Transcript: Is Japan at a turning point?

This is an audio transcript of the Rachman Review podcast episode: ‘Is Japan at a turning point?’

Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator at the Financial Times. This week’s podcast is about the future of Japan as a society, as an economy, and as a global power. It comes to you from Tokyo, where I’m gonna be based until early May. To help understand where the country’s going, I’m joined by two colleagues: Kana Inagaki is the FT’s Tokyo bureau chief and Leo Lewis is our Asia business editor. So, can Japan look forward to the future with optimism?

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The cherry blossoms are out in Tokyo, which always helps to lift spirits. But some of the rhetoric from Japan’s political leaders can be chilling.

Fumio Kishida audio clip, via interpreter
We are at a critical juncture and on the brink of being unable to maintain social functions.

Gideon Rachman
That’s Fumio Kishida, the country’s prime minister. Business people here in Japan seem optimistic. The stock market’s at a record high, and there’s cautious optimism that Japan’s finally conquered deflation. But none of that can get round a disturbing long-term trend. Japan’s population is shrinking and ageing. So I began my conversation by asking Leo about the demographic crunch. What does Kishida mean when he says that the country’s ability to function as a society is at stake?

Leo Lewis
So Prime Minister Kishida there is addressing a domestic audience that sees its society in the highest possible terms. It sees itself as having achieved great things as a society in terms of its commerce, its level of education, its wealth, and so on. And the idea is that something that Japan has been looking at for years, which is its own declining fertility rate and number of children being born, what he’s doing there in that comment is saying, look, it’s enough predicting this. If we don’t do something now, this wonderful society that we’ve created is at risk. So if you don’t have enough people to keep the society going in the way that people have become used to, the idea is that things start to fray and then fall apart. The ratio of elderly people has reached the point where it’s basically a quarter of the country. You know, it could be described by one metric as elderly.

Gideon Rachman
What, sort of retirement age?

Leo Lewis
Retirement age. And so, that is being . . . 

Gideon Rachman
And the population is actually shrinking now. Yeah?

Leo Lewis
The population is also shrinking. And one of the things that was notable really about last year was not just that the overall population was shrinking, but that the labour force, finally, was shrinking. So for many years, you had the situation where the labour force was actually getting slightly larger because more women were participating in it. But that has now peaked out. And last year was the first where the labour force started to shrink. And of course, that can’t really be reversed without immigration and complicated debates on that. And so the domestic shrinkage of the labour force became a true reality in ‘22, ‘23. And that’s the future Japan sees.

Gideon Rachman
And that future, I guess, means that there’s fewer and fewer working-age people supporting an ever-growing number of old people. So Kana, as Leo has been saying, I mean, Japan and the outside world have been talking about this as an issue for a long time. What have they tried and why hasn’t it worked? And what can they move to next?

Kana Inagaki
Yes. So Prime Minister Kishida — after giving this dire warning about the future of Japan society — has said he’s going to carry out unprecedented measures to tackle this issue. But some of these measures are measures that’s already been tested before. For example, they’re promising generous cash handouts to households raising children. And Prime Minister Kishida has also talked about allowing men to take more paternity leave, because a lot of the burden does still tend to fall on the mothers in Japan. But fundamentally, there is an issue about young people who don’t wanna get married. So you can help with the people who are raising children. But there’s also the question about how do you actually convince people to get married? There’s a recent survey by the Cabinet Office that showed that a record more than 60 per cent of those that were surveyed felt that they were not financially secure. And because of these worries about the labour shortage and the high debt that Japan has, all of these issues make young people quite worried about getting married. So that’s quite . . . 

Gideon Rachman
So basically economic insecurity then? They don’t feel they can provide for their kids if they have them.

Kana Inagaki
That’s right, that’s right.

Gideon Rachman
And why is Japan so expensive? I mean, I guess, you know, it’s not that it suddenly feels very cheap because the yen’s so weak. Why do people feel this crushing concern is that it’s just too difficult to have children?

Kana Inagaki
I don’t think the living costs themselves are that expensive. Like you say, inflation here is quite mild. I mean, the weaker yen, for foreigners, obviously. But in Japan I think it’s more about the concerns about the future. So for example, about the pension benefits. You know, how much of those are going to be guaranteed for the younger population? They’re very much worried about that. And so it’s not about things that feel expensive at the moment, but it’s more about what kind of guarantees they can get in the future. That’s really making them very much insecure.

