Annual Review 2022

Year of the Breakout of the War
6 articles have been selected for the Annual Review 2022 from the six issues of the past year.
#243 May/June 2022 Issue#244 July/August 2022 Issue#245 September/October 2022 Issue#246 November/December 2022 Issue#247 January/February 2023 Issue#248 March/April 2023 Issue

https://www.jef.or.jp/journalEditorial Committee Members
Mohan Gopal
Representative Director, Art of Living Japan

Mohan Gopal is an IT industry veteran in Japan for over 30 years. His
past positions include Japan Country Manager for Tata Infotech andfor Covansys, CTO of Camel International Group, Global Sales
Enablement Leader for Japan at Hewlett-Packard Enterprise andProduct Marketing lead at Sybase. He has also been a business
communications coach and is currently a university visiting faculty.
He is a volunteer with the Art of Living Foundation, an international
NGO promoting yoga and peaceful thinking. He actively presents
his views on varied topics including business, culture history andinternational relations.

Nobuo lizuka
Professor of Department of Economics, Kanagawa University

Having worked for the Nihon Keizai Shimbun (Nikkei) and theJapan Center for Economic Research for more than 20 years as ajournalist and an economist, Nobuo lizuka is one of the mostcredible economists and commentators on the short-term outlook
for Japanese business and economy. His economic analyses arealways based upon his sharp, intuitive observations of businessdata. He is also working as a research director at the Tokyo
Foundation for Policy Research.

Ken Karube
Journalist & Professor of Teikyo University

Ken Karube was a former executive writer for Tokyo-based wire
service Jiji Press, which he joined in 1979 after graduating fromWaseda University. From 1992 to 1996, he was a correspondent inWashington DC and from 2004 to 2009 he was chief of the Washington
and New York bureaus. Before taking the executive writer’s post, he
was deputy managing editor at the Tokyo head office (2010-2013).
Among his books are Failure of Economic Policy Management (1999),
The Bubble Economy (2015) and Japanese Bureaucrats with their
Abenomics (2018).

(Listed in alphabetical order by surname as of April 2023)

Taizo Tsuboi
Director, Planning and Coordination Division, research Planning
Department, Institute of Developing Economies-JETRO

Currently, he is in charge of general affairs, research planning andpublic relations at Institute of Developing Economies (IDE-JETRO),
one of the largest public research institute in the field of social sciencesin Japan.
In addition to the experience at the IDE-JETRO, he had worked as
Director in charge of policy and research, Invest Japan Department(2017-2019) as well as Director of the Investment Team, JETRO
London (2010-2014).

Kazumasa Oguro
Professor of Department of Economics, Hosei University

Having worked for the Japanese Ministry of Finance for several
years, Kazumasa Oguro became deeply interested in academic
research on the macroeconomy and public finance. He joined theFaculty of the Institute of Economic Research at Hitotsubashi
University and later moved to Hosei University. He is one of themost active advocates of fiscal reconstruction, including a
consumption tax hike to reduce the cumulative budget debt of theJapanese government. He is a first-class analyst of Japanesemonetary policy in the international context as well as the global
economy overall.

Sanjeev Sinha

Member Board of Executive Officers, SBI Group – SBI Securities,
Chair AI in Finance Forum, Founder & President IIT Alumni
Association Japan, Co-Founder Rockefeller’s Asia Society Japan
Formerly CEO TATA Asset Management and TATA Realty and Infra,
Director UBS Group Japan, AGM Mizuho Securities, Analyst Goldman
Sachs, Member AI Committee, MIC GoJ.
Authored 6 books from NIKKEI etc. TV Analyst on NHK, TBS, Fuji etc.
Post graduate education from Harvard and Wharton.

Sota Kato
Professor of International University of Japan & Executive
Director of the Tokyo Foundation for Policy Research

Mukesh Williams
Professor, Soka University; Distinguished Professor, Shoolini
University; and Former Faculty, Keio University
Mukesh Williams is a university educator, media writer, and poet. He
has taught modern literature, media studies, and cultural history at St.
Stephen's College Delhi, Shoolini University, Soka University, and Keio
University Tokyo. He is presently an advisor to the South Asia ResearchCenter, Soka University. He has conducted seminars on global culturesand counseled Japanese universities on academic exchange and PR
strategies.

Long Ke
Project Professor of Global Center for Asian and Regional
Research, University of Shizuoka & Senior Fellow of the Tokyo
Foundation for Policy Research

Nariyasu Yamasawa
Professor of the Faculty of Management at Atomi University

Keiichiro Kobayashi
Professor of Department of Economics, Keio University

Jillian Yorke
Interpreter & Translator

After working for the Ministry of Economy, Trade and Industry fornearly a decade, Sota Kato started to pursue an academic careerwith Japanese universities and think tanks such as the International
University of Japan, the Research Institute of Economy Trade andIndustry (RIETI), and the Tokyo Foundation for Policy Research.
Though generally considered a political scientist, his notablestrength as a researcher lies in an interdisciplinary and quantitative
approach to economics and politics. His expertise makes him asought-after commentator on the Japanese political scene.

Born in China and having studied economics at Nagoya University
in Japan, Long Ke is a distinguished economist and opinion leader
on the Chinese economy in the Japanese policy researchcommunity. He has long been an advocate of political reform in
China as a key to achieving economic reform in the country.

Keiichiro Kobayashi has experience in the economic policy-making
process as a former government official at the Ministry of Economy,
Trade and Industry. His interest in economic research led him to join
RIETI and pursue an academic career. He has been an active
commentator on economic policy issues, in particular fiscal andmonetary policies, such as how to eliminate non-performing loans
after the bubble economy in Japan. His current interest covers
areas such as innovation and income inequality.

Nariyasu Yamasawa is a professor of the Faculty of Management at
Atomi University. He worked for the Nihon Keizai Shimbun (Nikkei),
the Japan Center for Economic Research, and is former director of
the Statistics Commission Office, Ministry of Internal Affairs andCommunications.

Co-author of several books, Jillian Yorke worked for the Public
Relations Office, Minister's Secretariat of the Ministry of Economy,
Trade and lndustry in Tokyo as an English editor and checker for
more than a decade. She now lives in New Zealand, where she iscurator of the Japan Library: Pukapuka, as well as a freelance
writer, translator, and interpreter, and often visits Japan.

Introduction – Year of the Outbreak of War
By Naoyuki Haraoka
The year 2022 will be remembered as the year when the Russia-Ukraine war began with the Russian
invasion, even as the Covid pandemic was still raging. This double shock of war and pandemic
corresponds to that of World War I and the Spanish Flu early in the 20th century. These unexpected
shocks remind us that economic autonomy will be fragile in such circumstances. It seems true now that
economics has lost its power over policies; instead, politics has become the driving force to determine
even the direction of economic policy and business strategy.
This is symbolized in changing global supply chains. While economic efficiency was a key concept tobuild up supply chains, now security is the core principle. Friend-shoring (restructuring supply chainsto limit production networks to allied nations) or reshoring (transferring production sites overseas to ahome country) seem to have become the dominant business strategy today. This is to avoid heavy
dependency on nations (typically China) that are provoking geopolitical risks, sacrificing the economic
merits of efficiency. The rising risk of China’s unification with Taiwan by military force, following theexample of the Russian invasion of Ukraine, has intensified this change in global supply chains.
Against this backdrop, we have set the lineup of our Annual Review 2022 as follows.
Starting the review with an article on EBPM (Evidence-Based Policy Making) would suggest the roleof economics in policy-making in a period of geopolitics where uncertainty rules the world. Economic
theory does not work well when there is growing uncertainty following such shocks as a war. Economists
will need to specify the economic consequences of any policy quantitatively, without being preoccupied
with theories or ideologies – such as free trade always achieves the best outcome for all players. Security
could be damaged by free trade. Or, whether an environmental policy works well or not will depend onenergy supply circumstances, which will themselves depend upon geopolitical risks. Promoting only
renewable energy sources to meet environmental needs could result in only raising energy prices further,such as through fossil fuel price rises provoked by the Ukraine war. Accordingly, we need to analyze theexternal conditions around the economy, in most cases quantitatively, in order to ensure the objectivityof the analysis and the legitimacy of any policy. So we will need EBPM to quantify a policy’s
effectiveness against reality (May/June, 2022, Cover Story 3).
Faced with the risk of global supply chain disruptions at this moment between nations in the West
including the United States, Japan and EU member states in which the “rule of law” is observed andnations like Russia and China where “changing the status quo by force” is considered legitimate, Japan
must take the initiative in promoting a rules-based international economic system to maintain global

supply chains. Without the necessary efforts, the world cannot continue to enjoy the benefits of stable
and transparent trade and investment regimes. This could lower the growth potential of the world
economy. Even with the need to address security concerns in trade and investment regimes in addition
to economic efficiency, a rules-based approach to integrate these concerns into trade and investment
regimes would be effective in mitigating uncertainties in global trade and investment through enhanced
transparency. Our JEF Research Study Group 1 examined this issue and made public its“Recommendations for the Development of a Rules-Based International Economic System” in May
2022 (July/August 2022, Cover Story 1).
The METI White Paper on International Economy & Trade 2022, following this issue of growing
geopolitical uncertainty and its possible economic consequences, analyzed the economic impacts ofRussia’s aggression against Ukraine in detail (September/October 2022, Cover Story 2).
Security concerns need to be addressed not only by national security and trade and investment policies
but also by industrial policies. This is because raising national competitiveness through industrial
policies in their wider definition will be another important policy pillar in ensuring national security.
Our JEF Research Study Group 2 studied this issue and published another policy recommendation on“the need for evolutionary industrial policy to achieve broad economic security” (November/December
2022, Cover Story 1).
As FY2022 progresses, it has become clear that talking about the global economic outlook without ageopolitical and energy development outlook is useless. As the Ukraine war’s main economic
consequences are tightened petroleum and natural gas demand and supply andrising energy prices due to the economic sanctions against Russia, without assessing how and when the
war will come to an end it will be extremely difficult to predict the future of the global economy. We
must discuss the economy, energy and geopolitics simultaneously in the same context (January/February
2023, Cover Story 1).
Finally, our trip into research has exceeded the scope of economic policies, as global economic stability
must be brought about jointly through economic policies, national security policies and foreign policies.
This is obvious when thinking about a possible Taiwan Crisis in which China could try to achieve
unification with Taiwan by force, having drawn some lessons from Russia’s invasion of Ukraine. Our
JEF Research Study Group 3 examined the background and scenario of this Taiwan Crisis and provided
policy recommendations for three domains: national security, economy, and foreign policy (March/April
2023, Cover Story 1).
Thus, this annual review shows how an interdisciplinary approach would work well in our current times.

Selection of articles in the Review:1

New Direction of Economic & Industrial Policies Supported by EBPM
By Japan SPOTLIGHT
COVER STORY • 3 (May/June 2022, #243)

2

Recommendations for the Development of a Rules-Based International Economic
System
By the Research Committee on the Development of a Rules-Based International Economic System
COVER STORY • 1 (July/August 2022, #244)

3

Roundtable with Prof. Asei Ito, Prof. Kazuto Suzuki, Prof. Yasuyuki Todo & Yo Okada
Roundtable on the White Paper on International Economy & Trade 2022:
Economic Impacts of Russia’s Aggression Against Ukraine
By Japan SPOTLIGHT
COVER STORY • 2 (September/October 2022, #245)

4

The Need for Evolutionary Industrial Policy to Achieve Broad Economic Security
By the Research Committee on Evolutionary Industrial Policy
COVER STORY • 1 (November/December 2022, #246)

5

Roundtable with Prof. Ken Endo, Dr. Shumpei Takemori, Tatsuya Terazawa &Masakazu Toyoda
How Should We Interpret Geopolitics, Economy & Energy Developments inToday’s World?
By Japan SPOTLIGHT
COVER STORY • 1 (January/February 2023, #247)

6 Roundtable with Shingo Ito, Prof. Yasuhiro Matsuda, Satoshi Morimoto &Masakazu Toyoda
Possible Taiwan War – How Should Japan Deal with It Under Intensified USChina Conflict?
By Japan SPOTLIGHT
COVER STORY • 1 (March/April 2023, #248)

Naoyuki Haraoka is editor-in-chief of Japan SPOTLIGHT & executive managing director of
the Japan Economic Foundation (JEF).

COVER STORY • 3

N

ew Direction of Economic &Industrial Policies
Supported by EBPM

By Japan SPOTLIGHT

Evidence-Based Policy Making (EBPM) is defined in Japan as theclarifying of logical links between a policy’s purpose and the means
to achieve it effectively, the collecting of evidence proving those
links. In this clarification, data-endorsed evidence in particular isutilized and thus a basic framework of a policy can be clearly shown
to the public. With this definition, the Japanese government officiallyintroduced EBPM in its administrative decision-making process in2017. An official in charge of promoting EBPM was appointed ineach ministry. It also organizes regular inter-ministry meetings toshare each ministry’s successful cases of EBPM.

METI’s Engagement with EBPM
The Ministry of Economy Trade and Industry (METI) has beenworking on its implementation since 2017 as well. As EBPM isapplied to intra-ministerial budget request processes, first it needs tofill in a policy implementation process review sheet and publicize it toshow why a national budget is necessary, as well as the policy goals
to be quantified, and also set up and publicize a logical model-chart
showing how the policy would help change the economy and society.
Through this, the relevance of the policy means and objective would
be visible.
METI is now attempting to apply a quantitative analysis to
examination of a policy’s impact in some selected model cases.
Within METI, the divisions making a policy and requesting a budget,the policy assessment division and economists from the ResearchInstitute of Economy, Trade and Industry (RIETI) and experts on
quantitative analysis are collaborating to examine data to be utilized
for the econometric analysis to measure the policy’s impact, as well
as working on specific quantitative analysis.

METI’s New Direction of Economic & Industrial
Policies Implemented with EBPM
Industrial policies are now starting to be seen from a new angle. In
the 1980s and 1990s, the US and European nations labeled themprotectionist and tried to hinder them as unfair practices, though
their own national security policies worked as de facto industrial
policies to a large extent in enhancing their defense industries withsensitive high technologies. However, today, China is now
strengthening its industrial competitiveness significantly at anextremely high speed that has never been seen so far by large-scale
10 Japan SPOTLIGHT • May / June 2022

government support for industries. In particular, the expanding hightechnology sectors in China are now a threat to all capitalist
developed nations. The capitalist nations in the West are now
starting to think about application of large-scale industrial policies tocounteract this tremendous rise in China’s industrial
competitiveness.
In addition to this concern about competitiveness, China haspresented another challenge. National economic security has
emerged as a crucial issue for a nation’s survival during geopoliticalcrises. In sectors with sensitive technologies which could affectsecurity, trade and investment in those technologies may be limited
due to concerns about possible leakage of information about them totheir trading partners. Excessive dependency on certain vital
products by a specific nation would make that nation vulnerable interms of national security or trade, and investment relations with any
country suspected of stealing secrets of vital technology would
imperil the country’s security through leakage of key information on
the technology.
The US-China confrontation, or more generally the confrontation
between democracy and authoritarianism, one of the key geopoliticalrisks to the world today, could exacerbate the situation and thepossible disruption of global supply chains between democracies
represented by the United States and authoritarian regimes
represented by China would make it necessary for each nation tohave their own industrial policy to secure vital technology or
products in terms of national security. Thus many nations are now
pursuing industrial policies based on these assumptions, and Japan
should be no exception.
METI is now planning to adopt the following EBPM for promoting
its new industrial policies in general with a large-scale budget. A
policy’s impact, measures to quantify it and how to collect data forthose measures need to be clarified before its implementation.
Business operators expected to provide such data must agree with
the EBPM practitioner on the provision of the necessary data. Explicit
involvement by experts on quantitative analysis must be achieved.
RIETI, a public policy think tank affiliated with METI, having
established an “EBPM Center”, is to be officially involved in the
EBPM process as an advisor. As a trial, it adopted a subsidization
policy to secure production sites for advanced semiconductors inJapan and funding for green innovation (innovation of environmental
technology). Thereafter, new policies with large-scale budgets will in
principle be subject to EBPM and the effects of the finished largehttps://www.jef.or.jp/journal/

scale budget policies will be successively examined.

Ideal Future of EBPM in METI & Issues to Be
Tackled for Its Realization
METI eventually aims at becoming a data-driven organization. To
analyze policy impacts by data, a wider and horizontal utilization of avariety of data must be accommodated. In particular, in the near
future, it would like to get real-time data through a private cloudservice on finance, accounting, as well as labor management
contracts used by the companies to be covered by the analysis aftergetting their agreement. With such real-time data, it could have more
up-to-date EBPM. But to achieve this there will be challenges to be
overcome.
According to METI’s Business Process Re-engineering Division in
charge of promoting EBPM, there are mainly two issues to be
tackled. First, there are not enough data yet necessary for EBPM.
Second, government officials’ literacy in data utilization andquantitative analysis is not sufficient yet at this moment. There isalso frustration with so much paperwork on a wide range of policy
assessments that is occasionally duplicated.
On the first issue, the government plans to ask the offices incharge of the relevant policy to obtain the necessary data by usingpart of its budget at the beginning of the project proposal. These data
are, in the case of METI, usually on the business firms intending toapply. Thus, it will also examine the possibility of gathering data
sources of business enterprises’ activities for horizontal use while
promoting accumulation and utilization of digitalized data to beacquired when these business firms apply for any given policy
project.
In this regard, it is important first to promote utilization of
government statistics, but as government data are not up to date but
only available after a time lag, how to promote utilization of real-timedata from the private business will be a crucial issue to be solved.
On the second issue, the government plans to organize a training
program for those officials to promote utilization of data and expand
the data users. It is also going to introduce experts on econometrics
in RIETI who could help these officials involved in EBPM. The
officials would have a stronger incentive to work on EBPM if it isalways a prerequisite for budget allocation.
At this moment, in METI, there are four so-called EBPM
concierges providing officials with advice on how to collect data andhow to use them for quantitative analysis to prove a policy’s positive
impact. It is, however, a bit uncertain whether this is sufficient toallay all the frustrations of the METI officials involved in EBPM.
The United Kingdom and the US are the countries at the forefrontof EBPM. In the UK it has been developed since the government ofPrime Minister Tony Blair from 1997, and today more than 1,500
government economists are working on pre-policy implementationassessment by social cost-benefit analysis in a policy-making
process among different ministries and providing ministers with
policy advice. All of them were once employed by the Government
Economic Service and have been assigned to each ministry.
In the US, EBPM has been actively developed since theadministration of President Barack Obama from 2009. The Office ofManagement and Budget in the White House has reinforced eachgovernment department’s involvement in EBPM through its annual
guideline for budget requests from each department delivered tothem every year. They have $100 million in budget for promoting
EBPM, apart from Tiered Grants, subsidies provided depending upon
the robustness of the evidence.
Japan will need to study expanding funding and human resources
for EBPM, following these examples.

Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT.

Japan SPOTLIGHT • May / June 2022

11

COVER STORY • 1

Recommendations for theDevelopment of a Rules-Based
International Economic System

By the Research Committee on the Development of a Rules-Based International Economic System

The Concerns of These Recommendations: The
Rules-Based International Economic System thatJapan Should Aim at
As the international trade and investment system weakens, it faces
three challenges: 1) the deterioration of the multilateral free tradesystem, 2) the decoupling between the United States and China andthe convergence of security and trade, and 3) the supply-chain crisis.
The Japanese government has worked to maintain a multilateral
trading system that is based on the rule of law and includes both the
US and China and to develop a multilayered economic order with theaim of constructing a trading system based on our national interests.
Since the turn of the century, as the World Trade Organization (WTO),
the mainstay of the postwar multilateral trading system, struggled tomake progress in the Doha Round, the Japanese government has
achieved progress through regional trade agreements (RTAs),
including bilateral agreements, with a focus on free trade agreements(FTAs). One feature of an RTA is that it facilitates the development of aframework that provides an upgrade over WTO rules. The
Comprehensive and Progressive Agreement for Trans-PacificPartnership (CPTPP), economic partnership agreements (EPAs), theRegional Comprehensive Economic Partnership (RCEP), and otherrecent arrangements to which Japan is a signatory have contributed tothe development of the rules for the 21st century in a wide range ofareas including intellectual property, investment, labor, environment,
state-owned enterprises, and e-commerce.
However, rules-based multilateralism has been under siege latelyfrom the rising tide of populism that features anti-globalism in the US
and elsewhere in the industrialized democracies and the proliferationof unilateralism, in which the US and China as well as others pursue
their national interests by unilaterally imposing trade measures. A
framework is emerging in the Asia-Pacific without the US as it
abandoned the Trans-Pacific Partnership Agreement (TPP) and the
RCEP that entered into force in January 2022. Meanwhile, there is anurgent need to deal with states that adopt market-distorting policies
and measures. And recent years have seen the emergence ofgeopolitical and geoeconomic risks in the Asia-Pacific and IndoPacific, with the result that economic security is gaining importance insuch areas as supply chains, human rights, data governance, andmanaging high technology.
It was against the background of these changes in the international
economic order that the administration of US President Joe Biden in
https://www.jef.or.jp/journal/

October 2021 proposed the Indo-Pacific Economic Framework (IPEF)
and has been demonstrating a new eagerness to construct an
economic order in the Indo-Pacific region. Given its lack of market
access commitments, the IPEF is not an ideal approach for promoting
the creation of economic rules-of-the-road for the Indo-Pacific region.
It remains essential for the US to return to its original TPP initiative,
which has now become the CPTPP, and, ultimately for the regional
perspective, to explore ways to create the “Free Trade Area of the AsiaPacific” (FTAAP) which was proposed by the leaders of the Asia-Pacific
Economic Cooperation (APEC) forum. On the multilateral front, it isimportant to look for ways to reawaken the WTO from its stupor andprompt the development of rules on digital trade, labor, human rights,
and other concerns. To achieve this, Japan must exercise leadership inbuilding and maintaining economic order as a “global standard-bearerof free trade” with the WTO at its core. However, as part of theinternational response to the Russian invasion of Ukraine that began
on Feb. 24, 2022, 14 countries and regions including Japan, the US,
and the EU, who are members of the WTO, decided to revoke Russia’s
most favored nation status, and developed countries opposed Russia’s
participation in the G20 summit. The enormity of the impact ofRussia’s outrageous actions on the international order is obvious. It isnecessary to carefully consider how Russia should be treated ininternational economic forums, taking into consideration the mid- andlong-term impact on the international order.
The Japan Economic Foundation (JEF) brought together eminent
experts from various fields to set up the Research Committee on theDevelopment of a Rules-Based International Economic System. The
Committee reevaluated the rules-based international economic systemfrom the legal, economic, and political perspectives, considered ways
to improve it, and makes the following “Recommendations for theDevelopment of a Rules-Based International Economic System.”

