September 201410

CSR White Paper
2014
Overview of CSR in
Japan
Turning Social
Challenges into theCompany’s
Strengths: Akebono
Brake Industry

Views on China
Recycling andEconomic Growthin China’s Interior
Closer US-China
Ties Test Abe’s“Smart Diplomacy”

Redefining Self-Defense
The Abe Cabinet’s Interpretation of Article 9

Abenomics 2014:
Expanded Content,More Uncertainty
Rethinking PersonalTax Exemptions to
Mobilize Women’s PowerMoving the ROE“Mountain”
A Framework for Capital Market ReformJapan Perspectives
Japan Perspectives is an English-language journal published by the Tokyo Foundation containing articles from the Foundation’s website. In addition to translationsof the public policy research recommendations made by the Foundation, Japan
Perspectives offers timely insights into and analyses of Japanese politics, economy,society, and culture written specifically for overseas readers.
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together the minds and skills of outstanding human resources through policy research and global leadership development projects to offer fresh perspectives thatlead to positive social change.
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Recent Articles from the Tokyo Foundation Website
No. 10, September 2014

Contents
International Affairs
Redefining Self-Defense: The Abe Cabinet’s Interpretation of Article 9 ............... 3
Masahiro Akiyama
Japan’s “Proactive Contribution to Peace”: A Mere Political Label? ................... 9
Akiko Fukushima
Ukraine: How Far Can It Go? .......................................................................... 19
Paul J. Saunders

Politics & Government
Abenomics 2014: Expanded Content, More Uncertainty ................................. 23
Katsuyuki Yakushiji

Economy & Trade
Rethinking Personal Tax Exemptions to Mobilize Women’s Power .................. 28
Shigeki Morinobu
Moving the ROE “Mountain”: A Framework for Capital Market Reform ....... 40
Keiichiro Kobayashi

CSR White Paper 2014
Overview of CSR in Japan: Ideals, Intentions and Realities at Advanced
Companies ....................................................................................................... 47
Tokyo Foundation
Turning Social Challenges into the Company’s Strengths: Akebono Brake
Industry ............................................................................................................ 62
Tokyo Foundation

Corporate Social Responsibility: Potential and Challenges ............................... 72
David J. Vogel
Toward a New Era of Global CSR by Japanese Companies ............................. 79
Toru Naito

Views on China
Recycling and Economic Growth in China’s Interior ........................................ 90
Kenji Someno
Closer US-China Ties Test Abe’s “Smart Diplomacy” ....................................... 99
Takashi Sekiyama
Economic Opportunities Outweigh Risks in China ........................................ 107
Kiyoyuki Seguchi
Toward a New Japan-Taiwan Business Alliance ............................................. 112
BaatarPartnership with Acumen
Working with Nigeria’s Change Makers: (1) Leadership Training
in New York ................................................................................................... 125
Suzuka Kobayakawa

International Affairs
September 3, 2014

Redefining Self-Defense
The Abe Cabinet’s Interpretation of Article 9
Masahiro Akiyama

Prime Minister Shinzo Abe’s efforts to expand the scope of self-defense activities permitted
by the Japanese Constitution have met with resistance from some members of his own coalition. Tokyo Foundation President and Senior Fellow Masahiro Akiyama discusses the Julycabinet decision to revise the interpretation of Article 9 and the hurdles Japan must clear
to expand the role of the Self-Defense Forces to make a proactive contribution to peace.
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ne of the most hotly debated issues in Japanese politics today—and inJapanese society as a whole—is Japan’s right to engage in collective
self-defense—the use of military force in defense of a friend or ally. Whyis there so much fuss over an inherent right that all nations are recognized as having under the United Nations Charter? The answer lies in Japan’s “pacifist” Constitution, promulgated under Allied Occupation following World War II. At issue
specifically is Article 9, which reads as follows in the official English version:
Aspiring sincerely to an international peace based on justice and order, theJapanese people forever renounce war as a sovereign right of the nation andthe threat or use of force as means of settling international disputes.
In order to accomplish the aim of the preceding paragraph, land, sea, andair forces, as well as other war potential, will never be maintained. The right ofbelligerency of the state will not be recognized.
On the face of it, this would appear to prohibit the very capacity to wage amilitary defense, whether collectively or individually. Yet in fact Japan maintains
sophisticated land, sea, and air capability in the form of the Self-Defense Forces.
Why, one might ask, are the SDF even legal under Japan’s Constitution?

Masahiro Akiyama   President and Senior Fellow, Tokyo Foundation.
3

International Affairs© JMSDF website

Practical Limits of Pacifism
In response to questions regarding the legitimacy of the SDF, legal and other experts note that the text (in Japanese) states that land, sea, and air forces will neverbe maintained for the purposes stated in the preceding paragraph—that is, as war
potential or a means of settling international disputes. The government has thus
taken the view that the Constitution does not forbid self-defense in the event of anarmed attack on the nation, noting that it would be unreasonable to interpret Article 9 as denying Japan the wherewithal to defend its own people from threats totheir peace, particularly in the light of the Preamble and Article 13, which proclaim
the “right to live in peace, liberty and the pursuit of happiness.”
On this basis, the government has stood by the fundamental position that Japan has the constitutional right tomaintain armed forces, but only theminimum necessary for self-defense.
In addition, it has followed a highly
restrictive interpretation of “the minimum necessary for self-defense” that
permitted the use of force only if thenation was under imminent “armed
attack”—meaning an organized andsustained attack by the military forcesof a foreign nation.
Over the years, the government
has sought to clarify the limits on Japan’s defense capabilities and actions under
Article 9 through statements in the Diet and legal opinions drawn up by the Cabinet Legislation Bureau. In terms of weapons capability, the “minimum necessary
for self-defense” ruled out predominantly offensive systems, such as long-range
missiles and strategic bombers and assault aircraft carriers. In terms of operations,the overseas deployment of SDF troops has been prohibited, the SDF’s use of weapons strictly limited, and great care taken to avoid any form of security cooperationthat could give the appearance of integral involvement in the use of force by another country.
In addition, the government’s interpretation of Article 9 had been that althoughengaging in collective self-defense was prohibited, Japan nonetheless had an inherent right to do so. Succeeding cabinets have adhered to this admittedly rather abstruse argument, originally formulated by the Cabinet Legislation Bureau.

4International Affairs
Seeds of Change
Meanwhile, the regional and global security environment was changing dramatically, fueling concerns that Japan was losing the ability respond effectively tothe exigencies of regional and global security under the existing interpretation of
Article 9.
Prime Minister Abe took preliminary steps during his first term in office toward
the lifting of the ban on collective self-defense, along with other constraints on
defense operations that he considered outdated. In 2007, Abe formed the Advisory
Panel on Reconstruction of the Legal Basis for Security from a group of likeminded experts. The panel was charged with deliberating the legitimacy of military
action in four basic hypothetical cases—scenarios that in themselves shed considerable light on the evolving international situation. They were (1) defense of US
naval vessels on the high seas; (2) interception of ballistic missiles that might beheading toward the United States; (3) use of weapons in international peacekeeping
operations; and (4) logistic support for the operations of other countries in international peacekeeping operations by the United Nations, etc.
In its report, issued in June 2008, the panel concluded that the government
should revise its interpretation of the Constitution to permit Japan to exercise theright of collective self-defense (the first and second cases above) and participate inpeacekeeping operations categorized as collective security measures under UN auspices (third and fourth cases) and recommended that it introduce new legislation
to permit action in all four cases. By that time, however, Abe had stepped down forreasons of health. His successor, Yasuo Fukuda, chose not to act on the recommendations, and the issue lay dormant until Abe returned to power in December 2012.
Resuming the Crusade
In February 2013, two months after his return, Abe reconvened the Advisory Panelon Reconstruction of the Legal Basis for Security.
The panel’s final report, released in May 2014, stresses the dramatic and ongoing changes in defense technology and Japan’s security environment. It reiterates
the conclusion of the 2008 report that it has “become difficult to respond appropriately to important issues that arise under the contemporary security environment” under the existing interpretation of Article 9.
However, the latest recommendations go beyond the four cases set forth in the2008 report, extending to situations involving the protection of Japanese nationals

5International Affairs
overseas, cooperation in international policing, and response to security incidents
or situations that fall short of a full-scale armed attack.
On July 1, 2014, the Abe government took the next step by announcing andexplaining its intent to pursue executive and legislative action based on the panel’s
recommendations in a resolution titled “Cabinet Decision on Development of
Seamless Security Legislation to Ensure Japan’s Survival and Protect its People.”
The title makes no reference to “collective self-defense” per se, nor does the text
itself highlight the concept. One reason is that the decision pertains more broadly
to the optimization of SDF operations, but another is that the concept of collective
self-defense has become a lightning rod for opposition, not only among the generalpublic but also within the New Komeito Party, the junior partner in the coalition
led by Abe’s Liberal Democratic Party. As we shall see, the cabinet’s new interpretation neatly skirts the issue of the legality of collective self-defense under Article 9.
The July 2014 cabinet decision sets forth the government’s reinterpretation of
Article 9 in relation to a variety of hypothetical security situations, broadly grouped
under the headings of (1) response to an infringement that does not amount to anarmed attack, (2) further contributions to the peace and stability of the international community, and (3) measures for self-defense permitted under Article 9 of
the Constitution.
Under the first heading, “response to an infringement that does not amount toan armed attack,” the government stresses the need to ensure an adequate response
and seamless cooperation between responsible agencies (Coast Guard, police, SDF)
in the event of “gray zone” situations that threaten Japan’s territorial integrity but
fall short of an act of war.
As an example, it cites a scenario in which armed fishing boats attempt to occupy a remote island of Japan—a reference to recent activities around the Senkaku
Islands. The cabinet calls for joint exercises to prepare for such situations, as well
as reforms to streamline procedures for the issuance of a maritime-security-operation or defense-mobilization order involving SDF units to enable a swift and seamless response in coordination with the Japan Coast Guard and other responsible
police forces.
With regard to the protection of US naval vessels, the government intends todraw up legislation that would allow the “very passive and limited” use of military
weapons by the SDF to defend US military units in the event that they should comeunder attack—in a situation that threatens to escalate into an armed conflict—while engaged in activities that contribute to the defense of Japan, including joint
exercises.
The second heading is “use of weapons associated with international peace
6International Affairs
cooperation activities.” In this section, the government stresses the need to facilitate
more active and unhindered SDF support for UN-sanctioned peacekeeping operations as part of Japan’s “proactive contribution to peace.” It points out that situations arise in which Japan is called on to provide support for non-Japanese armed
forces involved in the legitimate use of force in a UN PKO.
Whereas previous cabinets have limited Japan’s role to “rear area support” toavoid any appearance of “integral” involvement in the use of force, the current
government takes the view that such support can legitimately be provided anywhere other than an active combat zone. The decision also substantially expands
the SDF’s right to use weapons during peacekeeping operations. Under the cabinet’s
new interpretation, SDF personnel may take on a more active role in PKOs byusing weapons when responding to requests for emergency support from units thathave come under attack (situations referred to as kaketsuke keigo) or “in defenseof the mandate,” in the language of UN peacekeeping.
The decision also sanctions the use of weapons by the SDF as needed to rescue
Japanese nationals overseas.
Skirting Collective Self-Defense
The third section is titled Measures for Self-Defense Permitted under Article 9 of
the Constitution. It begins by summing up the longstanding interpretation of Article 9 as permitting the use of the minimum necessary force to deal with “imminent
unlawful situations” that fundamentally violate “the people’s right to life, liberty,
and the pursuit of happiness.” While embracing this logic, it makes the case forincluding within such situations certain armed attacks directed against “a foreigncountry that is in a close relationship with Japan,” rather than limiting them todirect armed attacks against Japan, as previous administrations have done.
The decision notes that such actions may fall under the definition of “collective
self-defense” as defined by international law, and that international law sanctions
such action. But it sidesteps this issue by avoiding any explicit reinterpretation of
Article 9 to include collective self-defense. Instead, it expands the scope of actions
that qualify as self-defense.
This may seem like an arcane distinction, but it can make a real difference inpractical terms. While the right of collective self-defense is generally interpreted tomean the right to use force against any country that attacks an ally, the July 2014
cabinet decision clarifies that such actions are permitted only when they are taken
as measures for self-defense which are inevitable for ensuring Japan’s own survival
and protecting its people—in other words for defending Japan. In this way, the Abe
7International Affairs
administration has made the defense of an ally consistent with the longstanding
government interpretation of the Constitution.
Wanted: A Framework for Peacetime Defense
The recent cabinet decision, while touching on the issue of collective self-defense,
is devoted predominantly to other issues, including the scope of SDF participationin activities categorized as UN collective security measures, secondary actions tocollective self-defense, participation in other overseas operations, and peacetime
measures. Nonetheless, most of the public debate remains focused on “collective
self-defense” (shudanteki jieiken) as a kind of catch-all for SDF activities that falloutside the narrow limits imposed by previous governments.
But the truth is that Japan’s right of collective self-defense discussed above—
just like its right of individual self-defense—is severely limited and permitted onlyin the event of an armed attack on the nation or on another nation with which
Japan has close ties. Under Japanese law, then, actions in self-defense may be taken
only after the issuance of a defense-mobilization order in response to an armed
attack under the provisions of the Self-Defense Forces Law. The security problem
we are facing now, however, is a difficulty occurring during peacetime.
In the Tokyo Foundation policy proposal “Maritime Security and the Right of
Self-Defense in Peacetime,” issued in November 2013, we stress the need to create
an institutional framework for self-defense in “gray zone” situations during peacetime—before a situation escalates into an armed conflict. We have called on thegovernment to identify issues that need to be cleared and establish a clear decision-making structure. This, we think, requires a more flexible interpretation of an“imminent armed attack.”
The Abe government is to be commended for identifying the need for a seamless response to violations or infringements that “do not amount to armed attacks.”
However, in its discussion of security in surrounding areas, including remote islands, it fails to consider the essential issue of self-defense in peacetime. The protection of remote islands—perhaps the most pressing security issue facing Japan
today—is not a law enforcement issue but one of national defense. I strongly urge
the government to heed the Tokyo Foundation recommendation as it turns to thetask of drawing up legislation for a new security era.

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International Affairs
June 19, 2014

Japan’s “Proactive Contribution to Peace”
A Mere Political Label?
Akiko Fukushima

The centerpiece of Japan’s first National Security Strategy, announced in December 2013,
was a pledge to make a more proactive contribution to international peace. In an article reprinted here from the May/June 2014 issue of Economy, Culture & History JAPANSPOTLIGHT Bimonthly, Senior Fellow Akiko Fukushima places the concept in historical context, noting that it is a natural response to a transformed security environment andan extension of the security and international cooperation policies Japan has already been
implementing in recent years.
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n Dec. 17, 2013, the Japanese government announced its first-ever National Security Strategy (NSS) calling on the country to make a “proactive contribution to peace” based on international cooperation. The
strategy has prompted questions from the media both at home and abroad about
the strategy’s real intentions and its vision. Questions have been raised, in particular, about the phrase “proactive contribution to peace.” What does the phrasemean? Is it a mere political label? What sort of path will Japan embark upon under
this banner, and is this a cover for Japan’s return to pre–World War II militarism
and a rejection of postwar pacifism? This article will try to answer some of thesequestions.
Why Now?
Foreign scholars and policymakers have long criticized Japan for lacking a security
strategy and, for that matter, strategic thinking in its security and foreign policy,

Akiko Fukushima   Senior Fellow, Tokyo Foundation; Research Fellow, Asia International Center, Aoyama Gakuin University; Lecturer, University of the Sacred Heart.
9International Affairs
making Japanese policy unpredictable and unaccountable. Some have even argued
that with the ongoing shift in the balance of power, Japan could disappear fromthe radar screen of international relations unless it shows where it stands with aclear strategy. The NSS is a response to such criticism.
Basic Policy on National Defense

Japan did announce a national defense policy—the Basic Policy on National Defense—on May 20, 1957, and this has guided Japan’s defense policy to date. But it
is a very short statement of only half a page, stipulating that the “objective of national defense is to prevent direct and indirect aggression, but once invaded, torepel such aggression, and thereby to safeguard the independence and peace ofJapan based on democracy.” The policy cites four specific policies to achieve thisobjective, namely (1) supporting the United Nations, (2) nurturing patriotism, (3)building up national defense capabilities necessary for self-defense, and (4) maintaining security relations with the United States until the UN becomes capable ofmaintaining international security.
After World War II, Japan adopted a policy of aligning its security and foreign
policy with the position of the UN under the so-called UN-centered diplomacy. The
UN did not function the way Japan anticipated due to the East-West divide of theCold War, however, prompting the country to turn to its alliance with the US as thecornerstone of its security policy. Today, more than 50 years since the adoption of
the Basic Policy on National Defense, Japan confronts new challenges and a vastly
transformed security environment. Thus there is an urgent need to update its basic
policy to adapt to the prevailing situation.
Changing Security Challenges

Over the past 50-plus years, challenges to Japanese security have evolved beyond
the defense of territorial integrity. Security challenges have diversified to include
terrorism, piracy, cyber attacks, energy resources, space, climate change, pandemics, failed states, international crime networks, and the illegal trafficking of arms
and narcotics, to name just a few. These challenges, such as cyber attacks, are hardto predict. In a globalized world, moreover, Japan’s security has become indivisible
from that of other countries. Terrorists from far-away failed states may target Japan, and Japanese nationals may become victims of attacks thousands of miles
from home. For example, Japanese nationals were killed in Algeria in January 2013
when the plant where they were working was attacked by a group allegedly affili10

International Affairs
ated with Al-Qaeda in the Islamic Maghreb. This showed that peace and stability
in countries as geographically distant as Algeria have an impact on Japan’s security.
Needless to say, piracy in the Gulf of Aden, which is a vital shipping lane, also affects Japanese trade.
The indivisibility, unpredictability, and diversification of security threats demand a more sophisticated, comprehensive, and integrated response. A long-term
strategy is required, rather than ad hoc approaches to individual incidents.
Worsening Security Environment around Japan

Secondly, the security environment in areas around Japan has changed dramatically. In Northeast Asia, there are countries with large-scale military forces, andthose either already possessing nuclear weapons or continuing with nuclear development. Recently, one of Japan’s neighbors has been asserting its position in the
East and South China Sea by rapidly expanding and intensifying its activities in theseas and airspace around Japan, including by intruding into Japan’s territorial
waters and air space. As Military Balance 2014 observed, defense spending in East
Asia has expanded rapidly against rising tensions in the region. The shares of theregion’s increase in real defense outlays in 2013 were 46% for China, 5.7% forJapan, 5.2% for South Korea, and 40% for other countries—split roughly equally
between Southeast Asia and South Asia.
The Japanese government must do all it can to deter any aggression in its neighborhood and make diplomatic efforts to enhance cooperation with its neighbors
to prevent a crisis from occurring.
Avoiding Misunderstanding

In an age of complex and intertwined security challenges, many countries, such as
the US (since 1987), Britain (since 2013), Australia (since 2013), and South Korea(since 2009), have announced respective national security strategies. This is probably because they feel the need to explain their long-term security strategies bothat home and abroad to avoid misunderstanding. Given the changes in the security
environment, it is essential for governments to explain in advance how they plan
to maintain peace and stability and to protect their citizens, both during peacetime
and in contingencies. Long-term security strategies must also be explained to othercountries to avoid unfounded misunderstanding on specific policies and to promotebilateral as well as multilateral cooperation.
In an age in which the security strategy of one country will have a large bearing
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International Affairs
on that of others, and as security challenges become increasingly transnational,
international and regional cooperation will be crucial in ensuring an effective response. Such are the factors that have prompted Japan, too, to announce its NSS.
What Is a “Proactive Contribution to Peace”?
Background

Japan has been criticized for not doing enough for international peace and security,even being accused of “free riding.” The question of whether it can participate in
UN collective security activities has been left unanswered since Japan’s accession
to the UN in 1957.
In his letter of application for UN membership, dated June 16, 1952, submitted
to UN Secretary General Trygve Lie, Japanese Foreign Minister Katsuo Okazaki
wrote: “I, . . . having been duly authorized by the Japanese Government, state that
the Government of Japan hereby accepts the obligations contained in the Charterof the United Nations, and undertakes to honour them, by all means at its disposal,
from the day when Japan becomes a Member of the United Nations.”
The unspoken meaning of this phrase “by all means at its disposal” was thatJapan would fulfill its UN obligations so long as they did not violate the JapaneseConstitution. The question that remained was the means Japan could actually use,
for Article 9 of the Constitution stipulates that “aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war
as a sovereign right of the nation and the threat or use of force as means of settlinginternational disputes. In order to accomplish the aim of the preceding paragraph,land, sea, and air forces, as well as other war potential, will never be maintained.
The right of belligerency of the state will not be recognized.”
The question of whether or not “by all means at its disposal” was a demarcation of its obligations and whether or not Japan can send its Self-Defense Forces
on UN missions has been debated in the Diet since then. Soon after its accession to
the UN on July 30, 1958, Secretary General Dag Hammarskjöld asked the Japanese
government to send 10 SDF officers as military observers to reinforce the United
Nations Observer Group in Lebanon. Although the mission was to monitor aceasefire and did not involve combat, the Japanese government declined the UN
request because the mission might involve activities that were outside of the scopeof existing domestic laws, including the Self-Defense Forces Law.
During the 1990–91 Gulf War, when Japan was accused of not doing enoughdespite its very substantial monetary contributions, it was likened to a cash dis12

International Affairs
penser, disbursing cash in piecemeal fashion without working up much of a sweat.
In response to such criticism, the Diet subsequently passed the International Peace
Cooperation Law (the so-called PKO Law) stipulating five strict conditions underwhich the SDF could be dispatched. Three of the conditions—the existence of aceasefire agreement, consent of the parties for deployment, and impartiality—are
the same as the UN’s PKO principles. Japan added two more, namely, (1) should
any of the above three conditions not be met, the government of Japan may withdraw its contingent, and (2) the use of weapons shall be limited to the minimum
necessary to protect the lives of personnel. These stipulations were intended tomake sure that the dispatch was not unconstitutional. Since the law came into force
in 1992, Japan has sent SDF personnel to places such as Cambodia, the Golan
Heights, and Timor-Leste. Japan is currently participating in a UN peace-building
mission in South Sudan.
The current official interpretation of the Constitution is that “Japan has theright of collective self-defense, as stated in the UN Charter, but cannot exercise it.”This interpretation has constrained Japan’s security role so far. Nevertheless, over
the years Japan has been contributing to international peace, security, and prosperity through other means, including development assistance, capacity building assistance, and disaster relief, in addition to peace-keeping and peace-building activities.
What Does “Proactive Contribution to Peace” Mean?

As a basic concept, the NSS calls for Japan’s proactive contribution to peace basedon international cooperation. I wrote a policy recommendation on proactive contribution to peace over a decade ago in March 2001 in a National Institute for
Research Advancement (NIRA) Research Report entitled, “Japan’s Proactive Peaceand Security Strategies.” I translated the concept as “proactive peace and security
strategies” rather than a “proactive contribution to peace.” In the report I argued
that:
Looking toward the 21st century, we Japanese need to make efforts to establish
our identities as “Japan living in the global village,” based on the recognition
that the existence of Japan is inevitably linked with other parts of the world.
Undeniably, Japan’s traditional peace and security strategies after the end ofWorld War II in which we declared “not to become an aggressor,” “not to possess nuclear weapons” and “not to export weapons” have contributed to world
peace in no small measure. However, in the future, it is desirable to develop“proactive peace and security strategies,” where “Japan will proactively dosomething for world peace,” rather than reactive peace and security strategies.
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International Affairs
Thus I placed “proactive contribution to peace” on the other end of the spectrum from the reactive and passive pacifism of postwar Japan. After World War II,
as I noted above, Japan was cautious in playing a security role while it reconstructed and developed its war-ravaged economy. Japan wanted to remove its militarist image and wanted to portray itself as a peace-loving nation. In its public
diplomacy, Japan avoided any image of militarism, even to the extent of not introducing traditional Kabuki and Noh plays in which samurai are portrayed. Also,
Japan did not promote Japanese language education overseas—normally an important element of cultural diplomacy—until the 1970s because Japan’s prewar
language education was strongly linked to military expansionism. Instead, Japan
turned to the tea ceremony and flower arrangement to transmit a peaceful imageof the country.
In the postwar period, it was sufficient for Japan to avoid talk of security issues
to demonstrate its peaceful stance. And other countries did not expect Japan toplay a significant role in defense and security, either. Today, however, in the face ofthe broadening, increasingly transnational nature of security issues, Japan can nolonger ensure its own peace by doing nothing unless told. The international community, likewise, cannot afford to have the world’s third-largest economic power
remain passive and reactive on security issues. We need to become more proactive
in securing peace both at home and abroad. The basic principle of promoting peace
has not changed, but we need to be more proactive.
In 2009 the Japan Forum on International Relations published a report entitled“Positive Pacifism and the Future of the Japan-US Alliance” which in its Japaneseedition used the same phrase I had earlier proposed but used a different
phrase—“positive pacifism”—for its English translation.
These were the ideas that eventually gave rise to the concept of a “proactive
contribution to peace.”
Proactive Contributions Thus Far
Without using the label, though, Japan has already been proactive in its contributions to peace. One such example is the dispatch of Japanese SDF personnel andcivilians on UN peacekeeping and peace-building missions. In recent years, Japanese nationals have participated in and even led UN missions in Cambodia, TimorLeste, Bosnia-Herzegovina, and elsewhere and have also served as the UN HighCommissioner for Refugees.
The unanswered questions about Japan’s participation in UN PKO missions
still remain, however. When I was in South Sudan in July 2013, Hilde Johnson, the14International Affairs
UN Special Representative of the Secretary General, complained to me that theSDF cannot be deployed to dangerous zones, while Koreans are dispatched to unstable areas such as Jonglei. She hastily added, however, that she appreciates thehigh discipline of the Japanese contingent. This question is currently being debatedby the Advisory Council on the Collective Right to Self-Defense, and a decision
should subsequently be made by the government.
The second example of Japan’s proactive contributions to peace is the efforts
made to mainstream and seek the implementation of the notion of human security.
Since the speech by Prime Minister Keizo Obuchi in December 1998 announcing
assistance for people hit by the Asian monetary crisis, Japan has promoted thebroadly interpreted notion of human security embracing both freedom from fear(in such manifestations as conflict, terrorism, landmines, small arms, and humantrafficking) and freedom from want (including currency crises, natural disasters,
environmental degradation, infectious diseases, and poverty).
Some UN member states interpret the notion narrowly, focusing on the freedom from fear, while others view the concept as more broadly encompassing freedom from want. There are some who oppose the notion altogether, moreover,worried that “human security” might be used as a pretext to interfere in the domestic affairs of other countries with coercive measures. Concern has particularly
been voiced over the notion of “responsibility to protect” which allows intervention with force in the event of massive genocide or other extreme cases.
Japan has led the discussions on human security, seeking a convergence of thevarious interpretations and eradication of concerns. Japan has tried to mainstream
it by having a paragraph on human security inserted in the 2005 Outcome Document—the first mention in an official General Assembly document—and subsequently through the adoption of a common understanding of human security in
UN Resolution 66/290. The resolution interpreted human security as embracing
the right of people to live in freedom and dignity, free from want—that is, poverty
and despair—and freedom from fear.
Japan has also advanced human security through official development assistance (ODA) to fragile states. This is corroborated in the August 2003 revision of
the ODA Charter, which states that development should be approached from “theperspective of human security,” toward which end the protection and empowerment of individuals are important. Then in February 2005, Japan’s Medium-Term
Policy on Official Development Assistance identified human security as a pillar of
the nation’s ODA policy. This underscores the need for a human-centered approachand empowerment of local people—a thrust that has been embraced by the Japan
International Cooperation Agency.
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International Affairs
The United Nations Trust Fund for Human Security (UNTFHS) is the main
avenue through which Japan has promoted the concept of human security. The
Japanese government has continued contributing to the fund, donating a total sumof ¥42.8 billion ($390 million), as of October 2013.
While initially the sole donor, Japan has persuaded other UN member states
supporting the concept to contribute to the fund. In response, Slovenia has contributed $47,000 and Thailand $60,000 since 2007, and in 2010 Greece gave $150,000
and Mexico $5,000. As of October 2013, the UNTFHS has funded 210 projects in
85 countries.
Although the UNTFHS was initially regarded as just another aspect of Japanese ODA, the Advisory Board on Human Security revised its guidelines in January2005 to mainstream projects that include a wider range of interconnected regions
and areas and in which multiple international organizations and NGOs participate
with the intention of integrating humanitarian and development assistance bystrengthening people’s capacity and seamlessly implementing assistance in the transitional period between conflict and peace.
The Rapid Assessment of the United Nations Trust Fund for Human Security,
published by Universalia in May 2013, reports that the human security approachat the project level has filled unaddressed areas; empowered stakeholders; is avaluable tool in promoting the three pillars of the United Nations—development,
human rights, and peace and security—and overall has had a beneficial impact.
The third example of Japan’s proactive contributions, related to the second, as
the Chart shows, is its ODA disbursements. While assistance was initially offeredto other countries in Asia, it is now provided worldwide, including Africa, contributing to the stability of the region. Japan not only assists conflict-ridden countries
but also their neighbors, which could be affected by an influx of refugees or
terrorists from failed states. Security and development are closely inter-related.
When security is unstable and conflicts recur, the fruits of development could be
wiped out. When a region remains undeveloped after conflict, local residents will
not be at peace and may be unable to build a resilient society. Despite criticisms of
the securitization of development, there is a nexus between security and development.
The NSS specifically mentions that “Japan has garnered high recognition by theinternational community, by its proactive contribution to global development in
the world through utilizing ODA. Addressing development issues contributes to theenhancement of the global security environment and it is necessary for Japan tostrengthen its efforts as a part of ‘Proactive Contribution to Peace’ based on theprinciple of international cooperation.”
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Chart
ODA Disbursement by Major Donors($ million)
35,000US

30,00025,00020,000Japan
Germany
UK
France15,00010,000

Canada

5,000

Italy
0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: OECD/DAC and Japan’s Ministry of Foreign Affairs.

