 I'm Jay Fidel. This is Global Connections. And we're asking, how serious is the decline of Japan's economy? And how does that decline affect the region? With Carl Baker, the handsome young man on the screen with me, welcome to the show, Carl. But to be back, Jay, it's always nice to hear people say that I'm looking young. I try. So, Carl Baker is a senior advisor to Pacific Forum. We're going to talk today about one of his favorite topics, that is the economies of Asia, Indo-Pacific. And we're going to find out what is the problem in Japan and how serious is it and how is it going to affect not only Japan, but the other countries that are reaching it. This is very important. We can't get tied up in things happening in Europe or, for that matter, domestic things. We have to keep our eyes peeled on all parts of the world. And Carl could help us do that. Welcome, Carl. And can you tell us what the problem is in Japan? Well, the problem is, of course, that Japan is shrinking in terms of population and the economy is sort of shrinking along with it. But having said that, I think we need to remember that just last week, the Nikkei is reaching all-time highs. And so it's back. The stock market is back. The economy isn't necessarily there. But the stock market is certainly showing a lot of signs of strength. And so I think it's kind of a mixed bag of what's happening. The yen is incredibly weak. It's 150 yen to the dollar these days, which just not that long ago, we were complaining about it going under parity, got down to what, the low 90s. And so the yen is weak, which means there's people that see the Japanese market as an investable market. William Warren Buffett put big money in during the pandemic. He saw that as an opportunity. And clearly foreign investors are the ones that are pushing that market up. So they either know something or they're getting sucked into a market that's going to disappoint. Well, you mentioned that the Nikkei going up, but so is the American stock market. And I have one believe that we have a lot of trouble here in this country. And it's not only economic trouble, it's political and social trouble. We have a lot of poor people who are impoverished and homeless for that matter. We have a lot of discomfort and disruption in the country and a lot of political aggravation in the country. But the market goes up. And after a while, you got to say what you said is, gee, nice that it went up, but this isn't real. And the question is, is that a parallel in Japan with the Nikkei? Is it going up? But is it real? Yeah. And it's a fair question. That's what I tried to say. The market is going up. The population is going down. The strength of the economy doesn't seem to be there to justify what's happening. But having said that, there's some positives in Japan, I think. There's a big, as we move away from, or as we de-risk from China in the words of the economists, Japan becomes an attractive spot to invest in semiconductors in creating semiconductor fabrication plants. It has a place in the electronics industry that is trying to reclaim from the good old days when Japan led the electronics market. Some of us remember that in the 70s and 80s when you had to have that stereo from Japan. And so they're trying to make a playback into the electronics market. They're trying to do reform ever since Abe with his structural reform and fiscal monetary reforms. They're trying. And Prime Minister Koshida is back trying to do structural reform one more time. There's some positive signs in Japan. They just fell. The GDP, they're roughly, what, 4.2 million, or 4.2 trillion, I should say, fell to the fourth place behind Germany just last year. But it's still a big economy. It's still the fourth largest economy. And they're still producing goods. They're still producing cars. They're a little bit behind in the EV market. But what seems to be happening now is Toyota's hybrid approach seems to be working at least in the United States where people are moving more toward a hybrid car than an EV. So there's signs that it is coming back a little bit in the traditional areas where Japan has Excel, most specifically automobiles and the electronics industry. So I think there's positive signs, but you've still got a lot of weakness just from the population decline. Let's talk about that. Let's talk about the bell curve. When I first started looking at this just 20 years ago, the concern was the bell curve was upside down. And they were not having, they were not getting married. The Japanese weren't getting married. They were enjoying themselves. Young people were enjoying themselves. They had a lot to do, a lot of excitement, a lot of creature comforts and consumer attractions. And so there weren't as many kids. And since the Japanese do things together, they're a culture that does things together. Everybody got on that bandwagon. Nobody got married. Nobody had kids. And the bell curve was upside down. And when you have a bell curve problem like that, ultimately in the future, you're going to suffer for it because you don't have new people, new entrants into the workforce and the pipeline and so forth. Goldman Sachs, and I think I told you about this, Goldman Sachs says, and Goldman Sachs is big in Japan. And I remember the Goldman Sachs handover the transaction where a Japanese investment company bought Alamoana Center for lots of money. Goldman Sachs was there representing that Japanese company. And they are international, of course, but they're big in Japan. Goldman Sachs said that Japan was likely to drop out of the top five, you say, the top four right now, drop out of the top five economies by 2050, which is something over 20 years from now, and out of the top 10 by 2075. I frankly do not know how Goldman Sachs could make projections that far out. But that's what Goldman Sachs said. Your