Recommendations① Revitalizing the WTOA) The Question of the Appellate Body
(1) To add to the impasse in the rulemaking negotiations, the Appellate
Body, the core of the dispute settlement system, which some callthe “crown jewels” of the WTO, has been thrown into disarraysince December 2019, when it ceased to have enough members
Japan SPOTLIGHT • July / August 20223

for a quorum to hear appeals. Securing the rule of law by
normalizing the Appellate Body is urgently required, but early
resolution is difficult. In the meantime, in order to keep harm fromcoming to the legitimacy of and trust in the WTO from theaccumulation of appeals into the void, Japan should give serious
consideration to joining the Multiparty Interim Appeal Arbitration
Arrangement (MPIA) led by the EU for the provisional revival of therule of law. Of particular note is the fact that China is a member ofthe MPIA, giving it a role in trade policy vis-à-vis China. The EU has
also adopted enforcement regulations to deal with appeals into thevoid by MPIA non-members and Brazil has followed suit. The time
has come for Japan to consider taking this approach.
Note: “Appeal into the void” means to put a case on ice by filing anappeal with the currently memberless Appellate Body whilerefusing to use the MPIA.
(2) In joining the MPIA, the Japanese government should make it clearthat it is doing so as an emergency measure to maintain temporary
order and that it does not support the EU proposal for WTO
Appellate Body reform. It should exchange views broadly with all
the major WTO parties, not just the members of the MPIA.
(3) In undertaking WTO Appellate Body reform, Japan should also giveheed to US criticism of the Appellate Body and consider specificmeasures to place institutional constraints on the judicial activism
and procedural discretion overreach of the Appellate Body. This
does not mean simply following the US lead; instead, Japan shoulddraw a red line in view of its national interests. In particular, it isdesirable in principle to maintain the two-tier system and thenegative consensus rule, given the benefits that the judicial disputesettlement that the Appellate Body has historically provided Japan.
(4) The WTO should reconfirm its origins as an international systemthat is predicated on a system of rules agreed between market
economies. When interpreting existing agreements as part of the
dispute settlement process, to avoid accusations of overreach fromarising, it should not go beyond the elaboration of the agreementof the WTO members according to the standard method forinterpreting agreements under international law and should
exercise caution in referencing international law other than WTO
agreements and make it clear that judicial discretion is not being
used aggressively when making interpretations.
B) Reviving the Rulemaking Role of the WTO(1) While keeping the WTO from leaning too heavily into its judicial
function as explained in A), it is essential to revitalize its
rulemaking function in order to restore that balance between thetwo functions. The Japanese government should accordingly takethe lead in revitalizing the negotiations for establishing new rules.
Its ongoing efforts in this regard can be seen in such areas asdigital trade, fisheries subsidies, and investment facilitation fordevelopment. To maintain this momentum, it is important to
4 Japan SPOTLIGHT • July / August 2022

produce tangible results and to institutionalize the plurilateral – as
opposed to multilateral – format for negotiating rules.
(2) Regarding (1), it is desirable for the Japanese government to play
an active role in the Joint Statement Initiative on Services Domestic
Regulation of the WTO, the Ottawa Group, and other plurilateral
activities by like-minded countries. It should also work to produce
new agreements by incorporating the outcome of the January
2020 Joint Statement of the Trilateral Meeting of the Trade
Ministers of Japan, the US and the EU such as the reinforcement of
the rules for industrial subsidies, not to mention the negotiations
on e-commerce as part of the JSI (see ④A).
(3) The WTO should reconfirm its original commitment to the systemof rules agreed to between market economies and the mutual
opening of the domestic market on a most-favored-nation (MFN)
basis. Two decades since its WTO accession, China’s influence in
the WTO and the international economy more broadly has grownenormously. The time has come to consider whether it has fully
implemented the reforms that had been expected in the beginningand has complied with the WTO agreements appropriately. This isessential to the development of WTO rules going forward.
② Utilizing RTAs

A) Utilizing the CPTPP(1) For the US administration of President Barack Obama, the TPP wasthe means to draw China into new trade rules by making it
understand that it would be at a disadvantage to stay out of theframework. It is desirable to use China and Taiwan’s bids to join the
CPTPP as an opportunity to conduct firm, rules-based accession
negotiations. In particular, China’s CPTPP accession should be
used as an opportunity to put pressure on China to open its
economy, in coordination with efforts by the US from outside the
CPTPP framework.
(2) As an obvious precondition to its accession to the CPTPP, China
should be required to keep the promises it made when acceding to
the WTO and to immediately eliminate all economic coercion in
violation of WTO agreements.
(3) In the negotiations for China’s accession to the CPTPP, it will benecessary to secure its compliance with the intellectual property,
forced technology transfer, state-owned enterprise, labor,
environment, e-commerce, and other rules of the CPTPP. Where
existing rules are insufficient, the incumbent members of the
CPTPP should consider demanding that China make commitments
over and beyond the existing agreements. In doing so, adding
substantive provisions predicated on China’s singular socioeconomic system (or politico-economic system) should beconsidered, and effective mechanisms to secure compliance withthe agreement (e.g. special provisions for the burden of proof inthe dispute settlement system, periodic inspection system) could
also be explored.
(4) China’s WTO accession negotiations took 15 years. Similarly, theJapanese government should not compromise in the negotiations
on China’s accession to the CPTPP and should be comfortable withtaking as much time as is required. It should also consider
including in the accession protocol provisions to the effect that
China could be expelled or that other member countries could
withdraw concessions if it is determined that China is not incompliance with the provisions of the CPTTP or its accession
protocol.
(5) To construct the implementation surveillance system of the CPTPP,
it is important to strengthen the dispute settlement procedures andimplementation surveillance system, establish a secretariat,
achieve the early accession of the United Kingdom, and strengthen
collaboration with the UK, Canada, Australia, and New Zealand.
(6) Connection and/or collaboration between the EU and CPTPP
should be explored to deal with market-distorting measures by
Chinese governments in the future. Adding the US to this should
enable the CPTPP to function as a stepping stone for the creationof the WTO or other multilateral rules.
(7) As the Yokohama Vision and The Pathway to the FTAAP adopted atthe 2010 APEC summit in Yokohama make clear, there is anagreement on a long-term vision to create the FTAAP through the
expansion of the CPTPP and the RCEP. Efforts towards theachievement of this goal should be continued.
B) Building an Indo-Pacific Order around the US (the US“Return” to the CPTPP and the IPEF)(1) Japan should be an active participant in the IPEF, which the US is
promoting. However, the IPEF is not the best approach for thepromotion of economic rule-making in the Indo-Pacific region,
particularly since it does not include commitments on market
access, a matter on which bipartisan concern has been expressedin the US Congress. Thus, Japan should be persistent in urging the
US to return to what is now the CPTPP.
(2) A hard line on China policy has bipartisan support in the US
Congress. The Japanese government should make a strong appeal
on the strategic importance of the CPTPP to the China hardliners in
the administration and Congress who are responsible for trade
policy including its strategic aspects, as well as the role the CPTPP
has as an effective tool for correcting market-distorting policy
practices.

range of stakeholders including businesses, academia, governors
and other local officials, think-tanks, and the mass media for the
US to return to the CPTPP. The CPTPP’s role in improving
environment protection, labor standards, and, more broadly,
human rights through the framework of a trade agreement should
be used to make a strong appeal to enhance the understating of
the CPTPP among the constituencies that have an interest in theseissues (such as young people).
(4) In the US, the Trade Adjustment Assistance (TAA) Program
currently does not include compensation for the damage resulting
from trade liberalization. It is important for the TAA to beredesigned and implemented to reduce the negative impacts fromthe CPTPP and other trade liberalization initiatives.
C) Analyzing the Economic Impact of RTAs and Their
Expansion(1) Ex-ante forecasts and the analysis of ex-post evaluation are both ofimportance regarding the economic effect of an RTA. Ex-ante
simulation using economic models should be utilized in policy
planning as if it were a social science laboratory. In developing arules-based international economic system, the economic effectshould be considered and a system that is effective from an
economic-benefits perspective should be developed efficiently.
(2) A preliminary calculation of the economic effects of Asia-Pacific
EPAs shows that 1) the CPTPP and the RCEP do not compete
against each other but instead are mutually reinforcing, so it isdesirable to implement both instead of choosing one over theother; and that 2) including non-tariff measures in addition totariffs increases economic benefits. However, if the US joins the
CPTPP or India joins the RCEP, the economic benefits of lower
tariffs is reduced or even turns negative for some incumbent
members. In expanding RTAs, the key is not to just add newmembers but also to deepen measures for liberalizing andfacilitating trade and investment.
(3) Tariff reduction under an RTA is applied on a preferential basis to
the RTA signatories, but many non-tariff measures cannot beapplied exclusively to the products of the signatories generally
speaking, in which case the potential ripple effect of the reduction
through their universal application can be expected. It should be
noted that even where global rules are not developed under the
GATT/WTO system, the global application of an agreement
between certain countries has the potential to generate the kind of
economic benefits that would be generated by a WTO agreement.
③ Dealing with China’s Market-Distorting Government

Support and Regulations(3) The opposition to free trade in the US comes from certain
industries such as steel and automobiles, not the general public.
Thus, the Japanese government should strongly appeal to a wide(1) Government procurement is conducted by central and local
governments. Foreign companies may be subjected to de facto
Japan SPOTLIGHT • July / August 2022

5

discrimination due to political reasons in areas that are nominally
opened to the outside world under domestic law. China should beurged to join the WTO Agreement on Government Procurement,
which forbids such exclusive procurement practices. The Japanese
government should also review its own procurement system with aview to ensuring conditions for fair competition including
reciprocity with China and other countries that are not parties to
the Agreement on Government Procurement.
(2) The weaponization of interdependence is emerging as part of theeconomic security landscape. There has been an increase in recent
years of China exercising economic coercion through trade
restriction and other means, against Australia and Lithuania among
others (② A) (2)). It is necessary to persevere in seeking redress
through the dispute settlement procedures of the WTO, multilateralframeworks such as the Council for Trade in Goods, and thenegotiation process for CPTPP accession.
(3) It is possible that market intervention through sovereign funds,
given their high tolerance for risk, could fall under the definition of“unlimited guarantees”, one of the items that should be added tothe unconditionally prohibited subsidies measures under the WTO
Agreement on Subsidies and Countervailing Measures (ASCM)
according to the aforementioned 2020 Joint Statement of the
Trilateral Meeting of the Trade Ministers of Japan, the US and theEU. It is necessary to conduct a theoretical and empiricalinvestigation of the mechanism by which sovereign funds would
be market-distorting.
(4) As the example of the Chinese steel industry shows, subsidies tocover operating losses, debt forgiveness, or bad debt
compensation can lead to excess production capacity. Adding
them to the ASCM list of prohibited subsidies should beconsidered accordingly. As for excess capacity subsidies, it wasagreed at the Trilateral Meeting of the Trade Ministers of Japan, theUS and the EU to strengthen discipline, so discussions within thisframework should go forward as well.
(5) It is possible to demonstrate through economic analysis that theharm caused by the industrial subsidies that are provided in China
constitutes “serious prejudice” under the ASCM. Such economic
analysis, particularly methods used in justifying competition policy,
should be considered favorably.
(6) Japan should engage actively in negotiations over AI ethics rules,
the concept of data as a human right, government access, andother areas where digital rules are yet to be established, especiallywhere China is participating actively in the rule-making.
(7) Cases have been emerging where mergers and acquisitions byforeign companies fall through because of delays in theexamination by the Chinese authorities (e.g. acquisition of Hitachi
Kokusai Electric Inc. by Allied Materials). This has had the effect of
6 Japan SPOTLIGHT • July / August 2022

preventing rivals to Chinese businesses from emerging. In the IT
industry, where product cycles are short and competition is heavy,
it may have had the effect of preventing businesses fromestablishing themselves in the market. There is a gentlemen’s
agreement to conduct examinations expeditiously to prevent thesethings from happening, but there have been repeated cases where
the examination has taken much longer than foreseen in the
gentlemen’s agreement. Arbitrary application of the antimonopoly
law has also been observed. There is a need for rules that deter thearbitrary application of competition law. International coordinationof rules in competition law policy takes the form of creating soft
rules such as recommendations and guidelines in the International
Competition Network (ICN), the OECD, and elsewhere. Since China
is not yet a member of the ICN, consultations between tradeauthorities and between competition policy authorities should beinitiated on this point and China should be urged to participate in
the international coordination of rules.
(8) The Japan-China-Korea Trilateral Investment Agreement and the
RCEP are rules for China related to investment that are available to
Japan but not to the US or Europe and should be used accordingly.
The RCEP recognizes in principle the provision of preexisting
national treatment and most favored nation treatment. As for theprohibition of trade-related performance requirements, it covers
technology transfer demands and royalty restrictions over andabove the WTO’s Agreement on Trade-Related Investment
Measures (TRIMS). It is important to secure compliance with therules through the appropriate use of state-to-state disputesettlement (SSDS) procedures or the investor-to-state disputesettlement (ISDS) in the Japan-China-Korea Trilateral Investment
Agreement.
④ Developing New Rules

A) Developing International Economic Rules in the DigitalSpace(1) Japan should work with Australia and Singapore as co-convenorsof the negotiations on e-commerce under the WTO to work toachieve substantial progress during 2022 with the objective of
reaching agreement at the 13th Ministerial Conference (MC13).
The Covid-19 pandemic in particular has given a new urgency tothe need for global rules to regulate the surging digital trade. It is
desirable to encourage as many countries as possible to join theprospective agreement in addition to developing highly normative
rules under the principle of Data Free Flow with Trust (DFFT),
which Japan proposed at the World Economic Forum Annual
Meeting.in January 2019 and the G20 Osaka Summit in June of thesame year.
(2) The multilayered emergence of regional arrangements is occurring
for rules on digital trade alongside the multilateral negotiations.
There, Japan is securing highly disciplined digital trade rules in thee-commerce chapters of the CPTPP and the Japan-EU Economic
Partnership Agreement (EPA), the US-Japan Digital Trade
Agreement, and the like. It should look for ways to broaden thescope of the regional framework by expanding membership inexisting agreements while maintaining high discipline andincluding similar rules in the negotiations on new EPAs and therevision of existing ones. Meanwhile, the Digital Economy
Partnership Agreement (DEPA) is now attracting much attention in
the Indo-Pacific region. Although it does not match the CPTPP in
the quality of its rules – it does not have source code provisions
and is non-binding, for example – the Japanese government
should consider engaging in this arrangement in coordination with
Australia and the like, now that China has applied for membership.
It should also engage actively in developing rules for digital trade
for the IPEF, which the US proposed in October 2021.
(3) Government access (GA) is an area where the behavior ofgovernments and businesses as well as the views of civil society
have an extraordinary impact on the volume and quality of thecross-border economic space being developed for the digital
economy. It is extremely significant that the G7 has produced aroadmap for achieving DFFT and aims to developed guidelines fortrustworthy GA and that like-minded states are making progress in
the OECD with business support in discussions with input fromcivil society. As Japan holds the G7 presidency in 2023, it should
be expected to use its position between the US and Europe tonarrow the difference between the two sides and lead the way to aconsensus.
Note: Government access (GA) means enforceable access by
public organizations such as governmental organizations to
information in the possession of the private sector.
(4) If the increase in cross-border data transfer generates greater
concern over the effectiveness of law enforcement or createsconcern over unfettered access to domestic data from abroad, it
could lead to greater data localization instead. An internationalarrangement among many countries will be a stable foundation forinternational cooperation in investigations. In that sense, theJapanese government should aim at the early adoption of the draft
additional protocol to the Convention on Cybercrime. At the sametime, in the interests of promptness and feasibility, it is appropriate
for like-minded states to go ahead and steadily establish aframework in the spirit of DFFT. It is useful from this perspective
for the Japanese government to consider the relevant legal issues
for concluding bilateral international agreements that fall under thescope of the US CLOUD Act.
B) Theft of Trade Secrets Through Cyber Espionage andWhat to Do About It(1) Existing rules under international law do not provide effective
discipline over theft of trade secrets through cyber espionage.
Since this is not an easy issue to resolve, the near-term responseby the Japanese government should be to enhance the ability todeal with cyber activities by incorporating and using capacity
building and cooperation for the relevant authorities of signatory
states and other low-key rules in FTAs and other arrangements asin Article 19 of the Japan-US Digital Trade Agreement, Article 19.15of the US-Mexico-Canada Agreement (USMCA), and Article 8.83 of
the Japan-UK Comprehensive Economic Partnership Agreement.
However, it is necessary to remember that there are limits to theextent to which strict rules to regulate cyber espionage can beformed.
(2) Japan deals with theft of trade secrets through cyber espionage ascivil and criminal cases under the Unfair Competition Prevention
Act, but this law is weak as a means of deterrence. The Japanese
government should look to domestic regulation in the US andGermany, which have provisions for heavy penalties, and revise
domestic law, enhance deterrence against cyber espionage, andstrengthen measures.
(3) Directly regulating state behavior is best done through rules asinternational law. For this perspective, over the mid-to-long term,
the Japanese government should spare no efforts in the G7 andother forums where these countries are engaged to develop rules
as international law that will enable us to overcome the challenges
around theft of trade secrets through cyber espionage.
C) Business and Human Rights(1) The Japanese government and Japanese businesses should
promote human rights due diligence (DD) to prevent forced laborand other human rights violations in the supply chain. It isnecessary to develop guidelines as a first step and then consider
legislation as necessary. They should be made easy for businesses
to undertake, using the human rights DD systems already in place
overseas such as the UK’s Modern Slavery Act.
(2) It is essential for the Japanese government to deal with humanrights issues; they should not be left solely to DD by thebusinesses. The appropriate government response should betargeted sanctions against individuals and institutions engaged inhuman rights violations. Article 10, paragraph 1 of the Foreign
Exchange and Foreign Trade Act stipulates that the Japanese
government may restrict foreign currency remittances, capitaltransactions, overseas direct investment, provision of services,
etc., saying “it is particularly necessary in order to maintain peaceand security in Japan”. One option is to amend this to add thatsanctions may also be applied “if it is particularly necessary to
improve the human rights situation overseas”. Whether or not
individuals and institutions are identified and subjected tosanctions, it is important for Japan as a sovereign state to have themeans to impose sanctions against human rights violations.
(3) When considering the introduction of trade restrictions for humanJapan SPOTLIGHT • July / August 2022

7

rights purposes, full consideration should be given to the burden
on businesses and compatibility with WTO rules.

manufactured under working conditions above a certain level(wage level).

(4) Japan must also correct its own behavior as appropriate regarding
the human rights issues that have identified by the International
Labour Organization (ILO), the UN Human Rights Committee.
Note: For example, Japan decided to ratify ILO C105 (Abolition ofForced Labour Convention) and was in the process of taking thenecessary domestic procedures when these recommendations
were being finalized. Meanwhile, Japan maintains the death
penalty, which has been criticized by the UN Human Rights
Committee among others, while virtually all other developed
countries have abolished it.

(4) Given the heavy involvement of labor law and labor policy, theinvolvement of labor law practitioners is essential whenintroducing such measures in trade agreements. It will benecessary to expand the collaboration framework for trade experts
and labor experts (regardless of whether a trade agreement winds
up covering labor issues).

D) Trade and Labor(1) The US and the EU have tended to include more extensive labor
provisions in their FTAs, a trend that is likely to continue for theforeseeable future. At the same time, regarding labor issues, it
should be carefully determined whether it is appropriate to include
labor rules in a trade agreement, given the declining significance ofthe connection between labor and trade. It is desirable to develop
rules for substantive discipline regarding labor standards in otherforums such as the ILO.
(2) However, a situation where products become competitive due topoor labor law enforcement and the like in other countries isundesirable from the perspective of protecting the rights ofworkers as well as in terms of international competition. Moreover,
if we are going to seek the return of the US to the CPTPP, Japan
should at a minimum take the lead in introducing a mechanism to
improve working conditions in sectors closely connected to tradein Asia and related areas. In this respect, given the results that the
USMCA’s Facility-Specific Rapid Response Labor Mechanism has
yielded, it is worth considering whether a similar mechanism canbe introduced that goes beyond the bilateral side letters signed
between the US and Vietnam, etc. at the time of the negotiations
over the original TPP. The discussions here will serve as the basisof the discussions for the labor provisions in the IPEF. In all thesecases, the system should be designed as appropriate for the actual
circumstances on such matters as the role of sanctions, if any.
(3) The Labor Value Content (LVC) clause that was introduced in the
USMCA for the automobile sector is not sufficiently justifiable as apolicy so caution should be exercised as to its adoption. In
addition, it is important to keep in mind that the provisions are
criticized for being difficult to apply to complex supply chains,which may be the case for the Asian market. However, given the
power of domestic forces in the US behind the measure, thepossibility cannot be excluded that it will be aggressively promoted
in future trade agreements – a reason for now to keep a close eye
on developments under the USMCA.
Note: The LVC clause requires the use of automobile parts that are
8 Japan SPOTLIGHT • July / August 2022

E) Trade and the Environment: Carbon Border Adjustment(1) The EU’s Carbon Border Adjustment Mechanism (CBAM) is a new
trade-related measure without precedent whose WHO complianceis an issue. Although Japan does not export many products
covered by CBAM to the EU, it must be actively engaged
regardless. The European Commission announced its legislative
proposal for the CBAM in July 2021. Beginning in 2026, a business
importing merchandise that is covered by CBAM must submit a
CBAM certificate. The value of a CBAM certificate is linked to theprice of emission allowances in the EU Emissions Trading System(EU ETS). The importer submits the value of the merchandise
multiplied by its carbon intensity (emissions per ton). The carbon
price in the country of origin will be deducted. The details of thesystem, which will aim at WTO/GATT compliance, are unclear, butthere is potential for GATT violations in most favored nation
treatment (GATT Article I), which requires Members to accord toother Members the most favorable treatment given to the productof any one Member, violation of the schedules of concession(GATT Article II), and so on. The EU will impose the obligation on
imported products, which would be “internal taxes” imposed at theborder” or “other internal charges of any kind”, or measures“affecting … internal sale”, which are covered by GATT Article III
and could be in violation of the national treatment that the article
requires. But even if it is in violation of Article III, there is thepossibility that the invocation of the General Exceptions asprovided for in the main text and items of GATT Article XX forenvironmental purposes could be an issue.
(2) Going forward, surveillance to see if there will be any double
protection such as distribution of free credit to domestic
businesses or arbitrary discrimination, any misuse ofenvironmental protection as a policy objective, any negligence ininternational agreement negotiations, and the like is important.
These proposals will not escape criticism from developing
countries who believe that carbon budgets are not being usedmuch and that they “have low cumulative emissions and thedeveloped countries are to blame for rising temperatures”.
Provisions for exemptions should be given careful if cautious
consideration so that they will not result in the rejection of free
trade or new North-South rifts and divisions. Japan should also
begin considering a cooperative approach.

(3) Meanwhile, the US and the EU through their October 2021
agreement on steel and aluminum tariffs under Section 232 of the
US Trade Expansion Act invited like-minded economies toparticipate in negotiations for a first-of-its-kind global arrangement
to deal with excess production capacity and high carbon-intensity
products (products with high emissions per ton). For the next two
years, there will be an attempt to seek out cooperation on themethod for calculating the amount of emissions, but restricting
market access for non-participants that do not meet standards for
low-carbon intensity is also on the agenda. This goes further thanthe Japan-US and Japan-UK joint statements on steel andaluminum. Japan must participate in these discussions.
(4) 71 countries and regions including Japan participate in the Tradeand Environmental Sustainability Structured Discussions (TESSD)
group, a WTO JSI, and have confirmed that they will cooperate onsuch matters as trade-related climate measures, environmental
regulation and sustainable supply chains (developing countries inparticular), assistance for sustainable trade (“AID for Trade”), theenvironmental impact and related subsidies on trade. The Japanese
government should take an active lead in the discussions.
⑤ The Free Trade System and the Importance of Economic
Security(1) The domestic legal system for economic security will be connectedto the agreements on strengthening supply chains forsemiconductors and other strategic goods and on technology tradethat will be formed in the IPEF and security-oriented cooperative
arrangements such as the Japan-US-Australia-India “Quad”. Keepin mind that they are likely to move to ring-fence technology andgoods among like-minded states, coming into conflict with thenon-discriminatory, multilateral, free trade system. It is necessary
to keep this from causing a turn to protectionism, undermining thefree trade system, keeping in mind the relationship with the
Wassenaar Arrangement on Export Controls for Conventional Arms
and Dual-Use Goods and Technologies and other security-relatedtrade control regimes.
(2) Japan faces a harsh geopolitical environment, with Russian
expansionism evidenced most recently in its invasion of Ukraine
coming on top of Chinese expansion in East Asia and the situationon the Korean Peninsula. It is against this background that theeconomic security legal system is being established. The
importance of economic security cannot be denied, but there is adanger of disturbing the balance between the free trade system if
there is excess emphasis laid on insourcing and government
intervention. Measures taken for economic security purposes must
therefore be implemented in compliance with WTO agreements
and other international economic treaties. The recommendations
issued in February 2022 by the Japanese government’s Panel ofExperts on Economic Security makes this point as well.

(3) It is also important, as the Japanese government’s draft Act for the
Promotion of Economic Security stipulates, to use anti-dumping
tariffs (AD), countervailing duties (CVD), safeguards, and othertrade relief measures permitted under the WTO to protect thesemiconductor and other strategically important industries from
unfair competitive advantages. Japan is extremely parsimonious in
imposing anti-dumping and countervailing duties compared to its
main trading partners, as WTO data on the cumulative number ofcases from its establishment in 1995 to June 2021 in the US (AD828, CVD 296), the EU (AD 538, CVD 91), and China (AD 292, CVD17) show. The Japanese government should work more closelywith the industries with aim of making better use of these traderelief measures.
(4) As the importance of improving supply chain resilience grows inline with the changing international environment, the Japanese
government should consider using trade policy against serious
human rights violations abroad on the basis of international
coordination, which enhances foreseeability for businesses.
⑥ The Potential for Soft Law(1) Japan should utilize the G7, G20, APEC, OECD, the Economic
Research Institute for ASEAN and East Asia (ERIA), and otherinternational economic forums to develop rules and form public
opinion. 2023 in particular, when the US and Japan chair APEC andthe G7 respectively, should be an auspicious opportunity for thispurpose.
(2) In order to promote a free and fair economic order, remedy marketdistorting measures, maintain and strengthen high-level andcomprehensive economic partnerships, and other elements of the
trade and investment agenda, the role of APEC as an “incubator ofideas” should be emphasized. Energy conservation and renewableenergy goals present one example where soft law fully functioned
as targets were agreed and implemented. For example, in 2011,
APEC set an energy conservation goal to reduce energy intensity
by 45% from 2005 levels by 2035. If the current trendline(progress is monitored by the Asia Pacific Energy Research Centre(APERC)) continues, the target will be reached in 2034. In 2014, it
set the target to double the proportion of renewable energy
sources in the energy mix and electricity output from 2010 by
2030. If the current trendline (also monitored by APERC)
continues, the target will be met. It is to be also noted as an
example of soft law having developed into hard law that the APEC
soft-law approach has evolved to become the Institution
Technology Agreement (ITA) in the WTO put into effect in 1997.
The potential for soft law in a variety of areas as a role for APEC
should be explored.
(3) As explained in E)(3), the US and the EU invited like-minded states
through their agreement on steel and aluminum to jointly consider
the methodology for calculating emissions. Since this could
Japan SPOTLIGHT • July / August 20229

become the de facto standard for the market in the future, Japan
should speak up actively in order to make fair and transparent
rules. Meanwhile, German Prime Minister Olaf Scholz, who ischairing the G7 this year, is aiming to include a “climate club” at
the June summit. The details are unclear, but his proposal when he
was finance minister appears to be aimed at determining a(minimum) carbon price and presenting common rules for carbon
border adjustment that can be considered WTO-compliant. In thiscontext, there is the possibility that work may go forward on
explicit carbon pricing, measurement methods for implicit carbon
pricing under regulation and other non-market measures (and theinternational comparative analysis of the two), emissions
measurement methods for industries, and other matters. This
could be the stage for an international cooperative approach incontrast to the CBAM as a measure imposed unilaterally by the EU.
It is desirable for Japan to be engaged here.
(4) The CPTPP has the Labour Council, which is now actively taking up
issues. For now, the talks are centered on the construction of theframework for cooperation, but the Council should be developed asa forum for the active discussion of labor laws that affect trade.
The CPTPP framework does not exclude activities such as setting
guidelines and targets for working conditions according toindustrial categories and economic conditions or enhancing thetransparency of the labor laws of member states in order to urge
their improvement, so there should be no limits to the discussions
there.
(5) It may be difficult to establish strong rules from the onset for the
key points of digital rules such as government access. A soft-law
approach may be useful here, judging from the experience of theOECD, which has been a pioneer on government access,discussing the principles for government access and theirapplication. The lack of clarity in the national regulation of thedigital sphere could reduce predictability and increase costs forbusinesses due to differences between national regulatory
regimes. This makes it important to enhance the transparency ofnational regulation and reduce differences. The expeditious softlaw approach that the OECD is taking can be useful in this respect.
⑦ Cross-Sectoral Rule-Based Perspective

This Committee looked beyond the international economic system
to use Japan’s involvement in disputes regarding its territory andcontinental shelf to conduct a cross-sectoral inspection to see if Japan
has been consistent in its rules-based approach and whether theapproach is effective in resolving disputes.
(1) The Japanese government proposes for the rule of law on theoceans the following: (i) states should make their claims based onlaw, (ii) states should not use force or threats to enforce theirclaims, and (iii) disputes must be settled peacefully. Internationallaw is the foundation of the international order. This is a principle
10 Japan SPOTLIGHT • July / August 2022

that must be maintained at all costs.
(2) In disputes over territories and the continental shelf, it is notenough for a government to set forth the legal justifications for its
claims. It must also appeal to public opinion, both at home andabroad. It is unlikely that Takeshima, the Senkaku Islands, or thecontinental shelf in the East China Sea will be the subject of aninternational trial in the foreseeable future, but Japan should urge
the relevant states to seek resolution based on international law
and to do its best to mobilize public opinion as part of its long-term
diplomatic efforts.
(3) For example, the Japanese government takes the position that
there exists no issue of territorial sovereignty to be resolved
concerning the Senkaku Islands since the Chinese claims have nolegal grounds. However, if the issue is brought to the International
Court of Justice (ICJ), it is likely that it will rule that there is adispute. It is necessary to take this into account and justify its
territorial title to the international community. It should also seek alegal resolution of the dispute around Takeshima based on the
distinction between territorial and historical issues.
(4) To be consistent with a position in favor of a rules-based approachto economic issues, it is also desirable to resolve territorial issues
based on law while enlisting public opinion at home and abroad. It
may be difficult to entrust some territorial issues to international
adjudication since they are entwined with the politics, history, andsocial issues of the contesting states, but as a practical mattermany territorial disputes have been resolved through adjudication.
(5) Japan is unique in having domestic legislation that restricts theapplication of domestic law on competing continental shelves andexclusive economic zones (EEZs) to within the median line.
However, the Japanese position is that it has a 200 nautical-mile
title in the Japan Sea and the East China Sea until the boundaries
are determined under the United Nations Convention on the Law of
the Sea (UNCLOS). It is necessary to raise awareness on this point
since the Japanese position does not appear to be well-recognizedamong experts in other countries.
(6) How Japan responds to Russia’s invasion of Ukraine could affectthe future state of affairs in the East China Sea (Taiwan, Senkaku
Islands). Japan must protect the rule of law in the international
community. It must be clear in protesting territorial change byforce and must not recognize such changes.