The fourth example is that the Japanese Ministry of Defense since 2011 has
been providing capacity building assistance to other Asian countries in nontraditional security areas, including training for humanitarian assistance/disaster
relief; non-combatant evacuation operations; training of coast guards for piracy
control; training in peacekeeping operations focusing on infrastructure; and defense medicine. Such training and assistance would allow countries to utilize theirown resources in dealing with crisis situations and can also deepen cooperation
between Japan and the recipient countries, contributing to regional stability.
Japan is also collaborating with Australia and others in capacity building assistance.
Japan has thus already been making proactive contributions to peace, and it
intends to do more in the years to come. Japan has not suddenly shifted from areactive to a proactive approach with the Dec. 17, 2013, announcement of the NSS.
The strategy also emphasizes contributions through international cooperation, as
security challenges are becoming more transnational. It calls for collaboration withother countries in the region and in the international community in domains ranging from cyberspace and terrorism to maritime security.
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International Affairs
Japan’s Role in Promoting Peace & Stability
Japan’s “proactive contribution to peace based on international cooperation” istherefore not a mere political label or a cover for militarization. The NSS will enable Japan to be more strategic in implementing its contributions. The revised
National Defense Program Guidelines, announced on the same day, reflects thisthrust.
The NSS notes that Japanese security strategy is to be based on both defense
and diplomacy and that Japan needs a whole-government approach under theleadership of the newly created National Security Council (NSC). Given the diversification of security threats today, Japan must develop additional strategies andconcrete plans to clearly map out what it intends to do regarding issues such as
cyber attacks, maritime security, poverty, pandemics and health, and natural disasters. In facing these security threats, one has to take both hard and soft security
approaches in a comprehensive manner in order to build a resilient society.
Combined with the upcoming revision of the ODA Charter and changes in theinterpretation of Japan’s right of collective self-defense and collective security, Japan has a chance to truly become a proactive contributor to peace based on international cooperation. The real questions are what Japan actually implements andhow other countries respond through closer collaboration for peace, stability, andresilience.

Reprinted with permission from Economy, Culture & History JAPAN SPOTLIGHT Bimonthly (published by the Japan Economic Foundation), May/June
2014, pp. 52-55.

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International Affairs
August 20, 2014

Ukraine: How Far Can It Go?
Paul J. SaundersP

erhaps the biggest question surrounding the ongoing crisis in Ukraine is how
far it might go. Will Russia provide more assistance to rebels in eastern
Ukraine or even intervene directly in the fighting there? Will the UnitedStates and other governments apply additional economic sanctions on Russia andapply further pressure on others to punish or isolate Moscow? And will the Kremlin respond outside Ukraine, through economic, political or other steps to retaliate?
While a negotiated de-escalation is still possible, the likely answers to these questions are becoming increasingly disturbing.
No Incentives for a Settlement
The fundamental problem in the Ukraine dispute is the lack of incentives to de-escalate—on any side. This is most obvious with respect to Ukraine’s pro-Russian
separatists, who are under heavy pressure on the battlefield and have been losing
ground in recent weeks. After a brief post-election cease-fire during which he offered a settlement on terms the militants would have had great difficulty accepting,President Petro Poroshenko has renounced negotiations with the militants.
This essentially forces them to choose between death or injury in combat while
hoping for additional Russian help, on one hand, and death or imprisonment by
Ukrainian authorities combined with very difficult lives for their surviving families
and supporters, on the other. The Russian government’s conduct so far provides
some grounds for hope that more help will be forthcoming. So long as this is thecase, the rebels are likely to keep fighting.
The Ukrainian government likewise has every incentive to continue its current
offensive. Most importantly, Ukraine’s troops have been successful so far in taking
back significant territory from the rebel forces and look close to their immediate

Paul J. Saunders   Project Member, Tokyo Foundation’s Contemporary American Studies
Project; Executive Director, Center for the National Interest (Washington, DC).
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© Andrew Butko CC BY-SA 3.0

International Affairs
goal of cutting off the narrowing corridor between rebel groups in Donetsk
and Lugansk. At the same time, despite mounting civilian casualties—recently estimated at about 800 killed
and over 2,100 wounded since Aprilby the United Nations—Washington
and Brussels have tacitly encouraged
Kiev’s offensive and have slowly but
steadily hardened their positions toPro-Russian protesters in Lenin Square, Donetsk, Marchward Moscow, particularly since the8, 2014.
downing of Malaysian Airlines flight
MH-17.
On top of this, US and European officials have warned strongly against any
further Russian involvement in eastern Ukraine. For example, America’s Ambassador to the United Nations, Samantha Power, recently declared that sending Russianforces into eastern Ukraine would be “completely unacceptable” and that it wouldbe “viewed as an invasion of Ukraine” even if the Kremlin said that its mission washumanitarian assistance. [http://www.bbc.com/news/world-europe-28715467]
Statements like this allow Ukrainian officials to be confident that they will have
Western assistance (though probably not Western troops, at least initially) in resisting any possible direct military action by Russia. This encourages Ukraine to do
whatever it takes to crush the rebels.
The problem for Kiev is that Russia has every incentive to escalate too. Politically, President Vladimir Putin has invested too much of his personal reputation in
supporting the separatists—abandoning them could be costly and potentially destabilizing. As a result, Putin cannot allow Ukraine to defeat the rebels. The more
likely this looks, the more Putin will have to consider either sharply increasing his
support for them or, alternatively, intervening in Ukraine.
US and European leaders hope that their threatened “sectoral sanctions”
against Russia’s financial, energy, technology and other segments of the Russian
economy will deter Kremlin escalation, but their policy so far may actually havethe opposite result, for two reasons. First, President Barack Obama and European
leaders have said specifically and repeatedly that they will not fight a war with
Russia over Ukraine. This removes the strongest possible deterrent—the danger
that Russia could face war with much stronger opponents.
Second, many in Russia’s foreign policy elite think that if Russia abandons theseparatists, Washington and Brussels will not simply accept this outcome and re20

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turn to the pre-crisis status quo. On the contrary, they think that any Russianconcessions would produce greater Western demands—perhaps for Crimea’s return, for example—with no real hope to escape economic sanctions. So from Moscow, the cost of escalation is low and the benefit of de-escalation is low.
American and European officials appear to see a Ukrainian victory on the battlefield as the most attractive outcome, since it would remove political pressure in
the United States and some parts of the European Union for deeper involvement
while avoiding politically unattractive negotiations with Moscow and the separatists. Negotiations would inherently require concessions to succeed, of course, andno Western politician wants to support “rewarding Russian aggression,” a likely
criticism of any viable settlement.
This is why Washington, Brussels and European capitals will likely continue
backing Kiev’s attempt at a total military victory—including stronger and stronger
threats to discourage any additional Russian support for the separatists. If Russia
provides further help to the rebels, Western governments may in turn impose wider
economic sanctions. (And Russia will probably respond with its own stiffer sanctions—its recent agricultural import ban was a clear warning, and Prime Minister
Dmitry Medvedev has now suggested that Moscow could block Western airlines
from overflying its territory [http://www.nbcnews.com/storyline/ukraine-planecrash/mh17-sanctions-retaliation-russia-may-force-airlines-reroute-n173111].)The dynamics currently driving the Ukraine crisis are increasingly troubling
because none of the parties appears genuinely interested in a diplomatic solution.
Absent that, the conflict could become far more dangerous than it already is.
Paths to Wider Conflict
Imagine the following series of events. Fearing a separatist defeat, Moscow encourages large numbers of Russian volunteers (including possibly entire Russian army
units who have removed their uniforms) to cross the border with sophisticatedweapons, such as mobile surface-to-surface missiles to attack Ukrainian airbases
supporting airstrikes on rebel positions. With this help, the rebels stop Ukrainian
advances and recapture some key towns. Western governments publicly describe
this as a Russian invasion of Ukraine, impose severe economic sanctions, and start
to provide arms to Ukraine. The United States sends unarmed drones into Ukraine
to help Kiev locate and target the missile launchers and to provide other intelligence. Separatists shoot down a drone and supply video to Russia’s state television
channels, further inflaming the Russian public.
In response, Russia cuts off not only Western commercial flights but also NATO21

International Affairs
air access to Afghanistan through its airspace, and security forces detain a handfulof Western journalists in Moscow on accusations of espionage or of disseminating
anti-Russian propaganda. Having already lost access to Western capital markets
and investment, the Kremlin nationalizes businesses fully or partially owned byforeign companies based in countries imposing sanctions on Russia and expels
their senior Western executives.
Russian commandos posing as separatists infiltrate central or western Ukrainewith man-portable surface-to-air missiles and destroy a NATO cargo plane delivering weapons, killing the American crew, intending to deliver a signal to Washington to stay out. Russia disavows responsibility for the incident, but its officials
argue that arms shipments are a legitimate military target and criticize US interference in Ukraine. The American media brand Putin as a “murderer,” and the US
Congress passes a resolution declaring the incident an act of war.
Is this particular series of events a likely one? Probably not. Nevertheless, itillustrates starkly where confrontation over Ukraine could lead. Even if neither theUnited States nor Russia wants or expects a direct military conflict, predictable
decisions that leaders in both countries may have to face could gradually but relentlessly produce that result. Top officials on all sides should consider their assumptions and their options extremely carefully. The crisis in Ukraine could getmuch worse.

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Politics & Government
August 26, 2014

Abenomics 2014
Expanded Content, More Uncertainty
Katsuyuki Yakushiji

The revised New Growth Strategy released in June has brought the “third arrow” of Abenomics
into sharper focus, revealing an ambitious program for sustained economic growth. But thestructural reforms proposed this time around face serious opposition from industry lobbies
and vested interests. Katsuyuki Yakushiji sums up the plan and discusses the challenges—internal and external—the prime minister must overcome to achieve his economic goals.
*

*

*

I

n June 2014 Prime Minister Shinzo Abe released two new documents fleshingout his administration’s policies for fiscal reform and economic revitalization:“Basic Policies for Economic and Fiscal Management and Reform 2014” andthe revised “New Economic Growth Strategy.” In general, the market gave the plansa thumbs up for clarity and specificity, at least compared with last year’s Growth
Strategy. Yet their content has received surprisingly little attention in the media.
One major reason is the preponderance of policies oriented to long-term
growth, as opposed to fast results. This is a good sign. It means that Abe’s economic
program is done proving itself through flashy pump-priming measures and candevote its attention to low-key policies that emphasize patience and persistence.
But the latest structural changes he has proposed are likely to prove much harderto accomplish, owing both to their longer timeframe and to powerful opposition
from vested interests.
The Critical Third Arrow
Basic Policies for Economic and Fiscal Management and Reform is compiled anKatsuyuki Yakushiji   Senior Associate, Tokyo Foundation; Professor, Toyo University.
Former editor of the Political News Department and editorial writer, Asahi Shimbun, andformer chief editor, Ronza magazine.
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Politics & Government
nually by the Council on Economy and Fiscal Policy—chaired by the prime minister—and approved by cabinet resolution. It was first drawn up in 2001 underPrime Minister Jun’ichiro Koizumi as a way of strengthening the prime minister’s
control over the budget process through general guidelines for allocations in thefiscal year to come.
The New Economic Growth Strategy is the current administration’splan to bring about sustained private-sector investment and growth via
a wide range of structural policies, including deregulation, labor reforms,
and measures to prop up local economies. It is the third, and arguably themost important, “arrow” in the threepronged economic program known as
Abenomics.
The first two arrows, “aggressive
monetary policy” (quantitative easing) and “flexible fiscal policy” (targeted stimulus), have largely hit their mark, allowing Abe to trumpet his cabinet’s economic
achievements since it came to power near the end of 2012. At the June 24 press
conference announcing the two new policy documents, the prime minister touted
the successes of Abenomics, citing a 2% increase in wages among large corporations (according to a survey by the Japanese Trade Union Confederation), alongwith survey results indicating upward wage movement among 60% of the smaller
companies polled.
But the short-term efficacy of this monetary and fiscal expansion, while welcome, is not sufficient to put the economy on a long-term growth trajectory, and
Abe is well aware that the real challenge lies ahead. “We cannot yet say that thewinds of economic recovery have reached every corner of Japan,” he acknowledged. The new policies approved by the Diet are designed to support the “virtuous
circle” that the first two arrows set in motion and ensure that people in every community in every part of the country will feel the tangible benefits of the recovery.
“This,” he declared, “is the essential mission of Abenomics. Everything hangs on
the New Growth Strategy.”
Ambitious Structural Reforms
The 2014 Basic Policies and New Growth Strategy reinforce and complement one
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Politics & Government
another to the extent that they are virtually inseparable. Their collective content
can be summed up as follows.
The key economic challenges facing Japan today, we are informed, are (1)countering the negative economic impact of the consumption tax hike that went
into effect in April; (2) achieving economic growth fueled by private-sector demand; (3) reforming institutions and systems to lay the foundations for sustainablelong-term growth and vitality (including steps to stem population decline); and (4)achieving fiscal consolidation without sacrificing economic vitality.
With the exception of the first, none of these items is new. They are all issues
that previous administrations have attempted to tackle, but with little success thusfar.
The specific policy measures the government proposes to meet these challenges
are many and varied. To make Japan-based companies globally more competitive,
it seeks to lower the effective corporate tax rate from around 35%—quite high byinternational standards—to less than 30% over a period of several years. To reduceenergy costs, it plans to restart the nation’s nuclear power reactors, all of whichhave been idle since September 2013. On the labor front, it pledges to boost thecapacity of daycare and afterschool facilities to make it easier for women to enter
the labor force and calls for immigration reform to bring more foreign workers
into the country, albeit on a temporary basis. In the agriculture sector, it is callingfor changes to the farm coop (JA) system, including measures to guarantee theindependence of local coops, in hopes of breaking the powerful farm lobby’s resistance to long-overdue agricultural reforms.
Defusing Two Time Bombs
At the same time, the ruling Liberal Democratic Party cannot afford to ignore its
rural base, especially with local elections scheduled for the spring of 2015. Amongthe policies set forth this past June are measures designed to stem the ongoing migration of young people from the regions to Tokyo and support small and medium-sized businesses outside the capital region.
Another priority is defusing Japan’s demographic time bomb. Japan has theoldest population and one of the lowest birthrates in the world. The population isshrinking and is projected to drop from slightly over 120 million today to 97 million in 2050 and 86 million in 2060, unless the fertility rate rises substantially. The
Basic Policies calls for a wide array of reforms designed to keep the population ataround 100 million for another 50 years.
Meanwhile, Japan must find a way to avert a fiscal crisis. The administration
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Politics & Government
has reiterated its international pledge to cut the primary deficit to half of the 2010
level by fiscal 2015 and to eliminate it by 2020. While the former target appears
reachable, primary balance is still a distant dream. Long-term fiscal sustainability
will clearly require major cuts in social security spending, which account for about
one-third of the budget, through wholesale reform of the national pension andhealthcare systems. Unfortunately, the administration has yet to offer any concreteplans for social security reform.
Looming Battles
For the most part, the ideas presented in the Basic Policies and New Growth Strategy are neither new nor particularly controversial from a policymaking standpoint.
But many of them take on “bedrock regulations” and other sacred cows that powerful industrial lobbies have successfully defended for decades. If the administration follows through on them, it will be a groundbreaking accomplishment.
The main question is whether Abe can succeed where so many have failed.
Before the government can implement corporate tax cuts, changes in labor andimmigration laws, or farm reform, it must draft the pertinent bills and shepherd
them through the Diet. At each step along the way, it will have to contend withfierce resistance from industry, interest groups, and their allies in the ruling party.
Abe will have to stay in power for quite a long time if he wants to give such legislation a fighting chance.
Moreover, even if the bills become law, it will be years before the reforms canbring about the kind of restructuring needed for sustained economic growth. Of
the process charts that the government has published to provide a time frame for
the New Growth Strategy, most extend all the way to 2017. Achieving these ambitious reforms along with the fiscal retrenchment that must accompany them will
require years of determined and skilled implementation by the government in
power.
Setting Internal and External Priorities
In the meantime, developments in the Asia-Pacific and around the world could deal
further setbacks to the Japanese economy. One wild card is the outcome of negotiations for the Trans-Pacific Partnership. If the US-led talks break down or hit animpasse, the domestic economy will suffer. The conflicts that continue to break out
around the Middle East are another cause for worry. With the nation’s nuclear
power plants off line, Japan has become more dependent than ever on thermal
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Politics & Government
power generation and has been obliged to import fossil fuels at prices above theinternational average. If prices jump even higher as a result of political instability
in the Middle East, the impact on the Japanese economy could be devastating.
Japan’s frosty relations with China and South Korea provide further grounds
for concern. The Japanese economy has grown increasingly dependent on trade andinvestment with its closest neighbors, but the chill in diplomatic relations is preventing Japan from taking this economic interaction to the next level. Although
Abe has made overtures, these moves have yet to yield substantive results. If thestatus quo continues, this too will have an impact on the Japanese economy.
In short, to succeed in his bid to restore vitality and sustainability to the Japanese economy, Abe will have to juggle internal and external exigencies, skillfully
steering Japan’s foreign policy even as he pushes ahead with ambitious domestic
reforms. And he has only so much time in which to produce results.
While Abe has devoted much energy to the task of revising the cabinet’s interpretation of the Constitution to open the door to Japan’s participation in collective
self-defense operations overseas, his attention, with autumn approaching, is likely
to increasingly focus on the “third arrow” of Abenomics and the urgent diplomatic
issues on which its success—and Japan’s future—hinges.

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August 6, 2014

Rethinking Personal Tax Exemptions to
Mobilize Women’s Power
Shigeki Morinobu

Replacing the spousal exemption for personal income tax can correct systemic biases with regard to family work patterns and encourage women’s fuller participation in the labor force,thus unleashing the power of “womenomics,” argues Senior Fellow Shigeki Morinobu. The
article below is Chapter 4 of the Tokyo Foundation policy proposal on “Expanding the Tax
Base for a Sustainable Social Security System,” issued in Japanese in May 2014. A summary of the proposal follows the article.
*

*

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O

ne of the key policy objectives articulated in the “Japan Is Back” economic revitalization strategy released by the administration of Prime
Minister Shinzo Abe in June 2013 is to create the conditions for fuller
participation by women in Japanese society. In this connection, the government
promises to “explore tax and social security policy options with a neutral impact
on people’s choice of work patterns” as part of its commitment to “create an environment where men and women can strike a balance between work and childrearing.”
The following is an examination of the impact of income tax policies on women’s labor-force participation, with particular attention on the spousal exemption,and recommendations for reform.
Rationale for the Spousal Exemption
The current focus of debate over Japan’s tax policy and women’s labor force participation is the exemption for spouses. Given that the exemption costs the govern-

Shigeki Morinobu   Senior Fellow, Tokyo Foundation; Professor of Law, Chuo University; President, Japan Tax Institute.
28

Economy & Tradement some ¥600 billion in annual revenue through a narrowing of the tax base, it
should be carefully scrutinized to determine if it has any meaning in today’s tax
system.
Ever since Carl Shoup supervised the reform of Japan’s tax system in the late
1940s, the Japanese income tax has been built around individual-based taxation.
At the same time, the system has incorporated various deductions and exemptions
for householders in an effort to adjust the tax burden according to family circumstances. One of these tax breaks is the spousal exemption.
The spousal exemption deducts ¥380,000 from the taxable income of a married taxpayer (in practice, the husband) whose spouse earns no more than the
stipulated maximum (¥1.03 million for wage earners), in effect providing preferential tax treatment for households with full-time homemakers. Originally established as a “dependency” deduction, this tax break was established as a discrete
exemption in 1961 on the grounds that a spouse should not be treated as a dependent, since a husband and wife are both contributing to the sustainment of thehousehold.
In December 1961, the government’s Tax Commission offered two basic justifications for the exemption. First, it stressed the need to provide tax relief for men
married to full-time homemakers on the grounds that the wife incurred additionalcosts, adversely affecting the husband’s ability to pay. Second, it emphasized thevalue of the full-time homemaker’s housekeeping and child-rearing duties andsought to recognize the “helpmate’s contribution” to her husband’s earning power.
More recently, supporters have put forth a third rationale, arguing that preferential treatment for full-time homemakers is one way to encourage couples to havemore children at a time when Japan’s birthrate has sunk to an unprecedented low.
Criticism of the Spousal Exemption
Opponents of the exemption have challenged the validity of these arguments asfollows.
With regard to the first justification, some have criticized the assumption thatmarriage negatively affects a man’s ability to pay taxes, calling it a holdover of thepre-1961 concept of the spouse as a dependent. Indeed, it has been argued that thedomestic labor performed by the homemaker actually enhances the husband’s ability to pay, since it generates “imputed income” that escapes taxation.1
See Yasuo Tanaka, “Shotoku kojo no konnichiteki igi—jinteki kojo no arikata o chushin
to shite” (The Role of Income Tax Deductions Today—Focus on Personal Exemptions),

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With regard to the second justification, while acknowledging the contributionof the full-time homemaker to the husband’s earning power, critics contend that it
is unfair for the tax system to give preferential treatment to full-time homemakers,
since working wives often bear the burden of housework and childrearing as well.
They also make the point that, if the domestic labor of the wife allows the husband
to earn more, that means the “helpmate’s contribution” is already being rewarded
financially, and there is no need for preferential tax treatment.
As concerns the third justification, that the spousal exemption can help stem
the decline in the fertility rate, opponents have countered the exemption favors
full-time homemakers with or without children. It should also be noted that theexperience of other industrial countries over the past few decades challenges theassumption that greater labor-force participation correlates with lower fertility;
indeed, as we discuss below, the opposite appears to be the case.
In addition, arguments have been advanced from the perspective of equity.
Under the current tax code, most wage earners are entitled to a ¥650,000 employment income deduction as well as the standard ¥380,000 basic exemption. Thismeans that the spouse can earn up to ¥1.03 million tax free. Yet the husband canstill claim the ¥380,000 spousal exemption, resulting in a double exemption for the
couple. In Figure 1, the shaded area represents this double exemption.
The spousal exemption has also been criticized as a policy that benefits thewealthy disproportionately, since the percentage of households claiming the exemption is larger among higher-income households.
As women enter the labor force in increasing numbers, however, the main focus
of debate has shifted from the husband’s tax burden to the impact of a full-time
homemaker’s tax break on women’s employment. Opponents of the break argue
first of all that it fails the test of neutrality with regard to women’s work patterns
and earnings. Increasingly, moreover, critics are blaming the spousal exemption formaintaining a psychological ¥1.03 ceiling on women’s income (in the minds of
employers and employees alike), thus perpetuating employment inequities thathave been long since legally abolished.
Women’s Employment and the Fertility Rate
Defenders of the exemption have long focused on Japan’s low birthrate and dwinZeimu Daigaku Ronso (National Tax College Treatises) 48 (June 2005), National Tax
College (National Tax Agency), https://www.nta.go.jp/ntc/kenkyu/ronsou/48/tanaka/
ronsou.pdf.
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Economy & Trade
Figure 1. Income Deductions under the Current Personal-Exemption Systemdling population as rationales for preserving the deduction. Their argument is thattax relief for households with full-time homemakers should have the effect ofboosting the fertility rate. Interestingly, however, data from other industrializedcountries point in the opposite direction.
Figure 2 shows the correlation between the total fertility rate (vertical axis) andwomen’s labor-force participation (horizontal axis) among various member statesof the Organization for Economic Cooperation and Development. The graph for1980 does in fact show an overall negative correlation between TFR and labor-force
participation; in other words, the larger the proportion of women participating in
the labor force, the lower the fertility rate, generally speaking. However, the graphfor 2000 exhibits the opposite trend—a positive correlation. After 1980 the overallsituation among OECD countries clearly changed until, two decades later, higher
rates of female labor-force participation were associated with higher TFR. The
most likely explanation for this change is the adoption of public and corporate
policies supporting women’s employment, together with changes in the husband’srole within the family.
Significantly, Japan stands apart from this trend. Here women’s labor-force
31Economy & Trade
Figure 2. Women’s Labor-Force Participation and Total Fertility by OECDCountry

Source: Compiled by the author from OECD and other data.

