Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities.
This article focuses on the conversation between Mr. Takeshi Tashiro, Director of Policy Planning and Research Office, Ministry of Economy, Trade and Industry (Japan) and Keith Rabin, President, KWR International, Inc.
Hello Mr. Tashiro, it is a pleasure to meet you and to be speaking with a Ministry of Economy, Trade, and Industry (METI) official, who our firm has worked to support for many years. Before we begin, can you tell our readers about your background and current activities?
Thank you. My name is Takeshi Tashiro and I am a Director of Policy Planning and Research Office at the Trade Policy Bureau of METI. In this capacity, I provide international economic and policy analysis and help to develop planning options. Earlier in my career, I supported the development of “Abenomics”, the economic policies that have guided Japan since Shinzō Abe was elected to his second term as Prime Minister in December 2012. It is based on “three arrows”, including monetary easing from the Bank of Japan, fiscal stimulus through government spending, and structural reform. I also lived in the United States for three years while working at a think tank in Washington and studying for my master’s degree in public policy at Harvard’s Kennedy School. So, my work has focused on how to strengthen the Japanese economy, both domestically and internationally, how to alleviate deflation, and how to build economic ties and supply chains with Japan’s neighbors and other countries around the world.
Most recently, I directed the preparation of METI’s annual White Paper on International Economy and Trade 2020. It was released in July and includes our latest thinking on a wide range of issues. METI has been preparing annual White Papers for 72 years, and the current edition focuses on the Coronavirus pandemic, its impact on the global and Japanese economy, and trade policy direction.
While Japan is one of the world’s most advanced, and its third-largest economy, it attracts relatively little attention from international companies and investors. This is partially due to demographic pressures and several decades of perceived stagnation. Why is Japan underappreciated, what are its strengths and weaknesses, and can you give us some insight into the current state of Japan’s economy and why companies and investors should be paying more attention?
I think it is not just companies and investors, but the world itself should pay more attention to Japan. Our economy possesses many interesting opportunities – while providing lessons on pressing issues, including how to deal with an aging society, low growth, low-interest rates, and deflation. Larry Summers has described this as “secular stagnation” (some call this “Japanification”) and I believe the force of secular stagnation will become one of the world’s most formidable challenges as the effects of the Coronavirus pandemic crisis – which is the greatest economic disruption since the great depression – continues to rise. We don’t know when a vaccine will become available and despite rising asset prices – given abundant central bank liquidity – companies will be reluctant to expand and make long-term investments in this uncertain environment. That creates a rising propensity for savings, which has also been the main cause of Japan’s long stagnation for the past few decades.
Many people only look at the negative side, but it is important to also understand that even as Japan faced this long stagnation, it has silently transformed itself while maintaining social stability and high quality of life. There are so many interesting changes. One as you mentioned, is the strength of our development as a trading nation following the second world war, when we accumulated a large surplus though companies as Sony and Toyota manufactured products in Japan. That changed, however. Costs rose and we faced pressures from trading partners over surpluses and as a result Japan became an “investing nation”, optimizing supply and production chains by establishing facilities in developing and developed markets around the world. Although Japanese companies have expanded their overseas operations, Japan enjoys a relatively low unemployment rate among advanced economies. We leverage off Asian neighbors and their growing power and desire to develop themselves, both to maintain our own competitiveness and to grow their economies.
Given the difficulties Japan has faced in recent decades, coping with domestic stagnation, an aging society, and depressed demand, Japanese companies have enjoyed relatively strong performance and profitability, and one has to ask how this was achieved. The answer is through dedicated efforts to work overseas and establish a long-term presence in these economies. The Japanese government is also moving to understand the needs of countries in the region and to facilitate local and regional development while encouraging Japanese firms to optimize supply chains and production and to sell Japanese brands, products, components, and services in these markets and third countries around the world.
In the process, it has become more difficult to say that a company belongs to any one nation. Yes, the nationality of the company remains Japanese, but they rely on partnerships, labor and other agreements with other companies, people and institutions in the countries where they operate. That is how Japan has maintained its edge and competitiveness in a globalized world, at a time when our own economy faces many challenges. In recent years, however, we are becoming increasingly concerned with the rising backlash against globalization and increased nationalist pressures. That is creating a wide range of risks as well.
Other nations, however, particularly mature economies that face similar, though perhaps fewer extreme challenges such as an aging population, can draw from this experience, recognizing the benefits of expanded international trade and engagement.
