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Is China Unintentionally Rekindling Japan’s Great Power Ambitions?

Is Japan flirting with a triple dip? Japan’s economy contracted sharply at 3.5 percent on an annual basis last quarter, leading many to believe that the world’s third largest (and second most sophisticated) economy is headed for its third recession since 2008. A recession is conventionally defined as back to back quarters of decline in GDP. If GDP falls again next quarter, Japan will officially be in recession. Bloomberg reports:

Today’s data showed that Japan’s economy is approaching its smallest size since at least 1993, with nominal GDP recording its third-lowest level since the current data series began.

The world’s third-largest economy will probably shrink at an annual pace of 0.4 percent this quarter, according to the median forecast of 24 economists surveyed by Bloomberg News. That would be the third technical recession since 2008. Japanese recessions are officially defined by a government-charged panel that considers data beyond GDP figures.

The news is already adding to the gloom on world markets as investors think about Europe’s future, the U.S. fiscal cliff, and the slowdowns in the BRICs. With so much gloom and doom around already, a recession in the world’s third-largest economy is not what anybody needs.

But the long-term failures of Japan offer important lessons for the rest of us in how not to handle an economic crisis. At one time, people thought about Japan the way they now think about China, but for the past quarter century the country has been stuck on a low-growth track. A generation’s worth of Keynesian stimulus has vastly increased the country’s debt without doing much for growth. It’s not at all clear what Japan should try next: more Keynesianism? more austerity? Japan has been there, done that, and none of it has done much good.  In the meantime the anemic state of one of the world’s most important economies is one of the drags on global growth.

But China’s increasingly assertive foreign policy is, perversely, the one faint glimmer of hope for the moribund Japanese economy. Military Keynesianism, in which Japan builds up its armed forces, emerges as an aggressive exporter of arms worldwide, and pumps up its economy by large R&D budgets for military technology, could give Japan’s economy and its corporate sector a huge boost, particularly if this new military technology spurs the development of civilian high-tech companies.

Some Japanese nationalists have been promoting this idea for years. As fear of China pushes more of the public toward the nationalists, China unwittingly may not only be promoting the emergence of a dangerous military competitor but also reviving a powerful economic competitor. Certainly if China were deliberately attempting to create the rearming, reinvigorated Japan of its worst nightmares, it couldn’t do a much better job than its current mix of bluster, threats and political pressure.

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