32

Economy & Tradeparticipation rate rose moderately between 1980 and 2000, while the fertility rate
dropped. But the example of other industrialized countries should teach us that,given sound public policy, it is possible to boost the fertility rate while increasing
women’s labor-force participation.
Individual- or Family-Based Taxation?
An inquiry into Japan’s spousal exemption raises the more general question ofwhether income taxes should be assessed on the basis of individual or householdincome. In truth, both systems have their pluses and minuses, and it is difficult toargue that either offers a decisive advantage over the other.
Given the economic interdependence of family members and their tendency tofunction together as a single consuming unit, it makes sense to look at family income as a whole when gauging ability to pay. The problem with family-based
taxation is that it almost invariably incorporates a bias vis-à-vis taxpayers’ marital
status by taxing individuals at different levels depending on whether they are married or single. It can also raise serious fairness questions regarding the taxation of
single-income versus dual-income couples.
Assuming a progressive (graduated) tax-rate schedule, an income tax based onhousehold income (joint taxation) preserves an equal tax burden among families
with the same income. However, it typically results in a “marriage penalty” in that
two earners who marry and continue to work will end up paying more in taxes
than they did when they were single because their aggregated income puts them ina higher tax bracket.
To avoid or mitigate the penalty, many family-based systems use “income splitting” to compute taxes. Under this method, the couple’s incomes are combined andthen divided in two, and the tax rate is applied on the basis of this average. Thiscan lead to a “marriage bonus,” particularly if one of the spouses earns considerably more than the other.
Since the tax benefits of income splitting increase as the gap between the two
couple’s incomes widens, though, this system can be criticized as favoring single-earner households. Family-based taxation can also drastically reduce a married
woman’s incentive to enter the labor market, since any additional income she earns
will be taxed at a rate determined by the household’s aggregate income.
If our goal is to improve the tax system’s neutrality vis-à-vis family work patterns so as to encourage women’s participation in the labor force, in keeping withthe government’s growth strategy, then shifting to a system of this sort would becounterproductive. It would also be highly problematic from the standpoint of33

Economy & Tradeequity, since income splitting yields greater tax benefits for higher-income households, while those in the lower income brackets gain little or nothing.
Japan used family-based taxation prior to World War II, but after the war it
adopted the recommendations of the Shoup mission and made the individual thebasic tax unit. However, the individual-based system engenders problems as well,such as the practice of reallocating assets to other family members to avoid taxes
on income from a family business, not to mention the questionable equity of requiring one-earner families to pay more in taxes than two-earner families with thesame income.
From an international perspective, most major industrialized countries incorporate aspects of both individual- and family-based taxation. In the United States,
married couples can file either jointly or separately, and exemptions for spouses areincluded under personal exemptions, which include standard deductions for theindividual taxpayer, the spouse, and each dependent. Britain shifted from family- toindividual-based taxation in 1990 and eliminated the spousal exemption in 2000.
In Germany, married couples can choose either individual or joint taxation (income
splitting method), and there is no exemption for spouses. France uses a “family
quotient” income-splitting system to adjust the tax rate to the size of the family(combining all family income, dividing it by the number of family units, applying
the appropriate tax rate, and then multiplying the result by the number of family
units), with no special exemptions for spouses.
As the foregoing suggests, whether an individual-based or family-based system
is more conducive to ensuring the equity of a progressive income tax is not an easyquestion to answer. However, among the world’s industrialized countries, the overall trend has been toward individual-based taxation, as exemplified by Britain’s
1990 reform. Today 25 of the OECD’s 29 member states use individual-based
taxation in some form. I see no compelling reason for Japan to abandon its current
system in favor of mandatory or elective joint taxation. Moreover, given the increasing diversity in individual and family lifestyles, individual-based taxation isprobably the more rational choice.
From Spouse to Family Exemption
To return to Japan’s spousal exemption, then, any new policy the government
adopts must do three things: preserve the basic principle of individual-based taxation, ensure neutrality with respect to family work patterns, and strive for maximum equity on a household basis.
Thus far, discussion has centered on two basic proposals: (1) eliminating the34

Economy & Trade
spousal exemption and using the recovered revenue to create a comprehensive
childcare support system (for example, tax credits for dependent children, a childallowance, and an expansion in the number of day-care centers); and (2) replacing
the spousal exemption with a more generous basic exemption applicable to all
taxpayers, thus eliminating the bias against working spouses.
The first proposal has its roots in the 2002 reform recommendations of thegovernment’s Tax Commission, which called for eliminating exemptions for
spouses and dependents and instituting a tax credit for dependent children. The
commission’s reasoning was that, unlike an income deduction, “a tax credit can beapplied equally, regardless of income level.” As a drawback, however, the reportnotes that adopting such a measure would involve “combining income exemptions
and tax credits, which would make the system more complicated.” (In 2010, theTokyo Foundation issued a set of specific recommendations centered on the adoption of a refundable child tax credit in place of current exemptions for spouses anddependents.)
The second proposal, expanding the basic exemption to replace the spouse
exemption, would have relatively little impact by itself, assuming that the exemption would apply to all taxpayers and that the change would be revenue neutral.
In that case, the increase in the basic exemption would have to be exceedingly
small, and the efficacy of the reform would be minimal.
A third alternative would be a “transferable basic exemption” to replace thecurrent system of spousal and basic exemptions. This would do away with the
double exemption mentioned previously, while at the same time eliminating the¥1.03 million barrier that has discouraged fuller labor-force participation by
women. Under this system, every individual would be entitled to deduct a standard
amount from their income as a basic personal exemption. A married couple would
thus be entitled to two exemptions, regardless of their employment status or income. In cases where the wife earned less than the basic exemption, the husband
could deduct the unused portion of her exemption from his own income. This canbe called the “family exemption.”
Figure 3 compares the outcomes of this system of personal exemptions with thecurrent system. In this chart, the shaded portion represents the deductions thatwould be eliminated under the proposal.
Note that this system falls short of achieving complete neutrality with regard
to women’s employment choices since it would yield no change in the tax-exempt
amount for households with women earning less than ¥650,000 or more than
¥1.41 million. However, it would reduce the psychological impact of the ¥1.03
million threshold, mitigate the financial penalties experienced by Japanese couples
35

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Figure 3. Income Deductions Under a Transferable Family Exemption System

when the wife enters the labor market, and eliminate the inequity of the double
exemption.
Under this system, the tax burden would increase in households with women
earning between ¥650,000 and ¥1.41 million, since the husband would be able toapply only the unused portion of the woman’s basic exemption rather than the larger
spousal exemption and special spousal exemption (when the wife earns between¥380,000 and ¥760,000). However, a simultaneous expansion of the government’s
childcare support system (requiring an increase in spending) could serve to mitigate
the impact, since many of the households affected would be families with children.
Deducting Childcare Expenses
The government’s new growth strategy pledges to “pursue policies to further improve the work-life balance and consider measures to alleviate the financial burden
incurred by such services as babysitting and housekeeping.”
Because babysitters and housekeepers are unregulated in Japan and are under
no obligation to register their businesses or report their activity, no system cur36

Economy & Traderently exists for integrating such services into government policy. However, beginning in fiscal 2015, babysitting will be classified as “visiting childcare services”(childcare provided in the home of the child) and will be eligible for support under
the new child and childcare assistance program. In addition to such welfare benefits, the government should expand assistance and incentives for those employersthat offer babysitting or housekeeping allowances to employees.
Providing tax deductions or tax credits to offset babysitting and housekeeping
costs is doubtless desirable from the standpoint of alleviating such expenses for women
working outside the home. But tax designers must be armed with strong economic
data before establishing a permanent deduction dedicated specifically to that purpose.
With this in mind, we recommend further studies to assess the effects of tax relief
targeted to babysitting and housekeeping costs from the standpoint of neutrality.
In the meantime, since babysitting costs can take a variety of forms, the best
option for tax relief is probably to include such expenditures under “deductions
for specific expenses.”
Tax reforms carried out in 2011 expanded the use of the “specific expense”(itemized) deduction while establishing an upper income limit for the standard
employment income deduction. Cognizant of growing diversity in labor and employment patterns, the Tax Commission moved to lower the floor for itemized
deductions and expand the scope of qualifying expenses. As a consequence, the listof deductible expenses now includes the costs of acquiring the legal qualifications
needed to practice such professions as law, public accounting, and tax accounting.
The list also contains such “necessary job expenses” as purchases of publications,clothing, and entertainment expenses. Including babysitting and housekeeping
costs under “necessary job expenses” would allow the government to provide tax
relief for working wives without making any permanent structural changes to the tax
system and would minimize complications from the standpoint of tax enforcement.
***

Summary of Policy Proposals

Expanding the Tax Base for a Sustainable Social Security System
1. The importance of reexamining the tax base

Among the world’s industrialized countries, Japan derives a relatively small portion
37

Economy & Tradeof its total tax revenue from personal income taxes. One reason is that Japan’s tax
code limits the income tax base by providing for various income deductions, including the standard “employment income deduction” and deductions for social
insurance premiums. Moreover, because income from public pension plans is partially exempt from taxation, the tax base continues to shrink as society ages and the number ofpeople receiving pension benefits soars. Expanding the tax base by identifying potential revenue
sources that currently escape taxation can serve toboost tax revenues while at the same time enhancing the redistributive function of the tax system,
thus helping to address growing economic disparities. In this way it can contribute to the development of a fair and effective tax system.
2. Instituting a social solidarity tax

Japan’s social insurance system has a double function—to provide insurance coverage and to redistribute economic resources. Inasmuch as it is, in effect, a tax on wages, the redistributive component of social insurance (to finance healthcare for the elderly andto make up for the lack of pension contributions from dependent spouses and theunenrolled) should be financed with a new “social solidarity tax” levied on individual income. This would eliminate employer contributions to social insurance
programs, preventing a rise in labor costs and dampening the incentive to replace
regular employees with contract, part-time, and other nonregular workers.
3. Rethinking taxes on public pensions

The public pension scheme currently allows for multiple tax breaks. Contributions
are tax deductible, the interest accruing on contributions is tax exempt, and pension income is partially exempt as well. For many receiving pension benefits, thenet effect of the applicable deductions and exemptions is zero tax liability. Without
any substantive change in the pension and tax systems, current and future workers
will be obliged to pay for some ¥500 trillion in unfunded liabilities stemming frompast commitments. Paying their share of taxes on pension income is one way current beneficiaries can ease the burden of future generations and contribute to thevitality of the Japanese economy.
38Economy & Trade
4. Replacing the spousal exemption with a family exemption

The government is currently deliberating tax and social security reforms that would
correct systemic biases with regard to family work patterns as part of its commitment to encourage women’s active participation in the labor force. The current
spousal exemption—a tax break for households with full-time homemakers that
results in about ¥600 billion a year in lost tax revenues—has come under scrutiny
To restore the tax system’s neutrality with regard to family work patterns, Japan
should replace the current spousal exemption with a transferable basic exemption(or “family exemption”) designed to maximize fairness with regard to each household’s ability to pay.
5. Correcting the inequity of tax-free pension benefits

Survivors benefits paid to the immediate family of deceased pension enrollees are
currently exempt from taxation. While there is an obvious need to address theneeds of young survivors, exempting elderly beneficiaries while at the same timerequiring them to pay taxes on old-age pensions is difficult to justify from thestandpoint of fairness. Benefits received by elderly survivors should therefore be
taxed at the same rate as other pension benefits.
6. Broadening the tax base can mitigate economic inequality

Broadening the tax base means reducing and eliminating deductions and loopholes
so as to collect taxes from those who have thus far avoided paying them. Based on
the experience of other countries, we believe that the reduction of loopholes andexemptions to broaden the tax base, if carried out in combination with redistributive policies, can help to mitigate the economic inequality that has emerged as a
growing concern in recent years

39Economy & Trade
May 27, 2014

Moving the ROE “Mountain”
A Framework for Capital Market Reform
Keiichiro Kobayashi

Despite a slew of corporate governance reforms undertaken over the past two decades, Japanese companies remain extraordinarily immune to shareholder pressure. Keiichiro Kobayashi argues that reforms must begin targeting the investors in order to transform and revitalize Japan’s business culture.
*

*

*

A

bout two years ago, I assembled a group of financial experts to identify
the problems in Japan’s equity market and propose directions for reform.
We named our group the Yama o Ugokasu Kenkyukai (Yamaken) or“Moving the Mountain” Study Group. The name, explained in greater detail below, reflects our perception of the task facing policymakers if they wish to revitalize the Japanese economy through meaningful capital market reforms.
The need for reform is clear. Despite recent improvements, Japanese companies
in the Topix index averaged a return on equity (ROE) of only 6% during the 10
years from 2004 through 2013, as compared with 12.6% for the companies in the
MSCI World Index. If we focus not on the mean value but on the mode—that is,
the ROE levels occurring with the highest frequency—the difference is even morestriking. Figure 1 illustrates the frequency distribution of ROE values among listed
Japanese firms.
The peak in this histogram represents the ROE range most frequently seenamong Japanese companies: roughly 3%, as compared with a global figure of 13%.
In other words, to place Japan’s equity market on an equal footing with that ofother countries, we need to move this “mountain” a full 10 points to the right—

Keiichiro Kobayashi   Senior Fellow, Tokyo Foundation; Professor, Faculty of Economics, Keio University; Faculty Fellow, Research Institute of Economy, Trade, and Industry;
Research Director, Canon Institute for Global Studies.
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Frequency Distribution of ROE in Japan (10-year average)

Source: Yasunori Nakagami, Bloomberg.

hence the name of our study group. Convinced that moving this mountain would
require a wholesale restructuring of corporate governance through multi-level reforms, the group spent two years deliberating the kinds of policies that could help
bring about such a transformation.
Toward a Shareholder-Centered ModelIn the 1970s, corporate financing in Japan was basically controlled by a handful oflarge banks that maintained close, long-term relationships with their corporateclients. In their dual role as shareholders and creditors, these “main banks,” as they
are known, imposed a considerable measure of long-term discipline on corporate
governance.
In fact, the average ROE of Japanese corporations during this period wasroughly comparable to that of US companies. In the booming 1980s, however,Japanese corporations were able to raise cash by tapping into inflated asset prices,and the banks ceased to perform their traditional role. The ROE of Japanese companies began to plunge around this time, and even today—20 years after the collapse of the asset bubble—it remains far below the global average.
This suggests that a major factor behind the low ROE of Japanese corporations
is the loss of discipline formerly imposed by the main bank system. To restore discipline and boost ROE, Japan needs to complete the transition from a bank-centered model of corporate governance—embodied in the now-dysfunctional mainbank system—to a shareholder-centered model.
41

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To achieve this, it is not sufficient to focus reform efforts on the corporations
alone. What we need are consistent, integrated reforms along the entire investment
chain, injecting greater vitality at three stages: (1) the institutional investors, suchas pension funds and life insurance companies, that hold assets to be invested; (2)the asset management companies that invest funds on their behalf; and (3) the
private companies in whose stock a portion of those funds are invested.
At stage 3, the key goal is to encourage a greater awareness of the cost of capital in corporate management. This is also the goal of the corporate governancereforms Japan has implemented over the past two decades with a view to boosting
the vitality and competitiveness of Japanese business. To achieve this, reforms areneeded for stage 2—the asset management companies (AMCs) that invest in these
corporations on behalf of institutional investors.
The goal here is to get professional investors more actively engaged in the management of investee companies so as to contribute to their long-term growth. As
things stand now, Japanese AMCs exert almost no influence over corporate management. Asset managers in Japan focus their efforts either on passive index-based
investing, in which case they have no shareholder role in individual businesses, oron quick profits from short-term trading, meaning they have almost no interest in
businesses’ long-term growth.
There is a need to change this culture and to encourage the kind of investor
engagement that can impose discipline on corporate management, much the way
banks did during the heyday of the main bank system. This requires leveraging
their position as shareholders and providing management with timely and constructive ideas for reform—ideas that management would welcome and value.
Institutional investors (stage 1) have a key role to play as well. In addition toseeking maximum long-term performance from their investments, they have a social responsibility to help inject vitality into the asset management industry throughthe kinds of long-term investor agreements that encourage engagement-oriented
investment.
Japan’s Aberrant Asset Managers
Japanese economists and policymakers have been talking about corporate governance reform for decades now. The problem is that hardly anyone has bothered toaddress the other half of the equation, namely, institutional investors and the asset
managers that invest on their behalf—or, if the issue has been raised, no one has
paid much attention. It seems to me that the reason the corporate governance reforms of the past 20 years have yielded so few tangible results is that efforts have42Economy & Tradenot extended to institutional investors and AMCs. If we want to see real progressin Japanese corporate governance, we need to take a comprehensive, integrated
approach that deals simultaneously with the corporations, the institutional investors, and the AMCs together as closely interacting players in the investment chain.
It is no secret that Japan’s asset management business has serious and deeprooted problems. Surely one reason returns on Japanese equities have stagnated at
half the global average is the passive behavior of Japan’s asset managers, who dolittle more than pour their clients’ assets into the most popular index-linked funds,
knowing that their clients will be satisfied as long as their returns keep pace with thedomestic market overall. This situation minimizes incentives to boost corporate ROE.
Of course, each company’s ROE is basically a function of its productivity, but
pressure from the asset management industry can have a major impact on companies’ productivity. Japan’s lagging ROE is a testimony to the relatively backward
practices of our asset management industry. The relationship between Japanese
investors and investees has settled into an insular form of stagnation that may be
regarded as a manifestation of Japan’s “Galapagos syndrome.”
Our group believes that the only way to alter the hidebound behavior of institutional investors and AMCs in Japan is to modify the market environment andgovernance structures that encourage it. Since it is beyond the purview of this article to cover all the policy ideas discussed within our study group, I will limit
myself to offering three examples of the kinds of proposals that could play a pivotal role in the reform of Japan’s capital markets.
Proposal 1: Supporting Emerging Managers

One way to help Japanese AMCs’ break free of their herd mentality and passive
approach to investing is to encourage market entry by newcomers. Although Japan’s asset management industry has relatively few institutional barriers to entry,
even the most able newcomers face daunting obstacles owing to the reluctance ofinstitutional investors to entrust their funds to a company with no previous recordof performance.
This problem could be addressed by a kind of “affirmative action” system under which institutional investors would be required to allocate a certain portion of
their assets (for example, 1%) to up-and-coming AMCs, or “emerging managers.”
Many US states have adopted such quotas for their public pension funds via socalled emerging manager programs. A well-known example is CalPERS, the California State Employees’ Retirement System. CalPERS pioneered the emerging manager concept in 1999 with the launch of a $3 billion Global Equity Manager
43

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Development Program, and it has been increasing the quota ever since. Similarly,
the State Employees’ Retirement System of Illinois is required by law to utilize
emerging managers for approximately 10% of its equity portfolio. In 2012, thisamounted to about $720 million.
In the United States, emerging manager programs of this sort were originallyadopted with the political aim of supporting minority-owned investment firms, butthey are now regarded as a tool for boosting overall performance by augmenting
the contribution of small, up-and-coming management companies that can respondflexibly to changing market conditions. In Japan, this kind of affirmative action
could perform an important public policy function. By mandating the utilizationof AMCs that would otherwise find it virtually impossible to attract institutional
investors, such a program would serve the laudable purpose of injecting vitality
into Japan’s hidebound and stagnating asset management industry.
Proposal 2: Promoting Engaged Investment

To encourage these emerging managers to adopt an engagement-oriented approach,
we also need to ensure that they have assets allocated for long-term investment.
Start-ups in this industry face especially steep hurdles when it comes to longterm investing, as Japanese institutional investors are extremely reluctant—more
so than their Western counterparts—to entrust their assets to untested AMCs overlonger investment horizons. This places stiff constraints on the investment strategies of emerging asset managers. If entrusted with funds under a three-year agreement, an AMC can develop its own strategies for long-term asset building. As along-term corporate shareholder, it can engage with management to encourage
positive changes that increase the value of its shares. When limited to short-term
investment, however, they fall into the habit of short-term trading and never develop the capacity to for anything beyond a passive, short-term investor relationship. This vicious circle needs to be broken.
We believe that nurturing AMCs oriented to long-term investment is an important key to reform of the Japanese economic system. Assuming that this is a worthwhile public endeavor, it makes sense, as a matter of public policy, to make longterm funds available to fledgling AMCs. One way to do this would be to institutea requirement that public institutional investors (the Government Pension Investment Fund, Japan Post Bank, etc.) entrust a certain minimum share of their investment assets to emerging managers under long-term asset-management agreements(three years or more). Another possibility would be for public institutional investors (such as the Innovation Network Corporation) to invest directly in these fledg44

Economy & Tradeling AMCs, thereby providing them with sufficient capitalization to embark on
long-term investing.
Proposal 3: Creating an Investors’ Lobby

Finally, we believe it is essential for the investment industry to come together toformulate its own long-term vision and become actively involved in the rule-making process (including statutory regulation and the establishment of a frameworkfor dialogue with investee corporations) if it is to make the transition to engaged,
long-term investing.
Japan does have the Investment Trusts Association, but this is a passive entity
devoted to industry self-regulation under existing Japanese law. To my knowledge,
this country has no active, independent trade group that can advocate for the industry on laws and statutory regulations and lead the way on reform of businesspractices. To fill this gap, we recommend establishing a loose trade association built
around a nonprofit organization and open to professional investors across thebusiness spectrum. The functions of such a group—which we shall tentatively namethe Investors’ Forum—might be as follows.
1. Ascertaining the views of the professional investment community on laws andregulations governing its activities and lobbying the government on its behalf
through proposals, opinion papers, etc.
2. Developing standards for engagement with investees and representing the professional investment community in wide-ranging dialogue with business.
3. Acting as a counterpart to professional investor associations overseas; cultivating contacts and exchange with overseas associations to learn about best practices of overseas investment professionals and promote their adoption in Japan.
Conclusion
The goal should be to create a market environment conducive to long-term improvement in corporate productivity. To change the market environment, it is necessary to change the behavior of the institutional investors and asset management
firms that account for the lion’s share of equity investment. The Japanese economic
system must be reformed as a whole to promote the shift to a shareholder-centeredmodel, in which investors assume the role formerly played by the main banks andbecome actively engaged in the business policies of investee firms to promote theirlong-term growth and development.
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The proposals outlined here are but a sampling of the kinds of concrete policies
needed to effect this shift. Further study is needed to develop a comprehensive,
consistent policy package aimed at each stage in the investment chain: institutional
investors, asset managers, and corporations. The future of the Japanese economy
depends on it.