Japan possesses formidable strength as an industrial and manufacturing power. This is true, not only in terms of consumer- and end-products, but even more so in terms of components, technology and machinery which is essential to the production of well-known products and brands from other nations and global supply chains across a wide range of sectors. Can you talk about Japan’s industrial strength and capacity, its role as a technology leader and as a critical link within global manufacturing and supply chains?
In addition to Japanese branded products, our companies provide important goods and components for brands and products all over the world as well as the machinery from which they are made. For example, without Japanese companies, you might not be able to obtain iPhones as many critical components are Japanese, even though the product itself is not from Japan. That is how global supply chains are now structured. Japanese firms provide components not only for iPhones but for automobiles, computers, airplanes, and other products. So even though Japanese firms face increased competition from Korean, Chinese, European, and other brands, inside these products you will find many Japanese parts and components, and, in some cases, they are Japanese-managed production on an OEM basis.
Therefore, while in the US you see many Toyota’s, Honda’s and other Japanese cars on the road, which are highly successful, I think our strength is based more on our ability to establish, manage and optimize complex supply chains. This allows us to compete in, and contribute to the development of, industries and countries all over the world, both in terms of sourcing and manufacturing, as well as distribution to businesses and consumers.
For example, Japanese manufacturers build plants in the US, Southeast Asia, and other markets. These provide jobs, investment, and products that boost local and national economies, within markets that enjoy stronger growth rates than Japan. This allows our companies to expand and to grow and enjoy profitability far beyond what they could find in our economy.
I think that is one major industrial strength of Japan, and global supply chains are especially important for our economy. This necessitates a careful balance between efficiencies and disruption – including not only concerns over a host of trade issues but events such as the coronavirus pandemic. So, this reliance on trade and global supply chains is a strength but it is also a risk. It requires careful and ongoing reexamination so that our companies and economy do not become too dependent on any single source of supply and outlet so that we achieve sufficient diversification and have options given inevitable disruptions moving forward.
For many decades Japan-focused heavily on its relationship with the United States, both as its largest trading partner and as a guarantor of its security, as well as sales to Europe and other developed economies. As costs within Japan rose and China emerged as an alternative, Japan took advantage of its low-cost labor, and then targeted the market as consumption rose while demand was stagnating in Japan and exhibiting low growth in the US and other advanced economies. Today, China is the world’s second-largest economy.
It has become more assertive and there is growing concern about supply chain diversification as well as national and technological security, as seen in tensions in the South China Sea, events in Hong Kong, and the conflict over Huawei technology. We also note Japan’s recent announcement that it will be subsidizing companies to diversify their production base to strengthen supply chain resilience. What are your thoughts on this transformation? What does it mean for Japan and the region? What are the global obstacles and reasons behind it?
The role of China has been evolving and it is an important neighbor of ours. Economically it is rising rapidly, both as a source of production as well as a market for Japanese products and components. Growth has been strong over many decades and as you noted it is now the world’s second-largest economy. At the same time, we need to be careful not to become too concentrated or dependent on any trading partner. As I mentioned, if companies or Japan as a whole, places too much production, for example in electrical machinery, electronics or critical components, etc. in one geographic location, it can become dangerous, causing supply constrictions that can lead to major disruptions far beyond that product.
That is a trade-off we must address, particularly when considering the pandemic that has caused so much disruption to logistics and supply across the world. In fact, we need to consider this with every country though in the case of China it is particularly important given its growing size, proximity and the concentration of manufacturing and production-based there. We introduced subsidies for Japanese companies to diversify their supply chain. This is an initiative that seeks to maximize supply chain resilience across a range of industries for the benefit of the region and the global economy as a whole.
At the same time, even though Japan has become increasingly open to foreign workers, which some analysts believe could encompass up to about 5-6% of our total workforce by 2030, we recognize domestic production alone is not the answer. Aside from cost issues, we have also experienced disruptions from natural disasters in Japan such as the 2011 earthquake and we understand both the importance of diversification and that many products can be made more efficiently elsewhere. As a result, China became an important center of production and market for Japan.
In the US the coronavirus is generally viewed as a traumatic, but hopefully temporary obstacle, to be overcome so we can get back to “normal” as quickly as possible. At the same time some analysts in other countries, while recognizing the urgent need to address the pandemic, view it more as an accelerator of changes that have been occurring over the last decade, rather than a short-term phenomenon to be resolved once a vaccine is in place. While we hear Japan has been relatively successful in suppressing its spread, how has the coronavirus affected Japan? What are the regional and global implications, and do you view the virus more as a temporary obstacle or a transformational accelerant of trends already in motion? If the latter, what actions should governments and companies undertake to maintain and enhance their competitiveness moving forward?