comment? Yeah. Well, again, I realize and I understand that Japan is losing the share on the GDP because it is a shrinking society. And India is certainly going to probably surpass it fairly soon. They're just making what they're at three and three something trillion now. So you have to believe that India is probably nipping at their heels to take over that fourth spot. But again, Japan is trying. They finally started importing some laborers, more so now than they had in the past. So they're up to a couple million. It's not a lot, but they probably are ahead of that curve when you look at Korea, Taiwan. They still have a 1.4 repopulation rate or birth rate, which is better again than Korea and Taiwan and even better than China these days. So Japan is, yes, they've had their problems. They've had their problems for, I should say, 20 years. Yes, they made a lot of bad real estate investments in the United States in the peak of the 1990s. We all remember those days when Japan was buying trophy real estate and buying up neighborhoods at a time on the residential markets. So, yes, they've hurt themselves. They've been punished for about 20 years, but they act like they're making some progress. And when you compare it with the other Asian societies, and I think that's where we have to look, compared to China, compared to Korea, they're showing some signs of life. They're not out for the count, I don't think. They're trying to do corporate reform. They're trying to change that corporate culture of lack of innovation, of 12-hour work days and not a lot of productivity in that 12 hours. They're trying to push innovation. They're trying to push hybrid work where people are incentivized to do production rather than just sit in the office. So, I think I see some real hope for Japan that they may be post-modern society where some of the rest of us are still going into that post-modern where we start losing productivity, where we struggle with population decline and all that. I think maybe Japan is seeing the other side. It's not as rosy as you might like it to be, but I think they're starting to see the other side beyond that inverted bell. I'd like to examine the cultural connection. It certainly raised such a good point about how the Japanese came to Hawaii, for example. And they would come in groups, and the groups would have this kind of consensus decision process. But they all sat around in a meeting and when they were finished with one meeting, they would have a second meeting and a third meeting altogether now, on and on and on. And then they would make a decision to buy something at way more than the true value or the appraised value. They would buy, as you say, for a trophy. And you said to yourself, gee whiz, they're spending a lot of money in an investment which may not be as certain as it looks to them. And if they keep on doing that, it's not sustainable. And if they keep on doing that in Hawaii or the mainland or elsewhere, they're going to be spending too much. They're going to be hurting themselves. This is a flawed decision process about how they invest. And wouldn't you say that this is somehow responsible for the problems that I have seen in my reading on this, asset deflation, liquidity trap, high inflation, low wage growth, and a delayed recovery following the pandemic. In other words, this is a flaw in the way their system works, their corporate decision process works, and it has had effect in various components of their economy. And query first, do you agree with all of that? And second, is this something, this is structural, is this something that can be, is being corrected? When you say the market's going up and they're looking better in certain ways, is it because these things are being corrected? Or do we still have these flaws? The answer is yes to both. I mean, I think there is some recognition that things need to be fixed. For example, the immigration policies are slowly changed. Foreigners are slowly being recognized as vital to this recovery. And so I think that in that sense, there's hope. But yes, they still suffer from that cultural decision-making process that is very cumbersome, very consensus-oriented, and they're still the mindset of you have to be in the office longer than the boss. And the whole employment for a lifetime is still there. And so that ultimately is a problem that's recognized, and they're working. Remember, Abe managed to do financial fiscal and monetary policy, but he never quite got to structural reform. And now Qashid is kind of in the same place. His popularity is pretty low. It's in the 20s. And he's saying, I'm going to do structural reform. And really, it comes down to, can the government actually push structural reform beyond just words on paper? And that's where the struggle comes. As you say, the Japanese tend to be very comfortable inside their cocoon called Japan. My good friend, Brad Wasserman, wrote the book Peak Japan. And that was part of the criticism that he leveled against them is that you're comfortable in this society that doesn't really look at itself very critically sometimes. And I think that that's where they're at. But again, I see these sort of glimmers of reconstruction, if you will, of the electronics industry driven partly by the derisking that's going on in China. Japan becomes a pretty attractive place when you look at it. It's got the infrastructure to redevelop the electronics industry. And so I think that there's some hope. They're trying to reform some of their retirement systems. The old postal savings account system is sort of going by the wayside where they're trying to be more focused on a more dynamic kind of retirement system for people. So I think there's at least a recognition that there's a need to change. Now, the question is, can they actually execute it? Can they actually convince the Japanese themselves to change the