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CSR White Paper 2014
September 8, 2014

Overview of CSR in Japan
Ideals, Intentions and Realities at Advanced Companies
Tokyo Foundation

Addressing Social Issues That Government Alone Cannot Resolve
Up to now people in Japan have tended to think of it mainly as the government’s
job to deal with matters like the environment, human rights, women’s advancement, and poverty. But now the situation has become more complex. For example,
when we consider the factors seen as contributing to poverty, including unemployment, dysfunctional families, and lack of education, it is apparent that the Ministryof Health, Labor, and Welfare, which is responsible for government policy in thisfield, cannot resolve the issues on its own; it is also essential to have cooperationfrom businesses and communities in order to create jobs. And in the case of largescale disasters like the Great East Japan Earthquake of March 2011, the impact
affects every aspect of people’s lives and cannot be addressed solely within theframework of public administration.
There are limits on the capability of government organs to deal with the public
issues that we face. In order to cope with these issues, which are diversifying anddeveloping a complex web of interconnections, we must call on the resources ofsociety as a whole in support of the public realm.
Every social problem is in fact an amalgam of diverse individual woes, and its
solution must involve all-out efforts not just by the government but by all sectors
and strata of society, including businesses and citizens, based on a sense of theirrespective responsibilities. In particular, heightened expectations are being directed
at the corporate sector, with its organizational strengths and funding clout.
“Landmine” Issues That Threaten Inattentive Japanese Companies
Meanwhile, with the progress of economic globalization, the impact of corporate
business activities is rapidly expanding in scale. And corporate responsibility, which
was traditionally seen as applying to a relatively narrow range, notably the interests of companies’ shareholders and consumers, has extended to encompass the47

CSR White Paper 2014environment, jobs, and human rights in regions far removed from their home countries.
Japanese corporations, responding to the shrinkage of their domestic market
and taking advantage of the strength of the yen, have stepped up the pace and scaleof their overseas mergers and acquisitions. As a result of this M&A activity, they
are both procuring supplies and selling products in more countries, and they must
simultaneously manage organizations in locations with different operating climates. This international expansion of their operations is accompanied by the expansion of the risks they face, a point that was highlighted back in the 1990s when
Nike came under attack for the alleged use of child labor by suppliers in Southeast Asia.
Hideto Kawakita, who heads the nonprofit International Institute for Human,
Organization, and the Earth (IIHOE), notes that the social issues that citizens viewas important differ from country to country, citing the results of a survey of readersof environmental and social reports conducted by the NTT Group. For example,
according to this survey, the share of people citing “protection of human rights” asa form of social responsibility that corporations should address is much higher inother countries—Britain, Germany, China, and Malaysia—than in Japan.
What this suggests is that a Japanese company whose management takes aJapanese view of human rights may find itself unable to deal with the risk of suddenly being sued at one of its overseas affiliates on the other side of the globe forviolating human rights. So there is a strong need for Japanese corporations to address social issues from a public-interest perspective, not just to meet their social
obligations but also to manage the risks of doing business globally. In other words,
they must practice corporate social responsibility (CSR) to avoid stepping on“landmines” around the world.
Rising Expectations for Private-Sector Involvement
Though we hear much talk about the need for CSR, in practice the activities ofJapanese firms in this connection tend to be limited to introductions of their “gooddeeds” and contributions to charity and documents drawn up to meet international
CSR reporting standards. As matters stand, society cannot readily see the great
potential that companies have as participants in efforts to address public issues,and companies cannot readily generate synergy through the sharing of know-how
and the conduct of joint endeavors in this area. It is a shame to let these potential
benefits go to waste.
CSR activities ought to allow companies to draw on their own problem-solving
strengths and take the initiative in addressing social issues, thereby giving a com48

CSR White Paper 2014
petitive advantage in terms of business management as well, such as by letting themgrasp new business opportunities, enhance their technologies and services, andrecruit and develop superior human resources.
We believe that it should be possible to tap the strengths of Japan’s corporate
sector in a strategic manner. The question is what is required in order to breakaway from rigid reliance on the government, which faces severe fiscal constraints,
and get the private sector more involved, making it possible for corporations tochange society for the better.
To address this question, the Tokyo Foundation launched a CSR survey ofabout 2,000 companies around Japan, including listed corporations, major unlistedcompanies, and major foreign affiliates, seeking to investigate the relationship between Japan’s companies and social issues.
Five Common Points in Japanese CSR Efforts
Our survey contained numerous questions concerning companies’ thinking aboutsocial issues. These seem to have caused considerable confusion among the respondents, who made comments like, “We’ve never been asked how we define social
issues,” and, “We don’t know how to respond, since the question is not related to
the CSR guidelines.” These responses suggest that Japanese companies are not accustomed to considering social issues from an autonomous perspective.
Below we cite five common points that emerged from the survey.
1. Domestically, many companies are undertaking efforts in the areas of the environment, human rights, and women’s advancement, but few are addressing theissue of poverty. Overseas, the top area they are addressing is the environment.
2. Environment-related efforts approach the ideal in terms of being integrated withbusiness operations, but efforts in the areas of human rights and women’s advancement are mainly directed at people inside the company.
First of all, what specific types of social issues are Japanese companies addressing
through their CSR activities? Many are involved in initiatives relating to environmental protection, respect for domestic human rights, and women’s advancement
within Japan. But their human-rights-related activities are generally undertaken in
the context of legal compliance and corporate governance, involving employee
education and similar efforts aimed at preventing sexual harassment, power harassment, discriminatory behavior, and other abuses within the company. And theirefforts for women’s advancement aim to make it easier for women to be dynami49

CSR White Paper 2014
Figure 1

Figure 250

CSR White Paper 2014
cally engaged within the company and thereby to improve the company’s image(see Figures 1 and 2).
The most commonly cited areas in which companies view their domestic CSR
activities as having produced good results are (1) environmental protection, (2)cultural preservation, including efforts to keep local festivals going and to pass on
traditional culture to the next generation, and (3) maternal health, including improved maternity leave programs. Outside of Japan, environment-related efforts
are by far the most commonly cited as successful.
3. Companies are aiming to integrate their CSR activities and their business operations, but they have yet to approach this ideal.
Focusing on the CSR initiatives that companies viewed as successful, the companies
were asked how these initiatives were relevant to their business operations andhow they enhanced the company’s strength.
In terms of relevance, the most common replies were that the initiatives had
allowed companies to make good use of their own products or services and that it
had been possible to incorporate them into the company’s business processes. In
terms of enhancing the company’s strength, the respondents cited a wide range ofbenefits, including improvement of the company’s image, development of humanresources, new business opportunities, enhanced technologies, and increased earnings (see Figure 3). The ideal for companies is to “integrate” their CSR activities
and their business operations, achieving business success while producing a positive impact in addressing social issues.
When it comes to environment-related initiatives, an area in which Japanesecompanies are strong, they have been able to approach this ideal in many cases.
But in other areas the ideal is proving harder to realize. Consider, for example, thearea of human rights, which, as noted above, is one where Japanese companies facestrong demands overseas. So far they have undertaken few initiatives in this connection outside of Japan. And the steps they have taken within Japan are largely
related to their legal compliance efforts, such as paying attention to human rights
in their business processes and adding this subject to their employee training programs; they have not reached the point of actively working for social change
through their business activities.
The issue of human rights has traditionally been something of a taboo topic
within Japan, and so it has been difficult for companies to address it. But we are
now in an age when the US Department of State is regularly issuing reports onhuman rights concerns in countries around the world, including Japan, and so51

CSR White Paper 2014
Figure 3

Japanese companies can no longer keep up this posture of neglect. In this connection, the efforts by Takeda Pharmaceutical and Dentsu that we introduce below are
pioneering initiatives that address this issue both from the business side and as a
CSR concern.
In any case, the results of the survey reveal that, while many corporations are
pursuing the integration of CSR and their business operations as their ideal, it is adifficult matter to realize this ideal in connection with specific issues. Before we
consider the reasons for this difficulty, let us first look more closely at the conceptof “integration” itself.
Two Yardsticks: Contributions to Resolving Social Issues and Contributions
to Business Operations
In the business world, approaches like product portfolio management rely on apair of yardsticks, namely, market growth and market share. In CSR as well,there are two independent yardsticks that play a key role in integrating contributions to resolving social issues and contributions to business operations: (1) importance for corporate management and business operations and (2) importance in52

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terms of benefits for society—in other words, importance in terms of the public
interest.
In order to achieve the desired integration of CSR and business operations, it
is essential to aim for activities that will maximize both the contribution to resolving social issues and the contribution to business operations. But our survey revealed that this is hard to achieve in practice.
4. There is a greater emphasis on taking action to implement CSR than on deliberating how best to address social issues.
Corporations naturally devote much attention to the contribution of activities totheir business operations. But their focus tends to blur when it comes to contributions to resolving social issues. This aspect is generally left up to the judgment of
individual employees based on their own values and conscience, and often there isno deliberate coordination among employees in this connection.
So the CSR reports from Japanese corporations often feature snapshots ofexecutives and employees taking part in volunteer activities, along with blurbs
reporting on these efforts. In other words, they tend to be catalogs of “good deeds”
by people from the company. Of course, one cannot complain about good deeds,
but it is extremely rare to see CSR reports that actively present an integrated viewof the social issues that the company sees in its own area of business and the actions it is taking to address them.
This state of affairs can also be seen in the findings of our survey. In Figure 4
we show an issue-by-issue breakdown of the answers to two questions: “Howmuch interest do you have in resolving the following social issues?” and “Which of
the following issues are you taking concrete initiatives to resolve?” The results ofthis breakdown are interesting. For many issues, the number of companies thathave taken concrete action is higher than the number that have held repeated meetings to discuss the matter. When it comes to business management, a company
would never skip the deliberation process, including advance studies, but in thecase of CSR they move straight to implementation.
Of course there are some areas, such as the environment, in which Japanesecompanies are proficient and have been active for many years. For issues like these,
it is quite conceivable that companies completed their deliberations at an earlier
stage and were already at the implementation stage at the time of our survey. But
overall the results seem to indicate a strong bias toward action. This is also seen in
the areas of poverty and human rights, which are fields in which companies will be
expected to do more in the future.
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Figure 4

What we see here is a stress on doing good deeds, whatever they might be, andproducing results. It is possible that the process of deliberating why particular actions are appropriate for the company to undertake at a particular time is being
neglected. It may not be fair to suggest that companies are merely taking actions
so that they can fill up the pages of their CSR reports, but the fact that not a single
social issue was the object of more cases deliberated than of actions taken would
seem to indicate that, when it comes to CSR, companies are not undertaking thesort of advance deliberation and analysis based on a long-term perspective thatthey practice in their business operations. An emphasis on action sounds good, but
it is actually detrimental if it means that companies are taking a “stapler” approach
to CSR: merely putting together sheaves of documents cataloging the good deeds
they have done for society on an unsystematic basis.
The Case for Guidelines-Based Integration
How can companies switch from their current “stapler” approach to an approachthat emphasizes deliberation as the way to integrate CSR with their business activ54

CSR White Paper 2014ities on a systematic basis? One way for companies to consider what issues to address with concrete action in a more comprehensive and effective manner is throughthe use of guidelines.
One of the major sets of guidelines for CSR activities is the ISO 26000 standard, which groups social issues to be resolved into “core subjects” based on theperspectives of all stakeholders and breaks these down into detailed lists of issues.
For example, one of the core subjects is human rights, under which eight issues arelisted; it is recommended that companies decide on appropriate initiatives of theirown to deal with each of them.
(1) Due diligence: Check for violations of human rights within the organization
proper and in related organizations (client organizations); if violations arefound, correct them.
(2) Human rights risk situations: Special care should be taken in situations where
governments are corrupt and with business relationships that are not protectedby law, since violations of human rights can easily be overlooked.
(3) Avoidance of complicity: Avoid the earning of improper profits from humanrights violations, including profits earned through the organization’s complicity
in such violations and through violations by others.
(4) Resolving grievances: Resolve grievances by establishing systems that make itpossible to notify the organization when human rights have been violated.
(5) Discrimination and vulnerable groups: Prohibit direct or indirect discrimination
against all those connected with the organization, and give special consideration to providing equal opportunities and respecting the rights of vulnerable
groups whose members are liable to be placed at a disadvantage.
(6) Civil and political rights: Respect people’s rights to live with dignity as humanbeings and as members of society, including their freedom of speech and expression and freedom to participate in politics.
(7) Economic, social and cultural rights: Respect people’s rights to pursue lives ofhappiness and of good mental and physical health.
(8) Fundamental principles and rights at work: Respect the fundamental rights atwork identified by the International Labor Organization (ILO), including freedom of association, the right to collective bargaining, elimination of forcedlabor, abolition of child labor, and elimination of discrimination.
By referring to this set of guidelines organized by core subjects and issues, companies can shift from a collection of ad hoc “good deeds” aimed at promoting respectfor human rights to a more systematic program, mapping the connections between
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Figure 5

Figure 656

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the ISO 26000 core subjects and issues and their own business operations andidentifying the areas in which their efforts have been lacking up to now.
Japanese companies face major risks if they try to extend their operations toplaces like Europe and Southeast Asia—where, as we noted above, people havehigh expectations regarding respect for human rights—without reconsidering their
existing mind-sets and equipping themselves with concrete images and methods toaddress the relevant issues. If they adopt a more systematic approach and follow
established guidelines, they will be able to conduct dialogue with customers andvarious other stakeholders in the countries where they are operating, including
local government bodies, residents, and employees. This will make it possible forthem to ascertain their stakeholders’ expectations and deliberate on the importanceof the expected actions for their own business operations (see Figure 5). This approach goes beyond the realm of CSR and links up directly with the company’sbusiness risk management.
5. Having a department dedicated to CSR can make a big difference.
In the light of what we have considered so far, we can see that it is vitally importantfor corporate management that the company has a department dedicated to CSR
so as to consider all of the company’s initiatives to address social issues as a portfolio of programs and seek to integrate these activities with business operations.
The results of our CSR survey indicated this clearly.
As shown in Figure 6, we found a clear correlation between the level of interest
that companies show in resolving social issues and the presence or absence of adepartment dedicated to CSR. Quite naturally, an attempt to deliberate a social
issue in concrete terms requires study, vision, and consideration of the impact ofactions by the company on society and on the company’s business operations.
Though individual employees may have a good values, knowledge, and enthusiasm,
it is impossible to expect them to grasp the interrelations between social issues andbusiness operations in their entirety through their own efforts alone. Just as in thecase of developing a new line of business, it is necessary to handle the matter as a teameffort involving full-time staffers and an organizational unit dedicated to this task.
Here, though, we encounter another tricky issue, namely, the position of the
CSR department within the corporate organizational structure.
The Tendency for CSR Departments to Become Isolated
In tandem with the CSR survey, members of the Tokyo Foundation CSR project57

CSR White Paper 2014team conducted individual interviews with people at over 40 companies. The results of these interviews revealed that CSR still tends to “belong” to specific individuals. We found two patterns: one where CSR relies on the strong involvementof a senior executive and one where it relies on the persistent efforts of the responsible department.
In just about every company where a CSR department exists, it lacks organizational clout and has few employees. Since the number of the department’s employees is small relative to the weight and scope of its responsibilities, the ability
to get things done depends largely on the enthusiasm of the individual employees.
So the CSR activities end up “belonging” to these individuals.
If a top executive like the president or chairman of the board is strongly committed to CSR, it can have a strong impact on the company as a whole, and thework can be fulfilling. But it is rare for both patterns of “belonging” to coexist ina single company. And in any case, operations that rely on the power of individuals
lack sustainability.
Why are CSR operations liable to end up belonging to individuals? The underlying reason is that the time frame for corporate management from a CSR perspective is different from that for business-cycle management. A CSR department islooking at social issues that cannot be resolved quickly, and so its sense of time is
not the same as that of other departments scrambling to deliver results on a quarterly basis. This difference between long-term and short-term outlooks often resultsin the isolation of the CSR department from the rest of the company.
Since CSR departments address themselves mainly not to the company’s employees and customers but to society as a whole on various levels, including citizens
and governments, they tend to develop long-term mind-sets. From the standpointof executives and people in other departments working under medium-term management plans with spans of two or three years, the ideas set forth by the CSR
department are liable to sound like pretty thoughts lacking urgency.
Meanwhile, the older generation of executive officers and senior employees
are liable to misunderstand the significance of CSR. Many executives still equate
CSR with corporate philanthropy and the idea of “contributing to society,” thinking that it is something that is good to do but not essential. But in order for acompany to avoid stepping on “landmines” as it undertakes international operations, it must conduct risk management based on the knowledge assembled by
the CSR department concerning potentially dangerous issues. So CSR goesbeyond the realm of corporate philanthropy and other voluntary contributions tosociety.
Above, we noted the risk that a Japanese company may suddenly find itself
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being sued at one of its overseas affiliates on the other side of the globe for violating human rights. In order to avoid this sort of risk and reconfirm the company’ssocial raison d’être, it is essential to adopt the long-term perspective of CSR as partof the business process—it is essential, in other words to integrate CSR and business operations.
One hopeful phenomenon in this connection is the generational shift in the way
people view their relationship with society. Japanese corporate employees who are
currently in their forties or over tend to be highly focused on their own companies
and relatively lacking in interest in external phenomena. By contrast, those in theirthirties or under tend to seek their personal sense of worth not from their performance within the company but from their involvement with society. In other words,
younger employees are more open to the world beyond their own company andseek to interact with it naturally. Tapping the power of this younger generation may
make it possible for corporations to change society.
Where Are the Corporations That Can Change Society?
The results of our survey and interviews have given us a picture of the kind of
corporations that can change society, the types of ideas they are implementing, andthe sources of their motivation. We found three points characteristic of such corporations: (1) They are thinking and acting over a long time frame in integrating
their efforts to help resolve social issues and their own business operations. (2)They are keeping up efforts to tap their own corporate strengths in working toresolve social issues. (3) They have established concrete systems to channel theirstrengths for this purpose.
In closing, let us introduce the case of six Japanese corporations that have been
constructing relationships with society by appropriately identifying and tapping
their own strengths.
1. Sompo Japan Insurance Inc.: Focusing on dialogue

In order to identify the strengths that are required in order to integrate contributions to resolving social issues with its own business operations, Sompo Japan, hasbeen earnestly conducting dialogue with outside stakeholders. This ongoing dialogue has been clarifying what society expects of the company and which of thecompany’s strengths should be tapped in order to meet these expectations. The
capabilities that this company has displayed in a distinctive, highly visible mannerboth around the world and within Japan, notably in the areas hit by the March
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CSR White Paper 20142011 Great East Japan Earthquake, actually exist—perhaps less visibly—withinmany other Japanese corporations.
2. Itochu Corporation: A bottom-up approach

Itochu has been drawing on its corporate culture of conducting operations based
the awareness and motivation of its individual employees. Though the results may
seem to lack overall coherence, the company has built ties with society in a manner
befitting a trading company. The bottom-up approach it has been taking, relying
on input from the front lines of its operations extending around the globe, is also
effective for risk management.
3. Takeda Pharmaceutical Company Limited: Global partnerships

Takeda has gone global in order to compete successfully with the world’s othergiant pharmaceutical companies. Through the partnerships it has establishedaround the world, it is striving to respond to society’s expectations and demandsby “creating and sustaining corporate value”—in other words, by activating thepositive and offsetting the negative.
4. Kirin Company, Limited: Unification with brand strategy

In 2013 Kirin consolidated its beer, wine, and nonalcoholic beverage operations
into a single integrated beverage business within Japan. Its approach to CSR differsfrom those of the three companies cited above, focusing on “visualizing” the integration of CSR with the organization and with specific business strategies. In its
quest to lengthen the lives of its products in Japan, the country with the world’s
most demanding consumers, the company has found the answer in the integrationof CSR with its brand strategies, aiming to create shared value for society and thecompany through its business operations.
5. Dentsu Inc.: A “lab” model

Advertising and public-relations giant Dentsu promotes employee initiative through“labs”—small groups of employees from different sections of the company, whose
joint activities are recognized as part of the employees’ jobs. These labs, made upof people who are professionals at expressing and delivering messages, can turn an
issue like human rights into something with a different sort of potential. Dentsu,
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while nurturing the sort of thinking and posture that form the foundation of moves
to create a society embodying diversity, has also achieved solid integration of these
efforts with its own business operations. Dentsu’s lab activities, which attract individuals and have the potential to change society, offer a new model of organization.
6. Akebono Brake Industry Co., Ltd.: Continuation

Akebono, which boasts a large share of the global market for automobile brakes,
has been undertaking CSR activities over a longer time span than any other company considered in this overview. It has been making contributions in the field of
education for 50 years, and though these activities may seem to have no directconnection with its business operations, they have had an impact in connection
with other social issues and have in fact had a positive effect on the company’sbusiness. Akebono’s initiatives also offer good hints for addressing issues like diversity and inclusion, which have become important concerns for contemporary
corporate management.

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September 8, 2014

Turning Social Challenges into theCompany’s Strengths
Akebono Brake Industry
Tokyo FoundationW

hen you read the integrated business and CSR activities report published by Akebono Brake Industry, you quickly notice something interesting: the large number of employee photos featured on its pages,
compared to the reports of other companies. The cover of the 2013 Akebono Report is a good example, and so is that of the 2011 report: All photos are of Akebono employees working around the globe.
There are more employee photos inside. Akebono’s corporate mission is printed on the inside front
cover: “Through ‘friction and vibration, their control and analysis,’ we are determined to protect,
grow and support every individual life.” Underneath
this text is a picture of a group of Akebono employees, who are quoted on what the company’s corporate mission means to them personally. The juxtaposition of universal, crystallized principles andpersonal messages from employees who daily put
the corporate mission into practice gives a clear ideaof the kind of company Akebono is and what itmeans to work there.
Akebono’s company ethos comes through Cover of Akebono Report 2013.
strongly, too, in the report’s three feature stories.
The first is on the “New Midterm Business Plan,” the second is on “Product Development toward 2020,” and the third on “Developments since the Great East Japan
Earthquake.” The second article details how the company intends to turn its products and production methods into global standards and to become more competitive by adding enhanced product features (which the company calls “topping”) tomeet local market needs. The article features 12 young engineers who are respon62

CSR White Paper 2014sible for developing Akebono’s unique technology. Through the filter of these employees’ eyes—with specific references to their involvement in daily tasks—they
explain what the company’s goals are and describe what needs to be done going
forward in an approachable way.
Fostering Pride
But why are so many employees featured in the report? And why do they explain
all this in their own words?
An answer to these questions requires a look back at the company’s history.
Akebono manufactures brakes for automobiles andtrains. It boasts an impressive share of the global
market and is an example of Japanese manufacturing prowess.
“Brake” is the term for a device that stops a car
by using friction to convert kinetic energy to heat
energy. Brakes have an important role in protecting
human lives. We cannot escape the fact, however,that from a consumer’s perspective they are rather
uninteresting. People have heard of Japanese automakers like Toyota, Nissan, Honda, Mazda, Mitsubishi, and so forth, but not many could name a brakecompany.
In fact, Akebono employees are the same. They Comments by Akebono employees.
cannot buy their own company’s products, and neither do they know whether the cars they see on the road are using an Akebono
brake or not. A lot of hard work goes into making these products and parts, butwhen the fruits of such labor are not readily visible, having pride in one’s company
and its products can be difficult.
Akebono conducts surveys of its various stakeholders to learn what they thinkof the company and its products. Through this process, it has discovered that automakers and other business partners highly value the company’s products—even
more so than its own employees.
The company’s target for 2020 is to increase its share of the global OEM discbrake pad market to 30%. Its current share is 18%, so this is an ambitious goal.
Only an exceptional company could set its sights so high. But even for Akebono,
there might be more room in enhancing the pride employees feel about their company.
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A CSR Report for Employees to Read
At Akebono, the Corporate Branding Management Office plays a coordinating rolein advancing company-wide CSR activities. Branding is something that adds value
in the eyes of customers and is considered a central part of business strategy for
consumer product companies. But branding management is seldom an importantconsideration for B2B companies.
At Akebono, though, branding is aimed at fostering pride in employees, and it
is toward this goal that the company exerts its branding efforts. Generally speaking, companies direct their CSR and other annual reports at their various stakeholders. But the Akebono Report is created with the idea that employees would beamong its most important readers. It is intended as a guide to help employees
identify closely with the company and act accordingly.
The following comes from the conclusion of the “Top Message” section of thereport, written by Akebono Brake Industry President and CEO Hisataka Nobumoto: “Brakes are not merely car parts; they are indispensable automobile components that ensure safe and smooth driving. We encourage all who work at AkebonoGroup companies to take great pride in the fact that they deliver safety and security
to people throughout society through the production of superior brake products.
By recognizing the contribution of the significant contribution they make to society,we hope to stimulate the kind of proactive thinking and response to challenges thatprovide both personal fulfillment and corporate success. Launched in 2005, corporate brand management is one initiative promoted in line with this aim. Guided by
the idea that every associate should be an advocate of the Akebono brand in their
day-to-day operations, we will achieve greater recognition for our company among
all our stakeholders.”
Perhaps the most enthusiastic readers of CSR reports in recent years have been
students looking for the “right” company to join after graduation. Since they arelikely to stay with an employer for many years, they no doubt look at companies
from a long-term perspective, and they read the reports to find out about the companies’ engagement with society. This is also the reason that, as soon as they join
the company, they are less likely to read their own company’s report, as they become less interested in the long term than with addressing immediate concerns.
As is described in the Top Message, the Akebono Report is intended to stimulate among employees “proactive thinking and response to challenges that provide
both personal fulfillment and corporate success.” Already, about 60% of Akebono’s
consolidated sales are generated outside Japan, and about 60% of group employees
work outside the country. Maintaining a manufacturing base in Japan will not be
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easy from the viewpoint of maintaining global competitiveness. But if the company
can make full use of employees’ latent strengths, it can not only achieve the goal ofincreasing global market share, as mentioned above, but also create a company thatis truly ready to meet the challenges of globalization. That is why it emphasizes theimportance of fostering employees’ pride in the company and its products.
The company calls its employees “human assets,” rather than resources, and a
training center has been built in Japan to nurture such assets from around theworld. Akebono employees are trained to think not just about their own workplace
but also about the company’s operations as a whole, how their work is connectedto the work of the company, where the company is headed over the long term, andwhat their role should be in this evolution. The Akebono Report is designed toencourage such thinking.
It is not unusual for companies to think about how their CSR report would beread by their various stakeholders, but in reaching out to too many different readers, they may lose sight of their primary focus. Such companies can draw valuable
hints from the single-minded attention Akebono gives to fostering pride among its
employees, prompting them to take a broad and long-term view and encouraging
them to identify areas for improvement.”
Findings of a Post-Disaster Employee Survey
The emphasis on fostering pride among employees was evident in Akebono’s response to the March 2011 earthquake and tsunami in northeastern Japan. The
Akebono Group has four production sites in the areas that were affected. The
worst damage was suffered by a subsidiary producing brake linings and othercomponents: Akebono Brake Fukushima Manufacturing, based in the town ofKoori, Fukushima Prefecture. Thanks to the hard work of Fukushima Manufacturing’s employees, the company was ready to resume production by March 21, just
10 days after the disaster. Akebono’s corporate culture showed through mostclearly, though, in what they did next. The company surveyed its employees on“what they felt” during and “what they learned” from the disaster. By May 27 theyreceived 239 completed surveys in which respondents said they were impressed by“employee cohesion, teamwork, and solidarity,” “the company’s concern for its
employees,” and “the gratitude of residents, customers, and business partners in
disaster-hit areas.”
The process of recovering from the disaster and Akebono’s experience with theThailand floods later in 2011 provided an opportunity for the company to rethinkits supply chain. It moved to ascertain how many companies worldwide were ac65

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tually capable of supplying the raw materials and parts it needed and to examine
the effectiveness of its risk management policy with regard to sources. Akebono not
only reconfirmed the substitutability of its suppliers but, in reexamining its supply
chain, has also begun to rethink its entire approach to manufacturing.
This experience also convinced President Nobumoto of the high potential of
Akebono’s employees. “If all our employees can do their part working towards asingle goal,” he noted, “we can do great things. In fact, there’s nothing we can’t do.
What we need to consider, however, is why we typically don’t achieve that potential.” This is a message that Nobumoto often repeats to his employees. So in addition to instilling pride, management is asking employees to set their sights higher
and have a broader perspective so they can realize their full potential. This may besaid to be the essence of Akebono’s management philosophy.
Fifty Years of Providing Scholarships
One of the biggest factors behind Fukushima Manufacturing’s swift recovery wasa group of scholarship students working there, as became evident from the employee survey taken after the disaster. These students are on the Akebono Vocational Scholarship Program and work at Fukushima Manufacturing while attending junior college to complete a three-year occupational course, such as inkindergarten teaching, nursery school work, and nutritional science.
Akebono has been operating this program since 1964—for exactly half a century. It was launched by the previous president who himself received a government
scholarship to attend a university abroad and who wanted to offer a way for young
people to support themselves by working while continuing to study. The company
provides work and housing to young people who, for financial or other reasons,are otherwise unable to go on to university or vocational school. All the scholarship recipients spend three years living together in a dormitory while working shifts
at Akebono plants. The students pay for their education from their wages and earna degree or other qualification through hard work. To date, more than 3,000 students have benefited from the program, including some who are the second generation in their family to do so. They are called hosensei (nursery school students),
since many of them go on to work at nurseries.
The hosensei spend their mornings working and study from afternoon until
evening. At Fukushima Manufacturing, they have had a significant impact on company morale. The full-time workers have been heartened by the progress students
make during the three years there and how hard they try, and this has prompted
the employees to take a fresh look at themselves and to make new discoveries.
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Seeing the hosensei working so hard, they, too, approach their job with greater
seriousness and sense of responsibility. Compared to other Akebono production
sites, the level of cooperation among Fukushima Manufacturing workers is quite
high, such as when changing shifts.
Indeed, many Akebono employees note that they are not the ones supporting
the hosensei; rather, it is the students who are helping and teaching them. The Vocational Scholarship Program
was originally implemented at
production sites across Japan,
but Fukushima is the only facility where the program currently
remains. Successful applicantscome from all over northeasternJapan, and most return home
after they graduate. These young
women work as they study, live The April 2011 graduation ceremony held at Akebono Gloabl
Headquarters.
together for three years with fellow hosensei, and acquire strong
interpersonal skills that are highly valued by employers. They now live all overnortheastern Japan, working as nursery school staff, child nutritionists, and kindergarten teachers.
These students also made a huge contribution to the restart of operations following the March 2011 disaster, but the graduation ceremony at their university,
which was planned for March 17, had to be cancelled. Akebono thus organized aspecial ceremony for the graduating hosensei at its Global Head Office in Tokyoon April 10. Thanks to the assistance of a kimono rental company and beauty salon, all students were provided with traditional formal wear and were beautifully
coiffured for the ceremony, attended by President Nobumoto and other senior
Akebono managers.
At a glance, the scholarship program looks like a one-way street, with the company supporting the students. And because it requires substantial financial resources, some have suggested over its 50-year history that maybe it was time tobring it to a close. But the truth is that the program has had a very positive impact
on Akebono’s corporate culture. The company and its employees have gained muchfrom interacting and working with the students on a daily basis. In that regard, theprogram has created value to both the company and society at large.
President Nobumoto’s message to the 2013 graduates, titled “Setting Out on a
Journey of Creation,” offers an idea of how important the students are to Akebono.
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Benefitting from Unexpected Connections
There is one special-purpose Akebono subsidiary that promotes employment forpeople with special needs—Akebono 123. It was established in September 2013,
becoming the first such company to be set up by a manufacturer in Saitama Prefecture.
The employment rate of disabled people in the Akebono Group as a whole is2.28%. This is already higher than the statutory rate in Japan of 1.8%, but the rate
at Akebono Brake Industry and Akebono 123 combined is 3.88%. The average
employment rate of disabled people in Japan as a whole is 1.76%, and the corresponding rate for companies with more the 1,000 employees is 1.98%. Less thanhalf of all private companies in Japan, at 47.7%, meet the legally mandated em-“Setting Out on a Journey of Creation”
Hisataka Nobumoto
President and CEO, Akebono Brake Industry Co., Ltd.
For three years you have devoted yourself to study and work, forming friendships in the midst of difficult times. Now you have received your graduation
certificate. I offer you my sincere congratulations.
Around the time you joined the Akebono Group, we were expanding into
the North American and Asian markets and doubling the size of our operations. We were engaged in a growth-focused restructuring of our Group operations at home and abroad, prompted by issues that became apparent after
our sudden expansion. And right after you joined Akebono, the Great East
Japan Earthquake struck, hurling not only our company but the whole ofJapan into turmoil. In the midst of that, as the Akebono Group pulled together toward recovery and reconstruction, you devoted yourselves wholeheartedly to restarting production, even at the risk of your personal safety.
I am deeply moved by memories of how much strength you gave the entire Group.
LET’Z1 was held soon after the initial period of recovery and when we
1