I think we have to make this crisis an accelerator of change – though our success in doing so is likely to depend on our ability to join together, both within Japan, as well as other countries, to move in that direction. It would be unfortunate to just view it as a temporary traumatic obstacle and we have already seen dramatic changes of behavior and acceleration of trends that were underway. The rise of e-commerce, use of video conferencing, and more flexible workplace are just a few examples and are unlikely to reverse even after effective treatment and inoculation are available. To me, seeing so many people in the US and the western world wearing masks is quite surprising. It is something I could not have imagined when I lived in the US a short while ago.
Many other changes are underway, and we are developing policies to make the crisis work for us. This includes improving public health, infrastructure, supply chain, and other issues while allowing social distancing and our economy to reopen. In Japan, people wear masks as we learned from the pandemic a century ago and have high concern over spreading illness. That has allowed Japan, as you noted, to be successful in suppressing the spread. As other nations adopt, we will all be more prepared moving forward.
As a result, Japan is taking a comprehensive approach to encourage this transformation. We are working to create a new lifestyle that better allows social distancing to prevent illness and save and protect lives. Initiatives to facilitate digital transformation, online and digital payments, teleworking and telemedicine are all underway. I think even though, or because, this crisis is extremely traumatic we need to recognize and address the obstacles that are presented and use them as catalysts for needed change. Even though a therapeutic approach is needed to resolve the crisis, supplemented by provisions of liquidity to minimize economic disruption, we also recognize this is an opportunity to address and remove structural problems that have long troubled our economy.
That includes the need to digitalize our economy and our government and healthcare and payment systems. So, we are now trying to change our society and the crisis is helping to showcase the need to move more rapidly in that direction. The role of government is to help provide this support. The Japanese government is using fiscal stimulus not only to provide liquidity support to households and businesses but also to push telework and other forms of digital transformation.
The coronavirus pandemic has accelerated global efforts to stimulate national economies through massive stimulus programs similar to those that have existed in Japan for many years. This is leading to ever-accelerating levels of global debt which seem manageable when interest rates are at record lows and even negative in many countries – but potentially troubling for the long term. Similarly, many believe the world would be better off with a shift from monetary to fiscal solutions and infrastructure development. Japan also has a lot of experience in this area as well. What are your views on the present health of the international economic system? What can the world learn from Japan and would a fiscal approach produce better results and help countries better deal with massive unemployment and the business trauma that has accompanied the pandemic?
The initial stimulus packages enacted at the onset of the coronavirus have been very effective. It is essential that we cope with the pandemic with the necessary tools both in terms of health and the economy. As a result, the US, Japan and other nations supported by their central banks invoked stimulus programs at an unprecedented scale, with low or in some cases negative interest rate policies, which have helped to contain and minimize the effect of the disruptions that have occurred. This was basically the right move and necessary to confront the panic and initial effects of the pandemic.
Now, however, our attention is shifting to how to reopen our economies longer-term while maintaining social distancing and addressing other measures that constrain economic activity. This is difficult as if we stimulate and encourage face-face contact – infection rates will rise. So that is a major challenge. We have to proceed carefully, crafting measures that provide sufficient effect at an unprecedented scale, while accounting for necessary public health safety as well as concerns over rising debt load.
So, one lesson is we need to ensure advance planning and coordination so we can respond quickly and effectively to meet the challenges of the pandemic and other emergencies as they unfold. Another is that international cooperation is more important than ever before. Not just for dealing with the infection itself, but also to deal with the economic effects. Relating to your previous question – this is not just a catalyst for digital transformation – but also for international cooperation and political, economic and societal transformation with national, regional and global implications.
We also realize it is difficult to stimulate sufficiently with monetary policy alone, which is focused on liquidity and interest rates. The pandemic requires more careful targeting. That is because the negative impact is skewed toward service sectors such as travel, restaurants and entertainment and workers in these areas – while other areas such as cloud services, supermarkets and other industries benefit. Policies should be directed more specifically, including areas that lead to reform and I think that is important. This is not just our Japanese experience and our White Paper seeks to highlight how the pandemic provides opportunities that address important local as well as global issues through a careful, targeted approach.