system? And I think the migrant workers are going to force some of that. And there's probably going to be a backlash against these migrant workers, much like there is in the rest of the world. But at least they're recognizing that a pure Japan is not sustainable and that you need to think about innovation and you need to think about bringing in workers who don't necessarily follow some of those old norms that they have for the past century. Yeah, let me break that down into two questions that come to my mind. One is that we know in the 21st century that leaders, however they got to be leaders, are more powerful. Autocrats are certainly more powerful and seem to be more autocrats these days. And we have in the United States, the president, whether he's a budding autocrat like Trump or Joe Biden, they're more powerful. They've got more to do. People surround people, meaning the whole electorate, the whole base of people seem to surrender more power, expect more of them, and give them more power to do stuff. And I would imagine that's the way it is in Japan too. Now, some of the criticism that I've seen or the fault that I've seen in reading on this is that people in Japan and outside too lay the blame for this recession, this stagnation, if you will, what do they call it? The lost decade. And that means the decade ending now, but it could go forward for more decades, at the feet of the leaders. And I think you intimated that in your remarks a minute ago, that yes, people may recognize it. They're reading, writing, thinking, but it takes a leader to develop and execute a plan to correct things. And that would be the same in every country in the world. You need the leader, and since a leader is more powerful, the fault or the credit, as it were, is on the leaders. I haven't followed who's the leader of Japan for the past 10 years, but the implication is that the leaders of Japan are really not well-selected, not well-fitted, to be leaders in an economy that needs work. Well, I mean, the Liberal Democratic Party has really sort of regained complete control of the political system in Japan. There was a time when there was an opposition that was meaningful, and Kameito, and the DPP, they were there. They've sort of fallen by the wayside, over really since Abe came back. And Kishida is really sort of a disciple of Abe in many ways, that there's elements in the LDP that are in opposition, but not in a meaningful way. It's still strongly LDP. It's still largely a single-party political system. And I don't see a lot of interest in changing that right now. I think that there's really not much opposition to Kishida. That's why he can stay in power with 20 percent approval rating. There doesn't really seem to be any impetus within the legislation, legislative branch, to change the leadership. So, yeah, I think political leadership has been a problem and will be a problem. There's a really fine line that they have to walk on history, on trying to establish relations with the rest of Asia. They still struggle with the Korean relationship. It's better than it was mostly from the South Korean side. The Japanese are still sort of the recipients of a lot of hostility in China, of course. And even South Korea, while it's moving toward better defense cooperation in the face of a threatening North Korea and certainly of a growing China, that there's a better defense relationship between South Korea and Japan. And there certainly is strong economic ties between Korea and Japan because Korea continues to take advantage of its strength, its economic strength, these in Japan. So I think that, yes, there is a problem with political leadership, but again, it's a small process in trying to implement economic reform in that system. And so the fact that Kishida is still talking about structural reform should be encouraging. Even though it's been a real tough slog trying to implement those kinds of changes in the retirement system, in the whole approach to innovation and things like that. You know, talk about new entrants in terms of migration and immigration into Japan, acceptance of new members of the labor force and the community. I think Japan has a problem with that. If you look at Singapore, for example, Singapore will say one day, we need a million more people for our workforce. And they will open this bigot. And next thing you know is there's another million people from a half a dozen countries feeding into their workforce, and they have systems to provide housing and jobs on day one. This is really like, you know, continuing miracle in Singapore. They're really smart. They're really clever. And they understand that an economy is based on new entrants into the workforce and the consumer force, if you will. So it works in Singapore. But in Japan, it's hard to get a permanent residence. It's hard to hold joint citizenship between the U.S. and Japan. You can't do it. And that's the U.S.'s fault as well. I know a guy who married a Japanese woman, was so infatuated with the culture that he went to Japan and took out Japanese citizenship, thus losing his American citizenship. And he went into a restaurant and it had a little sign at the front window and said, only Japanese involved. And they threw him out. And then he said, wait a minute. I am a Japanese citizen legally just as much as anyone in this place. And they said, nah, nah, don't give us that. You're not Japanese. He sued. And ultimately, he went up to the Supreme Court of Japan and he got a very mixed bag result. But he had lost his American citizenship and he was stuck with his Netherland of being a Japanese citizen, but not a Japanese. So this kind of resistance toward new entrants, resistance toward migration, this also requires structural reform. And until they get that straight, I mean, it's great to have this kind of homogeneous population, but it doesn't work