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LET’Z is an employee general meeting to discuss the company’s future that is vol-

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ployment rate of people with disabilities, so the rate at Akebono Brake and Akebono 123 can be said to be quite high.
The large number of associates with special needs working at Akebono 123 is
not the only thing that makes the company special. It has achieved growth by expanding the range of work that these associates can do and training them according to their various disabilities and personalities. It has a quality-focused personnel
policy based on carefully allocating work according to each employee’s aptitude.
On its establishment in 2003 the company was initially tasked with providing
cleaning services for other firms in the Akebono Group and has since gradually
expanded its work. During the next 10 years the company’s staff has grown from
5 to 25.

were beginning to regain some calm. The Fukushima taiko drumming group
moved us afresh with its wonderful teamwork and exuberance. I received
these comments from those attending the meeting: “The audience and drummers became one,” “I had a taste of what it really means to work together,”“The audience listened attentively to both the drumming and the reports on
our business situation.”
Through the drummers’ powerful performance and the awareness of theirrole in the group, they showed us the importance of working together in harmony as a team. You gave us fresh energy and vitality.
No one could have predicted that so many difficulties would occur during
such a short period. And of course, no one would have wished these things tohappen. Nevertheless, this experience has given us strength and helped us
grow as human beings.
Please be grateful to your parents, friends, and all who have helped you
so far. Take the confidence you have gained from overcoming these hardships
and use it in the new life you create for yourself in new surroundings. Work
hard, and I wish you the best of luck in your future endeavors.

untarily attended. It is planned by a cross-company project team with 10 or so members and often opens with a performance by a Fukushima taiko drumming team madeup mainly of hosensei. The 2013 event was held on November 19 and was attended
by approximately 800 workers.

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In 2008, its sixth year of operation, Akebono 123 was awarded a chance tobecome part of Akebono’s production process for the first time when it began the
packaging of repair kits for brake parts. A special production line for Akebono 123
was set up inside an Akebono Brake plant, where employees have been working
alongside their Group colleagues. Akebono 123 workers have won many prizes attechnical skills competitions, and the company—viewed as a model employer ofpeople with special needs—is now asked to run workshops at schools and otherfacilities for the disabled.
This has been achieved thanks to the attention given to each employee’s needs
by Akebono 123 President Koji Saito and the instructors hired to guide workers’
activities. They carefully consider each worker’s characteristics, how best theirskills can be developed, what tasks they should be assigned, what support they may
need, and how their long-term career prospects may be improved. The management
staff is dedicated to helping each and every employee find job satisfaction and arole to play in society.
One remarkable thing about this personnel management policy is that all instructors are graduates of Akebono’s Vocational Scholarship Program. These
alumni returned to their hometowns to work at a kindergarten or nursery, andmany have married and have children of their own. A number of them whose children have grown up learned of an opportunity to give something back to Akebono—a company that enabled them to continue their education despite difficult
personal circumstances—and their former colleagues, and so they accepted an offer
to work at Akebono 123 as instructors, making use of the skills they acquired whileraising their children.
The Way Forward
In many ways, the scholarship students and Akebono 123 instructors represent thecompany’s ideal “human assets.” They are proud of their work, their colleagues,
and their company. They are skilled at spotting areas for improvement and work
daily to solve them. They are the kind of workers about whom President Nobumoto spoke in his Top Message.
The scholarship program launched 50 years ago and the special-purpose subsidiary for people with disabilities set up 10 years ago were aimed at fulfilling
Akebono’s responsibilities to society. Little did the company’s senior managers
know at the time that these two projects would eventually wind up setting an example for the rest of the company to follow.
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job opportunities for people with special needs over the years, Akebono has unexpectedly acquired valuable know-how on a key management issue: the effective
development of human “assets.”
CSR is not just about addressing social issues. Donations to charitable organizations alone will have little positive impact on a company’s operations. And encouraging employees to engage in volunteer activities will not necessarily prompt
them to think deeply about how their work is linked to society at large. CSR activities that have little relevance to a company’s main line of work will be considereda luxury and are unlikely to be sustained over the long term.
What we learn from Akebono’s example is the importance of a company’sawareness of its role in society and its relationship with its employees. Rather thanoverreach and attempt something unsustainable, it has chosen to engage with society over the long term. This is one approach to more fully integrating CSR into
the core aspects of a company’s business.

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September 2, 2014

Corporate Social Responsibility
Potential and Challenges
David J. VogelIn this brief essay, I would like to discuss the growth of CSR first more generally
and then in Japan, provide some suggestions to enable firms to improve theeffectiveness of their CSR efforts, and offer some general reflects as to what
CSR can and cannot accomplish.
The Growth of CSR
In recent decades, public expectations of business have steadily increased. While
investors still expect firms to maximize profits, the public has become increasingly
aware of the importance of the social and environmental impact of businesses.
Firms are now expected to make every reasonable effort to reduce their negative
externalities—or such harms as pollution that they cause while pursuing their business activities—and to increase their positive externalities, or their impact on addressing important social and environmental problems, such as poverty reduction.
The expansion of economic globalization has created a political backlash:
Many citizens regard its benefits as insufficient and its social and environmental
costs too great. It has been associated with increased inequality, economic insecurity, human rights abuses, and environmental degradation. In addition, many governments, particularly in developing countries, appear either unable or unwillingto control the conduct of global firms and their complex global supply and distribution networks. This has created a marked imbalance between the power of large
global firms and national government regulations: The former frequently appears
to be overwhelming or undermining the latter. CSR has emerged as a way to fill inthis “governance gap,” or to create a public domain between states and markets.

David J. Vogel   Solomon P. Lee Distinguished Professorship in Business Ethics andProfessor of Political Science, University of California, Berkeley; Editor, California Management Review.
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There is considerable evidence that business norms have changed: CSR is now
widely regarded as a legitimate dimension of global corporate decision making.
Survey evidence reveals that CSR has become a more important priority for managers and that its importance and legitimacy have steadily increased. Evidence of
the increased importance of CSR includes:— A substantial increase in the number of global firms that produce annual reportson their CSR activities.
— A substantial increase in the number of global firms that have a CSR program.
— A substantial increase in the number of CSR reports that are independently audited.
— A steady increase in the number of corporate codes of conduct. Industry codes
now exist for firms in virtually every global sector including chemicals, finance,
mining and minerals, tea and coffee, toys, textiles, diamonds, sporting goods,
and electronics. These codes have established standards for responsible corporate behavior, primarily with respect to employee rights, working conditions,and environmental impact. Some are governed by the firms themselves, whileothers, such as Fair Trade International and the Forest Stewardship Council,
involve partnerships with nongovernmental organizations. In some sectors, suchas forestry and clothing, there are multiple industry codes.
— An increase in the number of countries whose home companies have embraced
CSR. Thus the United Nations Global Compact now has more than 7,000 corporate signatures from 130 countries. Likewise the Equator Principles, which
established social and environmental criteria for project finance, have become a
global standard, endorsed by nearly every bank that engages in this kind of
lending.
— An increase in the number of social or ethical investment funds or indices; they
now exist in virtually every capital market. In short, CSR has become globalized.
CSR in Japan
Since it was originally developed as a Western concept, primarily in the UnitedStates and Britain, CSR came relatively late to Japan. The year 2003 is often referred to as CSR gannen—or the first year of the “CSR era.” It is clear, however,from the results of the Tokyo Foundation’s CSR Survey, as well as other sources,that major Japanese firms have now embraced global CSR norms and practices.
For example:— 75% of major Japanese firms have CSR committees.
— 88% of the largest Japanese firms issue reports on their CSR activities.
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— More firms in Japan have been certified as ISO 14000 compliant than in any
other country. (ISO 14000 is an environmental process standard which is usedby many large firms, especially in Western Europe, to select their suppliers.)— Japan is home to more socially or ethically responsible investment funds thanany other Asian country.
— 132 Japanese firms have subscribed to the United Nations Global Compact.
— Keizai Doyukai has issued several reports on CSR practices in Japan while
Keidanren has issued a Charter of Corporate Behavior.
Improving CSR Performance
While there has been a considerable growth of CSR, both globally and in Japan,
many firms are still struggling to better manage their CSR policies and practices.
What, then, can firms do to improve their CSR performance?
It is important to recognize that notwithstanding the importance of the 10
principles of the UN Global Compact and the widespread embrace of ISO 26000,
a comprehensive CSR guideline, it is clearly not the case that “one size fits all.”Rather it is critical that companies tailor their CSR practices to their own distinctive business operations and core competence. Clearly, the CSR agenda of a financial institution will differ from that of an oil company or a clothing manufacturer.
But even within the same industry, a firm’s CSR strategies are likely to vary, depending, for example, on such factors as the location of their business operations,strategies, size, and financial performance. Thus the challenge for every firm is toformulate their own CSR strategies.
How then should a firm go about developing its CSR strategies? The following
is not meant to list action items in order of importance but rather in sequence: they
are intended to enable managers to further develop their CSR initiatives.
One way to begin is to focus on the defensive aspects of CSR. These involve thereputation or, in some cases, the financial risks faced by a firm by being perceived
as not sufficiently responsible. Firms need to identify and anticipate their CSR-related business risks. What aspects of your firm’s operations might result in it becoming the focus of a media exposé or an attack by an NGO? Who is likely tocriticize your firm and for what reasons? What damage to your firm are they likely
to cause? In other words, how, where, and for what is your business likely to bevulnerable?
Investments in CSR can be usefully understood as a form of reputation risk
insurance. An important goal of a firm’s CSR initiatives should be to reduce thelikelihood that its reputation will be damaged. In this context, managers should
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carefully monitor similar firms that are currently being criticized, since this may
provide them with advance notice of the challenges their firm will be facing.
Another useful proactive strategy is to develop informal relationships with
reporters, investigators, and activist groups, as these can help you anticipate future
media and NGO activities. Finally, a firm’s CSR’s strategies should be linked to its
approaches for dealing with crisis management in general. Firms need to develop
advance procedures for responding to CSR-related crises. The key objective should
be to avoid being surprised or caught unaware.
A second approach for developing a CSR strategy is to carefully and comprehensively assess your firm’s social and environmental impact. If an important dimension of CSR involves reducing a firm’s negative externalities, then it is vitally
important that a firm’s managers first learn and understand what they are. This is
not only an important exercise but a challenging one: It requires a firm to engage ina comprehensive life cycle analysis of its products or services that includes a focus
on where and how they are sourced, how they are transported, how they are processed, how they are sold, how they are consumed, and how they are disposed of.
This exercise is particularly important for a firm that wishes to reduce its negative environmental impact or its “carbon footprint.” Many firms have found suchassessments extremely valuable as they have uncovered dimensions of the social orenvironment impacts of their supply and distribution chains about which they werepreviously unaware. Such an exercise can then inform a firm’s CSR agenda byhighlighting areas which it then has the potential to change.
The third exercise that should inform a firm’s CSR strategy involves thinking
very broadly about the social and environmental problems faced by society in general or in the countries where it does business. After identifying these problems, thenext step is to figure out what role your firm might be able to play in addressing or
ameliorating one or more of them. This important exercise requires you to thinkbeyond your company to the broader society in which it is embedded. It may turnout that there is little overlap between many of these problems or ills and yourbusiness operations, in which case, there is little or nothing for your firm to do.
Alternatively, it might well be the case that your firm has some unique competencesthat overlap the social or environmental problems you have identified and whichyour firm can then play a role in addressing.
The fourth approach to developing a CSR strategy is to examine it from theperspective of your business operations. Given your business goals and strategies,in what ways can CSR help you achieve them? It might be the case, for example,
that you need to attract better trained and highly motivated employees. Or you
might be interested in extending your business operations into another country,
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either by making it a part of your supply chain or as a source of new customers.
There might be an important constituency whose support your business needs.
How can CSR assist you in achieving these business objectives?
Each of these four steps—identifying your CSR risks, identifying your overall
CSR impact, identifying the broader social problems that need addressing, andidentifying which business objectives CSR can assist you in meeting—are designed
to accomplish a similar goal: their purpose is to help your firm establish its CSR
agenda, to assist it in deciding its CSR priorities. Thus the more a proposed CSR
initiative can reduce a reputation risk, reduce a negative externality, address apressing social need, and assist in the achievement of the firm’s business objectives,
the more it makes sense for a firm to pursue it.
Taking Specific Steps
After formulating your CSR priorities, the next challenge is to determine what
specifically your firm should do. It is important to think creatively and broadly
about this, for there are many ways in which a firm can improve its CSR performanceand thus net its positive social impact. These include philanthropy—the most traditional form of CSR—permitting or encouraging employees to actively participate
in various community initiatives, changing your product mix, changing the criteria
by which you select contractors or suppliers, improving the monitoring of yoursupply chain, and improving the environmental efficiency of your own operations.
In undertaking these efforts, managers need to think beyond their own organization. The large and growing number of industry codes represents an importantresource for companies. Many of these codes have already developed specific standards for corporate conduct as well as specific strategies and policies for implementing them. These codes also provide important sources of information for industry “best practices.”
Another possible advantage of participating in an industry code is that theirformation and in some cases their governance frequently involves the participationof nongovernmental or activist organizations—precisely those constituencies
whose activities and priorities may represent a reputation risk for your firm. In thiscontext, an important way for a firm to leverage its core competences is to directly
partner with nongovernmental, nonprofit organizations. These partnerships need
to be carefully managed, but there is considerable evidence that cross-sector partnerships can provide a firm with significant benefits: They can often result in better
results than a company can achieve on its own.
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insufficiently clear about their goals. You need to clearly define what you hope toaccomplish by your CSR initiatives and then develop clear metrics or measurements for these goals. These metrics are an extremely important business tool: they
signal what CSR commitments are important to your firm and enable you to clearly
assess the progress you have made in meeting them. They also represent an important way of communicating to the public about what you want to and can accomplish, and how well you are achieving the goals you have set for yourself. Moreover, developing clear CSR goals and publicly reporting on your progress inmeeting them represents a critical—even essential—vehicle for establishing the legitimacy of your CSR initiatives.
Such objectives should not be written in stone. On the contrary, they should beperiodically reviewed. It might be the case that you need to revise them either upward or downward or abandon some and/or add others.
In fact, the process of reviewing or possibly revising your firm’s CSR objectives
is also very important. It provides a way of making sure they are realistic andachievable. Alternatively it may alert you to shortcomings in your CSR performance which you can then address.
Finally, firms need to think comprehensively, strategically, and creatively about
the business benefits of CSR. In some cases, the business benefits of CSR can readily be measured. They may, for example, help to develop new markets for yourexisting products and services or even lead to new or revised products or services.
Likewise, they may improve the efficiency of your operations by reducing energy
use. (One reason why environmental initiatives have become so popular among firms
is that they often result in reduced operating costs, which can be readily measured.)But more typically, measuring the business benefits of CSR is much more difficult.
But the fact that some of the business benefits of CSR may be difficult to quantify does not make them unimportant; they may still be valuable. The hard-to-measure benefits of CSR can include a better corporate reputation, improved employee
morale or the reputation risks to which you firm was not exposed. It is also important not to overlook the personal value of a firm’s CSR efforts to its senior managers. Employing a firm’s resources to help ameliorate pressing social or environmental problems can be appropriately viewed as a form of nonwage compensation forsenior mangers: they enable them to broaden the contribution of their firm beyond
creating shareholder value.
CSR and the Market for Virtue
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same factor: the strengths and limitations of the business benefits of corporatesocial responsibility. There is a “market for virtue”: There are business benefits for
acting more responsibly. They include a better corporate reputation, improved
employee morale, better relations with stakeholders, more efficient use of resources,
and more effective and innovative marketing.
Moreover to the extent that CSR is viewed as a form of public relations risk
insurance, then investments in it certainly make business sense—even if these benefits are not always easier to measure. It is these benefits that explain why so many
global firms have expanded their CSR programs and initiatives.
But while the good news is that more responsible firms do not perform any
worse financially than less responsible ones, the discouraging news is that neither
do they perform any better. The reason is that the relative importance of CSR to atypical firm’s profit margins, return on investment, or market share is often modest.
The financial impact of a firm’s CSR efforts or the lack thereof is typically overshadowed by other competitive events, pressures, and opportunities. This, in turn,
reduces the amount of resources many firms may be able or willing to devote toimproving its CSR performance. There certainly is potential for firms to improvetheir effectiveness of their CSR efforts, but we must also recognize the extent towhich a highly competitive global marketplace constrains those efforts.
We need both to acknowledge and applaud all that CSR has accomplishedwhile at the same time also recognizing its limitations. Many important global
problems, such as reducing corruption or coping with the risks of global climatechange, are simply beyond the scope of profit-seeking firms to effectively ameliorate. They can only be adequately addressed with the support and cooperation of
governments.

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September 5, 2014

Toward a New Era of Global CSR by
Japanese Companies
Toru Naito

D

eveloping countries around the world are grappling with a multitude ofchallenges, from poverty and environmental destruction to conflict andhuman rights abuses. International organizations, national governments,
aid agencies, and nonprofit or nongovernmental organizations have been working
for years to address these problems through a variety of programs and initiatives.
But until recently, private industry’s participation in these problem-solving efforts
was indirect at best and was generally limited to business activities carried out
under contract with governments or development agencies, such as construction of
infrastructure or the supply of materials or equipment.
In recent years, however, the impact of global business on the developing world
has reached unprecedented levels. Accelerating economic growth has made developing countries highly attractive to such corporations, whether as consumer markets or as bases of production. Today, the industrialized world pours far more
capital into developing countries through private investment than through official
development assistance. Where such business operations spring up, their impact on
people’s lives can extend far beyond simple economics.
These circumstances have fueled a growing belief, exemplified in the United
Nations Global Compact (UNGC), that corporations must behave as responsible
members of civil society and work proactively in support of the environment, goodlabor practices, and human rights. At the same time, the past few decades havewitnessed the global rise of “base of the pyramid” (BoP) businesses specificallyoriented to improving conditions for people with the lowest income levels in theworld. We are embarking on a new era of corporate social responsibility in whichbusinesses are expected to make a direct contribution to the resolution of global
problems.

Toru Naito   Director, Partnership Program Division, Chugoku International Center,
Japan International Cooperation Agency.
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Japanese Companies’ Timid Response
What sort of overseas initiatives have Japanese businesses taken in response tothese new expectations? Unfortunately, surveys suggest that only a small fractionof Japanese companies’ CSR budgets are devoted to international cooperation. In
the 2012 Keidanren Survey on Corporate Philanthropic Activities in Fiscal 2012,
completed by 397 companies, only 2.0% of reported CSR expenditures fell under
the category of “international exchange and cooperation.” Out of the survey’s 14
activity areas, international cooperation ranked ninth, following education, culture
and the arts, academic and research programs, health and sports, the environment,
assistance to disaster-stricken areas, local community activities, and social welfare.
Is this simply a reflection of Japanese citizens’ attitudes toward problems facing
people in other parts of the world? While it is difficult to draw a meaningful statistical comparison between corporate philanthropy and the attitudes of private
citizens, we can gain some idea of the general level of public concern with international development issues from a 2010 survey by Intage, Inc. The report Social
Overview (Basic NPO Marketing Data Report) offers an analysis of Japanesecitizens’ interest and involvement in various social issues based on a nationwide
survey of more than 170,000 subjects aged 15–69.
In this survey, assistance to developing countries ranked sixth among 20 issues,
after environmental protection, energy conservation and recycling, disaster relief,
welfare services for people with disabilities, and healthcare, in which respondents
reported being personally involved within the past year. It came out ahead of education, social welfare, and culture and the arts—all of which ranked higher thaninternational cooperation in the aforementioned Keidanren survey. If we use thegeneral public’s interest and involvement as a yardstick, corporate efforts in thisfield said to be coming up short.
The Tokyo Foundation’s 2013 Survey on Corporate Social Responsibility (sample: 218 companies) collected fairly detailed comparative data on Japanese CSR
programs carried out within Japan and overseas, broken down into nine basic
categories (human rights, poverty/hunger, infant mortality/maternal health, childhood poverty, women’s status, prevention of infectious diseases, the environment,
preservation of regional and national culture, and other activities). The results shedlight on the dominant character of Japanese CSR initiatives in other parts of theworld.
The survey found that, while most Japanese corporations plan and administer
domestic CSR initiatives independently in response to specific challenges and issues, their overseas philanthropy generally take the form of financial or in-kind
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donations to NGOs or NPOs. Asked how the company itself benefited from its
CSR program, most respondents reported that their domestic initiatives (mostly
developed and administered independently) benefited the corporation internally, bycontributing to employee education and workforce development and by building
technical know-how. But when assessing the value of their overseas programs, they
pointed only to the public-relations benefit of a good corporate image.
Taken together, these survey data suggest that Japanese companies are insufficiently engaged in social issues in other parts of the world, particularly in comparison to the level of interest among Japanese private citizens. They also show that,when Japanese companies do engage in overseas CSR, the overwhelming emphasis
is on financial and in-kind donations to other organizations, with the result that its
value to the donor is limited to PR benefits.
Representative Examples of Global CSR by Japanese Corporations
Let us now examine some specific initiatives illustrating four favorite Japaneseapproaches in developing countries.
AFFORESTATION PROJECTS Among the most popular forms of overseas CSR by
Japanese corporations, particularly those operating overseas, is support for local
environmental programs. Environmental initiatives comprise the bulk of overseas
CSR activities reported by companies responding to the aforementioned Tokyo
Foundation survey, and afforestation projects figure prominently in this category.
The following are some noted examples.
Toyota Motor Corp. has been engaged for 10 years in a project to stem desertification in China, a key market for the Japanese auto industry. Komatsu (mining
and construction equipment), Sumitomo Forestry, and several major paper manufacturers are also carrying out tree-planting programs overseas.
It is particularly common for Japanese companies involved in logging as partof their core business to contribute to the renewal of forest resources through suchprograms. Afforestation projects are an effective way to enhance a company’s
global image as a friend of the environment, and their outcomes are visible andeasily gauged, making them popular with corporate insiders and consumers alike.
The projects themselves are generally administered by Japanese or local NGOs or
public agencies, with the corporation providing the funding. This makes such
philanthropy easy to implement from the corporation’s standpoint. Tree-planting
programs may also yield economic benefits for corporations, since they can beconverted to carbon credits under the Kyoto Protocol emissions trading scheme.

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Another popular approach to overseas
corporate philanthropy is to solicit applications for funding from individuals or
grassroots groups oriented to social change. In fact, several Japanese companies
have made an important contribution to Japanese international cooperation
through ongoing programs of this sort. For more than 30 years, the Duskin Ainowa
Foundation, established by Duskin Co. (cleaning products and services), has
worked to foster leadership among young people with disabilities by sponsoringoverseas training for disabled Japanese citizens and offering training in Japan todisabled persons from elsewhere the Asia-Pacific region. This program has helped
build international trust and understanding, and it laid the groundwork for manyof the overseas programs currently administered by Japanese organizations for thedisabled. The Ajinomoto International Cooperation Network for Nutrition and
Health (AIN), established by Ajinomoto (food and chemicals), awards funding fornutrition-related projects, selected from applications submitted by NGOs andNPOs. This program, which has continued for more than 10 years, provided theimpetus and know-how for many of the overseas health and nutrition programs
launched by Japanese NGOs in recent years.

COMPETITIVE GRANTS AND FELLOWSHIPS“CAUSE MARKETING” IN PARTNERSHIP WITH INTERNATIONAL AGENCIES AND NGOS

Cause-related marketing, in which a portion of the proceeds from consumer purchases goes to support a designated social cause, is on the rise among Japanese
producers and distributors of consumer goods. This is a particularly effective variation on the theme of donating funds to support activities by public agencies, one
which makes the most of the growing interest in assistance for developing countries
among ordinary Japanese citizens.
One noteworthy example of this model is the Volvic “Drink 1, Give 10” (or“1L for 10L”) campaign, carried out in Japan by beverage giant Kirin in partnership with UNICEF (United Nations Children’s Fund). Through this program Kirin
has raised funds to provide clean and safe drinking water for people in Mali overthe course of five years while drumming up Japanese sales for Volvic mineral water.
It deserves special mention as an example of CSR that yields economic and PR
benefits while contributing tangibly to the lives of people in the developing world.
Other examples of Japanese cause marketing in partnership with UNICEF are the“1,000 Toilets” project in Timor-Leste, sponsored by Oji Nepia (tissue paper), andthe “Wash a Million Hands” project in Uganda, sponsored by Saraya (personal
hygiene products). Other companies are carrying out similar programs in cooperation with Japanese NGOs. Morinaga (chocolate and confectionery) is using a
portion of its profits to help the nonprofits ACE (Action against Child Exploita82

CSR White Paper 2014tion) fight child labor and Plan Japan support children in Africa through its “1Chocolate for 1 Smile” campaign.
The fair trade movement, which promotes fair compensation anddecent living conditions for producers in developing countries, was introduced into
Japan about 20 years ago. At first the market for fair trade goods was small, with
only a handful of NGOs and fair trade organizations importing goods from participating cooperatives. But awareness of the fair trade movement and its products
has spread along with public concern over social issues. Today quite a few big
corporations have signed on to the fair-trade movement.
The trend has spread particularly rapidly in the food and retail sectors thankslargely to the active involvement of two major players, Zensho and Aeon. Assistingdeveloping countries through the sale of their products is a good way for suchbusinesses to leverage their marketing know-how for the betterment of humanity,
and it is also an effective way of conveying their social responsibility to customers.
For this reason, the trend is likely to continue.