Gideon Rachman
So Leo, I mean if they’ve run pronatalist policies, but they haven’t really worked persuading people to have more kids, what else is in the locker? I mean, you mentioned this very controversial debate about immigration. And some Japanese analysts I’ve spoken to said, well, actually, things are moving on that front. Japan, despite its reputation for being extremely cautious about immigration, is actually opening the doors more. Is that happening and is it gonna change the country?

Leo Lewis
Yeah. So immigration is not being used as a word in the political environment at all. It’s not that there isn’t a word for it. It’s just that it isn’t framed in the way that would turn it into a sort of big, scary immigration debate. But the reality, of course, is that companies, and in particular, sectors like construction and so on, do have a very high demand for people. That demand is not met domestically, and they’ve been quietly bringing in and using what in any other context would be called immigrant labour to meet that shortfall. And, you know, the government is quietly obliging by making it a bit easier for those people to come in and do those jobs and so, you know, this is sort of about nursing and so on. I mean, you mentioned pronatal policies. I mean, one of the things that kind of just sort of touched on there is that young people are concerned about who’s gonna take care of their elderly parents. And so answering that with a large number of people coming in to work in nursing homes and so on, is part of the Japanese debate. It’s just it’s not being framed as a yeah, as an immigrant . . .

Gideon Rachman
Yeah. And I mean, I guess I, I can sort of — although I come from a very high-immigration society and I’ve written things about how positive immigration is for the UK — I can, being here, understand Japanese reluctance. It’s a very well-ordered, peaceful, high-trust society.

Kana Inagaki
Yeah. And also, I mean, Japan hasn’t had the kind of rise of populism as in elsewhere, right, like extreme political views or shifts. And that’s partly the lack of immigration. It’s not happening here. But there is, like, people sometimes call it stealth immigration. People don’t talk about it. But there’s a lot of skilled workers that are coming in in certain areas, like restaurants or convenience stores. Every day you’ll meet foreign workers there. But the problem is: is Japan ready, for example, to accept helpers to raise children? There’s a social stigma attached to allowing people outside of the family to help with raising children. And so unless you can get the immigration rules relaxed to bring in helpers, then that whole issue we were talking about, the declining birth rate, it’s extremely hard because mothers always get the burden of raising children. They don’t get outside help.

Gideon Rachman
Yeah. And I mean, is there, as Leo seems to be implying, a kind of sleight of hand going on? In the sense that, you know, I think of Germany where for many years they treated immigrants or they call them guest workers — the idea was they would all go home. And is Japan sort of saying the same to its population? These people are only here temporary, but other countries’ experiences suggest that they will settle, they’ll raise families and stay.

Kana Inagaki
I think that’s true, I mean the idea that these skilled workers are here for temporary visas. But more and more companies are finding that they need them permanently. Big companies like Hitachi, all of these companies are actually doing acquisitions just so that they can hire more people. And so it’s not just through immigration, but there’s a need for very high-quality international talent. And Japanese companies are grappling with that.

Gideon Rachman
Yeah. So turning then to where the economy is right now, it feels to me like an interesting moment to be here in Tokyo, because you had this historic moment where the market finally crept above the level it was in 1989, before the bursting of the bubble. And there’s a sense that maybe deflation is now a thing of the past. So Leo, do you think Japan Inc, despite all this demographic stuff, has reason to be cautiously optimistic?

Leo Lewis
Certainly, at the larger end of the Japanese economy — the larger end of corporate Japan — there is a certain cause for optimism. And a lot of that relates to the fact that how effectively those companies have globalised, want a better word, they’ve made a much greater proportion of their revenues foreign-derived. I mean, this is not just an export story. This is putting manufacturing overseas and just generally increasing the ratio of overseas-derived revenues. And so you’re starting to look at companies that would previously have been much more domestically focused. They’ve crept up. So it’s now 60 per cent here, 70 per cent there, for revenues of companies that you used to think of as very Japanese companies. That’s happening at the much larger end of corporate Japan. But a very, very big chunk of the Japanese economy is essentially the supply chain of the bigger end of the Japanese economy, the big sort of manufacturing hinterland that is itself having to meet the needs of the bigger companies that have gone overseas. And so there is a cause for optimism. It’s really what it’s always been with Japan. It’s a question of how quickly those companies can catch up in terms of productivity and, you know, internal management systems, which often lag behind.