Japan Economic Foundation (JEF) initiated the Research Committee on theDevelopment of a Rules-Based International Economic System with prominent
Japanese experts in November 2021, and concluded its role by publishingrecommendations in May 2022.

COVER STORY • 2

R

Roundtable with Prof. Asei Ito, Prof. Kazuto Suzuki, Prof. Yasuyuki Todo & Yo Okada

oundtable on the White Paper on International
Economy & Trade 2022: Economic Impacts ofRussia’s Aggression Against Ukraine

By Japan SPOTLIGHT
In our Roundtable discussion on the White Paper on International Economy and Trade 2022, the main
issue was the economic impacts of Russia’s aggression against Ukraine. Our participants were Prof.
Kazuto Suzuki of the Graduate School of Public Policy at the University of Tokyo, an expert oninternational politics, Prof. Asei Ito of the Institute of Social Science at the University of Tokyo and Prof.
Yasuyuki Todo of Waseda University, both distinguished economists. The Roundtable was moderated by
Mr. Yo Okada, former director of the Policy Planning and Research Office at the Trade Policy Bureau of
METI, who authored this White Paper, and now counsellor of the Japanese government’s Secretariat of
New Form of Capitalism Realization Headquarters.
(Online Roundtable on July 12, 2022)
ParticipantsProf. Asei Ito

Prof. Kazuto Suzuki

Introduction of White Paper on International
Economy & Trade 2022
Okada: The theme of the White Paper 2022 is economic risk caused
by geopolitical uncertainty and the challenges and opportunities forinternational trade in responding to the changes brought about by
this risk to economic structure, technology, geopolitics and values.
We analyze in particular as a central subject the “economic impactsof Russia’s aggression against Ukraine”. On the challenges andopportunities for international trade, we analyze issues relating to theconstruction of resilient global supply chains reflecting common
values as well as economic growth opportunities through innovation,and consider four particular trends that are accelerating globally.

Global economic impacts of Russia’s aggression against
UkraineAfter Russia’s invasion of Ukraine, the G7 and other developed
countries promptly enacted unprecedentedly large-scale economic
https://www.jef.or.jp/journal/

Prof. Yasuyuki Todo

Yo Okadasanctions and have very quickly promoted reconsideration of theireconomic and political relations with Russia.
In contrast, most emerging and developing countries refrained
from decisive action, including economic sanctions against Russia,
and have been neutral in considering their economic and political
relations with Moscow. China, presumably believing there would be
no area where China-Russia cooperation is prohibited, continues tocollaborate with Russia, and among the other G20 members,
Indonesia, this year’s chair nation of the G20, is opposed to
excluding Russia from the gathering in 2022, insisting that all themembers are to be invited. Turkey, though condemning Russia’s
invasion of Ukraine, is not joining EU-led economic sanctions against
it. Mexico, though also condemning the invasion, maintains
neutrality and is refraining from sanctions. Brazil is also staying
neutral and has opposed sanctions, which could possibly have anegative impact on the Brazilian economy, though ready tocollaborate with developed countries that have imposed sanctions
against Russia. Brazilian Foreign Minister Carlos Alberto Franca
Japan SPOTLIGHT • September / October 202213

announced a clear objection to excluding Russia from the G20.
South Africa has been also supportive of Russia in proposing a“Humanitarian Resolution” in the United Nations without actuallyreferring to Russia.
Among ASEAN countries, Singapore is the only one designated as
an unfriendly country by Russia because of its announcement ofsanctions against Moscow. Except for Singapore, the countries incooperation with the G7 in imposing economic sanctions against
Russia are Australia and South Korea in the Asia-Pacific area, and alimited number of other countries.
It is also true that Russia’s invasion of Ukraine has
unprecedentedly added to mounting concerns about the division of
economies in the world since the end of the Cold War era.
Polarization has already been occurring and the war has accelerated
this trend, and thus the structural changes in the international
economy. I think this event could be a historical turning point in theinternational economic order.
In terms of the ranking of the percentage of a country’s nominal
GDP to the global total, Russia is 11th and Ukraine is 54th. Russian
nominal GDP accounts for only 1.8% of the global total and issmaller than South Korea’s; however, it is a major supplier of many
important staple commodities such as wheat and corn, as well as
fertilizers and energy in general. Depending on the degree of acountry’s reliance on trade in such products with Russia andUkraine, the impacts of economic sanctions will differ significantly.
Russia’s exports of wheat rank first in the world, and Ukraine’s
exports of wheat and corn rank fifth and fourth respectively.
Developing countries in the Middle East and Africa are particularly
dependent upon imports of these products from the two countries.
In extreme cases, Kazakhstan, Qatar, Armenia, and Lebanon rely
nearly 100% on Russia and Ukraine for their consumed wheat
imports. In addition, sub-Saharan countries depend on imports for
85% of their wheat, mostly from Russia and Ukraine, and the rise inglobal food prices is likely to be reflected in domestic price rises ofabout 30% in those countries, which could also suffer from supply
shortages.
Given that the Ukraine crisis is not expected to be resolved soon
and we cannot tell how long it may continue, its economic impact
will be expanded to the whole world through cost-push inflation due
to restricted supplies of commodities and soaring prices, as well asinterest rate hikes in developed countries to cope with inflation.
Prices of oil and natural gas are rising as well as the forward pricesof wheat and corn. Since the Russian invasion, prices of fertilizers
such as urea or potassium chloride have also risen and we are now
facing a food security threat.
The predicted economic growth of emerging and developing
countries and the euro area, which is highly dependent on Russian
14 Japan SPOTLIGHT • September / October 2022

energy, will be much lower in 2022, and growth in the countries atwar, “both Ukraine and Russia”, is plummeting drastically, needlessto say. In particular, with the effect of the sanctions, we have alreadyseen signs of economic stagnancy in the monthly economic datafrom Russia, which is blaming any negative effects on the wider
global economy precisely on these sanctions by the West. Thispassing of the buck seems to be working to some extent.

Four trends accelerating globally
The geopolitical environment has been deteriorating, supply
restrictions and rising prices of commodities and natural resources,
accelerated by both the Covid-19 pandemic and the Ukraine crisis,
have resulted in global inflation and a worsening economic situationin emerging countries, and the Chinese economy has been slowing
down with its zero Covid policy initiatives. All these factors haveincreased uncertainty in the global economy. Real global economic
growth has slowed down drastically compared with 2021, with
commodity prices soaring and inflation rates increasing.
The digital transformation, increased geopolitical risks such as thegreater need for economic security, enhanced global commitment tocommon values such as the environment, climate change andhuman rights, and a shift in public policy to an industrial policy haveall been accelerating in response to this heightened uncertainty. I
think these four trends will influence the future trajectories ofinternational relations and the global economy, and create further
uncertainty in business management while changing the sources ofcorporate value-added.
In particular, on geopolitical risks and commitment to common
values, differences in policy stances have been producing bloc-based
rule-making especially on the issues of climate change and humanrights. Rule-making has been affecting the structure of costs, capitalprocurement and conditions of business transactions andcompetition. With this, the global market has become progressively
divided into blocs.
Furthermore, with the trend of strengthened national industrial
policies, large-scale markets have been built up in specific sectors
such as green-related industries, aviation and aerospace, or
semiconductors in the United States and the EU. Thus, there will bevarious opportunities for businesses trying to gain a market share,depending upon the host country’s policy initiatives.
Under such circumstances, it would be desirable for a company toorient its business towards raising its profits and earning capacity byactively promoting reform of its business model, encouraging
product differentiation or enhanced value-added as well as efficientbusiness operations, instead of cost savings or provision of lowpriced goods as previously pursued. In addition, I think it will be
important to realize a new business model and industrial structure tocreate higher value-added by taking advantage of the four trends
mentioned: prompting corporate transformation by digitalization,
exploiting the opportunities created by the public sector, and turning
economic security and the common values into core business value.
As for the Japanese government, it needs to engage in discussions
on the international economic order at the G7 and other venues at an
early stage to help achieve an environment where Japanesebusinesses can be engaged in the social implementation of newtechnologies in the US and European markets. This would be
encouraging support for Japanese businesses. It is also important
for the Japanese government to play a bridging role between Asian
countries and advanced countries for comprehensive rule-making toachieve common values, while considering current conditions ofAsian countries. Japan should also promote common values rooted
in its own experience, such as with medicare or caregiving in an
aging society, for the rest of the world’s interest and set up an
agenda for a market to be born from these challenges.

Trade policy based on the four trends and challenges andopportunities for Japan
In this White Paper, we made an analysis and policy proposals
largely on two issues: construction of resilient global value chainsreflecting common values, and Japan’s retarded innovation and how
it could gain growth opportunities against such a background.
On the first issue, our analysis of the current status of global value
chains concludes that Japanese businesses have been working
steadily on diversification of production sites and suppliers in Asia as
their response to geopolitical risks, the pandemic and natural
disasters, and resilient supply chain construction is making good
progress.
For example, the share of the Japanese manufacturing industry’s
foreign direct investment in China to the total in Asia had been kept
high, but since 2012 when the Senkaku Islands issue emerged again,
it has been declining steadily and its investment in so-called China+1
countries like Thailand, India and Vietnam has increased.
On the second issue, it is becoming important to consider
economic security seriously and in this regard a reduction in
dependency on specific countries for key strategic items likesemiconductors or batteries, appropriate management of sensitiveand emerging technologies and prevention of their leakage are vital.
Also in terms of stable energy supply, it is becoming more important
to develop upstream natural resources, including domestic
resources.
On the third issue, supply chain management is now extremelycomplicated, as businesses are increasingly forced to meet a varietyof requirements, such as decarbonization, other environmental
issues and human rights, with a firmer interest in common values.

Digitalization of such complicated supply chain management andenhancing its visibility by using data would lead to the build-up of acommon database not only in Japan but also in the whole of Asia
where Japanese businesses have a network of supply chains. It will
be important to lead this to value creation.
On the fourth issue, we made an analysis on start-up companies
on the issue of Japan’s retarded innovation and their way of gaining
economic growth opportunities. While global venture capital
investment from 2020 until 2021 almost doubled, Japanese
investment, though increasing, was much smaller than othercountries, in particular other Asian countries such as China andIndia. It is also true that facilitation of ecosystems to support startups in terms of human resources, capital and place in Japan is far
behind the global standard. It is important to promote such
ecosystems to achieve mutually beneficial relations among start-ups
and their supporters. Japanese businesses should build up active
digital transformation (DX) alliances with the Asian countries withhigh growth potential and invest in Asia and collaborate with them increating value. This is important for them to get new growth
opportunities.
For example, Mitsui & Co. has been investing in IHH Healthcare, a
Malaysian large hospitals group, since 2011. Sumitomo Corp. also
invested in a large Vietnamese managed care group in 2021. These
are both cases of supporting Asian DX in the domains of medicare
and caregiving, and I hope support in these areas will expand.
On the fifth issue, although Japan has been investing in R&D
substantially, investment in intangible assets, especially in humancapital and in organizational reforms, has been low compared withother developed countries. For example, the calculated percentage ofintangible assets to the total value of listed companies is 80% in the
US and 70% in the EU, but in Japan it is only 30%. Japan muststrengthen efforts to raise investment in intangible assets, inparticular, in human capital.
Finally, with the accelerated development of new technologies
such as AI and robots, we increasingly need to cope with challenges
like greater unemployment or expanding income gaps and inequality.
It is important for Japan to fully utilize new technologies while
responding to these challenges and promote social implementationof these technologies, drawing on the experience of Asian countries
undergoing rapid growth.

Increasing the Effectiveness of Economic
Sanctions Against Russia
Okada: Prof. Suzuki, what do you think is to be done to increase theeffectiveness of economic sanctions against Russia while it isoccupying global choke points in energy and food?
Japan SPOTLIGHT • September / October 202215

Suzuki: Economic sanctions would differ according to their objective,
such as a change from the regime of Vladimir Putin leading to theend of the war or creating a situation that makes it difficult for Russia
to continue its military actions even without regime change. The
current sanctions are aimed at achieving whatever is possible now. If
the sanctioning nations try to enhance their effectiveness, they would
have to impose sanctions that would be rather painful for themselves
as well. In short, there would be rising prices of gas and other fuels
and food items that will have a certain negative impact on theireconomies. So I think it will be difficult for the West to change theRussian regime without stricter sanctions, and worrying about their
negative impact on their economies or political objections to them.
The current sanctions against Russia are aimed at raising the cost of
maintaining the war, but they could result in provoking Russia totarget choke points for the West before they can work effectively. It is
important for the West to build up economies that could be resilient
to shocks as well as domestic political negative reactions.
Okada: Russia has promoted the narrative that economic sanctions
by the West are responsible for rapidly rising energy and food prices
in emerging and developing countries. I guess those countries facing
price increases may understand such a narrative to some extent andask Russia or China for help. To avoid a divide in the global economy
possibly caused by the Russian narrative, what do you think must be
done by the West, in particular Japan?
Suzuki: The main factor behind the current rise in energy prices iscertainly the import ban on coal and oil from Russia. As for foodprices, the main reason for their rise is Russia’s blockade of theBlack Sea to ban exports from Ukraine. So we cannot simply say the
economic sanctions of the West are the reason for rising food prices.
There are a large number of emerging and developing nations
dependent on food and energy sources from Russia that officiallyaccept this Russian narrative, but with a better understanding ofwhat is happening today I believe this narrative would not leaddirectly to a division in the global economy.
A total of 141 countries supported the UN General Assembly
resolution blaming Russia for the war. There are also many emerging
and developing nations depending on imports from the West andthose nations will maintain this interdependency hereafter regardlessof their relations with Russia. This narrative was created by Russia to
identify whether a nation is on its side or not. Russia is certainly
intentionally provoking confrontation between the West and the
supporters of Russia by making a clear distinction between the two.
The West should organize a foreign policy strategy to clarify thatrising prices of food items are due to Russia’s invasion of Ukraine.

16 Japan SPOTLIGHT • September / October 2022

Okada: In the international economy where networks ofinterdependency among trade, investment and finance are prevalent,some countries occupying nodal points could weaponize thisinterdependency by using its leverage. At this moment, it seems theWest and Russia are trying to weaponize their interdependency oneach other. Japan does not occupy any nodal points or have muchleverage, so what do you think Japan should do in this situation?
Suzuki: Japan is a net importing country of food and energy
resources and it is important for Japan how to overcome such
vulnerability. It is rather difficult for Japan to achieve self-sufficiency
completely in food and energy. I think the policy to be adopted by
Japan should be storage of minimum natural gas supplies andstrategic stockpiling of food, and also demand-side control of energy
and food distribution, such as saving electricity, rather thanrationing. More importantly, as a country with such vulnerability,
Japan should do its best to consolidate the free trade system inorder to secure stable supplies of energy and food. Diplomacy will
also be important in order to prevent a country like Russia from
abruptly starting another war.
Okada: Since the invasion of Ukraine, we have seen growing
concerns about economic divisions in the world economy. As ourWhite Paper describes, this could accelerate structural changes in
the international economy on the back of multipolarization, withrising unilateralism and concerns about economic security. This
could eventually lead our international economic order to thehistorical turning point. How do you think the international economicorder will change in the aftermath of the Russian invasion of
Ukraine?
Suzuki: I think it will be difficult for us to maintain an international
economic order on the basis of optimism about free trade. There
would be rising risks of self-centered foreign policies or theweaponization of economic interdependency. To avoid them, it will be
important to ensure economic security. If a nation is economicallyvulnerable, it will need policies to protect its economy that issensitive in terms of economic security with certain limitations on
free trade and carefully manage exports of goods which have theirown technological advantages.
But I do not think economic security measures should be adopted
in all the aspects of trade. In the future international economic order,
I think restoration of a malfunctioning WTO is less likely and regional
economic cooperation frameworks such as the CPTPP or RCEP
would be more likely at its center. In this way, there is a possibility ofa free trade-oriented economic order built up in feasible areas oramong economic partners with mutual trust instead of the WTO. Free

trade may be narrowed geographically from a global scope toregional ones.
Another direction would be to focus on distinctions between theitems relevant to free trade and those that are not. For example, toysor clothing do not affect a nation’s economic security and thus
should be traded freely. But specific crucial items in certain limitedareas such as rare earths or semiconductors designated by the
Economic Security Promotion Law in Japan should be subject togovernment management. We will have such a two-layered structureof trade – free trade and managed trade – but the managed trademust be minimized as much as possible.

Responses to Digitalization & Global
Commitments to Common Values
Okada: Entering the 21st century, especially after the 2010s, theexponential growth and development of digital technology and global
data flows under the Fourth Industrial Revolution driven by IoT or AI
have been changing economic rules. Innovation is being encouraged
with newly emerging technological development and free data flows
have become crucial as sources for tech start-ups or value-added.
DX is a key for business success in expanding customers, providingthem with value, and increasing investment in intangible assets suchas human capital, as well as enhancing DX or R&D investment andachieving business reforms and raising productivity. The White
Paper mentions that it will be important to create new businessmodels and industrial structures producing more value-added withthe utilization of data analytics of cross-border data flows, formationof digital ecosystems, alliances among start-ups and Asia DX.
On commitment to common values, climate change, circular
economy, biological diversity, environmental protection, health,human rights and equality are among those that feature significantly
in public policy, as well as consumers markets and financial markets.
Against this background, businesses are expected to pursue not only
added value for shareholders but also for all kinds of stakeholders
such as customers, employees, local communities, the public sector
and the natural environment in alignment with their purposes. Youngconsumers today are starting to buy goods and services inaccordance with social and environmental concerns. I think it will be
increasingly important for a company to create core added value
from respect for such common values and build new comparativeadvantages instead of pursuing only corporate social responsibility
activities, incidental ones annexed to the company’s main business.
For example, Unilever is expanding sales of detergents for dishwashing enabling the saving of water as an environmentally friendly
product.
It is also important to make rules on common values since theywould affect a company’s cost structure, capital procurement andconditions of competition. Prof. Ito, what do you think about theseissues, in particular the challenges and opportunities born from themfor both the government and business to tackle?
Ito: Digital terminals have become prevalent these past two decades
among developing and emerging nations and this completelychanges the whole world. According to the International
Telecommunication Union (ITU), the number of mobile phone
contracts in Japan was 66 million, the third-largest in the world 20
years ago, but it is now eighth in 2020 when in Japan more than 200
million terminals are working, much more than its population. In
Nigeria, they already have 200 million digital terminals in use.
In 2005 Thomas Friedman, a well-known columnist, introduced an
episode in his book The World Is Flat that discussed how American
white collar jobs were being outsourced to India. So digitalizationfrom the perspectives of developing and emerging nations at thattime was nothing but the informationalization of developing
economies to become subcontractors for American white collar
labor.
However, the situation has significantly changed in this decade. I
call it “digitalization of the South for the interest of the South” where
human resources, capital funds, entrepreneurs and challenges are allon the side of the emerging and developing nations. Even without
help and support from the North, their own entrepreneurs andtechnologies are starting to resolve the challenges. In suchcircumstances, digitalization is commonly set as a goal to beachieved in any country’s mid and long-term plan of national
economic development. It is a new challenge for Japan to explore
what to do in the future under these circumstances. We will need tostart thinking about a strategy on the assumption that Japan is “notan advanced nation in terms of digital economy” but is possibly “apartner for collaborative creation”.
In other words, Japanese businesses need to develop their
expansion into emerging markets through investment in the hostcountry’s business firms or strategic alliances with them, as theycannot achieve it on their own like the giant IT software companies
such as Google, Facebook, Apple and Amazon. It should also be
noted that Japan itself is behind the global trend in its domestic
digitalization. In this light, I think we must think about utilizing digitalcollaboration with emerging nations. Meanwhile, Japan’s presence in
ASEAN is extremely limited in terms of investment amounts or
M&As. For example, the acquisition of ventures in Southeast Asia byJapanese firms was smaller than that of Thai companies between
2017 and 2021.
On Japanese companies’ engagement in promoting common
values, I think the issue is whether they can promote what they haveJapan SPOTLIGHT • September / October 202217

achieved so far to the rest of the world. For example, resource
recovery in Japan has been greater than the global average, but it isanother question whether Japan can promote this wellinternationally.
Human rights due diligence is one of these common values. But
there is concern that a strategic partnership between China andRussia will be strengthened in the wake of the Russian invasion of
Ukraine. Of course, China will have to maintain its close trade andinvestment relations with the West, but on the other hand it isworking on strengthening its partnership with Russia. In a way thisis a strategic ambiguity.
At the same time, I think there is a possibility of China’s permanent
support for Russia financially and materially. I am very concerned
about what will happen then. Japanese companies did notnecessarily exit from China when the territorial dispute over the
Senkaku Islands reignited. Most Japanese companies stayed in
China and remained patient. Even with the US-China confrontation
worsening, Japanese companies have not largely exited from the
Chinese market. The reality is that many companies will wait and see
what happens.
Okada: It is certainly true that Japanese companies have not been
completely leaving China, though they are trying to diversify theirmarkets and host countries. According to one survey, only a few
percent of respondents said they would need to exit China or reduce
their business activities there. So the exiting companies remain very
few. What do you think is the best way to deal with the gigantic
Chinese market and production sites?
Ito: I think there is a misunderstanding of China due to the lack ofprecise information and policy dialogue. For example, there are
extremely simplistic arguments about China’s protection of
intellectual property rights, such as China’s claim that it has a market
friendly intellectual property rights system or Western nations’argument that such rights are stolen from confidential businessinformation.
Though it is true that various regulations in China are devised toencourage foreign firms to invest in China or procure local contents
or promote R&D in the Chinese market, it is far from the reality that
all foreign companies in China have had their business secrets
stolen. It is also true that China’s intellectual property rights system
has recently been developed quite well. I think we need a precise
understanding and dialogue to overcome such simple and prejudiced
arguments.
On policy dialogue, have there been any venues for exchanges ofviews over China’s application for membership of the CPTPP
between the Japanese and Chinese governments since China applied
18 Japan SPOTLIGHT • September / October 2022

in September 2021? I have been wondering whether the Japanese
government has ever mentioned its specific concerns to the Chinese
government about its membership of the CPTPP. Different opinions
could always emerge and exchanges of different policy views should
be arranged at any time.
Okada: What do you think the government and businesses careabout most in promoting the ideas advocated by the White Paper
such as the creation of an Asian-wide database, active DX allianceswith Asia and joint value creation?
Ito: There is an argument that data sharing in supply chains will benecessary for surveillance of the regulations for the businessenvironment on human rights. If it is necessary to have precise
observation of forced labor or child labor in global supply chains,then I think it is desirable to accommodate a low-cost database. On
the other hand, for data sharing to create new businesses by using
health and medicare data or business transaction data, we will need
a completely different database system. So in my view, depending
upon the goals for database sharing, there would be divided plural
blocs for such an Asian-wide data base construction idea.
On the issue of DX alliances with Asia, we should develop a market
for the digital products of Japanese companies mainly in Southeast
Asia, especially in medicare, health care and caregiving. These
domains are interesting, since Japanese companies already haveknow-how in the domestic market due to the aging society in Japan.
So such know-how could work to some extent in helping Japanesebusiness survive in a time of digitalization. However, judging fromthe speed of investment or business development by Japanese firms
at this moment, there is a risk of Japan failing to be even a “partner
for collaborative creation of values for Asia” from the perspective ofSoutheast Asia. Now is the time to restart efforts for businessdevelopment in Southeast Asia that were disrupted by the pandemic.
Okada: It is certainly true that the presence of Japanese businesses
has been reduced by the disruption of investment andcommunications during the pandemic, according to Southeast Asian
countries. A Japanese Foreign Affairs Ministry survey tells us that
more countries in Southeast Asia refer to China as a more importantpartner than Japan. So I believe we should seriously redouble ourefforts to consolidate relations with Southeast Asian countries.

