year reign of the Tokugawa Bakufu was rife with economic failures. Yoshinobu Tokugawa, the last Shogun, came into power during a time of extreme dissatisfaction with the government, was ousted by the military of the Emperor Meiji, and modern Japan began. Now, about 130 years after the takeover by the Meiji government, major change is occurring again. Japan has long had characteristic cycles of deep economic downturns followed by healthy rebounds. Japan, before the attacks, was nearing the bottom of a major downturn. The economic and social systems, already heavily eroded, fell into total disrepair after the end of the bubble economy. Now, in keeping with Japan's economic cycle, it is likely that change, followed by a rebound, will come after this downturn. The attacks may have been just the vehicle to prompt serious economic change. In fact, before the attacks or gaiatsu (external pressure) from the United States, the government had been unable to implement structural reforms.

POST 9/11. Japan, like other Asian countries, depends heavily on the United States. The damage caused by the attacks, however, has affected Japan more severely than the other Asian countries. The United States takes in about 30 percent of Japan's total direct exports and 40 percent of its exports indirectly through various Asian countries. This, along with other economic ties, solidifies Japan's dependence on the United States.

Throughout this event, tremendous pressure has been put on Japan both militarily and economically. Koizumi has decided to expatriate Japanese Self-Defense Forces to areas around Afghanistan to support the American military effort. Although Koizumi's decision to deploy troops may have generated mixed emotions, this military involvement may have broken through the perceptual barriers of many Japanese opposed to building up the defense industry. Japan has very advanced defense technologies, including electronic devices originally intended for public welfare, and could no doubt become just as large an exporter of tools of defense as it is of cars. Of course, at this point in time, the public sentiment and certain provisions in the constitution would not permit the export of these goods. However, if the war continues and expands not only in Afghanistan but also to Iraq or Somalia, it is possible that Koizumi, with approval ratings of over 70 percent, could lead Japan into the business of exporting tools of defense to the United States and other terrorist fighting countries. The defense industry may also lead to the expansion of industries for public welfare, such as Internet communications.

On the economic front, after the attacks, pressure was put on Koizumi to accelerate the bad loan clean up and the Bank of Japan to implement measures to boost the economy. It is likely that without the attacks, these necessary reforms may have come at a snail like pace.

FUTURE PREDICTIONS. The crisis may have been a blessing in disguise for Japan. Koizumi is strengthening his leadership with a clear path to recovery and the government is more committed than ever to revitalizing the economy. By showing a commitment to the cause, the bad loan situation could be resolved in a short period of time. Also, a build up of the Japanese defense industry could further strengthen Japan's recovery. Most importantly, crisis often brings out the best in people and the Japanese are no exception. So, might terrorism pull the trigger on the Japanese economy? Probably not. This attack most likely accelerated the bottoming out of the Japanese economy. Expect a turnaround in the future.

Yoshihiro Sakai is a Fellow at the American Enterprise Institute. Prior to his post at AEI, Mr. Sakai worked for the Bank of Japan for fifteen years. His positions included the Senior Examiner in the Banking Supervisory Division and Manager of the Financial and Payment System Office. Mr. Sakai has also been published in Asahi Newspapers RONZA, KINZAI, and Japanese financial magazines.