Gideon Rachman
Right. And Kana, I mean, another debate that’s been very interesting to get a Japanese perspective on is that, you know, every time I go to the States and also in Europe now, there’s talk of decoupling, or now the phrase is de-risking with China. And the Japanese foreign policy people do seem very concerned about China. But what does Japanese business think? Is there any kind of effort to decouple from China?

Kana Inagaki
Yeah. So it’s a very sensitive issue for Japanese companies. Obviously, they’ve been straddling both the US and China for a very long time, and they have a lot of expertise built in on how to navigate these geopolitical tensions. But even for these Japanese companies, it’s been a challenge. Like you said, the Japanese government itself has been quite eager to align itself with the US in terms of export controls against China. And, you know, the talk about friend-shoring. Japan has done a lot with the US in terms of the chip supply chains. And all of this has been positive in terms of strengthening both the economic and the military alliance with the US. But in the business community, it’s been a very, very delicate issue. There are some companies that have been very religiously trying to oblige with export controls and trying to decouple or, you know, trying to cut China out of their supply chains. But at the same time, they face a huge reality of where they get most of their revenue from. So even now, they want to find a way out. And also there are questions about the US reliability as well. And so a lot of the business leaders are privately asking themselves, is it really OK to just go with the US on this policy? And also, are the Japanese companies actually being too obedient with some of these export controls? So there’s a real serious dilemma, I think, within the Japanese communities.

Gideon Rachman
And give me a sense of how dependent or otherwise Japan is on the China market, because it’s something I’ve been writing routinely, that China is Japan’s largest market. But somebody just told me, well, actually, last year America became Japan’s largest market again. So is that true? And is that evidence that some of this decoupling is already having a real effect?

Leo Lewis
I think it’s important to remember, obviously, the US is a massive market for Japan, always will be. China for a lot of Japanese companies represents the future of growth. Now, those numbers that you’re citing there, they come at a time when the Chinese economy is in a not great state, and there’s a lot of uncertainty around there. And the same uncertainties about investment that Chinese companies are themselves going through at the moment are also occurring to Japanese companies. Is it worth us investing now? If the growth isn’t gonna come for another few years, the Chinese economy needs to sort of reposition itself. And so those Japanese companies are very much closer in their cycle to the Chinese companies and their cycle. But the Japanese companies that have been looking at China for their growth have not given up on that. And why would you? It’s an enormous middle class that is in many ways, replicating some of the patterns that Japan’s middle class showed when it was created all those years ago. And so Japan has an expertise, and Japanese companies have an expertise in China that they’re not gonna likely give up, you know, just because they’re being ordered to do so or that they’re being encouraged to do so.

Kana Inagaki
I mean, one other good example is like Japanese carmakers. Like Leo says, there’s a huge market there that you just cannot give up. And you’ve spent decades trying to build those relations there. But also, if you wanna talk about electric vehicles, artificial intelligence, a lot of these companies say they need to be in the market in order to actually be on the cutting edge of these technologies. And because China is ahead in many of these technologies as well, it’s not just about the demand. They need to actually absorb some of these technologies as well. So there’s that need. And that’s why a lot of the Japanese companies have this policy that Leo was talking about. It’s just serving the domestic Chinese market. That in itself is a hugely appealing market. So they will not give that up.

Gideon Rachman
Right. But turning them to the geopolitics, which is gonna be very much in the news in the next few days, the prime minister is going to Washington. And again, one of the things that’s been striking for me here, having come from other bits of Asia where there’s some resentment about what they feel is American pressure to get tough on China and feeling that America is being overbearing, it strikes me, at least on the surface, that Japan and the Japanese government is very much on board with the kind of things that the Biden administration is trying to do, and with their view of China as potentially threatening. Am I reading that right, Kana?

Kana Inagaki
Well, I think there’s both ways. In terms of the threat from China, Japan is located where they actually directly feel the threat from China and also Russia’s invasion of Ukraine, as Prime Minister Kishida put it. A lot of the Japanese public here felt like this was not just a problem that’s far away, but actually that this could happen in their own neighbourhood. And that really kind of crystallised the threat that China is posing in the future.

Gideon Rachman
What the China could do to Taiwan or even to the disputed Senkaku/ Diaoyu islands.

Kana Inagaki
Exactly. But the other side of this whole thing, about how Japan has been significantly increasing its defence budget and also relaxing its rules, for example, on exporting its military equipment — one of the aims is obviously to strengthen its alliance with the US. But also Japan has this new fighter jet program with the UK and Italy. And so there is an underlying concern about how much Japan can rely on the US for its future security. And that’s why Japan wants to strengthen its own defence capabilities and also strengthen its alliance with UK, Australia. There’s been significant improvement. You know, following the summit in the US, there will be a trilateral with the Philippines. And so Japan has really been trying to strengthen its presence in the south-east Asia region as well. Underlying there is the sense of anxiety of whether Japan can really rely on the US alone in the future.