Active Role of Industrial Policy
Okada: Among large countries like the US, China, European
countries and Japan, in advanced technology areas such as green
technology, the role of active industrial policy is being reconsidered.

This is justified by economics too, given that private sector
investment alone based on private returns would be insufficient,while decarbonization is a global public good and the green
technology that could contribute to it would produce larger social
returns than private returns. Technological progress is pathdependent and thus promotion of industrial policy will be needed to
impact the technological revolution in the green industry and makeexisting technologies causing pollution obsolete. In these respects,
industrial policy can be justified.
Prof. Todo, what do we need to keep in mind to achieve thesuccess of active industrial policy? In particular, what do you think
about strengthening industrial policy in the semiconductor industry?
Todo: In principle, industrial policy in the narrow sense – promoting
specific policies to support limited industrial sectors – seems to havebeen ineffective so far and this may be true hereafter as well. For
example, it is said that China’s industrial policy has achieved
success, but data analysis shows us that while an industrial policy
assuming value creation by collaboration between the private andpublic sectors is successful, a protectionist-oriented policy is notnecessarily so. China’s industrial policy supporting semiconductors,
though implemented on an extremely large scale, cannot be
considered very successful as it fails to promote nationalization of
production. It should be noted too that industrial policy to encourage
competitiveness in limited sectors would also not be so effective.
The second point is that there seems to be a focus on production
rather than innovation in the current industrial promotion policy, but
this is not so effective in terms of industrial development. I think
China should give more thought to innovation, as it is a source ofindustrial development.
In reality, the so-called policies for strengthening supply chain
resiliency of the US or EU contain not only policies to attract
production sites but also to strengthen the capacity for innovation.
This is not included in Japanese industrial policy.
Concerning R&D in Japanese companies, the level is high but theeconomy is nevertheless weak. There are issues to be tackled, and I
think one of them is alliances with partners overseas. According to
my research, international joint research would enhance a country’s
innovation capacity. In the area of research on the pandemic,international cooperation has played an extremely important role.
According to the OECD, as Japan made little contribution to suchcooperation, its achievements have been fairly limited. I thinkpromoting international joint research or strengthening knowledgebased alliances will be increasingly important in the wider sense ofindustrial policy.
Looking at Japan’s semiconductor sector-related policies today
from this perspective, the main recent development has been to

attract a factory of the Taiwan Semiconductor Manufacturing
Company (TSMC) to Kumamoto Prefecture, but as it is a productionoriented policy I am afraid that we cannot value it very highly. Japan
has developed lots of policies to attract high-technology companies
to Japanese regions so far, but they have had little effect.
However, taking advantage of the TSMC factory’s introduction to
Kumamoto, Japan could enhance its innovation capacity by adopting
the following two policy measures. The first one is to strengthen thelink between the TSMC factory and Japanese suppliers and enhance
its innovation capacity. There are many research outcomes telling us
technology prevails through supply chains, and with this policy the
TSMC’s impact would be much larger.
However, in order to achieve a smooth alliance, we would needpolicy intervention such as information provision for finding relevant
partners or preventing leakage of confidential information from them.
Okada: In the US and EU, there are some government-led initiatives
to enhance the resilience of supply chains by reshoring or friendshoring (alliances with friendly countries) in the light of recent
geopolitical risks, such as the US-China conflict, the pandemic andRussia’s invasion of Ukraine, though the build-up of business-led
global supply chains has been progressing so far along with free
trade principles. Japan will have to join such renewed global supply
chains. What do you think about this development? Suchgovernment initiatives could distort business decisions and harm
efficient management. Could you tell us what the government andbusinesses need to consider in order to promote the resilience of
supply chains while maintaining their efficiency?
Todo: It is certainly true that the risk of supply chain disruption isincreasing. But I do not think it is relevant to promote reshoring(bringing back overseas production sites to Japan) to cope with it.
Reshoring is not an efficient business decision and would becontrary to globalization, which Japanese businesses have been
taking advantage of in pursuing the most efficient means of
production. In addition, there are so many risks in Japan as well,such as natural disasters like big earthquakes. They may have to do
it to some extent, but reshoring alone would not fix the issue. Friendshoring would be much better and I believe that encouraging
diversification of business directions would be most effective infixing this issue.
It is crucial to lower the dependency of Japanese businesses on
China by this diversification of business partners and enable them toreplace a partnering country with another country in cases of
emergency. This diversification would have costs for a Japanesecompany as it would need information about replacement countries.
To reduce these costs, JETRO or Japanese local governments would
Japan SPOTLIGHT • September / October 202219

need to provide them with the necessary information for suchdiversification as well as support them by business matching.
In addition, assuming that friend-shoring will be important in the
future, Japanese businesses would have to seek partnerships withnations that Japan has few concerns about, as a strategy fordiversification. Therefore, Japanese businesses will now have to takefull advantage of international cooperation frameworks such as theFree and Open Indo-Pacific (FOIP), the Indo-Pacific Economic
Framework for Prosperity (IPEF) and the Quadrilateral Security
Dialogue (QUAD) in order to achieve business matching.
Opacity and unpredictability would be extremely harmful in doing
business. As Prof. Suzuki mentioned, there will be two types ofgoods in the coming days: goods for free trade and goods for
managed trade. If the distinction between the two is not transparent,
it will be harmful for business. So we need clear rules on this
distinction. For example, the Economic Security Promotion Law
adopted in Japan needs to designate specific crucial products interms of economic security on the basis of rules and dialogue
between the government and private business.
Furthermore, it will be necessary to apply international rules as
widely as possible. The WTO would be the best venue for such rulemaking, but it would be difficult. Rule-making could be achieved byutilizing a regional cooperation framework such as the IPEF, and I
would like the Japanese government to take a leading role in thisrule-making.
Okada: With many countries strengthening industrial policies, there
will be large markets created in specific sectors in the US or
European countries in particular, such as semiconductors, greenrelated areas and defense and space-related sectors. Though Japanis also working on creation of such markets by joint funding by thegovernment and private business to develop new technologies, theUS or European markets in these sectors are so huge that Japanesecompanies would also have to get a share of them. How do you think
the Japanese government and businesses can work to resolve theseissues?
Todo: Private companies must have an incentive to enter such hugemarkets in the US and Europe even without government help. There
should not be any role played by the government in helping thesecompanies. The only exception could be information provision by thegovernment regarding the ambiguity of rules for those markets, ifany. Subsidizing businesses designated by the government would
not be a good solution. But the government could set up a dialogue
with the private sector and get a good understanding of what private
businesses would need and then release their message to the rest of
the world.
20 Japan SPOTLIGHT • September / October 2022

Responding to Rising Geopolitical Risks inthe Long Term
Okada: Geopolitical risks are rising, as shown in the pandemic, theUkraine crisis and the US-China confrontation. This increases
uncertainty worldwide. It is therefore very important to learn about
the future prospects of geopolitical risks and the government’s
economic security strategy. Japanese businesses will need todevelop supply chain strategies to enhance the resilience of their
supply chains to be prepared for unexpected changes in the businessenvironment or rules, for example by diversifying production sites ormaterial procurements or increasing stockpiles in a flexible manner,
while the government will need to work on international rule-making
appropriately to reduce these risks. Prof. Suzuki, what do you think
about these challenges that the government and businesses must
work on?
Suzuki: It is true that we cannot expect the continuation of the stabletrading environment that we have benefitted from so far, given thecontinuing rise in geopolitical risks. In this situation, I think theJapanese government and businesses would be expected to promote
structural reform continuously and gradually change our country’s
economy.
Even with the US-China conflict intensifying, sometimes
ideologically and sometimes militarily, both nations’ economic
interdependency will not disappear and probably the economic
interdependency between Japan and China would not disappear
either. Even though China is considered hostile to the US and Japan,
they cannot separate their economies from the Chinese economy.
Under such circumstances, it is difficult to reduce risks to zero.
Therefore, I think we should aim at surviving with these risks to acertain extent. It will be important to think about what is necessary
for survival and prioritize what needs to be protected in the case of
emergencies. For example, we should have a risk scenario taking theworst case into consideration to clarify what should be given up andwhat should be kept for survival in the case of an unexpected decline
in sales or suspension of imports due to intensified confrontation
between the US and China.
Without such a risk scenario and business continuity plan, it will
be difficult to respond to an emergency quickly. We need to think
about what to protect in our list of priorities among business
operations and how much we would spend to protect them, inconsidering how to balance the size of the risk and the cost of raising
resilience to reduce the risk.
Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Corporation.

COVER STORY • 1

T

he Need for Evolutionary
Industrial Policy to Achieve
Broad Economic Security

By the Research Committee on Evolutionary Industrial Policy

1. Recognition of the Current Situation
1.1. Heightening geopolitical risks and decline in the Japanese
economy and competitiveness
While geopolitical risks, such as the US-China conflict and RussiaUkraine war, are fast expanding, the competitiveness of the Japanese
economy is declining sharply. Under such circumstance, what needs
to be done to realize economic security in a broad sense?
Broad economic security will be defined by the following threepoints.
① (Strengthening competitiveness) Evolution of the Japanese-styleindustrial policy model② (Expansion of cooperative relationships with neighboring

countries) Development of an Asia-wide industrial policy③ (Core of economic security) Strengthening and expanding Japan-

US cooperation.
In realizing broad economic security, the concern is the weakening
national power of Japan, and this is signified by the stagnant wagesof the past 30 years. One of the large factors behind this is
productivity being sluggish compared to other advanced nations.
Aggressive fiscal and monetary policies under “Abenomics”
brought positive effects to the economy, and corporate earnings
improved. However, they did not turn to capital investment or rises inwages and this is thought to be a factor behind the economic slump.
In addition, we cannot forget that improvement in corporate earnings
under Abenomics was brought on by the good fortune of cheap
crude oil and natural gas prices. The rise in crude oil and natural gas
prices under the current Ukraine crisis has negated such good
fortune.
Stagnant investment is behind the decline in competitiveness ofJapanese businesses, and the issue is domestic investment notincreasing whilst the corporate sector owns capital. The reason forthis is the relative downsizing of the Japanese economy and the slow
transformation of its industrial structure. The ageing of society isalso having a negative impact on the economic growth of Japan. The
fiscal deficit and the decline in the effectiveness of fiscal andmonetary policies that come with an ageing society have become aparticular issue.
Since GDP is not growing, foreign aid such as ODA is notincreasing, and the amount of ODA has been surpassed by China,
https://www.jef.or.jp/journal/

leading to a decline in Japan’s influence in developing countries in
Asia and other areas.
The promotion of digital transformation (DX), to which Japaneseorganizations have been slow to respond, and the utilization ofdiverse human resources will be particularly crucial for Japanesestyle management to evolve institutionally.
Unless these things occur, the competitiveness of Japanesebusinesses will continue to decline further, wages will stagnate, tax
revenues will struggle to grow and thus social security which isessential to an ageing society will not develop, leading to a negative
spiral of increased income disparities, lack of will to work further,and stagnant productivity.
There is no all-round cure to resolve this negative spiral. As
verified below, in order to resolve the structural stagnation due to thecurrent decline in competitiveness even if little, industry (large
enterprises and small and medium-sized enterprises (SMEs)), thefinance sector, government (central government and local
government), universities (universities in metropolitan areas), andeach individual citizen all have to reflect on their past and aim for a
fundamental reform of their customs and actions that are thought tohave invited this stagnation.

1.2. Review of industrial policies and trends in other countries
China’s presence is expanding in Asia both in the quantity andquality of its infrastructure development. Exchange rates of Asian
nations are starting to be linked to the Chinese yuan, and China isbecoming an advantageous environment for conducting internationaltransactions. Based on the expanding influence of China, there is aneed to discuss how to utilize Japan’s quality infrastructure, which isan advantage for Japan, and SMEs which are supporting industries,
while also discussing how to nurture SMEs and industries ascooperation with Asian countries is strengthened. Such an Asia-wideindustrial policy perspective is also extremely important to heighten
the resilience of supply chains.
There is also a movement among Western nations, not only in
China, in which industrial policies, once perceived negatively asprotectionist, are being actively utilized for economic security.
As was typically seen with solar panels, there is a situation where
despite leading in technological development, Japan loses out at theactual business implementation level. In addition to technology
development, there is a need to consider policies that will create
value-added and incentives to allow scaling of businesses.
Japan SPOTLIGHT • November / December 2022

3

Traditional Japanese industrial policies include those that worked
negatively for competitiveness by slowing the metabolism, such as
regional finance and SME policies.
As industrial policies increasingly require qualitative evolution anda global perspective, there is a need to improve the quality of civil
servants in Japan. In Singapore, young and talented civil servantsreceive high benefits and have been successful amongst the finest.
The bureaucratic system of Japan with lifetime employment and a
vertical structure at its core is thought to require a drastic makeover.
Evolutionary industrial policies do not directly intervene in themarket, but as represented by Asia-wide industrial policies they fulfil
the role of “effective coordinator” with a broad ranging perspective
to bring out incentives for various market players, such as domestic
and international industries, private businesses and foreign
governments.

2. Policy Recommendations
2.1. Productivity improvement and economic growth
2.1.1. DX and regulatory reform

What should be aimed for as an evolutionary industrial policy is
not direct intervention, but indirect intervention which centers on
designing and developing an incentive system that respects theautonomy of private businesses.
The reasons for DX not progressing in Japan are the ignorance ofmanagement (asymmetry of information), the prejudice ofsupervisors without trying (status quo bias), and the lack of chance(failure to coordinate and path dependence). Measures to address
this include introducing a competitive market environment (cannot
survive without DX), provide re-learning opportunities for middle
management and organizational reform, digitalization of the public
sector, and diversification and globalization of personnel recruitment.
Through an evolutionary industrial policy, the transition from anindustrial society to a knowledge society should be promoted. Inorder to introduce a competitive market environment, a smoothmetabolism of industry is important. Promoting new entries,
reforming regulations that protect vested interests, and renewing thepolitical system are all necessary.
Japan’s civil law legal system, which does not accept new laws
unless there are legislative facts, is a hindrance to regulatory reform.
There is a need to release regulatory reform from such civil law
limitations. This is because such regulatory reform is critical tocreating new industries and businesses.
Specific policies include the introduction of the “spectrum
auction” (a bidding system for sales of frequency band licenses)
which almost all OECD nations have adopted. (Japan still employs
the “comparative screening method” where the Ministry of Internal
Affairs and Communications allocates licenses to business entities
upon conducting screening.)
Promoting market entry to Japan for ride-share services such as
4 Japan SPOTLIGHT • November / December 2022

Uber and Lyft which are widely used around the world can also be
considered. As the coronavirus crisis revealed, deregulation in the
medical and pharmaceutical area is also required.
2.1.2. Mobilization of the labor market in Japan

Employment is a derived demand of production, and as theenvironment surrounding the labor market changes dramatically,
Japan’s employment and working styles inevitably have to change. A
flexible labor market is required for people to work in a flexible
manner in line with the change in the megatrend. A highly flexible
labor market is expected to increase productivity by achievingsmooth labor redistribution and allocation of the right person to theright job.
Wage systems need to shift from seniority based to productivity
based. If wages and productivity become a match, it will enable
providing employment opportunities to all people regardless of theirgeneration, gender or nationality.
Japanese businesses have relied too much on cheap dispatch
workers, contract labor and cheap foreign workers as represented bytechnical trainees, and have failed to make necessary investments
such as digitalization. In pursuing reforms such as digitalization, it
will be critical to strictly follow equal pay for equal work. Strictly
following equal pay for equal work is also important in promoting
so-called job-type employment which sets out the details of the job
description in the employment contract.
Employment redundancy is not simple in Japan, and as a result
businesses are in a situation where they hesitate to proceed with new
hirings. Clear rules should be set on dismissals so that labor costs
can be saved.
It is also important to work on technological innovation such as AI
and robots to support employment of the elderly. This has thepotential to become one big industry in the future. It is also
important to create a labor market which retirees can enter at any
time so that talented elderly workers can fully exercise their abilities
through reemployment even after they have retired.
Human resource development has thus far centered on
businesses, but it should shift to center on individuals in the future.
Online education is a method that allows the acquiring of various
skills at any free time and encourages self-enlightenment. The
government should consider introducing a preferential tax system
for self-enlightenment. Enterprise-specific human investments havebeen a hindrance to mobilization.
For overseas personnel, while unskilled labor has been actively
accepted, Japan has been unable to offer an attractive labor andsocial environment to highly skilled personnel. As the decline in
population progresses, Japan cannot survive without utilizing
immigrants. There is a need to squarely discuss immigration policy.
Japan has benefitted from having cheap foreign unskilled workers,
but it should acknowledge that what is important is whether highly
skilled overseas personnel will come to Japan in shaping a futureintellectual society.
2.1.3. Improvement in education environment

It is important to globalize higher education (=universities) inJapan and acquire international competitiveness. In order to elevatethe quality of research at Japanese universities, there is a need toincrease the percentage of foreign professors and researchers. There
are issues such as not being able to bring home talented Japanese
researchers, or invite Asians to Japan who have studied in Japan andthen gained a Ph.D. from the United States and continued to work
there.
In order to resolve this issue, there is a need to increase theirsalaries or improve their working conditions, but the real impedimentis not the level of salary, but more the rigid wage structure wheresalaries are determined almost solely on seniority with complete
disregard for achievements or research areas.
For significant improvement in such working conditions for
professors and researchers, an enhanced tax system for donations touniversities is crucial, especially tax deductions. There is a need toenable fundraising activities that universities in Western countries
are conducting. There is also a need to train experts on fundraising.
For talented foreign nationals to work in Japan, what may be more
important than the wage system, in a sense, is the environment forthat person and for his or her family to live in, and the education
environment for the children is especially important. Not only for
those from the West, but for the elites of East Asia and India,
whether their children can get into top European or US universities isa highly important issue, and in order to achieve this goal, whether
an opportunity to access middle school and high school education ina good-quality English (+French) environment is available or not
becomes the key. An enhanced education environment, not just an
enhanced English education, that requires the use of English in all of
its curriculum and occasions will be important for the Japanese, and
it is also equally important in recruiting not just university faculty but
also for businesses to hire talented foreign nationals with highacademic achievements and high skill-sets.
2.1.4. Industry-government-academia collaboration

In order to strengthen Japan’s competitiveness and promote
innovation, there is a need to fundamentally revise the role ofindustry-government-academia collaboration such as by further
promoting cooperation between the social sciences and businesses.
For universities and businesses to cooperate, coordination on bothsides will be required, but from the perspective of SMEs, there is ahigh threshold in reaching out to universities to trigger that process.
It is important to lower the threshold by offering success cases ofindustry-government-academia collaboration.
University researchers depend too much on government funding,and it is important to lower this and collect private funding. A reviewof the donation tax system and the introduction of tax deductions are

therefore imperative. Regional universities should enhance funding
in this manner and be the center of regional revitalization.
There is also the idea that businesses should retain expert
personnel on finance within the company in order to utilize theretained earnings of businesses. To achieve this goal, policy
guidance should also be considered.
2.1.5. Activation of regional revitalization

In order to create ideas and projects that will serve as
breakthroughs for declining regional economies, human resource
development and methods of fundraising such as crowdfunding arenecessary. There is a need to create a new system for revitalizationof regional economies that does not rely on the central government.
As the regional population declines and downsizing of the market
continues, how to urge withdrawal, mergers and succession ofbusinesses, and to what extent mergers and concentration will betolerated without damaging the region’s traditions, culture andvitality will also become big issues.
As services become more important in industrial agglomeration
policies and downsizing of industrial agglomeration policies proceed,
initiatives by the local intermediary platforms (municipalities,
regional finance, chambers of commerce and industry, etc.), local
municipalities and citizens are becoming more important comparedto the simple government-led subsidy policies.
The idea of industrial policy should be transformed, and the target
should change from “hard to soft” and its purpose from “industrial
development to nurturing intellectual society”. Japan’s regional
revitalization policy should change from a centralized structure to adiversified and bottom-up structure.
Regional universities need to be more open in order to become thecenter of regional revitalization. Many undergraduate and graduate
students of regional universities become good entrepreneurs, andthey are the hidden forces. In this regard, matching regional
universities with SMEs is important.
A Japanese local government tends to implement the same
policies as other ones do as it is afraid of being criticized for taking aunique approach. Even if it fails by adopting the same policies, it
believes it can share responsibility with all the others. However, now,in order to restore the vitality of its local economy, it would need toencourage competition among local government policies, since it isthese policies that would attract businesses or universities.
Thus, assessments and rankings of regional governments using
various axes is also important.
Consolidation of regional universities should be undertaken
rigorously, and strengthening their structure should be planned.
Online remote classes, digitalization and a credit transfer systemshould be utilized effectively.
Policy coordination between regional municipalities and heads of
local governments should be strengthened and at the same time
researchers in economics should participate in policies, so thatJapan SPOTLIGHT • November / December 2022

5

planning of policy ideas, their implementation and assessment
should be conducted scientifically.
In addition to traditional loans, policies may be necessary to
expand equity financing and crowdfunding, which venturecompanies in metropolitan areas conduct, to regional economies.
Relying on foreign capital and foreign powers is easy but dangerous.
Its risks should be fully considered, but on the other hand successcases in certain regions should be researched and analyzed, and it
may be worth considering identifying and promoting what industry
types and business models are desirable for Japan for investment
from foreign-owned companies, including those in China.
In this instance, it is important to put in place a mechanism or
system that can clearly protect areas such as infrastructure andsensitive technology where foreign-owned companies or Chinese
capital should not enter and also identify actions that are notwelcome.
2.1.6. Improving the structure of large enterprises

There is a need for large enterprises in Japan to share thecommon understanding that a further decline in competitiveness willlead to a national crisis for Japan. In order to find a way out of thisdifficult situation, drastic reform is necessary. Abolition of theseniority system, building a wage structure utilizing the merit system
according to productivity, flexible promotion, and expansion of jobbased employment is essential. In addition, Japanese businesses are
slow at decision-making and are short of personnel who arecompetent in the global arena. These points also require fundamental
reform.
The current yen depreciation will not contribute to improvement incompetitiveness as it once did. This is because Japanese businesses
are not profiting from exports but are from entering overseas
markets. Rather, the yen’s depreciation and the rise in energy prices
will further accelerate the vicious cycle of worsening the fiscal deficit
through worsening the current balance.
Despite carrying surplus resources, many large Japaneseenterprises have been unable to commit management resources toinnovative activities with high uncertainties. In order to mitigate thisissue, reasoning and story-telling to commit resources to innovative
activities such as SDGs becomes important. These do notnecessarily have to be economically motivated.
Compared to the Nordic countries or Israel, there is little
collaboration between businesses to achieve innovation.
Collaboration between large enterprises and venture companies, andcreation of an intra-enterprise venture is required.
There is research that found that when personnel who havebackgrounds in large enterprises, especially those who haveexperienced management positions, start a business, it is difficult forthem to create innovation. Research and analysis on businesses thathave failed in support for start-ups will provide useful information infinding out what is necessary for innovation.
6 Japan SPOTLIGHT • November / December 2022

For businesses to grow, there is a stage that creates 1 from 0 anda stage that creates 100 from 1. In order to develop the latter stage
where Japan is lagging, promotion of corporate acquisitions should
also be considered.
2.1.7. Revitalization of SMEs and support for start-ups

Reform of the credit guarantee system was implemented tosupport start-ups, but the entry rates of new businesses did not go
up that much. There is also research that showed the percentage ofwomen among those that started businesses using credit guarantees
being extremely low.
There are issues with the response of financial institutions once
credit guarantees are used. Many comments came in frombusinesses saying “financial institutions actually did nothing”.
Financial institutions should aim to enhance enterprise value by
working alongside the businesses.
The credit guarantee system was originally designed for thegovernment to guarantee start-up capital by bearing the risk, and therole of the financial institutions was expected in working on issues
such as employees and business matching. Financial institutions
should actively reach out to clients and help clients grow theirbusiness. Deposit-taking financial institutions do not necessarily
excel at taking risks and play the role of the escort runner to theentrepreneurs. Offering capital though crowdfunding, not loans, ispreferable.
Improvement in the financial literacy of management is also
required, and the role played by the chamber of commerce andindustry and the activities of business associations is significant.
There is a need to improve the financial literacy of SMEs on both thefund-raising side and the asset management side. What is mostimportant to improve the productivity of SMEs is human resource
development.
Improvement in the status of the Institute for Small Business
Management and Technology is anticipated by positioning it as aprofessional graduate school and conferring degrees on graduates. If
students from Asia were to be accepted as well, they can be expected
to be active as highly skilled foreign professionals in the future. It isalso important to develop professionals who can take on the role ofthe escort runners of the founders of the start-ups.
Lastly, traditional SMEs, not just the venture companies that arestarting up, need be careful in not becoming a zombie enterprise
which has relied too much on interest-free loans from thegovernment.
2.1.8. Need for a national strategy