Our firm has spent many years facilitating East Asian integration and trade and investment development for Japanese and other clients as well as other efforts in Southeast Asia to develop special economic zones and effective energy and infrastructure policies and planning. How do you view the importance and potential of Southeast Asia, both as an emerging market for goods and services and as a production platform and link within the global supply chain? What advice can you give to firms and investors with an interest in this market?
Let me explain one interesting initiative METI is launching, called Asian Digital Transformation. Japan has long had good relations with its Asian neighbors. Many of these countries are undergoing very rapid deployment of digitalization and the societal and economic effects are enormous. Given they are starting from a lower base, in some cases the change is more rapid than what is occurring in Japan. This provides interesting economic opportunities as well as a catalyst for change in our own economy.
For example, Japanese companies and people can learn by interacting with our Asian neighbors. In the case of contact tracing, Southeast Asian government’s developed digital applications in cooperation with private companies and we can learn and facilitate these efforts by utilizing our networks and resources. This includes developing policies and guidelines that facilitate business activity and investment, regional development and integration, connecting Japanese funds, technologies and networks to encourage innovation and business activity within Southeast Asia. This is important, not just for their development but also for ours.
Since the end of the Second World War, the world has been guided by Bretton Woods institutions and a system that encouraged global coordination and led to free trade and prosperity. Over time it also led to the economic rise of nations who are now demanding a greater say. Modern technology, and the shift toward globalization, also introduced efficiencies and wealth – but resulted in more inequality, disparities, and concerns.
As a result, we are now experiencing a serious backlash and retreat from multilateralism toward more nationalist governments at a time when serious global problems, including the pandemic, climate change, technological standards, and other important issues that require a coordinated approach. What is your view of this problem and what steps can be taken to encourage global cooperation and to transform global institutions and systems to help guide us for the next 70+ years?
While the world is more connected than ever before, we are now facing a tough time when it comes to multilateralism. Last year marked the 75th anniversary of the post-war Bretton Woods agreements and divisive forces including growing distrust in international organizations, US withdrawal from the WHO, and Brexit, which are representative of a few of the many barriers that divide us. Nevertheless, improved global governance and cooperation is essential – with the pandemic being one of many issues we face – that does not respect national borders and requires a coordinated multilateral approach. It is also necessary to cope with other issues including inequality and vulnerable populations, food security and climate issues to name a few. I think Japan can help in that regard and we have been supporting the development of regional and bilateral trade agreements, and rules-based policies, not only in Asia but also in Europe, the US and other countries around the world.
This is not just about trade. Japan actively promotes global health at the United Nations, and while we realize it is a tough time for multilateralism we are determined not to give up and abandon it. With cooperation we can do a lot. For example, during the onset of the pandemic the US Federal Reserve provided liquidity to many countries with the support of the Bank of Japan other central banks and this helped to stabilize the markets. Without that cooperation the economic effects would have been far worse. Continuing cooperation now that the immediate panic has passed – to devise longer-term structures and solutions – is difficult though extremely important. We must recognize the world is far more integrated and bound than it was 75 years ago, and the role and importance of multilateralism is more important than ever before. In spite of the difficulties, however, I remain optimistic that we will find a way to deal with these pressures moving forward.
There is substantial potential for US and Japanese cooperation to strengthen supply chain resilience and to enter into other arrangements both between our governments and individual companies that allow closer cooperation, policy dialogue and innovation as well as profitable business arrangements and investments. How do you view the potential for US-Japanese government and private-sector cooperation? What areas are most suitable both globally as well as within third countries and the US and Japan?
The US is our friend and ally. We share many values including democracy, liberty, freedom and dedication to a market economy, so I think our foundation is very strong and there is so much potential. Energy for example is one area worth highlighting. For example, there is already a program that has been developed called the Japan-US Strategic Energy Partnership (JUSEP), which provides cooperation to develop third-country infrastructure development. This has produced tangible developments including the Mekong Power Partnership, and in Vietnam, US and Japanese companies are working together on several sites that have been selected for development.
Another potential area of cooperation is in Latin America. We have not really explored this sufficiently, either as a market or a sourcing platform. In Brazil for example, Japanese and US companies are working together on digital infrastructure with Brazilian telecom companies. We also envision cooperation in Africa. This is a vast and challenging market with favorable demographics, which has huge potential both in terms of natural resources, supply chain management and growing consumer demand. US and Japanese companies have complementary characteristics. For example, US companies’ have knowledge and networking power in the region, while Japanese companies can provide strong manufacturing capabilities. As a result, this is a market where the US and Japan can work together.