Gideon Rachman
Yeah. And Leo, one of the things that, again, has been said to me here in Tokyo is that the changes in Japanese national security policy under Kishida have been — by the country’s standards — pretty revolutionary. This is a country with pacifism written into its sort of soul after the second world war and its constitution. And that he has done a lot of things that Shinzo Abe, who was prime minister for a very long time and was quite hawkish, wanted to do but couldn’t quite get done, but that now in the post-Ukraine environment, Japan is doing more.

Leo Lewis
Yeah, that’s absolutely right. And it’s been quite noticeable, as someone who’s been following Japan for a long time. There have been various periods where, for want of a better word, the sort of pacifist-left, centrist-left side of Japan has protested quite strongly against what it’s seen as any sort of attempt to, as Abe was trying to, revise the constitution, the very pacifist terms in the constitution. You know, those protests have become smaller and smaller over the years. And so by the time we get to Kishida doing what he’s done in terms of the defence budget, the number of people that were protesting outside, you know, in Hibiya Park and so on was down to hundreds rather than thousands. And a lot of that has to do with the optics of Ukraine. But at the same time, there’s also an idea that Japan has been in this old state for a long time where, for example, the constitution technically doesn’t let it have an army, a navy and an air force, the military don’t really formally exist. Maybe that’s been an issue with recruitment and other issues. And so the idea of putting Japan back, just making it normal has been increasingly mainstream as an idea that it’s actually quite difficult now to find people who really rage against that idea in a way that you certainly could 20, 30 years ago. It was easy to create a large crowd outside the prime minister’s residence, protesting against the slightest signal that Japan was looking more aggressive, more militaristic in any way.

Gideon Rachman
Do you think Japan is gonna be able to sustain this military build-up, Kana, given all the other economic pressures that they’re under?

Kana Inagaki
At least for the five years that they’ve outlined, that’s obviously something that they’ve committed to. And I think, as Leo mentioned, there hasn’t been public opposition to increasing the defence spending. But if you look at Prime Minister Kishida’s popularity, one of the reasons that it’s falling, there’s all kinds of issues. Obviously, there’s the political funding scandal, but there’s also the question about raising taxes in the future to fund this increase in the defence budget. And that’s really one of the key areas that we’ve been looking into as well. And, you know, the Japanese public says they’re ready to increase their role in regional security, et cetera. Are they willing to actually pay for it? And that’s still a very, very delicate issue. And so when the government is very weak, it will raise questions about how they’re actually going to be able to convince the public that there will be some pain when it comes to actually funding this increase in the defence spending. So there’s certainly lots of questions about this. And the IMF is forecasting that the ratio of public debt to gross domestic product, you know, it’s an often-cited figure, but it’s supposed to hit 256 per cent in 2024.

Gideon Rachman
That’s an extraordinary figure. I mean, it used to be regarded as completely unsustainable.

Kana Inagaki
Exactly.

Gideon Rachman
But they were able to sustain it, I guess, in the period of very, very low negative interest rates. But if interest rates are rising, does it become more problematic?

Kana Inagaki
I mean, it will obviously be a bigger issue going forward. But when it comes to interest rates, it’s going to be a very slow rise. I think Japan will continue to grapple with low growth. I mean, talking about whether Japan has become a normal economy or not, there is still the same issues, you know, challenges that they’ve had before. So even after the BoJ starts raising interest rates, it will be extremely gradual. And the Japanese government bonds are owned by domestic institutions, so there won’t be that kind of volatility. And so it’s a problem that will weigh heavily but it’s not something that will blow up immediately. I don’t think.

Leo Lewis
I suppose the other thing that’s interesting as well has been what the increased defence budget will be spent on. People talk about raising defence budgets and assume it’s more kits and bigger programs and so on. But I mean, really, it cannot be overstated how big a problem Japan has simply getting numbers in to be in its self-defence forces. Recruitment is down generally. I mean, it’s got the same labour shortage as the rest of the country. But, you know, at the beginning of the year we had a horrible earthquake in the northern peninsula. And once again, the self-defence forces come in as the image of who’s gonna do the rescuing. You know they’re there, they’re immediately very efficiently helping out and rebuilding bits. But the idea of those people becoming a fighting force, and those guys being recruited not to sort of help in Japan, which is what they’ve been doing for the last 30 years more, but actually to possibly go and fight and defend Japan in violence. That’s not how they’ve been recruited really in the past. And so part of this defence budget is about just making this a more regular-looking military, and so just making the job attractive to young people and so on. It’s not just going to be bits of kit.