FAIR TRADE

Expectations Going Forward
How, then, can Japanese businesses beef up their efforts to address social ills aroundthe globe, and what role can public agencies and NGOs play in the process?
LEVERAGING CORPORATE KNOW-HOW, TECHNOLOGY, AND HUMAN RESOURCES

Japanese government and industry have been working cooperatively to expand
Japan’s economic presence overseas in recent years, and we can expect more andmore companies to incorporate overseas sourcing, production, and marketing intheir business strategies. Meanwhile, the private sector’s potential contribution todevelopment assistance has emerged as a major topic in discussions about options
for assistance after 2015, the target year for the United Nations Millennium Development Goals. The expert panel set up by the Japanese government in March2014 to update Japan’s ODA Charter has also highlighted the role of private investment and corporate philanthropy in international development.
Much of this discussion has focused on the potential economic benefits of foreign direct investment and BoP business ventures. But businesses can also play animportant role in improving social conditions overseas through CSR initiatives.
Unfortunately, Japanese companies’ expenditures on international cooperation anddevelopment have not kept pace with the public’s interest and involvement, as wehave seen. What can be done to close the gap?
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Clearly, Japanese businesses operating overseas need to invest more in CSR
activities geared to specific problems in the locales where they do business. In doing
so, moreover, they need to do more than contribute money; they must find ways tomobilize their corporate know-how, technology, and human resources.
In the wake of the Great East Japan Earthquake of 2011, a number of Japanesebusinesses won kudos by mobilizing their own special resources for effect relief
programs. Fujitsu created a database to help match victims to relief organizations
and services. The Google Person Finder gathered and posted information about thestatus of individuals in affected areas. And Honda provided access to local traffic
data in disaster areas gathered through its bi-directional onboard navigation system. Each of these initiatives reflects a determination to find a way of contributingthat capitalizes on the company’s strengths. If Japanese businesses would apply thesame approach overseas and apply their special know-how to the issues facing
developing nations, they could usher in a whole new era of innovative and effective
overseas assistance.
Japanesebusinesses overseas are all too frequently the subject of controversies stemmingfrom a lax attitude toward the environment, human rights, labor conditions, andlegal compliance in the host country. Japanese companies are frequently cited forlegal and ethical violations by international advocacy groups, to say nothing ofcomplaints from the local community, and their overseas record is incomparably
worse than their performance within Japan. This is a grave matter not only fromthe standpoint of social responsibility but also from the perspective of business risk
management, and it needs to be addressed seriously as such.
In this connection, it is important to remember that global businesses today arebeing held accountable not only for their own business activities overseas but also
for those of subcontractors to whom they outsource production, as well as businesses that supply materials and components. A top sporting goods company cameunder intense pressure to step up oversight when an international NGO revealed
that its overseas subcontractors were using child labor. Western clothing brands
have been called to account for substandard labor conditions among their overseas
suppliers in the wake of tragedies that killed hundreds of garment workers in the
Bangladesh. From society’s standpoint, big global corporations bear the greatest
responsibility because they have the greatest power and influence. This is something Japanese companies need to keep in mind.
A group of leading Japanese CSR experts recently issued a paper titled “Principles of CSR and CSV.” The paper cautions against the growing tendency among
GREATER CONCERN FOR THE ENVIRONMENT, HUMAN RIGHTS, LABOR

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Japanese business leaders to emphasize the concept of “creating shared value” overthat of corporate social responsibility in defining the role of corporations in society.
The authors of the report seek to shift the focus back industry’s responsibility visà-vis its impact on society, as set forth in ISO 26000 (international standards onsocial responsibility), which emphasizes continuous improvement to minimize abusiness’s negative impact on the environment and society.
This paper suggests ways in which public agencies and NGOs can help promote CSR among Japanese corporations. They need to take the initiative, as byorganizing seminars and other events to inform and educate Japanese businesses
about such guidelines as ISO 26000J and the UN Human Rights Norms for Business, and to familiarize business managers with some of the ethical problems andcontroversies that have arisen in connection with overseas operations and transactions. Government agencies providing support for overseas investment shoulddraw up and publish exacting standards for corporate social responsibility, alongwith specific guidelines pertaining to child labor and other human-rights concerns.
In addition, Japanese NGOs should develop their expertise in areas like environmental protection and human rights so that they can offer CSR monitoring andconsulting services to companies that seek such support.
Social entrepreneurs aroundthe world have spearheaded a business-centered approach to social activism thathas begun to bear fruit. One of the best-known social entrepreneurship programsis the microfinance service run by the American organization Kiva. Kiva uses theInternet to directly connect small-scale lenders in the industrial world with small
entrepreneurs in developing countries. More than 1 million people have used thewebsite to extend loans of $25 or more, yielding upwards of $500 million in total
investments. Similarly, the US nonprofit organization Kopernik (co-founded by aJapanese national) uses the Internet to solicit funds from individuals and corporations in order to supply people in remote communities with products that improvetheir lives through innovative but inexpensive technology. To date Kopernik has
supplied some 30,000 products to people in 16 countries. Both undertakings takeadvantage of Internet technology to connect donors and recipients across national
borders. They exemplify a new business model that holds the promise of continuity
and expansion.
Entrepreneurial approaches to social problems in the developing world aretaking hold in Japan as well. One example is Motherhouse, which sells high-quality handbags produced entirely in Bangladesh with local materials, in the processproviding training and decent jobs to help lift Bangladeshis from poverty. Another

SOCIAL ENTREPRENEURS AS MODELS AND PARTNERS

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CSR White Paper 2014is Hasuna, a jewelry maker that encourages values-based buying behavior by offering ethical products using environmentally friendly and human rights conscious
materials from developing countries. Andu Amet is a purveyor of upscale bags andother accessories made in Ethiopia from Ethiopian high-quality sheepskin. Cross
Fields and Very50 are “business-model nonprofits” that provide businesses andindividuals with opportunities to train and address social needs in developing
countries. Another example is Granma, a Japanese company that provides local
support services for Japanese businesses seeking to launch social ventures or BoPbusinesses in developing Asian countries.
Of course, social entrepreneurs are not concentrated in the industrial world. To
the contrary, the majority of social enterprises are local businesses launched indeveloping countries with the aim of providing the goods and services needed tosolve regional problems and improve people’s lives. Such businesses often facehigher financial hurdles at the launch and expansion phases than conventional
companies oriented to maximizing profits. They also have an acute need for operational know-how and information on comparable undertakings in the region andaround the world.
Ashoka was the earliest organization to recognize the potential of social entrepreneurship, and it has had a profound impact on social enterprises and the people
connected with them. Using the rigorous criteria it developed independently,
Ashoka has selected an elite group of social entrepreneurs called Ashoka Fellows,
who receive ongoing support from the foundation and form an influential global
network. Another pioneering organization is the US-based Acumen, which raises
capital to invest in social businesses around the world. In Japan, Arun is an innovative investment firm that is dedicated to financing social enterprises in Cambodia
and other developing countries.
Japanese corporations should pay close attention to these social entrepreneurs
and pursue possibilities for collaboration with them. While the benefits of programs by aid organizations and NGOs have a tendency to vanish once the project
comes to an end, social entrepreneurship offers the promise of expanding benefits
to society through independent, sustainable economic activity.
Furthermore, since social entrepreneurship shares many of the basic management principles followed by conventional businesses, corporations may be well
positioned to assess the viability and potential of a social venture from a businessstandpoint and contribute their own business skills and know-how to the undertaking. In addition, Japanese corporations can learn from the innovations of successful social enterprises and incorporate those approaches into their own CSR
programs in developing countries.
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Some Japanese corporations are already beginning to offer financial assistanceto local social entrepreneurs and the organizations and networks that support
them. For example, All Nippon Airways recently established a grant program for
Ashoka Fellows. The new Benesse Social Investment Facility, launched by Japanese
education giant Benesse, has already invested funds in an Indian education company. If this kind of assistance and cooperation spreads, it could usher in a whole
new era in social activism.
TAPPING EXTERNAL KNOW-HOW When planning overseas CSR programs, Japanese

corporations have a tendency to choose a general development issue and then donate cash or supplies to an NGO or aid organization working in that area. This
simplifies things for the corporation, but it precludes the kind of assistance thatleverages that business’s unique strengths. It also makes it difficult for a company
to reap the internal benefits of corporate philanthropy with respect to the development of human resources and technical expertise. One key step to boosting theefficacy of Japanese overseas CSR is for companies to begin putting their own
people on the ground and tackling social problems directly.
That said, it is scarcely practical for a group of employees with no prior experience in a country to march in, assess the needs of the local inhabitants, and design
and implement an effective program to match. Corporations need to build new
platforms, tapping the skills of employees with overseas experience and forging
partnerships with local NGOs and social enterprises. Ricoh, a major manufacturerof copiers and other imaging solutions, recruited employees with international
cooperation experience for a project team that is now working on-site with an
Indian social enterprise to develop plans for a local BoP business.
Meanwhile, a number of government agencies and NGOs have instituted programs to provide corporate employees with experience in developing countries.
JETRO (Japan External Trade Organization) dispatches young interns to work inpublic and private organizations in developing countries under a government program to foster “international readiness” in the Japanese workforce. The Japan International Cooperation Agency provides corporate employees opportunities foroverseas experience and training through its new Private Sector Coordination Volunteer System. The nonprofit organization Cross Fields runs an International Corporate Volunteering program, under which corporate employees put their professional skills to work overseas helping NGOs and social enterprises address social
needs.
Through overseas experience in the area of international cooperation, people
gain a unique understanding of local culture and society and an ability to function
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CSR White Paper 2014independently in foreign countries. These qualities are of great value to corporations that are expanding their operations overseas or developing global CSR programs. According to JICA, inquiries from companies seeking to hire Japan Overseas Cooperation Volunteers alumni have quadrupled in the past two years. Daichi
Konuma, co-founder and CEO of Cross Fields, and Hiroko Samejima, founder ofAndu Amet, are both former JOCV volunteers. As corporate demand for personnel
with international know-how continues to grow, NGOs can play a key role bypursuing cooperative human-resource programs consistent with their own mission.
From a long-term perspective, school education has a central role to play in thedevelopment of human resources capable of functioning in the global arena. With
the help of funding from MEXT (Ministry of Education, Culture, Sports, Science,
and Technology), under the Project for Promotion of Global Human Resource
Development, many Japanese universities have recently launched study-abroad
programs focusing on international development in cooperation with JICA andvarious NGOs. A MEXT program instituted in the 2014 academic year is providing funding for global education pilot programs at about 50 model high schools.
While some Japanese schools have provided a limited amount classroom instruction about developing societies and international cooperation under such topics asinternational understanding and development, there is clearly a need for more
extensive and widespread educational programs to promote understanding of
global problems and educate people to fulfill their global social responsibility.
PROMOTING CROSS-SECTOR NETWORKING Earlier we looked at survey results

showing that Japanese businesses place a relatively low priority on CSR programsin developing countries compared with the level of interest in the population atlarge. To a large degree, this failure may stem from insufficient knowledge regarding the situation in developing countries. Corporate officers may worry that they
will be unable to explain such programs to shareholders or find qualified personnel
to plan and implement them. If we want businesses to invest in more effective
global CSR programs, then public agencies and NGOs involved in overseas development need to provide those companies with information on local conditions andproblems, share examples of best practices in overseas corporate philanthropy, andoffer concrete proposals for company-friendly CSR partnerships.
The nonprofit organization JANIC (Japan NGO Center for International Cooperation) has set up a Network for Promotion of NGO-Corporate Cooperation.
Member NGOs and corporations are invited to participate in a variety of networking programs, including symposiums that explore successful NGO-corporate partnerships and task forces devoted to formulating guidelines for collaboration. Such
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opportunities for cross-sector networking—preferably including government aid
agencies as well as businesses and nonprofits—have an important role to play going forward.
One good way to promote practical, project-oriented partnerships would be toorganize forums dedicated to specific areas, such as environment, water, healthcare,education, and human rights, where people from business could meet with representatives of government, academia, and the nonprofit sector to discuss the issues
and consider how they can be part of the solution.

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Views on China
July 31, 2014

Recycling and Economic Growth inChina’s Interior
Kenji Someno

A potential solution to China’s environmental woes may be the development of “venous”
industries that retrieve secondary materials for reuse by the “arterial” sector in a circular
economy. Research Fellow Kenji Someno visited recycling facilities in the fast-growing inland regions of China to learn of the progress being made to formalize what had until quite
recently been marginal aspects of the Chinese economy.
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I

n many Asian countries, an economy is considered to consist not only of “arterial industries” that produce and market goods for the formal market but
also secondary “venous industries” that recover used or discarded products,
components, and materials—which in themselves have little or no market value—
and turn them back into reusable resources.
Creating a Circular Economy
The two are intimately related, with changes in the former having an impact on thelatter. Economic growth in China has proceeded at breakneck pace, before measures to deal with its environmental fallout could be put in place. Such headlong
development is one reason for the serious air, water, and soil pollution that China
has been experiencing in recent years. Said another way, rampant pollution is atelltale sign that venous industries in China have remained largely undeveloped
compared to arterial ones.
Until quite recently China’s venous activities remained at the most basic level,
being largely restricted to the production of fertilizer from human and animal

Kenji Someno   Research Fellow, Tokyo Foundation; Senior Research Officer, Ministryof the Environment.
90Views on China
waste and straw from the stalks of rice plants in rural communities. Even arterial
supplies were unstable until the rationing system administered by the All-China
Federation of Supply and Marketing Cooperatives and other firms was abolishedin the early 1990s. Most venous initiatives used the same distribution channels asarterial ones, only in reverse. So the All-China Federation of Supply and Marketing
Cooperatives was responsible both for providing materials and commodities andrecovering the used and waste products after consumption.
From the early 1990s, the rapid development of the arterial economy resulted
in venous resources of all kinds, including discarded household appliances andelectronic devices, scrap metal, and waste plastics. What was done with these materials? Because China lacked the technology, information, and social systems forrecycling, the informal sector comprising farmers and other small-scale operators who
had previously recycled things like straw, cans, and bottles now took to recycling
the new materials in the same way, working by hand, with little thought for minimizing pollution. Such an unsophisticated approach caused few problems in thepast, but when they began handling appliances containing heavy metals and chemicals—piling them up in vacant lots, dismantling them haphazardly, and using toxic
solutions to extract components—the result was serious environmental pollution.
Priority on Securing Resources
In Japan, social frameworks for waste disposal were already well developed by the
Edo Period (1603–1868). This was partly for hygienic reasons, given the country’s
hot and humid climate. Not long after the country adopted a modern legal system,
the Meiji government enacted the Waste Sanitation Law in 1900. Thus the basic
systems, infrastructure, and human resources to support the venous economy werealready in place by the early stages of Japan’s modernization, and the country wascomparatively well prepared to cope with the large volumes of industrial waste
generated as the arterial economy flourished during the postwar, high-growthyears. For the most part, Japan’s venous industries have developed in step with thegrowth of the country’s arterial sector.
China, too, has begun waking up to the need to create a recycling-oriented,
circular economy, similar to the initiatives being advanced in countries like Germany and Japan, particularly since the turn of the millennium with the spectacular
growth of its arterial industries. China, though, has been driven less by concerns
about the environment than the desire to secure resources, and it sees venous companies as the leading players in an environmental sector that is expected to drive
China’s economic growth in the years to come.
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Views on China
One manifestation of this policy has been the development of urban mining. In
May 2010 China’s National Development and Reform Commission and the Ministry of Finance announced a plan to develop pilot urban mining facilities in 30
cities within five years—with financial assistance being provided by the central andregional governments—to obtain reusable resources from junked electrical andelectronic appliances. Seven newly developed industrial parks were identified as thefirst group of such facilities: Tianying Recycling Economic Park in Jieshou, Anhui;
Ziya Circular Economy Industrial Park in Tianjin; Jintian Industrial Park in
Ningbo, Zhejiang; Miluo Industrial Park in Hunan; Huaqing Circular Economy
Park in Qingyan, Guangdong; Jinmai Industrial Park in Qingdao; and the Southwest Resource Recycling Industrial Park in Sichuan. The target is for the seven to
recycle 1.9 million tons of copper, 800,000 tons of aluminum, 350,000 tons oflead, and 1.8 million tons of plastic by 2015. Another 15 sites have already been
earmarked for phase two of the urban mining initiative.
Changes in the Interior
Industrial zones to reclaim materials from industrial waste have been developedsince around 2000, in advance of the pilot urban mining facilities. One Japanesecity that has been cooperating with these efforts, notably in Tianjin and Qingdao,
is Kitakyushu, famous for its “Eco-town” recycling project. China is also advancing
circular economy projects in Ziya, Tianjin; Caofeidian, Tangshan, and Zhuanghe,
Dalian, and has proposed the joint development of these parks with Japan andSouth Korea. In addition to these government-led developments, there are a number of informal-sector initiatives that are now recycling substantial amounts ofe-waste, such as in the Guiyuzhen district of Shantou, Guangdong.
These recycling efforts are all along the coast, which may be inevitable giventhat venous industries spring up in areas of vigorous arterial activity. But in recent
years, as the pace of economic growth has begun to slow in China’s coastal cities,
there are increasing hopes of growth and development in the western part of thecountry. The table below compares the gross regional products of the coastal andinland regions over a five-year period from 2008 to 2012. The country as a wholegrew by 163% over the period, with only Tianjin and Jiangsu outperforming
the average among the coastal cities. All six provincial-level inland cities, by contrast, grew by 180% or more. It has been argued that the scale of production ismuch smaller in the inland areas and that most of the growth in these regions hascome from public works spending. The growth figures should thus be read with agrain of salt, but they do reflect the government’s strong will to develop the western
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Views on Chinapart of the country and indicate that these efforts are achieving a degree of success.
Gross Regional Product of Major Coastal and Inland Cities

Gross Regional Product (million yuan)

Growth rate
2008–12 (%)

2008

2012

Beijing

11,115

17,879161

Tianjin

6,719

12,894

192

Shanghai

14,07020,182

143

Jiangsu

30,98254,058174

Zhejiang

21,463

34,665

162

Guangdong

36,79757,068155

Hubei

11,32922,250196

Hunan

11,555

22,154

192

Chongqing

5,794

11,410197

Sichuan

12,601

23,873

189

Guizhou

3,562

6,852

192

Yunnan

5,692

10,309181

316,030

516,282

163

China total

Source: China Statistics Yearbook (2013).

As I have noted, the development of the venous economy follows that of thearterial economy. If this proposition is correct, there should be nascent signs of an
emerging venous sector in western China. To get a firsthand look I visited the Niupengzi district of Neijiang, Sichuan, where the Southwest Resource Recycling
Industrial Park is being developed.
Old and New Ways of Recycling
Neijiang is a major distribution hub insouthwestern China, a city of some
4.3 million located 150 km fromChengdu, the provincial capital, and140 km west of Chongqing. The newrecycling park is being built in Niu93

Views on China
pengzi, a village some 10 km from central Neijiang. Driving along Route 321—themain road running through Niupengzi—one notices stacks of junk piled up outsideof people’s homes. This continues for several kilometers: there are mounds of trash
and waste materials of every kind, from dust-coated TV sets and refrigerators topiles of scrap metal and plastic. The answer to this riddle was that for more than
30 years, this was the site of the Neijiang Refuse Collection and Recycling Market,
the largest of its kind in the southwest.
The market specializes in plastic
waste, of which it handles more than
600,000 tons—worth over 5 billion
yuan (approximately US$8 million)—a year, or one third of the national total. I stepped out of the car
and spoke with an elderly woman by
the roadside, asking her how long thistown has looked this way. She told methat the amount of refuse flowing into
the region suddenly began to grow in the early 1990s, around the time that economic growth started to accelerate as a result of Beijing’s reform policies.
In front of the house across the street was a heap of waste vinyl. In the courtyard inside, three elderly men were using machines that looked as old as they wereto crush and clean the discarded material. The workplace was the epitome of smallscale manual labor—a cottage-industry approach to recycling. There were no facilities to treat the wastewater, which seemed to be simply flowing into the gutter.
A similar approach to recycling can be seen in the Guiyuzhen district of Shantou, Guangdong, but because the e-waste they handle poses a much higher threatof contamination, this method has resulted in serious pollution problems. Local
children have been found with high levels of mercury in their blood. By comparison, the situation in Niupengzi seems
less threatening, since the bulk of thework involves recycling plastic. Beingon the coast, moreover, Guiyuzheng
also recycles imported products fromJapan, Europe, and the Americas,
while Niupengzi mostly processes materials trucked in from Chengdu andother cities in the country’s southwest.
As I walked around Niupengzi I
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Views on China
came across typically Chinese scenes of people sitting in front of their houses playing mahjong or cards. Almost everyone, though, was elderly. A donkey loaded withbricks ambled slowly to a site where a new house was being built. Except for theoccasional traffic jam caused by the trucks bringing in new waste, there was noneof the bustle one might expect in a market doing 5 billion yuan of business each year.
The Sichuan Recycling Park
I continued down the national highway past yet more piles of scrap until I came toa T-junction where I turned off onto a smaller road. I was immediately greeted bya sight quite different from anything I had seen in Niupengzi. In front of me werelines of spanking new cafeterias and shops, with crowds of busy-looking young
people in work clothes on the street. At the end of the road was an immense complex: the Sichuan Southwest Resource Recycling Industrial Park.
On September 22, 2008, the Neijiang municipal government andChina Recycling Development Co.,the largest resource recycling company in the country, reached agreement on the construction of the Southwest Recycling base, and on November
14 they signed a contract calling for
an initial investment of 3.4 billion
yuan to develop a recycling park spanning 3.3 square kilometers to function
as the core facility for the recycling base.
The base is a colossal project that will make it the largest recycling center inthe southwest, comprising a market covering some 53.3 km2 and another area forthe deep processing of recycled resources covering 26.7 km2. The core recycling
park is being built in three phases over five years and is scheduled for completionin 2015. The first phase focused on an area covering 53 hectares and investment of
912 million yuan to develop facilities for retrieving and sorting scrap materials,
trading, processing, distribution and shipping, anti-pollution measures, waste management training, scientific and technological research and development, and public services. Phase two involved the construction of a 26.5 ha deep processing area
at a cost of 515 million yuan. And phase three, covering 253 ha and costing 2
billion yuan, will expand the park’s resource-retrieval and deep-processing capabilities.
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Views on China
While China Recycling Development, which is developing the site, is
not one of the 113 state enterprises
belonging to the State-owned Assets
Supervision and Administration Commission of the State Council, it is nevertheless China’s top recycling company that was founded with StateCouncil backing in May 1989.
In addition to its facilities in Neijiang, the company has bases all over the country, including Qingyuan, Guangdong
Province; Luoyang, Henan Province; Changzhou, Jiangsu Province; Linyi, Shandong Province; Lingwu, Yinchuan in the Ningxia Hui Autonomous Region; Tangshan, Hebei Province; Xian, Shaanxi Province; and facilities in Heilongjiang andJiangxi Provinces.
There are other major recycling firms in China, but most of these operate in
only one or at most a few provinces. One reason is the difficulty of obtaining recycling permits, which are issued on a provincial basis and only in small numbers.
The fact that CRD has been able to expand its operations nationwide is proof thatit has full state approval.
The first phase of construction at the Sichuan Recycling Park began on October18, 2009. At the time, Tang Limin, the Communist Party chairman for Neijiang,announced that with this project, “We will bid farewell to our history of ill-disciplined development, characterized by high pollution and minimal added value, andmove onto the stage of specialized, concentrated, industrial management development.” On March 9, 2011, the Neijiang government and CRD signed an investment agreement in Beijing for the second phase of the project. First phase construction was completed on June 5 that year, and the park officially opened for
operations, as 120 companies moved in. Work subsequently began on phase two.
When the project was launched in 2009, there were 1,142 recycling companies
in the area, employing 7,344 people and processing some1.5 million tons of waste
plastic and other materials a year. The local market, as mentioned above, wasworth around 5 billion yuan a year. Because the work was done almost entirely bysmall companies in the informal sector, though, tax revenue was limited, and pollution was a serious problem. Neijiang no doubt hoped to formalize the sector byinviting one of China’s leading companies to the city. Plans call for the recycling
park in Niupengzi to recycle 1.85 million tons of resources a year from 2 million
electrical and electronic devices and 50,000 scrapped automobiles. This, it is hoped,96Views on China
should generate sales of 10 billion yuan and profits of 200 million yuan, creating
1.9 billion yuan in tax revenue and jobs for 20,000 people.
As I drove into the recycling park I saw an impressive row of buildings on theleft. Belonging to the CRD, they were offices, recycling facilities, and storehouses
for venous resources. This was a modern, large-scale facility that was worlds apartfrom the village’s small-scale cottage industries.
Moving further into the site andturning to the right, I came acrossneatly segmented yards of various recycling firms. Seeing this I understood
the reason for the lack of activity inthe village—most venous businesses
with any financial clout had already
moved in to the park, leaving only thesmallest businesses operating outside.
Those that had moved into the park,
though, were not recycling the wastematerials themselves but taking them to the adjacent CRD facilities or selling themto other recycling companies. This arrangement has enabled local workers to keep
their jobs while preventing environmental contamination by transferring the actual
task of recycling to companies in the formal sector.
A Win-Win Situation?
In summer 2012 I visited Yutian County in the city of Tangshan, site of another
CRD factory. Like Niupengzi, this had been a major collection point for used plastic and tires where local farmers living around the factory undertook recycling on
an informal basis. The factory manager told me that CRD was persuading thesepart-time recyclers to focus on collection and leave the task of recycling to CRD toprevent contamination. I was also told that CRD had initiated a training programwith a view to employing local farmers to work at its factory.
The Niupengzi project is adopting a similar approach. Inasmuch as the collection of materials is one of the most important things for the venous economy, CRD
no doubt wished to tap Niupengzi’s track record as a collection hub for waste
plastic in setting up its recycling park there.
For the municipal government, too, the project has such benefits as helping tosustain and expand the local economy, boost tax revenue, and conserve the environment. As the project is the only urban mining base in Sichuan Province, support
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has been coming from the provincial government as well. In March 2010 the Sichuan Development and Reform Commission named CRD a model enterprise for thedevelopment of a circular economy in Sichuan, and in August the same year, theSichuan government issued the company a recycling permit for the appliances collected under a national subsidy program to encourage replacement buying for aging appliances. As a company with state backing, CRD is supported at the local
level as well through the issuance of permits and licenses. It has consequently seen
its profits rise, while regional governments have benefitted from a boost in tax
revenue and job opportunities, as well as a cleaner environment.
It looks like an obvious win-win situation.
If there is a fly in the ointment, it is the fact that despite all the advantages it
receives through preferential government policies, CRD’s sales for the year ended
October 2010 was just 375.97 million yuan. And although the company paid
63.34 million yuan in value-added taxes that year, at the same time the national
government paid 77.22 million yuan in subsidies to the Sichuan Southwest Renewable Resources Industrial Park project.
As a general rule, it is difficult for companies in the venous economy to makea profit from the sale of recycled materials alone, so they need to obtain income
from supplementary sources. In Japan, this might be the fee charged for the disposal of industrial waste, while in China it may be subsidies like those currently
provided for the recycling of household appliances. For companies in the formal
sector that can be expected to undertake recycling with due consideration for theenvironment, profits in the markets where informal operations remain are likely tobe quite low. The elimination of the informal sector is thus of primary importance,
not only for reasons of environmental protection but in order to ensure the sustainability of companies in the venous sector.
The third phase of construction on the Southwest Resource Recycling Industrial Park calls for investment on a scale far beyond that required for the first twophases. This raises questions about whether such investments are warranted considering the low anticipated income. Arterial industries, meanwhile, are continuing
to grow in western China; in June 2012 the Sichuan branch of CRD signed a cooperation agreement with Korea’s SK Group and Suning Appliance, a Chinese
electronics retailer. How confident, though, are local governments and CRD itself
that the venous economy will see corresponding growth? This is a question thatwill bear close watching.