Finding out the fundamental cause of the continuous decline ofJapan’s national power for the past 30 years, reversing the tendencyof the Japanese economy to decline through a national strategy, andputting Japan on a development path are urgent tasks. One way to
put Japan on a development path is raising wages, but this is amanagement decision and therefore at the core is expected
expansion of demand and improved productivity.
In a nutshell, the root cause of wages being low and stagnant isthe deterioration in the competitiveness of the Japanese economy.
Looking back, what led Silicon Valley, China and postwar Japan
were national strategies. Going forward, Japan should aim foreconomic development under a national strategy, and target areas tobe considered include information, data, space, medical treatment,
health and food. On the other hand, policies that are thought to havedelayed the metabolism of industries and lowered competitivenessshould be abolished.
2.1.9. Evidence-based policy formulation

In an era where the Information and Communication Technology(ICT) has developed and big data is utilized, there is a need morethan ever to implement policies based on evidence (EBPM =Evidence Based Policy Making).
In order for the government to promote empirical studies basedon data and quantitative policy evaluation, a budget for data scienceshould be created in economics departments. The time is now forgovernment-academic cooperation to also be brought todepartments in the humanities. It is also important to bring inpersonnel who can conduct quantitative analysis and explain the
results to the general public in easy-to-understand language. The
utilization of those who have obtained Ph.Ds is expected.
Theoretical research that carries out qualitative analysis andestimations should also be considered as evidence. Economic theory
can contribute to EBPM through implicating cause and effectrelationships that require attention and analyzing issues whereobtaining data and experiments are difficult.
Further, EBPM is also impacting reviews of recent industrial
policies. A certain positive impact is now being recognized forindustrial policies through a more precise empirical analysis,compared to the past where the market distortion impact ofindustrial policies was solely emphasized. And those industrial
policies were looked upon as typical protectionist policies.
In fact, to this date, research to verify the positive impacts of thesepolicies has been conducted including the economic impacts of
JETRO’s promotion of export programs and regional trade
agreements and the impact of the implementation of technology
development.
2.1.10. Sustainability of finance

The fiscal deficit continues in Japan and Japan’s debt ratio (toGDP) is exceptionally high by global standards. As calls for fiscal
consolidation are expressed around the world, there is a need to
discuss the sustainability of public finances. In particular, it shouldbe acknowledged that increases in the issuance of government
bonds mean passing the tax burden on to future generations.
Japan’s public spending is not necessarily high if social security

expenditure and government bond expenditure are excluded. The key
is how to use a limited budget efficiently. Generally, it has been
pointed out that the government outlook for its fiscal balance is too
optimistic compared to private outlooks. There are substantiatedoutcomes of analysis that have found that outlooks from thegovernment, which creates the fiscal rules, have smaller gaps thanthose of private entities.
Discussions about a carbon tax as a measure against global
warming are worth watching. There is a need to consider this within
the review of the overall energy tax system. Policies to promotetransformation in investment activities from a long-term perspective
are necessary to achieve a decarbonized society.
There are also issues with the non-traditional monetary policies
that the Bank of Japan is implementing. Up until now the majority ofJapanese government bonds with a maturity of less than 10 years
have been supported by the monetary policies of the BOJ. But withdebt monetization, which covers the fiscal deficit by printing more
BOJ notes, consideration should also be given to the possibility ofmonetary policies not being implemented in a flexible manner whensomething happens in the future.
In order to unearth bold private investment, pump-priming
investment by the government is necessary. While aiming to achievethat through wise spending, it should be noted that under financial
restrictions, increases in the consumption tax may also be required.
In considering Japan’s financial issues, recovering
competitiveness is a top priority. As the ageing society progresses,
Japan’s domestic savings are declining. The percentage of foreign
ownership of Japanese government bonds is also rising. If
competitiveness declines and exports do not rise, it will lead to a
deficit not only in the trade balance but also in the current accountbalance. As a result, yen depreciation will continue, leading to
inflation through rises in import prices. Financial tightening will be
conducted, leading to a fall in government bond prices, and throughincreases in interest payments public finance will further worsen.
2.1.11. Improving the appeal of the profession of civil
servant

In the US, the role of the private sector is more emphasizedcompared to the bureaucracy. Under the market mechanism, private
enterprises are advocated to expand both domestically and overseas
using their own power of being a private enterprise. In contrast, theroles of civil servants are emphasized in France and Germany. US
private enterprises and private financial institutions do not require
much help from the government and rely on their own power using
English to expand overseas and raise profits. In contrast, Japan,
France, Germany and others do not use English as a motherlanguage and that makes it difficult for them to expand overseas like
US businesses have.
Implementing an overseas strategy with the government and theprivate sector working together is necessary for Japan. In addition,
Japan SPOTLIGHT • November / December 20227

private enterprises alone cannot collect ample information fromoverseas, and therefore gathering of information from local Japanese
embassies and JETRO will be essential. With talented personnel inthe government sector being active on this front, the government
and the private sector need to work together on Japan’s strategy.
However, the number of those that aspire to be civil servants iscurrently declining and moreover the turnover of young civil servants
is increasing. Enhancement of the quality of civil servants as well as
improvements to the working environment are required. In addition,
adverse effects of the vertical structure of the government are being
highlighted, and improvement in the hiring system of civil servants
as well as their promotion system is an urgent issue.
In order for talented personnel to come together in thebureaucratic system, a pay structure based on abilities in addition toseniority should be built, and highly talented civil servants should be
paid compensation comparable to the private sector.
Specifically, in order to break down the vertical structure ofgovernment, human resources should be unified under the Cabinet
bureau of personnel affairs. At the same time, mid-career
employment as well as re-employment of those changing jobs
should be made possible, and a public recruitment system for
positions above certain posts should be considered. In essence, inorder to eliminate the involvement of politicians and the Prime
Minister’s Office in human resources, a third-party personnel
evaluation committee should be established. For comprehensive
service positions, compensation should be made equivalent to theaverage of the top 100 corporations listed on the first section of theTokyo Stock Exchange. Pensions should also be around the samelevel as in other major countries.
Once personnel enter the bureaucracy, individual skills growthrough working in various positions, and at the same time it isnecessary to enhance training and study abroad programs as welland establish an online education system. After the expansion ofcoronavirus infections, the number of remote meetings has gone up,
and the education system for civil servants should also include asystem where lectures can be attended when there is extra time.
Furthermore, human resource development programs such asattending lectures by foreign leaders should be promoted so that asystem can be established to provide indirect support to overseas
expansion of Japanese businesses.
In order to lighten the logistical office work of the Diet, Diet
statements should, in principle, be made by the ministers, andnotifications of questions should be made, in principle, one weekprior.

cooperation with surrounding countries and ASEAN, it is important
to dispose of the mindset of being a superpower.
Not only in technology, but cooperation between governments indeveloping legal systems and setting rules and regulations isnecessary, and it is important for Japan here to exert its influence.
Japan’s rules differ from other global rules. It is thought that if rules
and systems were the same for Japan and other countries, it will beeasier for businesses to be more active and conduct investment.
If training of civil servants were to be carried out not just for theJapanese, but on an Asia-wide scale, it will be useful in constructing
a human network.

2.3. Japan-US cooperation with economic security in mind
2.3.1 Importance of Japan-US cooperation

For economic security, the US is strengthening its industrial
competitiveness through active industrial policies, and showing acompetitive attitude towards China. External policies under theadministration of President Joe Biden focus on a return tointernational cooperation and coordination of willing nations. While
protectionist and US centralistic unilateral measures are still being
observed, a framework for Japan-US coordination and cooperationsuch as the Japan-US Economic Policy Consultative Committee(EPCC) and Quadrilateral Security Dialogue (QUAD) is coming
together.
Specific areas of potential cooperation include making supply
chains resilient, developing key infrastructure, and developing andsupporting advanced critical technologies
2.3.2 Other points to consider

Corporate cooperation between Japan and China can have both
positive and negative impacts on the competitiveness of Japanesebusinesses and economic security of Japan.
On the security side, technology leaks require attention.
Developing mechanisms and systems to protect domestic
technologies is imperative, such as selection of areas, for example
infrastructure and sensitive technology, that require restrictions offoreign capital inflows including from China and clarifying prohibited
activities.

2.2. Asia-wide industrial policy and Japan-Asia cooperation
Japan does not possess the power to confront the two great
powers, the US and China. In order for Japan to exert its presence ininternational society, there is a need to collaborate with multiple
countries and regions, like the EU does. In order to deepen regional
8 Japan SPOTLIGHT • November / December 2022

The Japan Economic Foundation (JEF) initiated the Research Committee on
Evolutionary Industrial Policy with prominent Japanese experts in November
2021, and concluded its role by publishing recommendations in June 2022.

COVER STORY • 1

HRoundtable with Prof. Ken Endo, Dr. Shumpei Takemori, Tatsuya Terazawa & Masakazu Toyoda

ow Should We Interpret
Geopolitics, Economy & Energy
Developments in Today’s World?

By Japan SPOTLIGHT
Experts: Prof. Ken Endo, Professor of The University of Tokyo, Japan (International Politics)
Dr. Shumpei Takemori, Former Professor of Keio University, Japan (Economics)
Tatsuya Terazawa, Chairman of The Institute of Energy Economics, Japan (Energy)
Moderated by Masakazu Toyoda, Chairman of Japan Economic Foundation (JEF)(Online Roundtable on Nov. 28, 2022)
Experts

Prof. Ken Endo

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Dr. Shumpei Takemori

Toyoda: The Russian military invaded Ukraine on Feb. 24, 2022
without any warning and many Ukrainians have been killed or havesought refuge overseas or are remaining in the country underserious threat of attacks as well as a shortage of electricity and foodsupplies.
The impact of these shortages is spreading out of Ukraine andworld energy and food prices have been rising, threatening the livesof people all over the world, including in developing nations. This iswhat we call the Ukraine crisis.
This Roundtable of experts on international politics, international
economy and energy aims to discuss how to interpret this crisis:
what exactly is happening, why is it happening and how can we copewith it.

What Is Happening?
Toyoda: Mr. Terazawa, I would like to ask you how seriously the
global energy situation is now under threat, how much energy prices
are rising and how the situation is different among nations or
regions. To my knowledge, Japan’s imported energy prices arecheaper than many other countries’ thanks to the high proportion of
4 Japan SPOTLIGHT • January / February 2023

Tatsuya Terazawa

Masakazu Toyoda

long-term contracts in energy imports, but the situation has been
recently changing. On the other hand, it seems that some companies
have ceased to conclude such long-term contracts.
I have also another question. Do you think fossil fuels have truly
no positive prospects? Or do you think we can continue to use themby turning them into hydrogen or ammonia by decarbonization?

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Terazawa: Russian oil’s share of the global market is 12% and its
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Thus, with Russian oil and gas supplies to the West impeded,
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there must be an enormous impact on the global energy market.
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to $600 in the European market, while LNG in Northeast Asia hit
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gas or LNG was significant. This is because a tanker could transport 16
crude oil anywhere in the world, but natural gas can only be
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With a supply shock, prices of the latter two fluctuate more than20
crude oil prices and this results in a more serious economic impact
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overall.
At this moment, since there is concern about a stagnant global
economy, energy prices have started to drop; the current crude oil
price is around $80, the European natural gas price in crude oil
equivalent is below $200 and the Northeast Asian LNG price is lessthan $150. But we must say those energy prices remain high.
How much each nation pays for its energy is another story. Whilenations in the West, including Japan, stop imports of Russian oil,nations not participating in the economic sanctions against Russia
continue to buy Russian crude oil at discounted prices, cheaper than
the world oil price by 20-30%. The notable examples are India, China
and Turkey. These countries can continue to buy Russian energy at
prices close to those before the crisis, meaning that energy prices
are relatively moderate for them. On the other hand, the nations
suffering most from energy price hikes caused by the Ukraine crisis
are European nations. This is because prior to the crisis 40% ofEurope’s gas consumption was from Russia through pipelines andwith the Ukraine crisis greatly limiting these imports, they are now
facing a supply shortage of natural gas. In addition, as they
compensate for this shortage with LNG imports from the rest of theworld at high prices, this will result in a serious impact on energy
prices in Europe.
As for Japan, we have in general a similar impact from the crude
oil price hike to that in the West, as this is the global market price.
On the other hand, Japan’s LNG imports are significantly based onlong-term contracts and the contracted price is mostly connectedwith crude oil prices. Since the crude oil price hike has been more
moderate than the spot market price of natural gas or LNG, Japan’s
imported LNG price rise in long-term contracts has been restricted toa moderate one. Thanks to these contracts, Japan has not faced yet
the supply shortage of LNG as in European nations. So I believe theenergy crisis impact overall on Japan has been more moderate thanin Europe.
However, these long-term contracts were concluded a long timeago, and after 2029 the percentage of the long-term contracts inparticular will be declining. Japan had not renewed those contracts
before the Ukraine crisis, though there were opportunities forrenewal. The background was the growing uncertainty about the
future of fossil fuels. LNG users in Japan, electric power companies
or gas companies, were hesitating in making long-term
commitments. Under such circumstances, the crisis happened.
My concern is that Japanese companies are still hesitant aboutcommitting to long-term contracts even after the crisis, while

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Takemori: At this moment, gas and oil price rises are coming under 21
22control, because global weather in autumn and winter 2022 was
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historically warm. Without this, European gas storage would be
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exhausted and planned blackouts or suspension of factory
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operations would be needed. China’s zero Covid-19 policy by
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continued lockdown of major cities has also been affecting the
supply-demand situation of gas and oil, as the Chinese economy is a 27
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fossil-fuel consumption-led economy emitting a quarter of the29
world’s carbon emissions and its decline in demand for energy
30sources would ease the global energy situation enormously.
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Europe could increase storage of gas in 2022 because it could
import Russian gas by pipeline in the first half of the year. However, 32
now that Nord Stream 1 is almost suspended and Nord Stream 2 will 33
not be used hereafter either, it will be difficult for Europe to build up 34
storage in 2023 and thus we presume that the winter in 2023 would 35
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be very tough.
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I think Japan’s energy situation will be a tough one as well in the38
winter of 2023. On the question of Japan’s long-term contracts of
39gas, in December 2021 when the risk of a Russian invasion of40
Ukraine was globally recognized, the time for renewal of long-term
contracts by Japan with Qatar came, but it was not done. I wondered 41
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why.
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I have a question about the new direction of Russian exports ofGerman companies and others are working hard to secure LNG
imports and LNG-producing nations are becoming aggressive inrefusing to sell LNG to them without their long-term commitments.
Chinese national companies are now securing many long-term
contracts. So the weight of Japan’s long-term contracts in LNG
imports will decline in the future and the weight of spot contracts
increase. Japan could suffer from a negative impact as in Europe
now. I think this would be a challenge for Japan in the future.
To overcome this, we would need a roadmap to show how natural
gas can be utilized in the long run. Otherwise, Japan’s natural gas
users cannot step into concluding long-term contracts.
Assuming that natural gas would be made into hydrogen orammonia (realizing what we call blue hydrogen or blue ammonia) in
the long run, we should prepare a path for such new use of natural
gas to achieve less dependency on Russian energy sources while
securing long-term demand for natural gas as blue hydrogen or blue
ammonia. In that way we can make long-term commitments forstable procurement of LNG. At the same time, we can contribute toresolving global warming through blue hydrogen or blue ammonia.

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gas. After Europe ceases importing Russian gas, Russia must
redirect it to other countries. There is a plan for a pipeline
construction, “Power of Siberia 2”, from the Yamal Peninsula facing
the Arctic Sea through Mongolia to big cities in China. This isplanned to be completed around 2030. My question is if China will be
truly capable to realize this pipeline construction plan to import
Russian gas. I am skeptical about China’s capability to achieve thiswithout Western nations’ technological support. When the accident
in Nord Stream 2 happened in 2022, we clearly learned that Western
technology was needed to maintain the pipeline. The pipeline
stopped to operate because Canada, a producer of motor propellers
for the pipeline, refused to deliver those under repair to Gazprom due
to economic sanctions against Russia. With clarification that Russian
pipeline operations would need Western technology, I am skeptical
about only Chinese and Russian technologies being able to realize agigantic pipeline construction plan connecting the Arctic Sea with big
Chinese cities.
Terazawa: It is true that the energy situation will be more serious in
2023. In particular, China’s decreased energy demand due to its zero
Covid-19 policy has certainly contributed to loosening demand andsupply at the end of 2022. If the Chinese economy recovers strongly
in 2023, global energy demand will increase strongly as well.
In the case of Europe, in the winter of 2022 it could pile up stocksof Russian oil, but in 2023 it cannot do so. It is true that Europe will
face a more severe winter in 2023. It would normally take several
years to increase LNG supply capacity, so we will see uncertainty
and extreme instability in energy supplies including LNG and natural
gas until around 2025.
Certainly, Russia has a project to construct a pipeline to China andis eager to achieve it. China was the largest LNG importing nation in
the world in 2021, having overtaken Japan. To meet its tremendous
demand, it has to diversify supply sources, so it would also eagerly
pursue construction of a pipeline from Russia as one of its
diversified supply sources. However, China would be shrewd to
avoid depending solely on one source like Europe and pursue a wellbalanced regional allocation of supply sources, considering Russian
sources as one of them.
How could it achieve this with its heavy dependency upon Western
technology? Having perceived a risk of depending on US technology,
given the current US-China high-technology conflict, China would try
to take maximum advantage of its own technology. It has its own
technology that has been used for pipeline construction so far and it
6 Japan SPOTLIGHT • January / February 2023

will seek to develop it, apart from whether it is the best or not.
However, as it will take time to accomplish such a pipeline, nofundamental development will occur in the energy situation soon.
The instability of the LNG market will continue for the time being.
Takemori: I have another question for Prof. Endo. Before Russia’s
invasion, Germany’s dependence on Russian gas supply was very
high, with 55% of its energy consumption depending on Russia.
With the addition of Nord Stream 2, its dependency would further
increase. When Russia occupied the Crimea in 2014, German
Chancellor Angela Merkel must have actively joined in economic
sanctions against Russia, but at the same time Germany has been
deepening its dependence on Russia since then. Why do you think it
has been doing so?
Endo: Germany’s dependence on Russia had been an important partof its economic development model together with a cheap euro andthe gigantic Chinese market. With the Ukraine crisis, this model has
collapsed. Germany maintained a policy of engagement with Russia,
assuming that Moscow would liberalize its economy and eventuallypolitics, too.
However, the Ukraine crisis proved otherwise. Current German
President Frank-Walter Steinmeier expressed regret about his
permissive treatment of Russia when he was foreign affairs minister.
Toyoda: I would like to ask Prof. Takemori about the global
economic outlook. Needless to say, the Ukraine crisis has a big
impact on the global economy which is still reeling from the lingering
impact of the pandemic crisis. In the next few years, what do you
think the global economy will look like?
Takemori: In 2023, with the more severe energy outlook,international organizations like the IMF or OECD have presented a
pessimistic outlook for the global economy. The short-term
challenge is inflation. To cope with it, the United States rapidly raisedinterest rates and inflation fell to around 7%. Developing countries
must be relieved to see it. With high energy prices and food prices,
their economies have been slowing down. A continued climb in US
interest rates would exacerbate their foreign debt problems as they
have a large amount of debt in dollars, and many of them would haveto seek help from the IMF.
Meanwhile, in Europe, core price indexes except for energy items
have not been rising much, unlike in the US. This is why the

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European Union’s interest rate rise is more moderate than the US.
Another reason is that in the EU there is one central bank and eachmember nation has its own public finances, which means asignificant rise in interest rates would put the public finances of theweaker economies such as Italy, Spain and Greece into a criticalsituation. So I think inflation in the EU will continue longer.
Whenever high inflation occurs, Germany makes noises to the ECB,
but today it is exceptionally quiet. This is probably because it regrets
its excessive energy dependency on Russia. With a worsening
economic situation hereafter, the EU may decide its own fiscal
expenditure again to support the member nations, such as with the“Restoration Fund for Recovery from the Pandemic”. But in the longrun, its energy policy must pursue blue energy, renewable energy
and small nuclear power as its core energy supply by around the2030s. Meanwhile, the global decarbonization drive exerts downward
pressure on fossil fuel investments so that we see global fossil fuelsupply failing to meet global demand.
Until around 2025, the global energy situation will be at a criticalstage if all nations try to mitigate their energy dependency on Russia.
Even after 2025, I have concerns that the energy crisis may continue
until 2030.
On developing nations, their food crisis was focused on thediscussions at the international meetings in November 2022. At thismoment, the issue is not only about the war preventing Ukraine fromexporting its food items but also the high rise of prices of chemicalfertilizers overshadowing affected economies. There is even a
concern about whether it would be feasible to maintain a world
population of 8 billion people without chemical fertilizers using
ammonia. Anyhow, how we deal with this mid-term energy crisis will
be an extremely critical issue.
Terazawa: We argue on the impact of energy prices in dollar terms
in the world market, but in Japan the issue is yen-based. In the caseof Japan, the impact of energy price hikes is duplicated with the
yen’s depreciation. I have two questions for Prof. Takemori. My firstquestion is how we should manage monetary policy in Japan,
seemingly today inviting yen depreciation. And my second question
is about energy subsidies.
Daniel Yergin, a distinguished energy policy expert, mentionedthat this crisis would be interpreted as the first crisis of an energy
transition which started in autumn 2021 even before the Russian
invasion.
The background of this crisis is underinvestment in fossil fuel

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Takemori: Exchange rate fluctuations are generally caused by the27
interest rate differential between the US and Japan. And in the US,
the high interest rate now is due to an extremely high inflation rate in 28
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the US. Meanwhile, Japan’s inflation rate is not so high. It is now
30around 3% and thus Japan does not have an urgent need to raiseinterest rates. I think low wage increases must be the reason for the 31
32
low inflation rate. To maintain full-life employment in Japan, there
tend to be so many workers in unnecessary sections of unnecessary 33
industries. To keep such inefficient employment, Japanese business 34
35
continues to go through any economic situation without raising36
wages. This must be a cause of low productivity as well as low
37
wages and low prices. To work on reforming this fundamental
weakness of the Japanese economy, we should introduce “layoffs” in 38
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Japan, though it would cause a serious economic challenge in the40
short run. With its introduction, labor mobility will be enhanced.
41
Competition in the job market would be encouraged, and more
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competent workers would get jobs with higher salaries. In other43
words, employers would need to pay more to get competentdomains and rising prices triggered by it, and Russian President
Vladimir Putin’s Ukraine invasion having tried to take advantage ofthis situation. These serial events pushed energy prices even higher.
Under such circumstances, Germany has never thought aboutchanging its energy policy. Its policy is in general to accelerate theuse of renewable energy, though it provisionally prolonged use of
nuclear power but only until spring 2023, and also prolonged use ofcoal in the short run.
Investment in fossil fuels has continued to decline reflecting thispolicy adopted not only by Germany but also by other European
nations and the US. In this light, if demand for fossil fuels hereafter
remains higher than the level which people promoting policies for
mitigating global warming have ever thought, its supply would notmeet demand. Such underinvestment in fossil fuels in the long run
would result in an energy market structure extremely vulnerable toexternal shocks. A big crisis like the current Ukraine crisis would
cause a seriously negative impact upon the world economy and I
have a concern that such a crisis could be repeated in this vulnerable
energy market structure.
I would like all nations including Germany to take note of this andadopt a well-balanced energy policy to encourage necessary
investment in fossil fuels to meet rather continuous demand in thelong run as well as promoting renewable energy, since renewableenergy cannot meet all the energy demand quickly.

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employees and thus wages would rise and the inflation rate could
also rise. There would be more room for raising interest rates, which
is supposed to be normal.
Anyway, on the fiscal policy side, we would need to pursue a wise
spending policy, namely more budgets for necessary policies suchas accommodating electric power systems to introduce solar or wind
power while cutting budgets for unnecessary policies. This will be
extremely important.
Many economists today would say that fiscal policy and monetary
policy should work together in the same direction, namely both ofthem should work expansively on deflation and both should betightening on inflation. This means there would be fewer boundaries
between both. Both of them should work together in collaboration as
an integrated policy to control total effective demand. With
inflationary concerns modified, fiscal policy as such should focus onwhat is to be truly needed selectively.
Toyoda: A question for Prof. Endo. In terms of international politics,
world nations seem to be divided into three groups: the US, Japanand Europe; Russia and China; and lastly third countries. Meanwhile,
the Ukraine crisis was apparently and unanimously considered to becaused by violation of international law. In spite of all this, the UN,
G7 or G20 are not working well in dealing with this violation. Whatdo you think is happening exactly?
Endo: I think this war is to be defined as an unlawful invasion
reversing a century-long effort by human beings to define wars as
unlawful actions and contain war crimes, or more specificallycontradicting the Anti-War Pact of Paris in 1928 or the Geneva
Protocol in 1924 defining a war of invasion as a crime.
However shocking it may look, this is a large-scale limited war,since the combative nations and the means of combat are limited,while in terms of the scale of human casualties and firepower
involved it is equivalent to what Russia experienced in the first phaseof German-Soviet conflict during World War II.
The United Nations Charter provides veto power for the permanent
members of the Security Council and therefore as is predicted, theUN does not function if one of those members commits an unlawful
action.
In a different perspective, the implication of veto power given topermanent members of the Security Council is that they are not toengage in a war against each other. Without this veto system, othermembers might have had to fight a war with the Russians, under the
8 Japan SPOTLIGHT • January / February 2023

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Why Has This Happened?
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Toyoda: Can we interpret this war as being provoked by Putin’s
30
nostalgia for the Soviet Union and a sense of being under threat of
31
from a NATO invasion of Russia, as well as the Russian authoritarian 32
political regime? Some people say that China is also under an33
authoritarian regime like in Russia. The latest appointment of the key 34
officials in the Communist Party and the administration in 2022, to35
the majority’s view, showed that power is getting concentrated on
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President Xi Jinping’s aides and people with views different from his 37
are eliminated.
38
What do you think will happen to China hereafter, Prof. Endo?
39
Japan is most concerned about China-Taiwan relations. What do you 40
think about the possibility of Chinese military action pursuing the41
integration of Taiwan into One China?
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mandate of a Security Council resolution. In this regard, the UN
Charter, as devised, could even be seen as preventing them fromstarting a war.
It is true that nations are divided into three groups on this Russian
invasion: Russia and China and a few others supporting it, Japan, theUS and Europe opposing it, and developing nations murmuring. I
think there must be strong antipathy among the nations in the thirdgroup, called the Global South, against the Western nations’monopolizing of political correctness despite historical events suchas colonization, racial discrimination and the Iraq War. Each nation inthis group also has been pursuing its own national interest withpriority placed on a free and independent attitude. For example, India
has been importing cheap oil from Russia, loyal to its long history ofa nonalignment policy.
However, it is also true that there was extensive support for the
UN General Assembly’s initial decision that Russia should get out of
Ukraine and stop its invasion: 141 agreed and only five opposed,with 35 abstentions. This implies that concerns, criticism andcondemnation of Russia’s invasion were widespread. Criticism of thewar is shared by many national leaders including Indian Prime
Minister Narendra Modi or Turkish President Recep Erdogan. In
particular, after having had to face the risk of a nuclear attack or
incident, more nations are becoming expressly concerned about thewar. The three group members are thus not necessarily fixed andwith widespread criticism against the war there have been changes
among group members little by little, reflecting it.