Gideon Rachman
Right. So moving from these big general problems back to the present day, I mean, Kana, you referred to Kishida being pretty unpopular. And some people say his days are numbered as prime minister, even though he has been — by some measures, as we’ve been discussing — quite effective. Why is he so unpopular? And what do you think his future is?

Kana Inagaki
I mean, covering politics in Japan, I’ve actually found that puzzling as well, why Prime Minister Kishida is so unpopular. I mean, on the foreign policy front, he’s made a lot of major changes to postwar policy without causing any public protests. And so if you talk to allies like the US or the UK, they see him as a very effective leader. But domestically, the childcare policies that we’ve been talking about, none of this have actually resonated with the public. The question about the tax increase and then most recently, there’s been this whole scandal — money that was raised in fundraising parties were alleged to have been pulled into secret slush funds. And this whole scandal has involved several of the senior ruling Liberal Democratic party members. And that’s really been a big hit for the popularity. And so, obviously, there are questions about whether Prime Minister Kishida will call a snap election in June. I mean, there’s even rumours that he might call it later this month. And the other big possibility is obviously because his term as LDP president ends in September, then that’s when they will also change the prime minister as well. It’s hard for me to predict what will happen, but one thing I can say is that everyone has been talking about Prime Minister Kishida stepping down for like the past year. Everyone has been betting he will be leaving soon and he has managed, even despite his extremely low approval ratings. I mean, if it’s below 30 per cent, most of the prime ministers in the past have been kicked out. But it shows that the opposition parties are very weak. There are also not very strong candidates, even within the ruling LDP, who can topple Kishida, because this political funding scandal has actually involved a lot of these, you know, powerful members of the LDP as well. And so when you come to talking about who is going to be his successor, that’s a very big question that’s out there where there is actually no compelling narrative. He will likely step down some time soon, but it’s also very questionable who is actually going to replace him.

Gideon Rachman
Yeah. So Leo, just to end then, can I ask a slightly heretical question? Does it actually matter? I mean, will it matter to the governance of Japan if Kishida goes in September or doesn’t go? Because I suppose Abe was something of an anomaly in that he was around for a very long time. He had a high profile internationally. But Japan, even through its great boom years, prime ministers cycled in and out. The LDP always seemed to run their show. Does this kind of political stuff, even though it’s kind of fascinating if you’re sitting in Tokyo, did the markets mind? Did Japan’s allies, should they mind?

Leo Lewis
Yeah. No, I don’t think it’s a coincidence that the markets have resumed their peak at a time when Abe was the longest-serving prime minister in modern Japanese history. Kishida has lasted for longer than people had expected. What I think mattered a lot was that when you refer to the cycling in and out of Japanese prime ministers, they were averaging about one year and seven months for the last 40 years. And the problem is that you can’t really get anything done, even if notionally, it’s the same party. It’s the LDP, actually don’t get anything done, and bureaucrats do drag their heels on projects because they think, well, if I just wait a year, someone’s gonna come in, I’m gonna have to do this again. You know, companies . . . 

Gideon Rachman
Sounds familiar.

Leo Lewis
You’re right. But companies have very little predictability. If they think that prime minister is gonna be gone, who do you cosy up to? Who’s gonna be the economy minister? And so I think what Abe did was reset the idea that actually it’s quite desirable whether you liked the prime minister or not, it’s quite desirable to have longevity in the prime minister’s office in Japan. And so things that we’d like, you know, and things that have done well. So, for example, you know, the governance code pushing for higher standards of corporate behaviour, those have happened because of continuity, not because there’s a genius idea that’s come out of nowhere. It’s because there’ve been prime ministers in place long enough to see through policies that take a while to bed in. And so, yeah, the worst thing that could happen in Japan, in my view, would be a return to the one-year terms that you had in the mid-2000s.

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Gideon Rachman
So that’s a way in which Japan should not revert to the old days. Thank you both very much indeed.

That was Leo Lewis and Kana Inagaki here in the Tokyo bureau of the FT, joining me for this discussion of Japan. Thanks for listening and please join me again next week for another edition of the Rachman Review.

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