IT would be a mistake to think Japan’s influence on the world was in terminal decline, according to respected Australian diplomat John McCarthy

The American-born outgoing Australian Ambassador to Japan told a WA Business News Meet the Ambassadors breakfast last week that, although the Asian giant would never regain its “powerhouse” status of the 1960s and 1970s, it would remain an important economic factor in the region and the world.

Japan’s political and financial leaders have been criticised in recent years for a failure to adequately address the decline in real GDP growth.

At the same time its near neighbour, China, is experiencing rapid economic growth, so much so that it threatens to pass the Japanese economy.

Nevertheless, Mr McCarthy said he believed the Japanese economy – which is the world’s second largest, at approximately $US4.3 trillion – was getting “leaner and fitter”.

“A generation hence [Japan’s economy] will be the size of Germany, Britain and a couple of the smaller European economies combined,” Mr McCarthy said.

He said it was important for Australia not to lose sight of where it counted with Japan – in the resources sector and regional security – as the fulcrum of diplomatic and political activity would shift from the Atlantic to the Pacific.

In the short term, he said, continuation of the decade-long reform process was important.

And while Mr McCarthy pointed to areas of competent and rapid reform – led by manufacturers and exporters such as Sony, Canon and Toyota, since the mid 1990s – he said it was generally accepted that the key service sectors of retail, construction, agriculture, and finance had been slower to respond.

The targets for reforming part of the banking sector were being met, however.

Another area that required special attention was the “inefficient machinery of government”, which affected the performance of the economy as a whole.

Mr McCarthy highlighted Japan’s hugely important highway system, as well as its giant post office, as two sectors that significantly affected the economy.

Huge sums of money had been “wasted” on the colossal highway system, while unlocking about $US5 trillion in assets from the control of the post office’s banking and insurance arms.

“The importance of reforming the post office is to permit the more efficient use of the funds that are in this system to the benefit of the economy,” Mr McCarthy said.

“Something has been done to put that process in place; slower than one would like, but it is still happening.”

In the longer term Mr McCarthy identified a declining population, low productivity levels and regional security as three potential issues needing to be addressed.

He expected productivity would begin to creep up as the process of reform proceeded.

“Japan is a highly imaginative country with a very high degree of technical expertise. It is a country that has enormous potential to develop once the reform process is some way down the track,” Mr McCarthy said.

One of the most crucial issues Japan was grappling with was population decline. Japan’s popu-lation will decrease from 127 million now to 100 million in 2050.

Mr McCarthy said this would have profound implications on health and aged care, productivity, social attitudes, particularly gender relations, and immigration.

He said the Japanese were very proud of their “extraordinary” society, however increasing immigration and the changing role of “their hidden asset”, women, are seen as big social issues.

The economic emergence of China and India was dominating Japanese thinking and diplomacy.

Mr McCarthy estimated China’s economy to overtake that of Japan in 15 to 20 years’ time and, sometime not too long after that, India’s would follow.

In addition to the economic issues – China is Japan’s biggest trading partner – the shift also had serious regional security ramifications for Japan, Mr McCarthy told the breakfast audience.

REFORM FOCUS

• Economic reform has been led strongly by the big exporters/manufacturers.
• Reform in the public and  the services sectors has been slow.
• Japan takes Australia very seriously on resources and security.
• Japan’s declining population will have profound implications for the country.
• Reform is vital for the post office and highway systems.
• Banking sector targets are being met. 

Many challenges ahead for Japan

HOW Japan deals with its predicted population decline is one of the biggest issues facing the country, according to John McCarthy.

The outgoing Ambassador to Japan said although Japan’s economy was getting leaner and fitter it faced huge problems down the track, particularly as a result of its population decline.

Japan’s population will decrease from 127 million now to 100 million in 2050, considerably altering the size of the workforce relative to the size of the population.

Mr McCarthy said the issue already was beginning to affect the number of hours worked and, further out, had implications for health and aged care, as well as productivity.

How Japan copes with this in the long term is of fundamental importance to Japanese society and the country’s economic future

“It can change by Japan using its hidden assets – that is women,” Mr McCarthy said.

“This is beginning to happen, but it still has a long way to go and depends not only on what the government does in terms of spending money to enable women to go into the workforce.”

He said a significant change in social attitudes was required.

Immigration was another challenge facing the Japanese.

Although there’s a significant amount of illegal immigration, mainly from China and Korea, the Japanese are uncomfortable with the concept of immigration.

“There is real concern in Japan if they begin to allow immigration it will change the nature of this extraordinary society of which, justifiably, they are very proud,” Mr McCarthy said.

To keep the population stable would require an immigration rate of about 500,000 a year.

Right now that is not acceptable to the Japanese, but Mr McCarthy said change was taking place among some business leaders and government on the issue.