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Endo: In International Relations studies, we are inclined to think
about war from three perspectives: international, national andindividual. In international dimensions, it is certainly true that theRussians are concerned about NATO expansion reaching Ukraine
and accommodating facilities and equipment to defend missiles in
Poland, demonstrating power close to Russia’s border. In this light,
there is some international criticism that the West has threatened
Russia too much with NATO expansion. However, at the same time,
there is another view that the West has threatened Russia too little.
The administration of President Joe Biden, following the trend of US
withdrawal from overseas conflicts, stated that it would not sendsoldiers to Ukraine. Within this perspective, it could be seen as a
failure in deterring Russia, but whether a US threat could make Putin
give up his invasion would remain a big question.
Lastly on international dimensions, we should not forget about the
impact of the collapse of empires that has not been much talked
about. A collapse of a big empire could have a durable impact thatlasts more than one generation. Empires of the past tell the same
story: the Russian Empire, German Empire, Austro-Hungarian
Empire and Empire of Japan. Some Russians still have traumatic
feelings about the collapse of the Soviet Union in 1991 without agunshot having been fired.
Some groups in Russia have been eager to restore the Soviet
Union, but with independent states, new national borders and new
ethnic allocations. This war was provoked by such historicaldevelopments from the impact of the collapse of the empire. The
wars that Russia started after the Cold War took place in “postSoviet space”, i.e. the former Soviet Union’s territory. All of themwere initiated with little regard to the West’s intentions and actions.
In the national state dimensions, there have been contradictory
political developments: democracy versus authoritarianism or
dictatorship in the post-Cold War period. Putin had the impressionthat waves of democratization were reaching Russia, as even Ukraine
was democratized after the waves of democratization in Eastern
Europe and Arabic nations. He would most likely consider thesewaves as US-inspired anti-Russia movements. Some experts on
Russia refer to the Rose Revolution in Georgia and the Orange
Revolution in Ukraine around from 2003 to 2004 as decisive
incidents which made Putin convinced of an American conspiracy
behind the events.
Meanwhile, Russia itself has been becoming a more dictatorialstate and there are fewer obstacles to conducting an invasion within
its national politics. This is certainly Putin’s war. He always desired

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Takemori: I think the long-term energy issue affected Putin’s actions 21
as well. He became Russian prime minister in 1999 and president in 22
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had been low, but after 2000, in particular after China’s entry into the 24
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the tailwind enabling Putin to win domestic elections continuously.
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American shale oil production has increased since around 2012.
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The primary reason was rising oil prices. The background was that30
China’s 4 trillion yuan macropolicy package to stimulate the31
economy after the Lehman Shock pushed up energy demand. The
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second reason was the US zero interest rate monetary policy that33
made high-cost investment in shale oil profitable. Shale oil
34
production was generally unable to meet the cost without low
interest rates and high oil prices and those two conditions were met 35
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then and encouraged US shale oil production to jump up.
However, OPEC tried to inflict damage on the US shale oil industry 37
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by its decision to refrain from oil production cuts, and that resulted
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in lowering crude oil prices to $30 in 2016. In 2014 when Russia’s
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Crimea invasion took place, crude oil prices had already started to
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fall. Putin may have thought that unless he took steps to stir up
patriotism among the Russians, his popularity would fall with the fall 42
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of oil prices.
to restore the former Soviet Union’s prestige and spheres of interestand has attempted to take advantage of every weakness of the West,such as with the energy dependence. He thought Biden would not beable to produce any counter reaction against Russia since the wholeWest itself has seemed weaker, exemplified by the withdrawal fromAfghanistan, and there is also the business of the US-China
confrontation. What is interesting about Putin is that he is not simply
trying to restore the former Soviet Union’s spheres of interest but
also trying to get revenge on the US by imitating the American logic
used for justification of its resort to use of forces, which the
Bulgarian philosopher Ivan Krastev referred to as “emulation asrevenge”.
To be more specific, Russia invaded Ukraine, saying that it has
been developing weapons of mass destruction and had also
committed genocide, like the Nazis, and that Russia would have to
make a humanistic intervention and change the regime. Showing off
the American logic itself used by the US government to start a war
against Iraq and others, it revealed the Americans’ ruthlessness. Thisis such a malicious way to start a war.

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Takemori: He must have thought it would be the last chance toconsolidate his power, as the global energy shifts toward renewables
would one day wipe out demand for fossil fuels.
Terazawa: I think President Putin decided to invade Ukraine at thebest opportunity to take advantage of the weakness of the West in
the energy domain. It was a moment when the West was faced withthe biggest vulnerability in energy supplies with prices rising,underinvestment in fossil fuels and lack of excess supply capacity.
Also from a long-term perspective, Russian gas leverage is foreseen
to decline under the progress of decarbonization. With thisbackground, he thought it would be a vital moment for him to restore
the glory of the Russian empire while he is still alive and mark his
name in history.
Even with the sanctions of the West, Russia can continue the war
because its revenue from energy is unchanged as non-Western
nations continue to buy its energy, and even at discounted prices
Russian energy revenue has remained unchanged. This is the reason
why the West must continue investment to achieve less dependency
on Russian energy. However, under pressure from global warming,
how much it can do so is uncertain. That is our concern.
Endo: Putin would think so far this war has been to a certain extent
successful in destabilizing the energy situation in the West.
Terazawa: It may be successful in the short run, but without thetechnologies of the West it would be difficult in the long run todevelop oil and gas fields. I think this demerit would be bigger than
the short-term merits. So this war will never have been a gooddecision for Russia as a country. It can be rationalized only in termsof what Putin could do to restore national glory in his lifetime.
Toyoda: Prof. Takemori, do you think the economic sanctions on
Russia work well or not?
Takemori: Economic sanctions target Russian banks to stop theirinternational settlements, in other words they aim to make it
impossible for Russia to buy products made by the West with its
dollar income from energy exports. But at the request of European
nations heavily dependent on Russian energy sources, energyrelated payments were eliminated from the coverage of sanctions onexport payments to Russia. This made sanctions as a whole
ineffective, as Russia does not export manufacturing products and
10 Japan SPOTLIGHT • January / February 2023

its dollar income consists mainly of energy exports. In addition,
Russia can conduct transactions in currencies other than US dollars
with China or India. So the sanctions had little effect on its earningincome in foreign currencies.
On the other hand, it works well on the purchases of goods fromthe West. If Russia tries to buy massive amounts of weapons or
machines, once these transactions are revealed they can be stopped.
At this moment, the Russian army’s weapons are becoming obsolete
and fewer spares are available. This is certainly the result of
sanctions and the shrinking Russian economy.
The US is applying this lesson in its policy toward China. It has
already promulgated acts to stop providing China with newtechnologies in order to make Chinese semiconductor products
obsolete. Russia’s current economic power or military power isgradually deteriorating by failing to receive new products or
technologies from the West. Likewise, the US is promoting a policy
to prevent China from buying advanced technologies and goods fromthe West. This will be the core strategy of the West toward China in
the era of the “New Cold War”.
Terazawa: In addition to its inability to get new technologies, thesanctions are working well in creating a tremendous outflow of thebest and brightest in Russia overseas. Investment flows into Russia
could be discouraged as well. These could have a strong negative
effect on the Russian economy in the long run, though sanctions on
the energy industry do not seem to be working well in the shortterm.
This could apply to China as well. It is not only about rejecting
technology transfers to China but also whether China’s best andbrightest studying abroad will come back to China or stay abroad toescape its authoritarianism. This will be a key to China’s long-term
development. For the US to contain China, it will be important to
attract those best and brightest to the West.
Toyoda: Coming back to the issue of energy, I would like to ask Mr.
Terazawa if we could truly give up upstream investment in fossil
fuels.
Terazawa: I do not think we can stop upstream investment abruptly.
Thinking about newly developing countries and also many “Hard-toAbate Sectors” where decarbonization would be difficult to beachieved, there will still be stable demand for fossil fuels. As we still
have a long way to go before 2050, without investment to sustain

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robust demand for fossil fuels during this period, our energy market
would become very unstable and with some external shocks, energy
price hikes would occur easily.
In addition, in the light of the global environment, what needs tobe mitigated is not fossil fuels but CO2. Thus, decarbonization offossil fuels such as by creating blue hydrogen or blue ammonia fromfossil fuel gas or elimination of CO2 emissions from fossil fuels by
CCS (Carbon dioxide Capture and Storage) would make it possible
for fossil fuels and decarbonization to co-exist consistently.
From the perspective of promoting less dependency on Russianenergy as well, I think the need for investment will increase, as
elimination of energy imports from Russia will need equivalent
investment even with the unchanged global energy balance.
Underinvestment in fossil fuels has been concentrated on certain
regions or energy companies. For example, European and Americancompanies have been particularly underinvesting with pressure fromtheir shareholders. In contrast, Middle East countries or state
enterprises have been investing more. Thus, contrary to the common
view on the Middle East, its influence has been rising rather thandeclining.
In total, I think we will need to maintain investment in fossil fuels
not only from the need for upstream investment in them to achieve astable energy market but also from the need to achieve lessdependency upon Russian energy as well as less dependency upon
the Middle East or state enterprises for fossil fuels.

What Is to Be Done Hereafter?
Toyoda: Lastly, shall we discuss about what to do hereafter? On the
global economy, the economic outlook for 2023 by the IMF is very
pessimistic. National government expenditures have been increasing,as well as fiscal deficits. Prof. Takemori, what do you think is to bedone to achieve both goals consistently, getting the economy backon a robust growth track and budget sustainability?
Takemori: I think the main concern in predicting the economy is how
this war will come to an end. On April 29, 2022, Jurgen Habermas, a93-year-old German philosopher, wrote an article in the German
paper Suddeutsche Zeitung in which he said: “It was the lesson our
generation learned that no one would be a winner in a nuclear war.”
This means that we cannot force a country which has nuclear
arsenals to surrender; the only possibility is to seek a compromisewith the country. Of course, the key issue of the current war iswhether Ukraine can regain its territory deprived by Russia, but at
the same time this war matters in terms of global security. Thereneeds to be a compromise in this regard. A compromise might
emerge in 2023 when the West may try to mitigate its energy
constraints, though there would be an enormous cost with Putin’s
victory in the war of energy. Without an end of the Ukraine war, I
think the global economy will not be stable. After the end of this war,
we will face another challenge provoked by China. China cannot
hereafter update its high-technology goods or enhance the quality of
those goods, as the high-tech industries in the West will stop
providing China with their new semiconductor technologies from2024. This will push up the price of electronics products in general.
It is true that China has been providing cheap and high-quality goods
so far, but this will not be possible anymore. Production in South
Korea and Taiwan would not make up for China’s production decline.
It would have a negative impact on the global economy. With these
two uncertain factors of Russia and China, short-term economic
predictions are extremely difficult.

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Endo: How this war ends will be determined by two factors: the20
current cost of the war and future risks. Some suggest finishing the 21
war to minimize the current cost, but others insist on continuing it to 22
get rid of the seed of a possible war in the future. There is a fight23
between the two. Ukraine is now in the second category. I agree with 24
Prof. Takemori in saying a compromise might be necessary, if
25
eagerness to continue the war among the West proves limited.
26
The biggest risk in thinking about how the war may end would be 27
the US. If former President Donald Trump had won a second term,28
as some speculate, the US may have left NATO. If the Russian29
invasion had happened after the US left NATO, NATO would have30
been powerless and Ukraine could not have continued to resist.
31
Russia, in reality, has not won many wars by its aggression and it
32
has succeeded only in pushing out Napoleon and Hitler. It has been
33
tough in trench warfare to protect its acquired pieces of land. In this 34
war as well, it will try to protect what it has already taken by trench
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warfare. In such circumstances, how long the West can continue to36
supply weapons to Ukraine or support it wholly will be a key
37question. Though Ukraine is now still in high spirits, if the West’s
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support declines I guess there could be a moment in the future when 39
it will have to think about a ceasefire, which might mean stopping40
short of regaining its entire territory.
41
This is an unlawful invasion. There will be an impact on China42
Taiwan relations, though Taiwan is in some ways different from43
Japan SPOTLIGHT • January / February 2023

11

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Ukraine, in particular as China considers the issue of Taiwan as adomestic political question. The important lesson of the Ukraine war
is first of all that nations with the intention and power to change thestatus quo and with greater authoritarianism could take extremely
risky political actions. In spite of the long history of attempts to makewars of invasion unlawful, we cannot exclude the possibility of wars
under such circumstances. This posture could be applied to China
under Xi, with its intention to change the status quo, referring to thepossibility of resorting to weapons, and with its deepening
authoritarianism.
However, it seems to be quite a challenge for China to invade
Taiwan in terms of its military capacity. The Chinese army cannot
easily pass over the 100-kilometer long Taiwan Strait with its strong
oceanic current. The Russian army has struggled to pass over only ariver. Missile attacks would be possible, but they would result inincreasing Taiwanese readiness to resist. The Ukraine crisis musthave also given Beijing a simulation opportunity in examining theWest’s reaction to unlawful war or invasion, namely their restored
unity, though in reduced size, economic sanctions against Russia
and continuous support for Ukraine. Judging from theseobservations, I think China’s invasion of Taiwan is most unlikely inthe near future. We must be well prepared for it, though, since China
has never given up its intention to regain Taiwan, and with its greater
power and deeper authoritarianism, this risk cannot be excluded.
Toyoda: Assuming that economic sanctions against China are
possible in the future, will Japanese companies start thinking about
the need for decoupling. Can you comment on this point?
Endo: There have already been developments in businesses invested
or settled in China escaping to third nations following the deepened
conflict between the US and China. It is understandable to see anincreasing number of Japanese companies engaged in such risk
assessment with the start of the Ukraine war.
For the time being, a Taiwan invasion will not happen, I suppose.
But there is a possibility that the US, through thoughtless action,
might trigger a crisis. The US has occasionally given wrong signs to
its enemies. A long time ago, on the occasion of the Korean War,
State Secretary Dean Acheson drew what we call the Acheson line
between the Korean Peninsula and the Tsushima Strait, defining theregion inside the line as definitely defended by the US army. Thissign helped to make Kim Il-sung, then the leader of North Korea,
decide to start the war in the Korean Peninsula.
12 Japan SPOTLIGHT • January / February 2023

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Takemori: Russia has been considering “time as their enemy” overthe long term as its economy, depending on only fossil fuels with the 11
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progress of decarbonization, is gradually shrinking. In contrast,
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China has been thinking that “time would support China”, since astime goes by the situation becomes more favorable for it as it could 1415
keep competitiveness in its manufacturing sectors with its
16technology catching up with the West as well as maintaining cheap
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wages.
The American strategy to contain China is to stop this catching-up 18
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process by ceasing to provide advanced technology and aiming to20
reduce its military capacity and eliminate the threat of all the hightech industries in the world being monopolized by China. To achieve 21
22this, semiconductors are under export control and chip technology
as well as human resources and services related to supercomputers 23
and AI are subject to export bans now. For example, ASML, a Dutch 24
25company with lithography technology vital for producing nanosemiconductors, is not going to be involved in business with China. 26
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NVIDIA, chips necessary for AI, and thus its technology would stop
29
improving.
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Japan now considers China as an important part of the global
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supply chain. But Japan will have to think about withdrawal from32
business in China or relocation of its supply chains, as
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semiconductors built in components provided by China would
become more expensive and less high-quality. This may not happen 34
immediately but in five years Japanese companies will be faced with 35
36
a question of whether they can maintain Chinese components as a37
core part of their supply chain.
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Toyoda: To pursue both climate change mitigation and energy
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security in a balanced way, the global commitment to restrict the41
global average temperature rise to 1.5 C in comparison to the pre42
Industrial Revolution age may be difficult to achieve. Mr. Terazawa,
43
what do you think about this?
On the Gulf War as well, the US ambassador to Kuwait did not say
clearly “No” to Iraqi President Saddam Hussain and Saddam thought
he could invade Kuwait. With such confusing signs from the US or
no clear sign from the US president, China may think this would be
an opportunity for invasion. A Taiwan crisis would be dependent
upon three factors: Taiwan’s willingness to resist, the US willingness
and capacity to intervene, and also China’s willingness and capacity
to change the current situation.

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Terazawa: This 1.5 C goal does look difficult to achieve.
Furthermore, in responding to the Ukraine crisis, coal-fired powerhas been increasing, which will make it even more difficult toachieve. Meanwhile, in terms of the energy flow argument, European
nations are now ready to promote decarbonization further in dealing
with the Ukraine crisis to consolidate energy security. The emerging
economies and developing economies are also ready to promoterenewable energy. Therefore, though it is extremely difficult toachieve carbon neutrality in 2050, it is also true that expansive use ofrenewable energy and decarbonization will proceed across the world.
Taiwan committed to stop utilizing nuclear power in 2025 and also
to reduce coal-fired power. It would increase use of renewableenergy. But due to its constraints in using renewable energy, it will
have to use more natural gas and increase use of gas-fired power.
The Taiwan example shows us that we will need fossil fuels in
pursuing the option of no use of nuclear power while pursuingdecarbonization. We will need to continue necessary investment infossil fuels. Without nuclear power, the goal to achieve carbon
neutrality in 2050 will be still more difficult to achieve. We need anational debate on nuclear power if Japan truly seeks for carbon
neutrality. Carbon neutrality and abandoning nuclear power cannot
be consistent for Japan.

Building Japan’s Future
Toyoda: Finally, could all of you give your brief recommendations onwhat Japan should do from now on?
Endo: We are seeing the emerging reality that the UN, the only
critical public assistance system, does not work well in the domain
of international security. On the possible conflict with China,
including territorial issues like the Senkaku Islands, the UN system
will not function well either, as it is a permanent member of its
Security Council. If it does not work, we should seek mutual
assistance. To the extent that the US remains a reliable partner, thismutual assistance system should be strengthened. However, thismutual assistance system may occasionally not work well either
depending upon US domestic politics. We will need self-help in thiscase to some extent including increased defense expenditure.
We will need to examine seriously how limited resources, financial
or human, are to be wisely allocated, according to well-defined
purposes. We should pursue well-focused and functional self-help. I
believe we should put greater emphasis on defense capabilities,

instead of a deterrence strategy with middle-range missiles equipped 1
with conventional warheads which may not function, and strengthen 2
our defense of the Southwest Islands.
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Takemori: Most Favored Nation and National Treatment, two basic
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concepts of the WTO, are dead. Russia and China are now
6differentiated. We are seeing friend-shoring, a concept well accepted. 7
Instead of the WTO rules, we see more discussion on geopolitics. I
8am glad to see in Japan discussion on fiscal sources of increased
9defense expenditure finally emerging after a long time. I do not think 10
it is a bad idea for Japanese industries to consider corporate taxes as 11
fiscal sources for increased defense expenditure, because we can12take advantage of increased defense expenditure for industrial policy 13
to raise the potential of Japanese science technology and military
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technology.
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Hereafter, the Japanese government must think about what16
industrial sectors could contribute to enhancing national security and 17
raising international competitiveness. Wasting budgets cannot be
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allowed. We have to transform our fiscal expenditure to maximize its 19
benefits.
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Terazawa: It is extremely difficult to achieve both goals of mitigating 22
global warming and strengthening energy security. It is so in
23particular for Japan. We Japanese seem to have spent so much time 24
and energy discussing each advocate’s preference or dogmatic
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arguments such as “Which is better, nuclear power or renewable
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energy?” But we will need to face reality and seek realistic solutions 27
at this stage to engage with these two big issues. There are no28
exceptions to this among the government, industries and the people. 29
So whether you like it or not, we will need to utilize all energy
30sources, renewable energy, energy saving, investment in fossil fuels, 31
nuclear power, etc. Otherwise, we cannot achieve both goals.
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Taking advantage of the Ukraine crisis as a wakeup call, the33
government, industries and people of Japan, under strict economic
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and natural resources constraints, will need arguments focused on
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reality to produce solutions rather than dogmas.
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Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with the42
assistance of TapeRewrite Corporation.
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Japan SPOTLIGHT • January / February 2023

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COVER STORY • 2

PRoundtable with Shingo Ito, Prof. Yasuhiro Matsuda, Satoshi Morimoto & Masakazu Toyoda

ossible Taiwan War – How
Should Japan Deal with It Under
Intensified US-China Conflict?

By Japan SPOTLIGHT
Participants: Shingo Ito, Senior Researcher of Institute for International Economic Studies, expert on
economic relations between Japan and China, as well as Japan and Taiwan;
Yasuhiro Matsuda, Professor of the University of Tokyo, expert on Taiwan and China;
Satoshi Morimoto, Former Defense Minister, expert on military security;
Moderated by Masakazu Toyoda, Chairman of the Japan Economic Foundation (JEF).
(Online Roundtable on Jan. 20, 2023)
Participants

Shingo ItoProf. Yasuhiro Matsuda

Current Situation of Ukraine War
Toyoda: The Ukraine war has continued for more than one year,
following Russia’s invasion that violated international law. There
have been many victims on both sides. Japan as well as the UnitedStates and some European countries have imposed economic
sanctions on Russia and taken a wide range of measures to support
Ukraine.
Meanwhile, there has been a growing concern about Taiwan for
Asia-Pacific nations including Japan, in the sense that this Russian
attempt to change the status quo by military forces without
consideration for rules could be followed by China. Chinese
President Xi Jinping firmly declared in October 2022 at the 20th
Chinese Communist Party National Meeting that “China must achieve
unification with Taiwan and it is definitely possible.”On the other hand, the US has clarified its policy to support
Taiwan even by use of military force.
How should Japan face this situation? Though Japan is a US ally,
its economic dependency on China has been significantly growing,https://www.jef.or.jp/journal/

Satoshi Morimoto

Masakazu Toyoda

like many other major powers in the world. In this light, if militaryunification with Taiwan by China happens, Japan will face the need
for well-considered plans and preparations for its own survival.
At this critical moment, I would like the experts of this roundtable
to discuss the following three issues: How do you assess the current
Ukraine war? How could this war affect China’s attempt to unite with
Taiwan? And how should Japan deal with the confusion that such an
attempt would cause?
We have three distinguished experts to discuss these issues:
Satoshi Morimoto, a military expert and former Japanese defense
minister; Yasuhiro Matsuda, an expert on Taiwan and China issues
and professor at the University of Tokyo; and Shingo Ito, an expert
on the economic relations between Japan and China as well as Japanand Taiwan, and a senior researcher at the Institute for International
Economic Studies.
Let me start the discussion by asking Mr. Morimoto about the firstissue. Why do you think Russia violated international law and started
a military invasion of Ukraine? What do you think would be thebenefit of this for Russia? When do you think this war will mostJapan SPOTLIGHT • March / April 20239

likely come to an end, and what do the Russian people think about itall?
Morimoto: There is no definitive interpretation of the causes of thisRussia-Ukraine war. I just would like to mention that Russia
continues to maintain a strong grudge toward the US about being
demoted to an ordinary European power by a superpower following
the end of the Cold War between the US and the Soviet Union.
In addition, NATO has been expanding its membership to the East
since the Cold War ended and the territory of its member nations hascome closer to the Russian border. Among Russia’s neighbors, there
are only three non-NATO members: Belarus, Ukraine and Georgia. If
Ukraine joins NATO, Russia will view this as an even greater threat
from NATO. So in this regard, Russia’s invasion of Ukraine can beseen as a military strategy to bolster its national security byintegrating Ukraine into Russia. There is also a false perception in
the depths of the Russian mind that Ukraine was historically part ofRussian territory.
Anyhow, the views of both sides in the war on the territorial issue
differ so much that diplomatic negotiations between them have been
stopped since the fifth meeting for peace promotion on March 29 in
2022. Given that in any further talks for peace the nation which hastaken a military advantage over the other would be the beneficiary,
each of them has been trying to expand its territory by military force
and thus battles have been continuing for a year in the East andSouth of Ukraine, in the Crimean Peninsula and also in Kyiv, theUkrainian capital.
As most commentators on the war can see, neither of them has
ever thought of accepting defeat in diplomatic negotiations. For thetime being, from March to April, to achieve a great military successin a spring offensive, Russia appointed Chief of the General Staff
Valery Gerasimov as overall commander and shook up its militaryleadership, having now mobilized many soldiers to win the final
battle.
A key to this spring offensive, on the Ukrainian side, is military
support from the US and Europe. They want heavy tanks in order togive them an advantage in close combat when tanks can move atease in the melting snow in the spring. A definitive impact would be
provided to them by the German-made super tank Leopard 2.
10 Japan SPOTLIGHT • March / April 2023