economically. And until they get that straightened out, I think they're going to be stuck. Do you agree? Yeah, sure. I mean, it's absolutely a problem. I mean, you have heard stories that in rural Japan, you can basically buy a house for a song if you're willing to live in one of those little dying communities that doesn't have much commerce anymore and has houses that are just derelict houses sitting there waiting for somebody to take ownership because you can't rent them out and the family doesn't even want to deal with the taxes anymore. So yeah, I mean, rural Japan is like that. But go to Tokyo, and as you say, it's a vibrant, exciting city that has an incredible amount of infrastructure and the efficiencies are amazing when you look at what you can do in Tokyo. And that becomes a problem because you've got the cities and then you've got rural areas where nobody really wants to live. Nobody wants to maintain that livestock. So immigrants are important. And it's becoming more and more apparent, I think, that you need to do that. And so yes, it is part of the structure. That's right. And they need to make it easier to come. But the deflation of the yen seems to me that an American tourist has a huge advantage. And an American investor has a huge advantage. And if you are so inclined to find a little rural town somewhere and you're charmed, and it is charming for sure, in a great number of places in Japan and outside of Tokyo, you would do well. You would get a bargain for that house, a real, real bargain. And you can live cheaply. Only thing is that after a while, they'll throw you out. After a while, you still aren't Japanese. So I wanted to cover one other thing with you, Carl. And that is, so you have a kind of, I don't want to call it a domino effect, but you have Japan, which was for many, many years after the war. It was a spectacular miracle what happened after MacArthur and all that, how the economy soared to the heavens and was providing products for the world that nobody could resist. First quality, everything, first quality. Cars, electronics, name it. Maybe not quite the case now. And other countries are catching up. China is doing a lot of EVs. China is doing better electronics than it was before, and on and on. But so the question I put to you is, how does Japan's decline? And whether Goldman Sachs is right or not, we know there's at least the possibility of a long-term decline here. At least there's a decline right now. There's a measurable decline right now, a lost decade. How does that affect, A, Japan's relationships with other countries in Asia and its position in the world as a call it an economic beacon? I mean, I think it's still there. I think Japan is a very developed economy. It certainly has a high-end infrastructure in place that can sustain a information age society. It still is very active in Southeast Asia and the Middle East. When you go to Southeast Asia, the one thing you always get from the Southeast Asians is that Japan has been a constant threat, that they have done incredible amount of infrastructure development in terms of maritime security, in terms of economic development. The gold standard is still Japan in terms of infrastructure investment. They go to China because China has the Belt and Road, and they are trying to emulate Japan in some ways. But the fact is that in Southeast Asia, they still see Japan as the best economic partner. I'll say that. And of course, the United States has always struggled with infrastructure development and infrastructure investment. So Japan is still viewed very much as a positive. Now, having said that, you also have a lot of competition in Korea, China, Taiwan, and increasingly in Southeast Asia for the electronics market. That's something that I think Japan has lost permanently. But again, the cars still a lot of Southeast Asia drive Japanese cars. And clearly, they're in competition with the Koreans and the Chinese, especially China's EV vehicles are moving in fast. But I think that Japan still has a very good reputation in the rest of Asia. But yes, it is losing its market attractiveness. And how de-risking from China plays into that is not as we shouldn't dismiss it, I think. But that's something that Japan is seen as a very attractive alternative for some of the high-end investment. And again, it's another one of those structural reforms that Japan needs to pursue is foreign direct investment, that they really need to rethink how they approach foreign direct investment in semiconductor fab plants and computer software. All those things are available in Japan. They've got the educational capacity to really develop those industries. So Japan is still there. Japan is going to be there as a high-end economy. And it still is attractive to Southeast Asia. There's a lot of Southeast Asians that go to school in Japan. And again, it's all a matter of learning how to accept foreigners as a vibrant part of your economy, much like Singapore has. Although I'll make the comment on Singapore that just in today's paper, I saw that Singapore is once again raising the minimum wage for foreign workers because there's this increasing backlash in Singapore about the number of foreign workers. And so it's not all roses in that part of the world either. Well, there's one other area I wanted to cover with you. And that's, of course, rather economics affect the image of the country. And Japan's image is good culturally and ethically. You want to make a deal with a Japanese company. It's going to be reliable. They're going to follow through with the deal. They're not going to play with you. And that is unique and important to know that Japan is like that. And it offers a business environment that is worthy and really, really attractive. And we saw that here in Hawaii. They make a deal. They follow through. Good. As I say, there's two