India is also a major emerging economy. It is now hindered by the coronavirus – though over 200 Japanese companies have created investment plans which we think will go into effect as the danger recedes. There are so many opportunities there and in other developing countries around the world. This is a topic we address in the White Paper I mentioned. These are young markets, with favorable demographics, a range of resources, and substantial growth before them for decades to come.
The Japanese and US governments are also working together to develop guidelines and policies to set up global rules to deal with trade-distorting practices in third countries. These include subsidies to boost sectors that are not always the most efficient, such as non-market-oriented policies and practices that lead to severe overcapacity. One success we had in a recent trilateral trade ministers (EU, Japan and US) meeting was a proposal to strengthen rules concerning industrial subsidies and a basic structure for cooperation has pretty much been developed to address forced technology transfer and other important issues. This activity will be expanded over time between our nations. The trilateral group cooperate on WTO reforms and to multilateralize the proposals.
For many years in our research, we have separated international investment and business activities by those that focus on production and supply to third countries and those that emphasize consumption and demand. What opportunities and investment themes do you think are most important for foreign companies in the new environment that is emerging in Asia around the world? What regions are most important and what should US and other companies understand when considering long-term opportunities and expansion plans outside their own economies, particularly in the developing world?
The developing world is extremely attractive and there are many growth opportunities as their living standards rise, creating strong demand and consumption within a young, rapidly expanding middle class. At the same time, one also should look at developed countries such as Japan. While growth rates may be low, developed countries are large and established. They also lead in technological and supply chain reconfiguration, as well as many other trends that are rapidly changing life and society all over the world.
In Japan itself, we have been transforming our economy over the past few decades without a lot of attention and there are many opportunities here. Much can be learned from our achievements. One strength that is rarely noticed is that female participation in the Japanese economy has been rising to unprecedented levels. In many ways, it exceeds that of the US. For example, according to OECD, Japan’s female labor force participation rate was 72.6 percent, and that of the US was 68.9 percent in 2019.
In addition to investment, these developments have important societal and political implications. In Japan, for example, we can contribute to the discussion of how to adapt to an aging society including healthcare and related issues. This provides many opportunities for US and foreign firms, both within Japan as well as in adopting our approaches within their own economies. Another issue is payment systems. Japan aims to double the digital payment rate until 2025. When the additional consumption tax was introduced last October, METI devised a digital rebate program to offset the impact and promote cashless payments.
Although the rebate program ended this June, more people are now willing to use electric payments. We also lag in other industries and the development of important services. This is a real opportunity for US and foreign companies who have expertise in disruptive new services utilizing digital technology and an interest in introducing them to Japan.
Japan was an early leader on the climate change issue, organizing the Kyoto Protocol meetings which ultimately led to the 2015 Paris Agreement that seek to keep increases in global average temperature to well below 2 °C above pre-industrial levels. While international coordination has been difficult, particularly after the 2017 US withdrawal under President Trump, the pandemic has actually at least temporarily caused a global reduction of carbon emissions. There is also more emphasis on renewable energy and some advocate shifting more toward nuclear as a clean energy source. What is the potential effect of the pandemic on climate change discussions?
The pandemic has shown how many challenges remain in terms of climate change and other complicated global issues. While there have been short term benefits as industrial activities recede and production is suspended, over time this will come back if we do not develop long term solutions.
I think the pandemic has made it clear and allowed us to recognize how vulnerable global society is if we do not pay attention and react carefully in a coordinated way. We cannot simply deny the existence of problems and develop piecemeal solutions. In many ways the challenges of addressing the spread of the virus and climate change are the same – though the virus is occurring at a faster rate – so it is more visible and showcases the issue. These are global challenges and to effectively contain, resolve and manage these problems – in an age where we are so connected through supply chains, travel and technology – we need a global and coordinated approach.
In that sense, while the spread of the pandemic has been a real tragedy, we hope that ultimately it will serve as a positive influence serving as a catalyst for stronger international cooperation not only on climate change but the whole range of important issues we face today.
Thank you, Mr. Tashiro, for your time and attention. Look forward to speaking again soon!
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Keith Rabin serves as President at KWR International, Inc., a global consulting firm specializing in international market entry; trade, business, investment and economic development; site location, as well as research and public relations/ public affairs services for a wide range of corporate and government clients.