Another key weapon is anti-aircraft missiles to counter groundattacks by the Russian air force. The center of the current battle is
the East of Ukraine, but it will be moved to the South. As the Russianarmy has retreated from Kherson, it would be a key to the entire war
for Ukraine if it could regain Zaporizhzhia and move to the South andthe Crimean Peninsula.
It will be difficult to reopen diplomatic negotiations, but the keys tothe future of this war will be the Victory Day in Russia in May and theNATO leaders meeting in July.
There will be two big issues at the NATO leaders meeting. The firstis the membership of Finland and Sweden. At this moment, Turkey
opposes Swedish membership. On this issue, the task will be how toachieve those nations’ membership while managing to maintain theunity of NATO. The other issue is whether NATO members could
unanimously support Ukraine with military forces.
The US and European nations are now divided into two groups.
The first one, including Germany, France and Italy, aims at
maintaining long-term European stability with ingenious
management of cooperation with Russia as much as possible, while
the second, including the US, the United Kingdom and Canada, arethinking about reducing Russia’s military capacity as much as
possible by exhaustive war and turning it into a state that could not
attack a European nation anymore. In this light, Japan, the hostcountry of the G7 meeting, is in a difficult position to achieve acompromise between these two groups.
Furthermore, I think US domestic politics will be another key
factor in the direction of the war. As is known, the US Congress,
which reopened from Jan. 3, 2023, after the November mid-term
elections, now sees the Republicans with a majority of seats in theHouse of Representatives, at 222, while the Democrats hold 212. In
this political situation, right-wing Republicans are now coming backto an “America First” foreign policy by saying they should strengthen
national borders instead of sparing military support for Ukraine andfinancial reconstruction. You cannot expect easily unanimous
support from the US for Ukraine.
As for Russian domestic politics, I think 60-70% of the nation still
support the war started by President Vladimir Putin. This is because
there have been very few ordinary citizens in Russia killed by thewar, even though 80,000 to 100,000 have been killed or injured onboth sides. In Russia, it is soldiers that have been killed in the war.
When the bodies of these Russian soldiers were returned to theirhome country, the union of their mothers protested and objected to
the war, but that was the main sources of opposition.
It is also true that many citizens were afraid of being called up as
soldiers, and last year when the Russian military tried to mobilize
another 300,000 soldiers, around 200,000 tried to escape overseas.
But in 2023, I believe the announcement of the mobilization of anadditional 1.5 million soldiers was made after tightening bordersecurity to prevent such escapes. The weakness of Russia is its
shortage of soldiers, a weakened industrial base and the possibilityof declining logistic support for the war.
On the Ukrainian side, the motivation of the soldiers is not an
issue but the damage suffered by the citizens is extremely serious.
Many Ukrainian citizens have been sacrificed. In spite of this, there is
still strong motivation for fighting among Ukrainians. The issues forthem are how to maintain their soldiers’ military skills and how muchsupport they can gain from the US and European countries.
As a matter of fact, the US had been hesitating to deliver weapons
to Ukraine to enable it to attack Russian territory directly, probably
out of concern that Russia might resort to using tactical nuclear
weapons. The US is thus trying to manage its military support for
Ukraine to avoid such a catastrophe. Ukrainian President Volodymyr
Zelenskyy has been extremely unhappy with US military support andat the end of 2022 he visited the US Congress and asked the US toprovide more weapons and ammunition to Ukraine as they were
shedding blood to protect democracy. I believe this is what the
Ukrainians truly believe.
Anyhow, I am afraid this war will continue for a long time. Someare saying it could finish by the end of 2023, but I do not think so.
The most important thing is for the G7 leaders meeting in May andNATO leaders meeting in July to think about how to achieve acompromise to end this war. How can Japan take a diplomatic
initiative in this work? I believe we must think about how a Japaneseinitiative in these diplomatic efforts could impact relations between
China and Taiwan and what implications it could have for stability in
the Indo-Pacific area.
Toyoda: I would like to ask Mr. Ito about the economic issues. Could

you tell us how the Ukraine war would affect the rest of the world
economy, excluding Ukraine and Russia, and what impacts could be
produced in different regions? I would also like to ask for your viewson the reasons why countries’ responses to economic sanctions
differ. Some countries have joined in the sanctions but some havenot.
Ito: First, the Ukraine war dampened the global economy which wasjust starting to recover from the pandemic. Together with developed
nations’ economic sanctions against Russia, the supply of energy,
food and fertilizers has become restricted, which raised the prices of
those commodities hugely and led to further price hikes on a wide
range of other goods.
Russia is the second-largest producer of natural gas in the worldin 2020 and the third-largest petroleum producer, as well as thelargest wheat producer in the world and the largest exporter of
fertilizers. Ukraine is the largest sunflower oil producer in the world
and one of the major exporters of corns and wheat. Since the major
developed nations have been engaged in large-scale monetaryloosening as well as expanded fiscal expenditures to soften theeconomic damage caused by the pandemic, such active macropolicy measures further raised commodity prices.
With such a significant rise in energy and food prices, the terms oftrade have been greatly worsened, mainly among nations with low
self-sufficiency in energy and food, and this provoked a flow ofnational income in those nations to overseas. Above all, the lowincome or middle-income nations with a high Engel coefficient(proportion of food consumption to total consumption) or a highpercentage of utility costs to disposable income suffer more fromsuch price hikes. Also, not only the Commonwealth of Independent
States (CIS) members but also African nations and Middle East
nations are in general highly dependent upon wheat and corn or
fertilizers provided by Russia and Ukraine.
It is to be noted that with the normalization of extremely loose
monetary policy to modify the damage from the pandemic bycurbing inflation and raising interest rates, for the newly emerging
economies suffering from tremendous external debts there would be
the additional burden of income outflows overseas due to worsening
terms of trade. For example, concerns have arisen about theJapan SPOTLIGHT • March / April 2023

11

reimbursement risk of external debts in nations like Turkey,
Argentine and South Africa. In nations like Egypt, Lebanon, Sri Lanka
and Pakistan, rising inflation caused by high increases in food prices
has provoked political unrest.
Among developed nations, European Union countries are sufferingmost. This is because EU nations’ energy dependency on Russia ishigh and their natural gas supply from Russia became restricted due
to economic sanctions and the destroyed pipeline with Russia. In
2020, for example, 55% of German imports of natural gas camefrom Russia and it is the same situation in Italy. Also in the case of
the EU, Russia occupies a certain share of its market, but in the lightof national security and maintaining international order, it imposed
economic sanctions on Russia and the cost has become enormous.
There has been not a small impact on the Japanese economy.
Inflation has been continuing, initiated by price hikes of food andenergy. With the yen’s depreciation against the US dollar due todiffering monetary policy directions, people are starting to sense a
decline of real income in their daily lives. The yen rate on a customs
declaration basis reached 131 yen to the dollar on average in 2022,
the lowest value since 1998, and with the drastic increase in imports
due to price hikes of fossil fuels, Japan’s trade deficit reachedaround 20 trillion yen, the largest in its history. Since the Ukraine
war, based on these observations, the IMF revised its outlook for real
GDP growth drastically downward for low and middle-income
nations with a low self-sufficiency rate of energy and food, as well as
for the EU and Japan. They lowered their estimated growth of thesecountries by around 1 percentage point after assessing the Ukraine
war impact on their economies.
On the question of different responses to the war, it is developed
nations and regions in general that have joined in economic
sanctions against Russia. To be more specific, these countries andregions are the US, Japan, the EU, the UK, New Zealand, South
Korea, Taiwan, Singapore, Canada, Iceland, Liechtenstein, Norway,
and Switzerland. Such nations and regions are considering theprevention of further threats to their national security rather than any
damage incurred by economic sanctions. In particular, the EU isafraid of threats to security and the other countries are all ready toaccept the economic cost of sanctions, believing it more important toprotect international norms as stated in the UN Charter.
12 Japan SPOTLIGHT • March / April 2023

However, I need to mention that those countries not joining ineconomic sanctions against Russia do not necessarily all approve of
the Russian invasion. As a matter of fact, on March 2, 2022, in the
UN National Assembly, the resolution of condemnation against
Russia was approved by 141 nations, while only five countries
objected and 35 abstained. So the overwhelming majority supported
the resolution. Many of the nations of what we call the Global South
condemned the Russian invasion as the “use of arms not consistent
with the objectives of the UN Charter” and considered it an
infringement of sovereign rights under international law.
Nonetheless, there are many reasons why so many countries have
not joined in the economic sanctions, and these seem to differ fromcountry to country. First, there is a group of nations that regard the
US and other nations in the West as a threat to their national security
and which have close military cooperation with Russia. Typicalexamples are those that objected to the UN Resolution on March 2,
2022.
Second, there is another group of nations that have purchased
Russian weapons, even though they do not consider the nations of
the West as a threat to their national security. India is one suchnation. It is said that 80% of the nations that objected to or abstainedin the vote in the UN National Assembly on the condemnation
resolution are those that have purchased Russian weapons.
Third, there are countries finding tensions with their neighbors
more imminent and in this regard thinking that decisively worsening
relations with Russia would not be to their advantage. Fourth, in thecase of newly emerging countries, they would find their economies
could be more seriously damaged by retaliation for economic
sanctions and thus they try to protect their economy by balancing
their relations with the major countries.
And fifth, there are cases of Western nations’ former colonies
where a lack of confidence in the West is the reason why they did notjoin economic sanctions against Russia. There are countries in thiscategory where the West supported their authoritarianadministrations in the Cold War and they could only manage to beliberated from such governments with the help of the Soviet Union.
Also there are nations who are resisting the dichotomy ofauthoritarian states versus democratic states. There is such a wide
range of historical contexts and views in the background of the many

countries that condemned Russia for invading Ukraine but whichhave not joined in economic sanctions.
Toyoda: I have a question for Prof. Matsuda on the similarities anddifferences between the Ukraine war and the Taiwan contingency.
Many nations see Ukraine as an independent state, whereas Taiwan
is viewed as a part of China. In this sense, could you clarify how theissue of reuniting Taiwan and China is to be interpreted ininternational law and what would be the legal basis for interpretationof the issue for the US and Japan?
Matsuda: At first glance, Russia’s invasion of Ukraine to try tointegrate it into Russia and China’s possible attempt in the future tounite with Taiwan by use of force resemble each other. These are
identical in the sense that dictatorial nations try to use force torestore their “lost territory”. Thus, our concern about Taiwan coming
under military attack from China has been exacerbated since theoutbreak of the Ukraine war. But though they look similar intuitively,
there are several differences between the two.
First, geographical difference. As Ukraine and Russia areconnected by land, an invasion is easier with a strong army. In thecase of Taiwan and mainland China, there is the more than
100-kilometer wide Taiwan Strait. They used to be both part of the
Qing Dynasty’s territory, but Taiwan was an outlier of Qing and is toolarge to be regarded merely as a remote island.
In addition, Russia and Ukraine were once part of the same
country in the 20th century, namely the Soviet Union, while Taiwan
and mainland China were parts of the territory under the samenation’s rule only from 1945 until 1949 following the Qing’s cedingof Taiwan to Japan in 1895. Thus for more than 120 years, bothpeoples have been educated differently in a different country andunder a different political regime. Even the letters they use for writing
are different. Therefore, they have a rather different cultural identity
from each other and the logic of both nations belonging to “the same
people, the same nation” is increasingly invalid.
China often claims to be “one China” as a principle. This is a threesteps logic, namely, “There is only one China”, “Taiwan is aninalienable part of China” and “the Government of the People’s
Republic of China as the sole legal Government of China”. However,in this logic, “China” and “the People’s Republic of China” do notnecessarily match. Whenever China concludes diplomatic relations
with another country, it refers to Taiwan as “a part of China” or “apart of the People’s Republic of China” and with such remarks tries
to make the issue ambiguous. But most nations do not approve of
Taiwan being a part of the People’s Republic of China, except forfriendly socialist nations such as North Korea.
In the case of the US, it acknowledges the Chinese position that
there is but one China and Taiwan is part of “China”. But this does
not mean that it recognizes that Taiwan is part of China. The US only
“acknowledges” the Chinese position. Other nations such as Canadaor the Philippines use the expression “take note” in response to thisChinese claim.
In the case of Japan, responding to this Chinese claim that Taiwan
is a part of the People’s Republic of China, it officially says that it“fully understands and respects this stand of the Government of thePeople’s Republic of China, and it firmly maintains its stand under
Article 8 of the Potsdam Proclamation.” This is meant to be “theterms of the Cairo Declaration shall be carried out, Formosa (Taiwan)
and the Pescadores (Penghu Islands) shall be restored to the
Republic of China.”
China made a compromise with Japan by having agreed upon thisexpression and signed the Joint Communique of the Government ofJapan and the Government of the People’s Republic of China in
1972. However, with this Japan said that it “firmly maintains its
stand to restore Taiwan and the Penghu Islands to the Republic ofChina” and it did not recognize that Taiwan was a part of China. In a
Diet session, the Japanese government publicly announced that it
did not naturally recognize it.
If Japan approves naturally the Chinese claim that Taiwan is a partof China, it would need to ask China to issue permissions and visas
to maintain economic relations and human exchanges with Taiwan.
The Chinese side as well understood that this issue was not resolved
clearly on the occasion of the normalization of Japan-China
diplomatic relations. However, China has been trying to turn the “oneChina” principle into a fait accompli by repeatedly mentioning thatJapan has approved “one China” principle since 1972.
Similarly, in the UN as well, the “one China” principle has neverbeen approved. In the UN, the right of representation of China has
Japan SPOTLIGHT • March / April 2023

13

been transferred from the government of the Republic of China to thePeople’s Republic of China, but the UN has never decided to approvethat Taiwan is a part of China. Keeping this question unresolved but
repeating its claim that Taiwan must be a part of China, China hascreated a situation where other nations would find it difficult to
oppose it explicitly.
On the question of “peaceful resolution” of Taiwan issue, in thecase of the US, a domestic law, the Taiwan Relations Act, mentions
that normalization of US-China diplomatic relations was achieved
under the “expectation that the future of Taiwan will be determinedby peaceful means”. In other words, it indirectly indicates that use offorce for unification would collapse the premises for normalization of
US-China diplomatic relations. Meanwhile, in the case of Japan, thenForeign Minister Masayoshi Ohira told the Diet, “I think a rivalry
between the People’s Republic of China and Taiwan is basically aChinese domestic issue,” adding “I believe there would be no
possibility of this issue ending in a military conflict.”
But according to former Ambassador to the US Takakazu
Kuriyama’s interpretation, “As long as they talk peacefully about thisissue, it is a Chinese domestic issue,” but “if China attempts toachieve unification with Taiwan by use of force, what we call theliberation of Taiwan by use of forces, this will not be considered as adomestic issue anymore. This is what ‘basically’ in the above
meant.” (Takakazu Kuriyama, “Normalization of Japan-China
Diplomatic Relations”, Waseda Law Journal, Vol. 74, 4-1, 1999).
This is how the US and Japan share the basic view that “peacefulunification would not be a problem but unification by force must be
another story.”In the argument on international law, I think this would be
probably an issue of international humanitarian law. In this law, evenin the case of domestic issues, the slaughter of a nation’s own
people is not allowed. Use of force could kill people and any attempt
to change the status quo by military means is in general not to beallowed by international law.
Another issue is that if a Chinese military attack on Taiwan went
beyond the Taiwan Strait, it would not be as a matter of fact
considered a domestic issue. The Taiwan Strait, for the most part, iswhat we call international waters, excluding territorial waters andcontiguous zone. International waters mainly consist of Exclusive
14 Japan SPOTLIGHT • March / April 2023

Economic Zones (EEZ) and the high seas. In an EEZ, coastal
countries’ rights are limited to sovereign rights to biological andnon-biological resources, and the rights to freedom of navigation or
national security are the same as on and under the high seas. In thislight, China is not allowed to make the Taiwan Strait a battlefield on
its own.
It is physically impossible to achieve unification by force without
turning international waters into a battlefield. For example, in thecase of a blockade of the Taiwan Strait by setting up floating mines
there, some mines could flow into the sea close to Japan. In such away, China’s claim that it is a domestic issue would almost certainly
prevent ships from passing in the seas neighboring Japan. It would
be then impossible to tell Japan not to intervene in a Chinese
domestic issue.
In this regard, the fact that the “importance of peace and stabilityof the Taiwan Strait” was mentioned in the joint statement of the “US
and Japan 2+2 meetings” in 2005 as a common strategic goal andwas repeatedly raised in the “US and Japan 2+2” and also in the
US-Japan leaders’ meeting in 2021 has crucial implications.
Here is to be noted is that Taiwan and the Taiwan Strait are
geographically different concepts. The use of the word “Taiwan” inthe context of the US-Japan alliance would offend China seriously,
but the Taiwan Strait is mostly international waters and Chinese
territorial waters and contiguous zone are limited there. Thus, theemergence of threats to its peace and stability would be an extremely
big concern. By saying that must not be allowed, it is logical that
China should not be allowed to achieve unification with Taiwan byforce under international law.
On the other hand, a legal basis would be needed for the US toprevent China from use of force. In the US Taiwan Relations Act, thegeneral gist of it is that the US shall “maintain the capacity of theUnited States to resist any resort to force or other forms of coercion
that would jeopardize the security, or the social or economic system,of the people on Taiwan” and also that the US shall “provide Taiwan
with arms of a defensive character”. It further suggests that “thePresident is directed to inform the Congress promptly of any threat
to the security or the social or economic system of the people on
Taiwan and any danger to the interests of the United States arising
therefrom. The President and the Congress shall determine, inaccordance with constitutional processes, appropriate action by theUnited States in response to any such danger.”
It is interpreted that “appropriate action” would include anything
appropriate, and thus the law permits the use of force to cope withthe war, if necessary. In this light, China’s military actions are
deterred by the risk of US intervention.
In the US the legal basis for defending Taiwan was changed
around the occasion of normalization of US-China diplomatic
relations in 1979, but in Japan the legal basis for support for the US
military around the time of the establishment of a law of situation inareas surrounding Japan was changed. In the case of a Taiwan
contingency, US military activation to deal with it is assumed.
Meanwhile, the US-Japan Alliance predetermines the area where the
US and Japan could cooperate in military action as the area of “theFar East”. This basically means “in general, the area to the north of
the Philippines and also Japan and its surrounding areas including
the areas under the rule of the Republic of Korea and the Republic ofChina.” This definition remains unchanged even now. In other words,
Taiwan belongs to the area of “the Far East” where the US-Japansecurity alliance is supposed to work.
However, it is to be noted that the Japanese interpretation of thissecurity alliance assumes that US military action is to be “always
taken only as the execution of the right of individual or collective
self-defense allowed by the UN Charter to resist an invasion”.
This means that US military forces were to act for the right ofcollective self-defense to defend their allies including Taiwan when
the US and Taiwan had official diplomatic relations. In this case, it
was assumed that Japan would allow the US army to use its militarybases in Japan after advance talks with the US. However, since 1979
there have been no official diplomatic relations between the US andTaiwan and Taiwan has not been considered an independent state.
The US cannot defend Taiwan legally based on the execution of theright of collective self-defense and its actions must be based on only
its domestic Taiwan Relations Act.
On the other hand, China committed to a policy of “peacefulunification” on the occasion of normalization of US-China diplomatic
relations and thus such a defect in the defense of Taiwan did not
matter for the time being. But the question arose when the Taiwan
Strait war occurred in 1995-1996 whether it was necessary to revise

the legal basis for Japanese support for the US military in the
defense of Taiwan. In the “Guidelines for Japan-US Defense
Cooperation” in 1997 and the law of situation in areas surrounding
Japan in 1999, a contingency in areas surrounding Japan is meant to
be one that has a grave impact on the peace and security of Japan. In
legislation on peace and security in 2015, it is clarified that if Japan
perceives a military conflict as a “situation that will have an
important influence on Japan’s peace and security”, it can engage inrear area logistical support for US military forces participating in theconflict, while keeping the concept of the area of “the Far East” in theJapan-US Security Treaty as it is. This is because Japan cannot
support US military action anymore if it is not based on theexecution of the right of collective self-defense but based on the
Taiwan Relations Act, a US domestic law, according to the existing
interpretation of the law.
In addition, in 2015 another concept – “situations of existential
crisis” – was created. This was meant to allow Japan to use limited
execution of the right of collective self-defense to protect the US
military if it was attacked, and if this attack poses threats to thesurvival of Japan and the people’s rights to freedom and happiness(situation of existential crisis). Also, if the US military bases in Japan
were attacked, this would be literally an armed attack on Japan andJapan could counterattack by executing the right of individual selfdefense, interpreting it as “a situation of an armed attack against
Japan”. So, this is how Japan can now provide different ways of
being prepared for a possible Chinese use of force against Taiwan.
Toyoda: How do the differences in the political systems of China andTaiwan affect this war?
Matsuda: Until the 1980s, the difference in the political systems
between the two was simply socialism and capitalism. Taiwan called
its political system the “Three Principles of the People”, but theCommunist Party of China (CPC) in the People’s Republic of China
and the Chinese Nationalist Party (KMT) in the Republic of China(Taiwan) were both building up dictatorial regions. Both parties were
contradicting each other and competing continuously, but there were
two occasions when they agreed to cooperate before 1945, namely
the First United Front and the Second United Front. And in the 1980s,
Japan SPOTLIGHT • March / April 2023

15

Chinese supreme leader President Deng Xiaoping proposed aunification formula of “one country, two systems” to integrate thetwo different political systems, socialism and capitalism, into one
single country after achieving a Third United Front through dialogue
between the two and peaceful unification. However, with the
democratization of Taiwan, the preconditions for this proposal totallycollapsed. In democratized Taiwan, the administration is establishedon the basis of elections: how voters think about a policy isimportant and dialogue between two dictators cannot decideanything. At this moment, most Taiwanese people would not beinterested in unification. Besides, the KMT is not in power now, so
based on these facts a Third United Front would be impossible. It isalso almost impossible for Taiwan to accept the idea of peacefulunification through dialogue.
It was also Deng’s plan to achieve the success of “one country,
two systems” in Hong Kong first to reassure the Taiwanese. But
since Hong Kong was returned to China in 1997, Beijing has failed toachieve success to reassure the Taiwanese people. Social andpolitical confusion in Hong Kong in 2019 and the legislation of the
Law of the People’s Republic of China on Safeguarding National
Security in the Hong Kong Special Administration Region further
pushed Taiwanese people to refuse China’s proposal of “onecountry, two systems”.
“One country, two systems” was a kind of formula of collusion
between the dictators in the 1980s. But with the democratization of
Taiwan and China’s failure to create a model of “one country, twosystems” in Hong Kong, it has become almost impossible to beachieved. In other words, it has been theoretically proved that apeaceful co-existence between dictatorship and democracy,completely different political systems, would be almost impossible.
However, China has not given up the idea of “peaceful unification”
despite this. This is because if it gave up, it would be in trouble as it
would bring back the Taiwan Strait as a potential battlefield anddiscourage Taiwanese companies from investing in mainland China.
So, China would probably become obsessed with menacing Taiwan
with its huge military forces without actual use of force. I think this“coercive peaceful unification” would be its strategy to adopt. With
its nuclear arms preventing the US from intervening, as well as
military forces enabling it to conquer Taiwan, it could coerce Taiwan
16 Japan SPOTLIGHT • March / April 2023

into surrender. It might be possible, without losing a single soldier
and without a single gunshot, to force Taiwan to submit and achieve
unification. I think this type of “peaceful unification” is what China isaiming at now.