98Views on China
May 26, 2014

Closer US-China Ties Test Abe’s “Smart
Diplomacy”
Takashi Sekiyama

US criticism of Abe’s December visit to Yasukuni Shrine elicited a chorus of objections
from Japanese politicians, most insisting that the prime minister has been misunderstood.
Takashi Sekiyama sees the incident and its aftermath as a sign that Japan has much tolearn about “smart diplomacy” in an era of rapidly growing Chinese influence.
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U

S President Barack Obama visited Japan from April 23 to 25, being welcomed as a state guest at Tokyo’s strong request. This in itself expresses
the importance Washington places on its relations with Japan. The jointstatement confirmed, moreover, that America’s commitment to defend its ally under
the Japan-US Treaty of Mutual Cooperation and Security extends to the Senkaku
Islands, which Beijing also claims. These facts would seem to suggest that the US
government has strongly endorsed Tokyo’s position in its confrontation with Beijing.
The reality, however, is not so straightforward. Although hardly reported inJapan, the United States and China have nurtured a very close relationship. This
year marks the 35th anniversary of the normalization of diplomatic ties between
the United States and the People’s Republic of China, and in recent years the US
and Chinese heads of state, cognizant of increasing economic interdependence between their nations, have maintained close contact on a wide range of issues, keeping diplomatic relations on a solid footing.
Meanwhile, ties between Tokyo and Beijing—already badly frayed—deteriorated further in the wake of Prime Minister Shinzo Abe’s visit to Yasukuni Shrine
last December. This paper offers a brief overview of the US-China relationship and
explores its implications for Japanese diplomacy.

Takashi Sekiyama   Research Fellow, Tokyo Foundation; Director, Sasakawa Japan-China
Friendship Fund; Adjunct Assistant Professor, Meiji University.
99Views on China© Official White House Photo by Chuck Kennedy (CC 3.0)

US-China Relations Since 1979
For more than three decades following the birth of the People’s Republic of China,
the US government withheld diplomatic recognition from the Communist regime
in Beijing, treating the Republic of China in Taiwan as the legitimate governmentof China. The United States and China set to work normalizing relations following
US President Richard Nixon’s historic
visit to Beijing in 1972, and in January 1979, Washington severed diplomatic ties with the ROC and finallyshifted its recognition to the People’s
Republic of China.
In a statement dated January 1
marking the 35th anniversary of USPRC diplomatic ties, Chinese Ministerof Foreign Affairs Wang Yi acknowledged past differences while stressing
President Obama and Prime Minister Abe hold a joint press
high hopes for the future. “China-US
conference at Akasaka Palace in Tokyo, April 24, 2014.
relations in the past 35 years haveachieved historic growth despite ups
and downs,” he wrote. “Looking ahead, we are fully confident in the future of ourrelations.” At a press briefing on January 2, US Department of State Deputy Spokesperson Marie Harf responded by saying, “We remain committed . . . to building astable, reliable, and continuous relationship with China on the military-to-militaryside, diplomatic side, economic side, and we welcome the rise of a peaceful andprosperous China that plays a constructive role in the region.”
US-China relations have deepened over the past 35 years. In the 1980s, during
the Cold War, the relationship rested largely on the common strategic goal of containing the Soviet Union. In the 1990s, following the Tiananmen Square incident,
it entered a period of tension and turbulence. Since the start of the twenty-first
century, however, the two nations have been cultivating ever-closer economic, diplomatic, and person-to-person ties.
On the economic front, the volume of bilateral trade has grown about 200-foldover the past three and a half decades, from less than $2.5 billion in 1979 to over$500 billion in 2013. Today the United States is China’s biggest export market,
China is America’s leading source of imports, and the two countries are one another’s top trading partners.

100Views on China
Figure 1. Value of US-China Trade, 2002–12($US billion)

Source: World Trade Organization, International Trade Statistics 2013 (US figures).

China is also the world’s largest foreign holder of US government debt—a distinction it has held since it overtook Japan in September 2008 at the peak of thefinancial crisis. Today China holds approximately one-fourth of all foreign-held US
Treasury securities.
Figure 2. Major Foreign Holders of US Treasury Securities(as of end of November 2013)

Source: US Department of the Treasury.

101Views on China
Not surprisingly, travel between the two countries has skyrocketed as well.
From a few thousand visitors in 1979, the number of people traveling between the
United States and China has soared to about 4 million (2013).
On the political front, diplomatic ties have improved dramatically of late. Top
US and Chinese leaders have met for bilateral summit talks 14 times over the past
five years. In 2013 alone, Presidents Barack Obama and Xi Jinping met twice toreaffirm their nations’ cooperative ties. By contrast, Xi has yet to agree to a summit
meeting with Prime Minister Abe, who came to office in December 2012.
Washington’s focus on improving ties with China predates the advent of the
Obama administration, and it crosses party lines. Under the Republican administration of George W. Bush, the United States and China stepped up high-level dialogue under the frameworks of the Senior Dialogue (six meetings between August
2005 and December 2008) and the Strategic Economic Dialogue (five meetings
between December 2006 and December 2008).
Since Obama took office, these discussions have continued under the framework of the US-China Strategic and Economic Dialogue. Although the Democratic
Party may be the party of international cooperation, the current US emphasis onstronger ties with China is clearly a bipartisan phenomenon.
Building a “New Type” of Bilateral Relationship
During their summit talks last June, President Xi reiterated his proposal for building a “new type of great-power relations”—a cooperative, nonconfrontational relationship based on mutual benefit and respect, as contrasted with the tension andantagonism that persisted between Washington and Moscow and between Beijing
and Moscow during the Cold War. President Obama echoed that call.
Of course, Beijing’s top political priority is domestic policy, not foreign relations. In recent years, such festering problems as corruption and abuse by local
public officials, unemployment among migrant workers, and poor employment
prospects for college graduates have fueled growing discontent in Chinese society.
Ethnic conflict and separatism are on the rise in regions like Tibet and Xinjiang.
Protests and acts of violence have become grown common and widespread throughout China.
The most pressing challenge facing the country’s leaders today is coping withthese mounting problems while keeping the economy on track. To do this, Beijing
needs to focus like a laser on the domestic situation, and this means maintaining asmooth, cooperative relationship with the United States, China’s biggest trading
partner and a pivotal regional player.
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The Obama administration, which has trumpeted a pivot toward Asia in its
foreign policy, is no less determined to maintain constructive ties with Beijing. The
top political priority for the Obama administration remains the domestic economy,
which has yet to post a strong recovery in the wake of the Lehman crisis. The WhiteHouse views export growth as a key to reducing domestic unemployment, and itis eyeing China as the country with the greatest potential for absorbing those exports.
In fact, the United States and China have a host of common and overlapping
concerns as the world’s first and second largest economies and permanent membersof the UN Security Council. Among the topics Vice President Joe Biden and Xicovered during some four hours of wide-ranging talks in December 2013 were theChinese economy, Taiwan, Tibet, US-China economic ties, North Korea, Iraq, andSyria.
Given these realities, we can expect the trend toward bilateral cooperation—
particularly in the economic sphere—to continue for the foreseeable future. In
terms of intergovernmental cooperation, we can look forward to progress on climate change, energy, and food and drug safety, areas on which the two sides
reached basic agreements during Biden’s visit. In the private sector, foreign investment should pick up substantially once the two governments finalize the bilateral
investment treaty now under negotiation.
In addition, despite a general tendency to regard the Trans-Pacific Partnershipas a tool for containing China, participation in the TPP is the next major item on
Beijing’s international trade agenda after the bilateral trade treaty, according to one
high-ranking Chinese economist. Premier Li Keqiang stated in September 2013, at
the China-ASEAN Business and Investment Summit, that Beijing was willing toconsider a range of regional frameworks, including the TPP, and China’s Ministryof Commerce later confirmed that it was deliberating the possibility of joining in
the free-trade initiative. Washington has sent positive signals as well; during his
visit to Japan in May 2013, Under Secretary of Commerce Francisco Sanchez statedthat the United States would welcome China’s participation in the TPP.
To be sure, both the investment treaty and the TPP must overcome major hurdles, but there is no question that both countries are making a concerted effort at
the government and private levels to strengthen bilateral ties.
Of course, this is not to suggest that the US-China relationship is one of complete mutual trust and satisfaction. Washington continues to voice concern over the
Chinese government’s suppression of free speech and other human rights abuses,
its lack of transparency with regard to continuing increases in military spending,cyber-spying on US corporations and government agencies, and other issues. Even103

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in the economic sphere, where bilateral ties are relatively untroubled, China’s
chronic trade surplus with the United States (surpassing $300 billion) and its frequent violations of intellectual property rights remain a source of friction.
Beijing, for its part, continues to demand that Washington refrain from interfering in matters affecting China’s “core interests,” including Taiwan, Tibet, andterritorial disputes in the South China Sea and East China Sea. While Xi’s foreign
policy is oriented to maintaining the stable international environment his regime
needs to focus on domestic issues, he has also made it clear that he will not compromise where China’s core interests are concerned. On the economic front, theChinese government remains frustrated by American restrictions on high-tech exports to China and on Chinese investment in the United States.
Still, the statement by Foreign Minister Wang cited above and the US response
express a mutual determination to maintain a constructive relationship notwithstanding acknowledged differences. While disagreements will no doubt continue tocrop up from time to time, both governments have embraced a basic policy ofworking to resolve such issues through dialogue.
The Specter of Conflict in East Asia
The real shadow hanging over US-China relations today, in fact, is not the bilateralissues noted above but the deteriorating regional situation in East Asia, which
threatens to entangle the United States. Territorial claims in the South China Sea
have generated friction between China and Vietnam, the Philippines, Brunei, andMalaysia. But even more troublesome from the US perspective may be the escalating territorial dispute between China and Japan, a key American ally. Given thehigh priority Washington places on cooperative ties with Beijing, Tokyo’s efforts tobring US pressure to bear over the Senkaku dispute have placed the Obama administration in an increasingly difficult position.
The US government has articulated its displeasure with any kind of unilateral
action that threatens the stability of the Asia-Pacific region. At the same time, thelast thing Washington wants now, given its interest in stronger ties with Asia’s
fast-growing economies, is to throw a monkey wrench into US-China relations.
And the United States certainly has nothing to gain from becoming enmeshed in an
escalating dispute between Japan and China.
This ambivalence came through clearly in Washington’s reaction to Beijing’s
establishment of a vast air defense identification zone (ADIZ) and its requirementthat any aircraft flying through the zone submit its flight plan to Chinese authorities. In a December 4 press conference following Beijing’s announcement, Secretary104

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of Defense Chuck Hagel went no further than to call the “unilateral” policy “destabilizing” to the region, complaining that Beijing had not consulted the UnitedStates in advance. Although Washington has refused to submit flight plans for US
military aircraft, it has also declined to join with Tokyo in demanding that Beijing
rescind the new policy.
All of this helps explain Washington’s reaction to Abe’s visit to Yasukuni Shrine
in late December last year. A press release issued on December 26 by the US Embassy in Tokyo publicly scolded the prime minister, saying, “The United States isdisappointed that Japan’s leadership has taken an action that will exacerbate tensions with Japan’s neighbors.” In short, Washington treated Abe’s visit to the shrine
much as it did Beijing’s establishment of the East China Sea ADIZ—as an action
to be deplored on account of its potential to destabilize the region.
Some Japanese leaders have dismissed such objections, countering that theprime minister has every right to honor the spirits of the fallen and should not be
deterred by foreign criticism. The author personally sees nothing objectionable in
the prime minister’s paying tribute to the war dead while at the same time renewing
the Japanese government’s commitment to peace. But there is no denying that, by
making a gesture guaranteed to further alienate China and South Korea at a timeof troubled relations with both countries, the Japanese government has undercut
its own foreign and security policy.
A Test of Japanese Diplomacy
Over the past few years, China has pursued policies and actions that show a determination to change the status quo in the East China and South China Seas. Diplomatically, Japan needs to respond to such behavior by marshaling international
opinion in its own favor and showing the world that China is unilaterally destabilizing the region. Unfortunately, Abe’s nationalistic views, as suggested by his
Yasukuni visit, have created the impression among Western nations that Japan is
also helping to undermine the region’s stability.
On the security front, the Japanese government must take action to ensure that
the Self-Defense Forces and the Japan-US alliance serve as an effective deterrent toany possible military challenge from China. Moreover, at a time when fiscal constraints are forcing the United States to trim its military budget, Washington iscounting on Japan to assume a greater security role in the Asia-Pacific region.
With these challenges in mind, the Japanese and US governments are discussing
the first upgrade to the Guidelines for Japan-US Defense Cooperation in 17 years
with the aim of reaching a final agreement within the year. Unfortunately, with
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Japan-China relations as strained as they are today, any move by the United States
to upgrade defense cooperation with Japan is likely to fuel mistrust and anti-American feelings among the Chinese. In short, Abe’s Yasukuni visit has compromised
Washington’s ability to pursue constructive revision of the Guidelines. This is
scarcely advantageous to Japan’s national security.
Since January this year, top Japanese government officials and ruling-party
politicians, including Deputy Foreign Minister Nobuo Kishi and former Foreign
Minister Hirofumi Nakasone, have been traveling to Washington in an effort toconvince US leaders that Prime Minister Abe’s motive in visiting Yasukuni Shrine
was not to provoke Japan’s neighbors but to renew the Japanese government’s
commitment to peace. Most of the people they have spoken to have responded that,while they appreciate the prime minister’s motives as explained to them, the problem from Washington’s viewpoint is not Abe’s motives but the all too predictable
result of his visit. Given the backlash from the Chinese and South Koreans, noamount of explanation regarding the prime minister’s good intentions is likely toassuage Washington’s “disappointment.”
Other reactions from the ruling party have been even less helpful. LDP lawmaker Koichi Hagiuda, special advisor to Prime Minister Abe, responded sharply
to the US Embassy’s press release, arguing that only the Democratic Obama administration would issue such a statement. “We never had to put up with such
fault-finding under the Republicans,” complained Hagiuda. Washington’s emphasison ties with China and stability in East Asia, though, reflects a strong bipartisanconsensus, as we have seen. It would seem to be the Japanese, rather than theAmericans, who are misreading the other side’s motives.
Of course, one visit to Yasukuni Shrine is not sufficient to destroy the ties ofmutual trust and cooperation that Japan and the United States have developed over
the years. But Tokyo’s current course is a dangerous one. At a time when not only
Washington but also the vast majority of European and Asian governments are keen
to maintain stable ties with Beijing, Japan risks isolating itself by needlessly antagonizing the Chinese and then seeking validation from the international community.
Our relationship with China is a complex one, holding within it potential for
conflict as well as for great mutual benefit. As such, it must be managed holistically,
with close attention to each aspect. It demands the kind of “smart diplomacy” thatcan secure the economic benefits of friendly ties while guarding against security
risks through calm, measured cooperation with other countries that share ourconcerns. This is the test facing Japan in an era of ever-stronger US-China relations,and it will take all the diplomatic skills our government can muster to meet thatchallenge.
106Views on China
July 22, 2014

Economic Opportunities Outweigh Risks
in China
Kiyoyuki Seguchi

Japanese companies doing business in China have enjoyed a strong rebound in sales overthe past year, after protests and boycotts sent sales plummeting in the fall of 2012. Kiyo­
yuki Seguchi reviews their success and warns that businesses that shy away from China on
the grounds of risk are jeopardizing their own survival in the global marketplace.
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W

ith diplomatic relations between Japan and China relations at theirlowest point since the normalization of ties more than four decadesago, the influx of Japanese businesses into the Chinese market has
slowed. But firms that previously took the time and effort to adapt to China’s business environment and establish a foothold in the local market are reaping rich rewards. Their experience offers important lessons for Japanese business in today’s
global economy.
Business as Usual
More than a year and a half has passed since tensions flared over the Japanese
government’s purchase of the Senkaku Islands in September 2012, but relations
between Tokyo and Beijing remain as chilly as ever. A glimmer of hope appearedin the late summer and fall of 2013, when Prime Minister Shinzo Abe passed up two
opportunities to visit Yasukuni Shrine, viewed by the Chinese as a symbol of Imperial Japanese aggression. But that November, Beijing put an end to speculation about
an imminent rapprochement with its announcement of a vast East China Sea air defense identification zone covering the Senkakus. And with Abe’s Yasukuni visit thefollowing month, the relationship appeared doomed to continue on its frigid course

Kiyoyuki Seguchi   Research Director, Canon Institute for Global Studies.
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The anti-Japanese protests and boycotts that broke out in China in the fall of2012 dealt a significant short-term blow to Japanese business activity in China,
with sales plummeting in all sectors. But the effect petered out fairly quickly. As
early as December 2012, sales had recovered in all major sectors except autos,
government procurement, and tourism. By April 2013, auto sales were almost backto year-before levels. By the end of June, Japanese companies were able to bid on
Chinese government contracts again, and July sales figures of Chinese travel agencies showed a rebound in group tours
to Japan.
In October last year, Japanesemanufacturers of automobiles, industrial robots, and farm equipment,
among other products, posted record-breaking sales on the Chinese
market. In the following, let us examine these trends a little more closely.
Sales

The guardian lion at the entrance of the Forbidden City,
Beijing.

Japan’s big three automakers (Toyota,
Nissan, and Honda) made impressive gains in China from September 2013 on. In
November, sales of new Nissans and Hondas nearly doubled from the previous
year, while Toyota posted year-on-year growth of 40%. Together, Japanese automobiles claimed a 19.2% share of China’s new-car market that month, overtaking
German cars (15.6%) to reclaim their top position among foreign brands. Sales ofauto parts have mirrored this recovery in finished-auto sales.
Meanwhile, demand for Japanese factory automation systems has been soaring,as manufacturers in China scramble to cope with rapidly rising labor costs. In thesummer of 2013, Yasukawa Electric launched operations at a brand-new robot
manufacturing plant in Changzhou, and Kawasaki Heavy Industries plans to produce robots at a new plant in Suzhou beginning in April 2015. Mitsubishi Electric
has also posted rapid growth in Chinese sales of factory automation systems, andEpson’s plans to shift robot production from Nagano to its Shenzhen facility testify
to a growing emphasis on the Chinese FA market.
Nor is the good news limited to cars and robots. Daikin Industries, for example, is riding a surge in Chinese demand for air conditioners. With sales for theperiod from April to September 2013 up 45% from the year before, Daikin plansto add 2,000 more sales outlets in China, increasing the total to 14,000.
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Views on China
In the food sector, Saizeriya, an Italian-style family restaurant chain with about
150 restaurants in China, intends to increase that number to 400 over the next
three years. Other companies eyeing ongoing expansion in their China operations
include Yoshinoya, a fast-food chain specializing in gyudon (“beef bowl”); Muji
(Ryohin Keikaku), known for its extensive line of design-conscious, no-frills consumer products; Seven & I Holdings, parent company of Japan’s 7-Eleven chain;
and instant-noodle giant Nissin Foods, which plans to build three additional plants
in China between now and 2016.
Direct Investment

Underlying the fundamental health of Japanese business in China is the high levelof foreign direct investment from Japan, which continues to lead the world in FDI
to China. Between January and November 2013, FDI flows to China from Japan
totaled about $6.7 billion, outpacing those from the United States ($3.1 billion),
South Korea ($2.9 billion), and Germany ($2.0 billion).
At the same time, FDI from Japan increased at a slower rate—2.3%—than thatfrom the United States or South Korea (both up 8.6%), not to mention Germany(up 43.7%). This represents a sharp drop compared with the previous year’s growthof 16.1% or the 55.0% increase recorded the year before that.
For the most part, this slowdown reflects the reluctance by Japanese companies
to launch operations in China in the wake of the 2012 protests, which resulted inboycotts and incidents of vandalism. Companies that had already enjoyed a measure of success on the Chinese market have kept their wits about them, pursuing
profits from a smart growth strategy, even while keeping an eye on the risks involved. The rest, however, have been scared off by the gloom-and-doom atmosphere of biased media reports. This gap has been apparent for some time, but it
has grown all the more conspicuous since the government purchase of the Senkaku
Islands.
Looking Ahead

Japan’s direct investment in China is expected to continue to grow over the next
few years, judging by the ambitious investment plans Japan’s major banks havebeen receiving from client companies. The reason is simple: a burgeoning consumer
base that continues to expand at a rate exceeding GDP growth.
Demand for Japanese goods and services typically soars in cities where the percapita GDP has topped $10,000. By computing the total population of Chinese109Views on China
cities that have achieved this average income level, one can roughly estimate thenumber of Chinese consumers in the market for Japanese goods and services. In
2010, that number was approximately 100 million. By 2013 it had grown to around
300 million, and in 2020 it is expected to reach between 700 and 800 million.
Two basic factors are driving the surge in China’s (dollar-denominated) per
capita GDP: the rapid rate of real economic growth and the appreciation of therenminbi. The currencies of other emerging markets, such as India, Brazil, and Indonesia, have declined in value owing to a deteriorating current account balance.
But China has maintained a sizable trade surplus ever since 2005, and as a result
its currency has continued to appreciate. This, combined with rapid economic
growth, has pushed up per capita GDP in dollar terms.
China’s economic growth is expected to remain brisk until around 2020,
buoyed by continuing urbanization and infrastructure investment. And barring an
unexpected drop in the competitiveness of Chinese exports, the renminbi should
continue to appreciate. This means that per capita GDP will keep rising, making it
likely that the market for Japanese goods and services will continue to grow.
Surviving in the Global Economy
As previously mentioned, Japanese businesses tend toward two general extremes.
At the heart of this gap are disparities in companies’ capacity to localize, which inturn determines their ability to succeed in today’s global economy.
Japanese companies that have successfully localized their Chinese business operations, recruiting talented Chinese managers to lead their local affiliates or subsidiaries, have deftly navigated China’s business environment, with its special risks,and boosted their performance year by year. The key is organizational support
from the main office predicated on close communication and mutual trust between
the parent company and its local affiliate.
On the other hand, many Japanese businesses have spent years trying to penetrate the Chinese market with very little to show for it. The reason is that they havefailed to meet the challenge of localization head-on by tapping capable Chinese
executives and delegating genuine authority to them. Meanwhile, those companies
that have remained on the sidelines until now are at an ever-increasing disadvantage. Lacking access to reliable local information sources, they allow themselves tobe deterred by biased reporting in the Japanese and Western media and hang backuntil their window of opportunity has closed.
The fact is that the risks traditionally associated with doing business in China—
problems recovering payment and protecting intellectual property—are receding in
110Views on China
importance. From a long-term viewpoint, the biggest risk for major Japanese firms
is losing their presence in the Chinese domestic market. Given the size of this market and the huge potential for profit that it offers, firms that cannot compete in the
Chinese market are likely face at a significant decline in global stature and corporate value relative to rivals who can make a go of it.
Small and medium-sized firms competing in niche markets may well be able tosurvive on the strength of their share of the Japanese market and overseas markets
other than China. But for major Japanese corporations facing intense global competition from Japanese and foreign rivals, failure to compete on the Chinese market
will mean failure to compete in the world. This is the real “China risk” for businesses today. Japanese corporate executives must remember that the best defense
is a good offense. If they want to survive in the global economy, they cannot afford
to shy away from the Chinese market.

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Views on China
July 8, 2014

Toward a New Japan-Taiwan Business
Alliance
Baatar

The rapid removal of barriers to trade and investment between Taiwan and China augurs
a new age of cross-strait economic integration. The author examines this changing environment and the unique economic opportunities it offers for Japanese businesses able to navigate the unique triangular relationship between Japan, Taiwan, and China.
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lthough Tokyo severed formal diplomatic ties with Taipei when it normalized relations with the People’s Republic of China in 1972, Japan andTaiwan have continued to cultivate close economic, cultural, and people-to-people ties in the nongovernmental sphere. The two countries have a fundamentally strong bilateral relationship, buttressed not only by economic interaction
but also by deep historical roots and a shared commitment to such values as democracy and human rights.
Given this relationship, it is only natural that Japanese and Taiwanese businesses would enter into a variety of partnerships and cross-border strategic alliances. Moreover, the role of such cooperation has expanded greatly in recent years
as Japan has shifted production overseas and turned its attention to emerging Asianmarkets. Today, Japan and Taiwan have more to gain than ever from a new type ofbusiness alliance built on a complementary, symbiotic relationship.
In the following, I assess recent trends in bilateral trade, investment, and people-to-people interchange and explore the possibilities for building new businessalliances grounded in the close ties already existing between Japanese and Taiwanese companies.