kinds of people in the world, two kinds of nations in the world. One is to follow through nations and the other is the others. Anyway, so that all feeds into geopolitics. If we look at this whole patchwork of countries in Asia, your specialty, really, and for that matter, Indo-Pacific and Central Asia, although they don't really play on the same field, this changes the calculus. If Japan is seen as a power that has declined, and it's not clear, but could decline further. We don't really know yet. The jury is out really in many ways. But that changes the way other countries, mostly China, for example, maybe North Korea, the way they see Japan as a player in the geopolitics, in the player of strategy, development of weapons and weapons systems, of threats, of general geopolitical strategy, like, for example, around Taiwan. So my question to you is, how does this affect Japan's role geopolitically in the region? Well, I mean, this goes back centuries where Japan has tried to play west versus east, and it wants to be the best partner to the west. And I think that this is what's happening today, is Japan very much recognizes its decline, and it has worked very hard to maintain a strong relationship with the United States, because it sees United States as its ultimate security partner in the face of a growing China threat, military threat, what Japan sees as a military threat. And certainly in the context of Korea, it sees the threat from North Korea, the military threat from North Korea with its missile development and all that, that I think Japan very much sees itself as tied to the presence of the United States in the region. And that's why I think Japan is so concerned about maintaining that relationship with the defense relationship with the United States. And again, this is another area that there is some glimmer that Japan is beginning to recognize that it really does need to develop a defensive. And so this is something new, based on Article 9 of the Constitution, which says that they can't develop that kind of industry, where that's changing now, that they have decided that they really can export weapons systems. And so that's becoming another part of the potential economy that's developing in Japan is a defense industry and a defense industry complex that would be important to a revived Japanese economy. So the geopolitics of it is that Japan sees itself very much tied to the United States. That's one area that is working very hard with South Korea to develop a better relationship with the South based on their common military interests. And that's always been the strongest area, I think, for Japan and South Korea to work on is a better military relationship. The economies are quite integrated actually, where the military has sort of struggled to maintain or to keep up with the economic side. So I think that it plays geopolitics, but I think there Japanese certainly recognize that they are in a weaker position than they would like to be. And therefore, they have always tried to maintain that appearance of a very strong relationship with the United States and very supportive of the United States in both Southeast Asia as well as through the Quad with the Indians, the Australians, the Japanese and the Americans. So I think that's really how I think Japan sees itself as sustaining in the strategic environment is through its relationship with the United States. Well, that takes me to my last question, which is I recall that Japan is building, aside from a military defense industry, it's building its military. It's building ships and I don't know what else. And certainly it has the infrastructure and the engineering to do that. And then you wonder exactly what the United States commitment is to help Japan. So we give money, weapons, what not, to so many countries for so many reasons in terms of geopolitics. Are we, should we be, what is our future role with Japan in terms of providing defense, of having mutual defense agreements and of supporting them in new ways? What should the U.S. do going forward with Japan? Well, I think the United States should do exactly what it's doing with Japan, which is maintaining a strong defense relationship. And that reminds me, we talk about, there's a huge military presence in Japan, of course, and Japan foots a big part of that bill. So they are basically paying the United States a lot of money to maintain a fairly robust force structure in that country. When you look at Yokosuka, Japan, Masawa, Kadena, Yokota air bases, those are huge bases and almost everything being developed on those bases is being developed through Japanese money. So it would be almost impossible, I think, for the United States to maintain its presence in Asia without the help of the Japanese. So to be clear, the defense relationship is very much skewed in America's favor when it comes to the relationship with Japan. The United States is not giving away weapons systems to Japan. Japan pays, they collaborate with their research and development. So I think the short answer is, I think the United States is in a very good position in its defense relationship with Japan. And it's because Japan has been very, very willing to support American efforts to maintain that military presence and that military force. Yeah, everybody loves Japan. The U.S. loves Japan. It's really interesting how that has flowered out since the war and everyone you talk to has gone there, wants to go there, is always attracted to it, including me. And you spend plenty of time in Asia and in Japan. I lived in Japan for seven years in the military. Carl, thank you very much for this discussion. I really feel it's helpful to understand how things are doing, how our relationship with Japan is doing, and what the role of Japan is in the Indo-Pacific. Thank you so much, Carl. Carl Banger, Senior Advisor at the Pacific Farm, Aloha.