Baatar   Associate Professor, Tama University.
112Views on China
Japan-Taiwan Ties by the Numbers
With the exception of 2009, when the global recession precipitated a sharp decline
in commerce, the total value of trade between Japan and Taiwan has either risenor held essentially steady every year since 1990. The 2012 figure of US $66.5 billion ($18.9 billion in Taiwanese exports to Japan; $47.6 billion in Japanese exports
to Taiwan) was only slightly below the historical high of $70 billion recorded theyear before. Japan is Taiwan’s second-largest trading partner, and Taiwan is Japan’s
fifth-largest. According to trade statistics published by Taiwan’s Ministry of Finance, Japan was the world’s fourth-largest importer of Taiwanese goods in 2012
(after China, Hong Kong, the United States, and Singapore), accounting for 6.3%of the total value of Taiwan’s exports. In the same year Japanese products accounted for 17.6% of Taiwan’s imports, the top share for the second year running.
Japanese investment in Taiwan has grown rapidly since the conclusion of the
Economic Cooperation Framework Agreement (ECFA) between China and Taiwan
in 2010, jumping from 266 cases totaling $240 million in 2009 to 619 transactions
totaling $410 million in 2012. A major boost came with the signing of an investment pact between Japan and Taiwan in 2011. That year, Japanese firms invested
a total of US $440 million through 441 transactions, the largest numbers ever. Thisis another sign of increasing economic interdependence between Japan and Taiwan.

Figure 1. Value of Taiwan’s Trade with Japan

Source: Department of Statistics, Ministry of Finance, Taiwan.

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Figure 2. Taiwan’s Exports to Top Trade Partners as Percentage of Total (2012)

Source: Department of Statistics, Ministry of Finance, Taiwan.

Figure 3. Taiwan’s Imports from Top Trade Partners as Percentage of Total(2012)

Source: Department of Statistics, Ministry of Finance, Taiwan.

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Figure 4. Japanese Investment in Taiwan

Source: Investment Commission, Ministry of Economic Affairs, Taiwan.
Note: Figures are on approval basis.

Figure 5. Travel between Japan and Taiwan

Sources: Japan Tourism Agency; Tourism Bureau, Taiwan.

Taiwanese investment in Japan seems to have entered a new phase as well. In
2012, Hon Hai Precision Industry (the world’s largest electronics manufacturingservice company) began negotiating with Japan’s Sharp to buy a major stake in the
consumer electronics manufacturer. And in July 2013, CTBC, one of Taiwan’s top
financial institutions, reached a buyout agreement with the major shareholders ofthe midsize Tokyo Star Bank. If the deal goes through, it will be the first takeoverof a Japanese bank by an overseas-based institution. CTBC has also been busy
signing cooperative agreements with other regional banks around Japan with theapparent goal of building a new business model centered on financing for Japanesefirms that want to expand into other parts of Asia.
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With closer economic ties has come a surge in people-to-people interchange.
Travel between Japan and Taiwan have been on an overall uptrend in the past five
years despite the impact of the global recession in 2009 and the Great East Japan
Earthquake in 2011.
Tourism between the two countries received an important boost from the conclusion of a bilateral open skies agreement in November 2011. Since then, airline
routes have opened up between Taipei and such regional Japanese cities as Kagoshima, Shizuoka, and Toyama, and visits in both directions have soared. In 2012,according to statistics from the Japan Tourism Agency and Taiwan’s Tourism Bureau, 1.43 million tourists visited Japan from Taiwan, the second-largest number
by country. Likewise, Japan accounted for the second-largest number of visitors to
Taiwan, with 1.47 million tourists. The result was the largest two-way flow ofvisitors ever.
Taken together, the ongoing increase in trade, the improved investment climate,
and the surge in people-to-people links between Japan and Taiwan make a compelling argument that the two countries are entering a new phase in bilateral relations.
Moves toward Cross-Strait Integration
A key factor behind the increase in economic interaction between Japan and Taiwan
is the trend toward economic integration between Taiwan and mainland China.
Taiwanese firms have been expanding into mainland China since the 1990s,
when Taipei relaxed restrictions on investment in the PRC. Since then, Taiwanesebusinesses are estimated to have made roughly 80,000 investments in China totaling somewhere between US $100 billion and $150 billion. In a list of China’s biggest
exporting firms of 2010, published in 2011 by the Chinese government’s General
Administration of Customs, 13 of the top 20 companies were based in Taiwan. Making the most of China’s industrial agglomeration and the extensive networks linking Taiwanese companies, these firms have emerged as major players in the Chinese
market, making an important contribution to the China’s economic development.
Foreign investment by Taiwanese firms in China accelerated after President Ma
Ying-jeou came to office in May 2008. As part of his policy of reconciliation with
Beijing, Ma dramatically loosened restrictions on investment by Taiwanese hightech firms in China. In 2010, capital flows to China accounted for more than 80%
of all foreign investment by Taiwanese businesses. Although diversification reduced
that share to 60% in 2012 (according to Taiwan’s Investment Commission), China
remains far and away Taiwan’s favorite target for foreign investment.
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Figure 6. Taiwan’s Top Foreign Investment Destinations as Percentage ofTotal (2012)

Source: Investment Commission, Ministry of Economic Affairs, Taiwan.

The rate of cross-strait people-to-people exchange jumped when Taiwan lifted
its ban on Chinese tour groups in 2008. In 2010, China sent more tourists to Taiwan—1.63 million—than any other country, overtaking Japan to claim the top
spot for the first time. The number of rose to 1.78 million in 2011 and 2.59 million
in 2012 in the wake of a decision by Taipei to admit individual tourists from 26
mainland Chinese cities between June 2011 and August 2013. Meanwhile, thenumber of Chinese employed by Taiwanese-owned businesses in China surpassed
12 million, and the number of Taiwanese citizens working in mainland China hit
1 million (3 million including family members). These figures indicate a new burstof economic and interpersonal interaction accompanying recent improvements incross-strait relations.
The most important development in cross-strait economic integration was theJune 2010 conclusion of the Economic Cooperation Framework Agreement, a preferential trade agreement between China and Taiwan that came into effect in September 2010.
The ECFA consists of a wide range of measures for economic liberalization andcooperation grouped under four major headings: trade and investment, economic
cooperation, early harvest (accelerated tariff reduction), and other provisions (dispute settlement, etc.).
Under the “early harvest” program, both sides committed themselves to phas117

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ing out tariffs on specified products beginning in January 2011. China agreed tolift tariffs on 557 goods and liberalize investment in 11 service industries, while
Taiwan pledged to lift tariffs on 267 goods and liberalize investment in 9 service
sectors. The Taiwanese products covered by China’s tariff reductions amounted toabout $13.8 billion worth of imports in 2009, or 16.1% of the total. The Chinese
products covered accounted for about $2.9 billion the same year, or 10.5% of thetotal value of Chinese imports into Taiwan. By January 2013, tariffs on the specified products had been eliminated entirely.
In this way the government in Taipei has actively pursued economic cooperation with China in a bid to avoid the marginalization of the Taiwanese economy
amid moves toward regional integration—particularly the China-ASEAN FTA thatcame into effect in 2010. It is also hopeful that the ECFA will pave the way forbilateral agreements with other major trading partners, such as Japan, the UnitedStates, and Singapore, while strengthening the competitiveness of Taiwanese business in the region and enhancing Taiwan’s position in the regional economy.
More recently, Taiwan and China concluded an agreement for the protection
and promotion of bilateral investment and an arrangement for customs cooperation at the eighth round of top-level talks between Taiwan’s Straits Exchange Foundation (chaired by Lin Join-sane) and China’s Association for Relations Across the
Taiwan Straits (then chaired by Chen Yunlin), held in Taipei in August 2012. The
SEF and the ARAT are quasi-official organizations charged with negotiating technical and economic agreements between Taiwan and China.
In the period spanning June 30, 2009, when Taiwan relaxed its restrictions on
Chinese capital inflows, and the end of 2012, investment by Chinese businesses in
Taiwan hit the $500 million mark. Much of this activity occurred in 2012, when
China’s Bank of Communications and Bank of China both opened their first Taiwan branches. In 2012, the number of investments from China rose 35% to 138,
while their total value jumped 650% to $328 million. With the signing of a bilateral agreement on trade in services in June 2013, the expansion of economic ties
between China and Taiwan can be expected to continue full throttle.
Another significant development is the Taiwanese government’s decision toallow Chinese businesses and their engineers to operate in Taiwan’s new “free economic pilot zones” under the same conditions as other foreign firms and employees. Taiwan has long prohibited Chinese entities from acquiring a controlling stakein Taiwanese IT businesses out of security concerns, but in the new FEPZs, launchedin August 2013, these restrictions have been relaxed. For the first time, a Chinese
firm will be able to take a controlling stake in a joint venture with a Taiwanesecompany in such key areas as semiconductors and liquid crystal displays.
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One of Taipei’s key objectives in liberalizing trade and investment with China
in this manner is clearly to facilitate Taiwan’s participation in trade agreementswith other countries. In early July 2013, Taiwan and New Zealand concluded a defacto FTA, the first such agreement between Taipei and a government with whom
it does not have diplomatic ties. In response, China’s Foreign Ministry commented
that it had no objection to “nongovernmental business and cultural exchanges”
between Taiwan and other countries, signaling Beijing’s acceptance of such pacts,
which it has opposed in the past. The agreement with New Zealand was succeededby a similar pact with Singapore, and Taipei has expressed interest in an economic
partnership with Japan as well. It has also indicated that it hopes to participate in
the two regional free trade frameworks currently under negotiation: the Trans-Pacific Partnership, currently consisting of 12 nations, including the United States andJapan; and the Regional Comprehensive Economic Partnership, involving 16 countries spanning Asia and Oceania, including Japan, China, and South Korea.
The trend toward integration of the Chinese and Taiwanese economies can be
expected to continue, aided by the ever-expanding activity of Taiwanese businessin China. Japanese business leaders and analysts are watching the trend with greatinterest, since integration promises a whole new range of possibilities for alliances
between Japanese and Taiwanese business.
A Half-Century of Business Partnerships
Japanese businesses have been forging cross-border partnerships with Taiwanesefirms for decades now, though the form these tie-ups take has evolved with thetimes and the changing needs of both countries. From the mid-1960s through the1970s, Japanese manufacturers looked to Taiwan as a base for the assembly of
manufactured exports. The period spanning the 1980s and the early 1990s saw therise of cross-border partnerships in third countries. From the mid-1990s to themid-2000s, Japanese corporations began developing stronger complementary relationships with Taiwanese industry as their operations expanded into other Asian
countries.
The structure of Japanese trade has changed dramatically since the 1990s, withthe focus veering sharply away from the United States and toward Asia. Between
1990 and 2012, the share of Japanese exports bound for the United States fell from
32% in 1990 to 17.6% in 2012, while Asia’s portion rose from 31% to 54.7%.
During the same period, China’s share of Japanese exports soared from 2% to18.1%; and exports to Greater China (China, Hong Kong, and Taiwan), meanwhile, rose from 16% to 31.9%
119Views on China
Figure 7. Japan’s Exports to Major Trade Partners as Percentage of Total (2012)*China, Hong Kong, and Taiwan
Source: Trade Statistics, Japan Ministry of Finance.

Figure 8. Japan’s Imports from Top Trade Partners as Percentage of Total (2012)*China, Hong Kong, and Taiwan
Source: Trade Statistics, Japan Ministry of Finance.

Much the same trend can be seen in Japan’s imports. From 1990 to 2012, theshare from the United States fell sharply, from 22% to 8.6%, while the contribution of Asian goods rose from 29% to 44.3%. Here, too, China’s share grew dramatically, from 5% to 21.3%, and Greater China’s ratio jumped from 11% to 25.2%.
China has emerged as an economic powerhouse that supports the global econ120

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omy not merely with its labor force but also with its huge and rapidly developing
market, and now the progressive integration of the Chinese and Taiwanese economies is further transforming the international economic landscape. Japanese businesses need to adapt by forging new and stronger business alliances with Taiwanesefirms already well established in China. Taiwan can be their gateway to the Chinese
market by making maximum use of the ECFA to facilitate their expansion. In addition, they should begin to think of Taiwan, Hong Kong, and even Singapore as
belonging to a single Greater Chinese economic zone.
Penetrating the Chinese market through Taiwan can be facilitated by forging
partnerships with Taiwanese businesses. Today several circumstances are conspiring to encourage the growth of such cross-border ties. One is the conclusion of the
ECFA, which seeks to integrate the Chinese and Taiwanese economies and create
a free trade zone. Another is the development of increasingly complementary relationships between Japanese and Taiwanese business. The Taiwanese government isalso actively promoting Japan-Taiwan cross-border alliances. And last but not leastis the affinity so many Taiwanese feel toward the Japanese people; indeed, in a2010 public opinion survey carried out by the Interchange Association, which
represents the government of Taiwan in Japan, 52% of respondents chose Japan as
their favorite country.
Leveraging Both Sides’ Strengths
To operate effectively in the Chinese market, the partners in a Japan-Taiwan business alliance must establish a complementary relationship that makes the most ofeach side’s relative strengths. Let us examine what Japanese and Taiwanese businesses can bring to the table when it comes to doing business in China.
Chief among the advantages Taiwanese business enjoys are its global value
chain; its affinity toward Japan; its networks of interpersonal relationships andability to negotiate in a Chinese milieu (including connections with local governments); its relatively advanced industrial technology and fast, low-cost mass-production systems; its ability to tailor its products to the needs of the local market;
an impressive track record of achievement in China; the ability to respond flexibly
to political and social change; and the ethnicity (language, culture, customs) it
largely shares with the mainland Chinese.
Japan, meanwhile, brings its technological know-how and capacity development and innovation; top-notch quality control; brand recognition and value on a
global level; an international reputation for reliability; and advanced organizational management, process management, and internal governance systems.
121Views on China
The key to successful business alliances between Japanese and Taiwanese firms
is a rational division of labor that leverages the relative advantages of each side atvarious stages, from research and product development to procurement, production, marketing, distribution, sales, and after-sales service, as illustrated in Figure
9. Simply put, this means building an integrated regional value chain that brings
Japanese technology and product design to the emerging Asian markets—China’s
in particular—using materials and parts sourced from Taiwan, test-marketing on
the Taiwanese market, and tapping the business networks of Taiwanese companies
operating overseas.
The liberalization of trade and investment between China and Taiwan offers awealth of opportunities for Japanese businesses with Taiwan connections. Thosethat have been providing products and services for the Taiwanese market can makeuse of the know-how, business partnerships, and human resources they have acquired in the process to secure a role for themselves in the cross-strait development
projects that are expected to emerge as liberalization of China-Taiwan trade andinvestment progresses, thereby accelerating their expansion into China. Corporations that have partnered with Taiwanese companies in the manufacture of products for global export, whether through joint development or outsourcing of components, will be able to secure a cost advantage over the competition by selling
Figure 9. Japan-Taiwan Business Alliance122Views on China
products on the Chinese market that have been assembled in China. Japanesebusinesses with corporate clients in Taiwan may now find it strategically advantageous, given the favorable winds generated by the ECFA, to use Taiwan as a basefor development and export.
With a few exceptions, small and midsize Japanese businesses have made relatively little progress expanding overseas, owing to limited resources and the risksof launching business operations in an unfamiliar environment. But given the rapid
improvement in cross-strait relations in recent years, these smaller businesses may
find they can acquire the resources they need to penetrate the Chinese and otheremerging markets by forming business alliances with Taiwanese counterparts, making the most of each side’s strengths and compensating for one another’s weaknesses.
Of course, any Japanese business considering such an alliance needs to draw
up an individualized blueprint tailored to its own sector and business strategy, withthe lessons of previous partnerships in mind. The choice of a partner is also critical,
as the success of any business alliance depends on finding a good fit in terms of
mutual trust, the potential for a mutually complementary relationship, and theability to embrace a common vision at all levels of management.
Conclusion
In Taiwan’s January 2012 presidential election, incumbent President Ma Ying-jeouof the Kuomintang, with Wu Den-yih as his running mate, fended off a challenge
from the opposition to secure a second term. Setting forth his policy agenda for the
next four years, Ma stressed his administration’s ongoing commitment to preserving the political status quo in in the Taiwan-China relationship based on the “threeno’s” (no unification, no independence, no use of force). At the same time, hepledged to continue his policy of reconciliation centered on stronger economic ties
by pushing for early negotiations oriented to further liberalization, including tariff
reductions, under the ECFA.
On the Chinese side, at the 18th National Congress of the Communist Party of
China in November 2012, party leaders called on Taiwan to join in discussions fora peace agreement (activity report by then General Secretary Hu Jintao) and voiced
Beijing’s intent to wrap up follow-up talks for tariff reductions and deregulation
under the ECFA by the end of 2013 (press conference by then Minister of Commerce Chen Deming).
This was a time of rising tensions between Japan, China, and Taiwan over the
Senkaku Islands (referred to as the Diaoyu Islands in China and the Diaoyutai123

Views on China
Archipelago in Taiwan). In August 2012, President Ma proposed an East China Sea
Peace Initiative to preserve peace and stability through economic cooperation
aimed at sustainable marine development for the mutual benefit of all three parties.
Urging all sides to refrain from escalating the conflict and to commit themselves toa peaceful resolution, he called for the adoption of an East China Sea “code of
conduct” based on a trilateral consensus and the creation of a formal mechanism
for joint development of resources in the East China Sea.
Ma has described Taiwan’s relationship with Japan as a “special partnership”
that he wishes to maintain and has pledged not to side with Beijing against Tokyo
over the Senkakus. On April 10, 2013, Japan and Taiwan concluded a fisheries
agreement, which went into effect a month later. On November 5, 2013, the Taiwanese and Japanese negotiating authorities signed five documents agreeing toboost cooperation on electronic commerce, patent priority claims, pharmaceuticalregulations, railways, and maritime search and rescue. On November 28, they
signed a memorandum of understanding on financial supervision aimed at maintaining the health of the financial system through exchanges of information between financial authorities.
These developments have set the stage for further progress in the developmentof Japan-Taiwan relations. In such an environment, partnerships between Japaneseand Taiwanese industry can function not only to maintain strong bilateral ties atthe private level but also to help stabilize political and diplomatic relations in theregion.
In our age of globalization, the economic dynamism of China and other emerging markets is the engine that powers the global economy. Japanese businesses needto understand which way the wind is blowing and actively explore the possibilities
for tapping into Asia’s emerging markets by leveraging its deep ties with Taiwaneseindustry to build a new type of cross-border business alliance.

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May 27, 2014

Working with Nigeria’s Change Makers(1) Leadership Training in New YorkSuzuka Kobayakawa

In September 2013 Suzuka Kobayakawa began her 12-month fellowship under the Tokyo
Foundation–Acumen Global Fellows Program. In her first report, she details her experiences during the initial training phase in New York before going to work at Pagatech, an innovative startup delivering universal access to financial services in Nigeria.
***Life in the “Real World”
It was mid-September when I landed at JFK Airport, full of anticipation and excitement. With me were two suitcases containing everything I would need for the year
ahead, which I would spend in New York and Nigeria. I took a taxi at the airportand headed to my new home in Brooklyn.
On the way, many thoughts swirled through my mind. I knew the kind of people the Acumen program attracts, andjust thinking about meeting themduring my training in New Yorkthrilled me: They were determined tostand with the poor, prepared to listen
to unheard voices. They valued generosity, accountability, humility, audacity, and integrity. They listened to others and respected their views. I felt
sure I was going to learn a lot from

Suzuka Kobayakawa   Tokyo Foundation–Acumen Global Fellow, 2013–14; Was a
Reporting Officer for UNDP in Nepal; led a sales team at Recruit Co. in Japan.
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them, and hopefully I could offer something for them as well. How far would webe able to grow?
When I arrived in Brooklyn, I signed the lease papers, and the agent handed me
the key. I opened the door to find a number of fellows waiting to give me a friendly
welcome: my new roommates, with whom I would spend every waking moment
for the next two months.
There were 12 global fellows this year from 11 countries. We’d been in touch
several times by phone and email before coming to the States. At some stage someone suggested the idea of renting an apartment together; eventually, seven people
signed up and agreed to share a nine-room house. Until now we had only met
online. Now we were about to embark on a life together in the real world. So, we
took to calling our new home the “Real World House.”
Training Begins
The Acumen office is located inside
the Google Building in Manhattan.
Whenever I enter a building like this Ifind myself looking up at the list of
tenants and musing about the people
who work there. It must be a carry-over from my days in sales, I guess.
I observed people as they hurried past,trying to figure things out about themfrom their facial expressions, the way Brooklyn Bridge Park, a 10-minute drive from the “RealWorld House.”
they dressed, and the things theytalked about.
What kind of approach would be effective if I were trying to seal a deal withthese people, I wondered. My reverie was interrupted when a man I had never seen
before suddenly walked up to me and greeted me with a smile. “Hey! You’e Suzuka,
right? You used to work in Nepal? Welcome to Acumen!”
I was quite taken aback to be addressed by name by someone I’d never met
before. How did he know who I was? He laughed and told me he had looked at
the bios of this year’s fellows on the Acumen webpage and committed a little bit
about their backgrounds to memory. This wasn’t the only time I was impressed bypeople at Acumen. The positive impression was reinforced again and again in thehours that followed.
Everyone I met in the office knocked me out: their inspiring presence, their126

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beautiful manners, their stellar backgrounds. They all seemed to be such great listeners and observers of people. I was struck by how considerate they were, by theircommunication skills, and by the sense of fulfillment that seemed to emanate frominside them. I also got to meet Jacqueline Novogratz, Acumen’s founder. I had
longed to meet her ever since I read her memoir, The Blue Sweater. Everybody was
simply brilliant.
The next month shot by. Our days were packed with activity: We met the previous year’s fellows and listened to their experiences and advice, we got tips from
TED speakers on how to get our stories across. In between, I grabbed every freemoment I could to catch up on my reading for the next session. And then there
were the probing sessions at the leadership workshop, kicking off with a grueling
period of introspective silence that seemed like it would never end.
During our financial training, when we dealt with cash flows and balance sheets
totaling millions of dollars, we went through a moral imagination exercise in which
we were sent off with just five dollars and a subway ticket to experience the life of
New York’s poor. In another exercise on human-centered design, we took to thesubway in wheelchairs and blindfolds, trying to come up with feasible ideas for a
public transportation system more accessible to handicapped people.
Self-Exposure
After just two weeks, we were all settled into our new environment and knew one
another quite well. It was during the third week, just after the long periods of silent
reflection at the leadership workshop,
when one of the other fellows remarked to me: “The things you talkabout often seem to hinge on the ideaof strength and weakness.” It is certainly true that I have often wished formore strength and that I tend to thinkof weakness and lack of power as
fearful things. I’m not talking only
about physical strength. I mean otherParticipating in a training course in finance with othertypes of strength as well: economic
global fellows.
and political power, knowledge, networks, emotional strength, kindness, and generosity.
I have always worked hard to make myself stronger and to overcome weaknesses and vulnerabilities. However, the Acumen training was centered on the idea
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Partnership with Acumenthat we should reveal ourselves to one another as we really are, weaknesses and all.
It made me feel uncomfortable.
My fear of being vulnerable dates back to that impressionable period in earlyadolescence when I was an avid reader, reading whatever came to hand. Some of
the books I read dealt with cruel themes: things like war and conflict, poverty, violence, injustice, and discrimination.
There were terrible descriptions of a baby being tossed into the air and impaled
on a bayonet and of child victims of human trafficking. The revelation that there
were still parts of the world where a girl my age could be stripped of her dignity
and forced to suffer unbearable pain shocked me to my core. I could barely believe
what I was reading.
Throughout human history, those who suffered were always women, children,and others in positions of weakness. For me, weakness was something to be feared
and avoided at all costs. This idea was stamped on my consciousness from my early
teens. A frightening encounter with a sexual pervert during puberty only reinforced
the idea that as a girl I had been born on the side of the “weak.”To overcome my fear, I took up martial arts. I got a black belt, gulping down
protein drinks and building up muscles and eventually bringing home trophies andprizes from various tournaments.
Having grown up with values like these, there was no way I could expose myvulnerabilities in front people I had only just met—especially when they all had
such glittering backgrounds. If anything, the idea made me feel more defensive thanever. I believed that I was well aware of my own weakness and was doing a decent
job of dealing with them. It was because I knew my weaknesses so well that I
worked hard to make up for them. I even had a number of “calculated weaknesses”
that I didn’t mind letting people see in order to break down the distance between
us. Wasn’t that enough?
I couldn’t accept the idea of telling others about my hidden inferior complexes:
my cowardice, shallowness, inadequacies, selfishness, and lack of confidence. I worried that they would be disappointed if they found out, so I protected myself andtried to make sure that no one ever knew.
The other fellows often asked deep, probing questions, though. They were
probably trying to get to know the real me. I should have been grateful. They wereso sensitive and observant that they must have noticed there was more to me thanI was letting on. Besides, we had plenty of time to deep dive into our inner selves.
In the Acumen office we worked together, discussing issues until business closed,
and in the Real World House we cooked together and sat up talking till late. Trying
to articulate the subtle ins and outs of your inner self is difficult in any language.
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Having to do it in English, which wasn’t my mother tongue, made it even harder.
It wasn’t easy to explain the different values and different ways of thinking that
had been shaped by experience without touching on my vulnerability. I just smiledand hoped others wouldn’t see through me.
The effort exhausted my already tired brain, worn out after the Acumen training during the day. I would collapse into bed and fall asleep over my reading assignments and preparations for the next day. The next thing I knew, it was morning. And so it went on.
What Is Leadership?
I suppose everyone has their own idea of what a leader is and what leadershipentails. For me, a leader is someone who can unlock the potential in others and by
so doing boost the performance and happiness of the whole group; someone who
can correctly grasp the situation and make the best decisions based on the evidence;
who can respect and bring together different positions and opinions, diverse philosophies, and values.
A leader is someone with the power to move things forward through inspiring
speeches, someone with a rich knowledge and understanding of the world, who istrustworthy and in control, with an extensive network of contacts; someone who
is attractive as a human being.
My “factors for an ideal leader” did not include any weak points. Therefore,
my weaknesses, I felt, were exactly what I didn’t need. I worked much harder onbuilding my financial, operational, and other hard skills than on opening myself up
and exposing my vulnerabilities to others.
I felt vindicated in my approach when one of the facilitators remarked one day:
“Ideas of leadership are just illusions. Leadership is about taking action.” When I
look back on it now, I think the message we were meant to take from this was that
it is important not to be trapped by fixed and traditional ideas of leadership; youneed to make sure that the action you’re taking is really adaptive to the circumstances. But at the time I interpreted it to suit my own ideas: “Don’t waste time
discussing concepts and ideas; it’s action that counts.”
If you want to change something, I thought, actions work better than words.
And so I worked on building my strengths and conquering my weak points insteadof talking about it. I recoiled from the idea of revealing the weaknesses I knew
existed inside me, and tried to keep it hidden. It was only when we entered thesecond half of our training that my refusal to acknowledge my weaknesses started
to cause me problems.
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