Impact of the Ukraine War on China’s
Unification with Taiwan
Toyoda: Prof. Matsuda, I would like to ask you further about the
implications of the Ukraine war for China? Do you think its attempted
unification with Taiwan could be prompted or delayed by the Ukraine
war? What do you think would be the timing of attempted
unification?
Matsuda: China is now very carefully observing the Ukraine war andlearning many lessons. In February 2022 on the occasion of the
Beijing Winter Olympic Games, a China-Russia leaders meeting wasorganized and both leaders emphasized that there should be notaboos about both nations’ cooperation. It is said that Putin gave
notice to Xi of the impending Russian invasions of Ukraine in a
private conversation.
Xi did not try to dissuade Putin. Rather, in telephone talks on the
day following the commencement of the war, Xi expressed his
understanding of the Russian national security environment andconfirmed his approval of the invasion. He did it after having
recognized that not only the Donbass region but also Ukraine’s
capital Kyiv had been attacked by Russia.
In other words, at the beginning of the war, as all in the world
thought, Xi believed Russia would win completely and had neverthought that Ukraine would demonstrate such strong resistance orthat the war would be prolonged for such a long time. Therefore, it istrue that China miscalculated the direction of the war, just like Russia
did. This is why we guess the lesson that China is learning from thewar is a negative one.
China supports Russia, but at the same time does not reveal that itsupports Russia, or seems to try to give an impression to the worldthat it is keeping its distance from Russia. Actually, on the ChinaRussia meetings, while China used unclear expressions about themeetings in press conferences or avoided reference to the language

used in the meetings in its public announcements, Russia
announced a clear statement on the website of the embassy inBeijing that China supported its actions. Having understood that too
close relations with Russia could invite secondary sanctions from the
US and EU, and possibly worsen relations with them, China has now
been trying to keep a measured distance. In the light of such Chinese
reactions, it may have drawn negative lessons from the Ukraine war– the most important one being that military power alone cannot
determine the direction of a conflict so easily and may not work very
well in remedying a situation.
There are many in China today who claim that unification with
Taiwan would be easy. There are even people saying that with theirmilitary strength unification could be achieved within several days oreven several hours. The Ukraine war has reminded such people that
arms alone could not decide anything very easily. Besides, Russian
weapons in the battlefield in Ukraine are not as effective as the
Chinese expected.
A second lesson is that – given that Ukraine is connected to
Russia by land – it would be rather easy to send a massive army into
an enemy’s territory by land. But it would be extremely difficult tosend hundreds of thousands of soldiers across the Taiwan Strait to
Taiwan, because they would have to practice landing operations infull view of the enemy. Land forces are the most vulnerable when
they are using the sea or sky – a direct hit on a ship could cause
thousands of soldiers and their equipment to sink. So, this presents
a bigger challenge.
A third lesson is that powerful economic sanctions were
implemented at the earliest occasion. Both Russia and China musthave thought that economic sanctions against Russia could not be
implemented, as European nations’ dependence on Russian energy
sources is high. What Russia can sell to the rest of the world is only
energy resources and weapons, but China has much closer ties withthe world economy and economic sanctions against China could
damage not only China but also the rest of the world. If such asituation continued for a long time, Chinese opportunities for
economic development would be finished and other nations, such as
those that could not replace Chinese products with other ones,
would be in enormous trouble. However, in the case of assemblyoriented simple manufacturing, there are alternatives to Chinese

goods, so with prolonged economic sanctions we could say that
China would be at a disadvantage. Beijing must have understoodfrom the Ukraine war that economic sanctions against it should not
be underestimated.
Nonetheless, China may also have learned some positive lessons.
For example, one crucial lesson is that deterrence by the threat ofnuclear weapons can work effectively. Russia’s nuclear threat may
well have deterred direct US intervention in Ukraine, so China may
now believe that there would be a high threshold for the use of
military force against a nuclear superpower.
However, from the West’s viewpoint, nuclear deterrence also
works well for the US, Europe, and Russia in their own
interpretations. For example, in the current situation, the Westcannot directly attack Russia for fear of Russia’s retaliation with
nuclear weapons and Russia cannot invade NATO member states, as
it thinks that its own possible use of nuclear weapons would provoke
the West to respond in the same way, which would be disastrous for
Russia.
In this regard, what China is doing is expanding its own nuclear
arsenal. It thinks that an overwhelming nuclear arms expansion
surpassing US nuclear weapons would prevent US intervention, andseems to have drawn a theoretical endorsement for this strategy
from the Ukraine war.
A second positive lesson is that in the case of military action, aquick “blitzkrieg” attack to try to finish the war in a moment with full
utilization of all its military powers from the beginning must berecommended. In other words, gradual development of force must
be avoided. The Russian military initiative was started in the belief
that Ukraine, a big country, could be overwhelmed by use of a smallscale military force in a short period, but because of Ukrainian strong
resistance, Russia could not help but send gradual and continuous
military forces to the battlefield and this has resulted in the decline of
Russian national power. Perhaps a Russian victory in this war is notpossible.
A third positive lesson is the importance of creating a fait accompli
at an early stage. In sum, to control Taiwan at a very early stage itwould be important for China to create a situation in which Taiwan
has already submitted completely and is under Chinese governance,
and in this sense any military support for Taiwan or economic
Japan SPOTLIGHT • March / April 202317

sanctions against China would be senseless. Russia’s merger of the
Crimean Peninsula in 2014 would be a case in point. If such a fait
accompli by China could be made as quickly as possible, it could
avoid the economic sanctions that Russia now faces, since its
economy is the second largest in the world while Russia’s is merely
11th.
China has been observing the impact of economic sanctions on
Russia. Moscow has continued to export its energy resources, but
imports of various electronic components, machine tools and theintroduction of high-technology have all been stopped, and humanresource exchange also. Sending students to the US to gather new
knowledge or learn about technology and then calling them back to
China was a trigger for China’s emergence in the world economy, butwith the intensified “cold war” between the US and China it has
become almost impossible to do this. In Russia, since the war with
Ukraine started, several million people have left the country. Most ofthem were young and bright. In other words, with such effective
economic sanctions against Russia, China may be wary of similar
outcomes. This is an important goal of the economic sanctions
against Russia for the US and Japan.
As a matter of fact, it would be far more difficult to impose
economic sanctions against China than Russia. First of all, needlessto say, China would veto any resolution of condemnation against it in
the UN Security Council, and Russia would at least abstain. So, theUN Security Council could not issue any condemnation resolution
against China. In addition, on the question whether an Emergency
Special Session of the United Nations General Assembly could issue
such a resolution or not, as in the case of Russia, we must takeaccount of the fact that Taiwan is different from the case of Ukraine,
an independent state and member of the UN. Not a few countries
consider Taiwan as a part of China and China’s influence upon the
Global South is far greater than Russia’s. Based on these facts, itwould also be difficult. So, it would be difficult to carry out sanctions
against China in a format justified by international law. The current
economic sanctions against Russia are led by the G7 and most likely
there would be no other way but economic sanctions against China
being likewise organized mainly by the G7.
In this light, what is important is for us to lower our dependency
on China in some extremely crucial areas at the earliest opportunity,
18 Japan SPOTLIGHT • March / April 2023

namely in peaceful times. More importantly, there will be cases
where China imposes sanctions against us and to be resilient against
such sanctions we need to think about the weaknesses in our
economy, including supply chains, from now on. If a Taiwan
emergency happens, we cannot expect to control China’s actions
with economic sanctions in the short term.
As for the timing of China’s attempt to unite with Taiwan bymilitary force, it is certain that it cannot achieve it immediately. Thisis true regardless of the Ukraine war. The reason is, as I mentioned,
that the cost of such a war for China would be too great and it cannot
ignore the risk of exceeding the Taiwan Strait as well as risk of US
military intervention.
On the other hand, in 2023 Xi will turn 70 years old. At the age of
80 or 90, it would be difficult for him to lead a large-scale war due tohis physical condition. But while he is still in his early 70’s before
2027, he will be physically and mentally tough enough, and at a time
when Taiwan, Japan and the US still need to strengthen their defense
forces, some may see an early occasion as a window of opportunity
to try to unite with Taiwan. According to this view, China’s militaryinvasion of Taiwan should be realized sooner rather than later.
In contrast, the view that an invasion would be postponed is basedon the time that Xi has left. As seen in the announced personnel
assignment of his administration at the 20th National Congress of
the CPC in October 2022, Xi will not quit for another five years, but at
minimum he has another 10 years until leaving the post of supremeleader of China. Would he risk all his political assets in his first or
second year, given that he still has another 10 years ahead? There
must be a high possibility that he would wait and see during the next
five years.
Another basis for this view is the speed of China’s nuclear
weapons expansion. According to the US intelligence, China is now
aiming to have 1,000 nuclear warheads in 2030 and 1,500 in 2035,
meaning it will take more than another 10 years to create a nuclear
force for immediate use nearly equal to that of the US. At that point,
China could find it possible to deter US intervention by its own
nuclear force. Over the next few years, however, there would be stilla large gap between the US and Chinese nuclear arsenals.
There is another view that China may try to achieve its aims bytaking advantage of a moment when the US has ceased its

commitments to somewhere in the rest of the world. For example, apolitical movement in favor of isolationism could be born in the US
with people wondering why the US should have to send militaryforces to protect Taiwan when the US is no longer the “world’s
policeman”. Or there may come a time when the US would not want
to intervene in other nations’ military conflicts anymore because ofproblems caused by previous such interventions. China may just
wait for such an occasion, which could bring it a better outcome.
There are also occasions when military invasions would be difficult
to achieve. For example, it would be critical to create a safe andtranquil situation without any challenges such as on the occasion of
the Party Congress of the CPC. This is a political season when all
party and government officials from the top to the working level
would not want to make any small mistakes. Under such politicallysensitive occasions, high-risk military actions would be mostunlikely. In this sense, in 2027 when the 21st Party Congress isplanned, such an action must be unlikely.
In addition, a full invasion of Taiwan by military forces would be
limited by the seasons. There are high waves in the Taiwan Strait inwinter and it would not be good for conducting a landing by militaryforces. Besides, it would take a few months or few weeks to occupy
a large island in general, according to historical precedent. In thisregard, the best time would be the season when there would be no
typhoons for several weeks, which means there is no other goodoccasion but a couple of months between April and October.
If, in such period, the Chinese military carries out a large-scale
military exercise, our allies could raise their alert and be well
prepared for a possible invasion resulting from that military exercise.
As a matter of fact, several months would be needed for a militaryinvasion and it could not be concealed. Therefore, a surprise attack
would be extremely difficult. Thus, it is not certain whether China
could choose the best time for a full invasion. Therefore, there is no
simple answer. The Ukraine war would not necessarily serve as a
judgement on whether a Chinese military invasion should be carriedout soon or be delayed.
Toyoda: A question for Mr. Ito. The economic interdependency
between China and the rest of the world is much greater than thatbetween Russia and the rest of the world. China’s GDP is nearly 10

times as big as Russia’s. With economic sanctions imposed on
China, the sanctioning countries would be seriously affected as well.
How would those countries deal with it? What impact would Japan
have from sanctions against China?
Ito: Economic sanctions on China would have an enormous
economic impact on the world, far bigger than the ones on Russia.
China is an economic superpower with the second-largest GDP.
Though China’s personal consumption is half that of the US, it stillaccounts for more than 10% of the world’s private consumption.
China’s investment has reached a little less than 30% of all global
investment. With such a large-scale economy, sanctions against
China and its own retaliatory measures would seriously affect theworld economy.
Meanwhile, the presence of Chinese tourists in the world tourism
market is significant and as their zero Covid-19 policy has ended, inmany countries there are high expectations for inbound Chinese
tourists. Even before the pandemic, China was already the source ofthe largest number of tourists in the world. But if economic
sanctions against China are imposed, the Chinese government is
expected to tighten the flow of tourists to those nations with which it
has worsened foreign relations.
China’s presence in global supply chains has also been raised. In
terms of the scale of manufacturing GDP, China is the largest andaround 30% of manufacturing GDP in the world is now accounted
for by China. Though its status seems to have started to decline as abase of assembling and exporting labor-intensive products it still
maintains a base of manufacturing we can call the factory of theworld.
The Chinese manufacturing industry has seen higher value-added
and its role as a supplier of intermediary goods and capital goods
has been significantly raised. With the pandemic having stopped the
supply of parts and components from China, we really sensed its big
impact on production, ranging from home electrical appliances toautomobiles. We will see another big impact on production if mutual
economic sanctions are imposed. We also saw during the pandemic
that there was concern about the shortage of medical products due
to limited production of those goods, such as masks and personal
protective equipment (PPE).
Japan SPOTLIGHT • March / April 2023

19

As is seen in the intensified US-China high-tech war, China has
been highly competitive as a supplier of high-tech products. It has
the largest share of production in the world in domains like solar
panels, wind turbines and storage batteries. China is still the largest
supplier of IT products, though the production bases of IT goods are
becoming diversified. China also keeps its influence in the supply ofrare earths. With restricted supplies, various products would be
negatively affected in some strategic goods like permanent magnets.
There are now far more countries with more imports from China
than from the US, so we can say that the status of China in global
supply chains has been particularly raised. I think disruption of
economic relations with China would have an enormous impact on
the world economy. In finance as well, the Chinese presence in theworld is rising. Above all, newly emerging countries have highexpectations of China as a provider of economic aid. Its FDI stock
amount has exceeded Japan’s.
Politically, China is one of the permanent members of the UN
Security Council and it has top officials in a variety of internationalorganizations. These political factors would prevent many countries
from imposing economic sanctions on it. Each nation would have to
make a more difficult decision on imposing economic sanctions on
China than in the case of Russia.
Of course, as China is also engaged in economic activity in theinternational network of global supply chains, it too will suffer criticaldamage from economic sanctions. It is to be noted that the
proportion of exports of goods and services in China’s GDP was
about 19% in 2020 and the percentage of the imports in GDP was
16%, still higher than for Japan or the US.
On the destination of Chinese exports, the US, Japan and the EU
account for around 40%, and they account for around 25% of total
Chinese imports. More specifically, China would be in difficulty witheconomic sanctions covering semiconductor manufacturing
equipment, related chemical goods, and the Electronic Design
Automation (EDA) used for circuit design. China also considers highquality industrial machinery or ultra-precision polishing technology
as a choke point. In terms of sources of technology imported toChina, relations with developed nations are still crucial for China, andif dollar settlements are stopped it would inevitably have a grave
impact on the Chinese economy.
20 Japan SPOTLIGHT • March / April 2023

The impact of economic sanctions against China could besignificantly changed depending on what kind of sanctions are
imposed in response to what situation and what kind of retaliation
China would make. Anyway, the impact on Japan would not be small.
China is the largest trading partner for Japanese exports and thepercentage of the value-added induced by Chinese final domestic
demand to Japanese GDP has reached 3.1%. The percentage has
been increasing year after year.
Japan’s staple export items to China are computer memories, autoparts, automobiles represented by hybrid cars, and semiconductor
manufacturing equipment. The percentage of Japan’s GDP fromimports from China was 3.7% in 2021, the highest so far. The staple
import items from China include note PCs and mobile phones, withthe share of these imports exceeding 80%. Meanwhile, the share ofexports to Japan from China to total Chinese exports of those
products is now less than 10%. In the case of Japan, the number of
items with the percentage of imports from China to total Japanese
imports exceeding 50% is larger than the ones in the case of Europe
and the US. And China’s export dependency rate on exports to Japan
has fallen to around 1%. Under such circumstances, China could
take export restriction measures against Japan more easily.
This is how Japan-China mutual dependency in trade isasymmetrical and Japan’s vulnerability has been rising. Under suchcircumstances, with retaliatory measures against sanctions taken
into account, there would be a risk of serious stagflation. For
example, one calculation shows that production equivalent to around
10% of Japan’s GDP would be gone, if 80% of Japan’s imports from
China are suspended for two months. We cannot exclude thepossibility of Japan being significantly affected.

How Should Japan Cope?
Toyoda: Mr. Morimoto, do you think the US would seriously protect
Taiwan in the event of China’s attempt at military unification? In
general, it is said that people in the US are reluctant to send soldiers
to Taiwan. What do you think the US can do more specifically?
Morimoto: I believe that Ukraine war will continue longer than we
imagine. I do not agree with a few experts saying that around the end

of 2023 the war will be ended. Both nations’ claims are so different
and they are reluctant to make concessions. Also their support bases
are working well, so I guess they will continue to fight until they are
truly exhausted. Their supporters would be also exhausted. Within
two or three years from now, the US and Europe will be truly
exhausted politically, economically and on national security issues.
They would still probably support another victim of a new war, like
Taiwan, or hope the war will end somehow.
As is known, there will be important elections in 2024, such as apresidential election in Taiwan in January, a Congressional electionin India in February, a Russian presidential election in March, aUkrainian presidential election in May and the US presidential
election in November. In those elections, how to deal with the
Ukraine war will be an important issue. At this moment it is difficult
to foresee the future, but I would like to say a couple of things.
First, it would not be bad for China if the US and Europe become
exhausted as the Ukraine war continues. If the war comes to an end
quickly, the US and other Western countries could have extra energy
to look to China, which would not be good for China.
Second, whatever may happen in the Ukraine war, I think China
will choose its own way. It cannot ignore the Ukraine war and willdraw some lessons from it, but I believe China will work on
unification with Taiwan using its own kind of logic. I do not think it
will be relevant to think about the issues of Ukraine and Taiwan as
being connected.
Based on these two assumptions, I would like first to talk about
how the US would react to a Taiwan war. President Joe Biden has
clearly mentioned four times so far in responding to media questions
that the US would come to the support of Taiwan in the event ofChinese military action to pursue unification. But you would bewrong if you believe that this policy will remain unchanged in future
US administrations. The US overhauls policies by administration
every four years and adopts new strategies. Biden would observe
what he has said in his presidency to a certain extent at least, but weneed to think about the future direction of US policy, bearing in mind
whether future administrations would observe it or not.
It has been the principal thought driving US politics so far that itshould prioritize US national interests most, while maintaining therole of leadership in the international community without being

closely engaged in other countries’ issues. I think this principle will
not change hereafter as well. But I also think the US would notintervene in the Taiwan issue if China attempts to unite with Taiwan
by means other than military force, such as dialogue, negotiations or
persuasion not considered as military intervention underinternational law.
If political confusion arises in Taiwan as a result of the group ofpeople whom they call the “faction of independence” and China tries
to achieve unification by military force by taking advantage of it, it
would be difficult politically as well as in the light of international law
for the US to stop Chinese military intervention, since unification
efforts would be the result of this Taiwanese group’s own initiative.
As is known, there is a procedure to be taken defined by the War
Powers Act that in the case of the US president’s sending the US
military overseas, it is to be reported to Congress within 48 hours
after the issue of the order and their approval is to be confirmed
within 60 days. If it is not approved by Congress, the US president
must legally order the military to retreat.
The US, in trying to prevent China’s unification with Taiwan bymilitary force, may deploy its air force, Marines, and nuclear
submarines in the Taiwan Strait area and restrain the Chinese
military forces and stop them landing on Taiwan. But China,
expecting this, might pull all its forces together to secure commandof the sea and the air in the Taiwan Strait and strong blockagearound the whole area surrounding Taiwan and Japan.
It may be possible for the US to restrict partly China’s actions but
it would be extremely difficult for it to stop a landing campaign by
military efforts. What the US can do is to provide Taiwan withweapon systems to prevent Chinese military forces from landing,such as anti-ship missiles or anti-aircraft missiles.
Unlike the case of Ukraine, there are not so many countries
supporting Taiwan. In the light of the current North Korea situation,
South Korea can move very little. ASEAN countries only havesufficient weaponry for their own defense, and in their thinking about
their future relations with China it would be difficult to imagine thatthey would cooperate with the US to stop a Chinese landing
campaign in the Taiwan Strait.
The US and Europe may come to support Taiwan, but they would
have to go through the seas and China would almost prevent sea
Japan SPOTLIGHT • March / April 2023

21

lanes communication such as in the South China Sea and around thePenghu Islands and make it difficult for them to aid Taiwan. It would
be only Japan and Australia that could support Taiwan. Even if
Canada or Europe try to intervene, they would not come to Taiwan
directly but come via Japan. In this case, Japan would play a role likethat of Poland in the Ukraine War.
Taking these things into consideration, my Taiwan scenario is asfollows. It is expected that China would try to unite with Taiwan
without resorting to weapons, but it is not assured. Taiwanesepeople firmly believe that Taiwan and China are different nations now
and they do not think they are a part of China. In December 2022 on
the occasion of Japan-Taiwan policy consultations, the Taiwaneseside strongly said that Taiwan is different from China and they havenever thought about its being a part of China as was stated by
Chinese. I do not think that such convincing Taiwanese would accept
a scenario of unification with China even if they were threatened by
China.
On the other hand, China, considering unification with Taiwan as
the Chinese Communist Party’s historical mission, will pursue it
without fail. Trying to prevent China’s unification with Taiwan isextremely important in terms of foreign policy, military strategy, andeconomic policy. But there is no guarantee of success. We must
think about how to deal with this war assuming that Taiwan would
not be a region Japan favors in the future. In this case, the region
southwest of Japan would be set as a frontline against China, and apossible military strategy would be for some US military forces toleave there and instead set the US defense line on Hawaii and Guam,
maintaining an Indo-Pacific alliance to secure the national interestsof all Indo-Pacific nations.
As a matter of fact, the US Air Force let all its F-15 fighters returnto the mother country and it keeps F-22s and F-35s on rotation duty
in Okinawa, but it does not think about keeping them there
permanently. On the other hand, the largest military power
threatening China’s command of the seas and the air in the Taiwan
Strait is the US Air Force in Okinawa, and then it would be likely for
China to try to destroy it before a war begins in earnest. I suggestthat the Japanese Defense Ministry creates a facility at Kadena Air
Base to contain all the fighters in it and at the same time build up
alternative facilities and airports to be used by the US Air Force for
22 Japan SPOTLIGHT • March / April 2023

their activities on the west side of Japan.
Meanwhile, as the frontline of the US itself is Guam, it will be able
to set up an integrated air and missile system to try to protect themainland of the US from Guam, and Japan will be clearly seen as
only an advance deployment base in the Indo-Pacific region for the
US. Bearing this in mind, we will have to work on preparations forsuch a war.
The key points for China in determining the timing of an attempted
unification by force are firstly how much the US would be ready toprevent it and how China can assess this readiness. Secondly, what
would be the military balance at that time? Thirdly, how much would
other nations, in particular those in Europe, Canada and Australia beready to support Taiwan along with the US. And finally, what would
happen in Taiwanese domestic politics with such actions is anotherkey question.
Bearing these points in mind, how can China create a power
vacuum that excludes the US as a leader? For example, withcooperation from Russia or North Korea, it could provoke confusion
in northern Japan so that the US and Japanese defense forces would
have to deal with it and at the same time threaten the Senkaku
Islands so that US and Japanese defense forces are obliged toprotect them. In such a situation, if the US aircraft carrier task force
happens to be in the Middle East, this would create a power vacuum
that China could take advantage of to make a surprise attack on
Taiwan having already prepared for the campaign.
Anyway, the challenge for Japan would be in terms of defense of
the southwest region if China achieves unification with Taiwan andhas occupied the island. It would be extremely important for the US
to deter the Chinese military by keeping a forward deployment
strategy.
In this regard, even though it appears that what Japan can do has
been mostly covered by the security bills of 2015, this is not the casein reality. There are still many things Japan can do if its very
existence is under threat. Japan’s limited execution of the right ofcollective self-defense was presented to the Diet, but what can bedone by Japan under the threat to national existence covers a wide
range, and security bills do not touch upon them explicitly.
Security bills would clearly change role sharing between the US
and Japan: namely, Japan would concentrate its efforts on defense

campaigns, unable to use counterattack forces and leaving all theoffensive campaigns to the US. Any time when both the US andJapan feel it necessary, I think they will have to work on revising the
Guidelines for Japan-US Defense Cooperation.
On economic sanctions, having seen the sanctions against Russia
discussed for a long time in the US and Europe, I guess China would
think about creating a situation in which all the issues are settled
before discussions by the Western allies on possible economic
sanctions are concluded – so that with a short-term decisive war it
would seem pointless to impose any sanctions because “everythingis over” already.
I conclude that the Chinese Communist Party will not change its
resolution to achieve unification with Taiwan as an historical mission
whatever the outcome of Ukraine war may be. We must be well
prepared for this crucial moment and think about our national
security.
Toyoda: Prof. Matsuda, could you explain what can be done to avoid
a Taiwan war? And Mr. Ito, could you tell us how we can minimize
the economic damage from the war?
Matsuda: I think there are many things to be done by Japan. First,
the Japanese Self-Defense Forces have been accommodating selfdefense powers without assuming a large-scale attack from the
major powers, and thus Japan is extremely vulnerable to substantial
attacks like ballistic missiles. It is most important to strengthen its
self-defense capacity fundamentally and this can be done on ourown.
If Taiwan is attacked by China, the US military is assumed to be
activated in general and Japan is expected to support the US. It isalso necessary to be ready to make a counterattack if the US or
Japan is being attacked, but if Japan is attacked in earnest, with thecurrent military capacity of Japan, its air and naval forces could becompletely destroyed in the initial stages of the attack. In otherwords, the current situation of the Self-Defense Forces gives China
an incentive to launch a devastating initial attack which would enable
it to cause continuous damage. Japan needs to change this situation.
For example, Japan needs to contain its vulnerability by building
up air force bases underground or increasing bunkers and shelters.

If ammunition runs short in three days or a week of fighting, as in
the current situation, and Japanese forces cannot continue to fight,
however good its defense facilities may be will be almost
meaningless. So, Japan would need to make it possible for its forces
to continue a war for at least several weeks, at maximum several
months, without provision of ammunition from its allies. It will be,
above all, important for Japan to strengthen the Self-Defense Forces
and acquire a counterattack capacity in order to avoid giving China
the belief that it could have enough time to attack Taiwan with an
initial devastating attack on Japan and the US military.
Next, on the issue of strengthening the US-Japan alliance, first, it
is extremely important to ensure the US commitment. If the US
decides not to join in the war against China, this war will end with aChinese victory. Unless Japan continuously reminds the US of theimportance of Taiwan for Japan and the US, the US could be moreseduced by the concept of “America First” and the US-Japan alliancewould be politically destroyed all at once.
In addition, Japan needs to supplement the US military capacity as
its original mission. For example, Japan should have its own
intermediate-range ballistic missiles not owned by the US. But I
guess that cannot be done immediately. In the three government
documents on national security made public at the end of 2022,
high-speed missiles or hypersonic missiles are mentioned. If Japan
can own such weapons, this would mean that Japan cancomplement the US military capacity with weapons that the US does
not own at this moment.
Lastly, it is important how much Japan can attract the US allies tothis region. Australia is in this region, and Japan must have closer
relations with it hereafter. On the United Kingdom and France as well,their aircraft carriers stayed in this region for months in 2021, whichshowed us their big presence. German warships also came to Japanafter 19 years’ absence. It is necessary to get support from Germany
and from NATO. Germany is Japan’s important ally as well.
Japan would need the commitments of the UK, France andGermany to this region and their stance maintained of not approving
any change to the current status in the Taiwan Strait. With theirmilitary presence, China would have to attack all these US allies in theevent of attacking Taiwan. With this, the war could literally become aThird World War and we can expect China to refrain from it.
Japan SPOTLIGHT • March / April 2023

23

Besides these points, space is another key. In a NATO leaders
meeting in 2021, it was concluded that assets in space being
attacked would be covered by the execution of the right of collective
self-defense. Thus, if China attacks US space satellites in order toattack Taiwan, this could provide an authentic reason for NATO to
execute its right of collective self-defense to defend the US. In the
US-Japan leaders meeting in January 2023, they agreed upon assets
of defense in space. A big motivation for this agreement was toprevent China from attacking those assets. Maintaining the US
military’s advantage in the space domain is extremely important andsupporting this is also important. For example, whether European
satellites can be used to replace US satellites being attacked is
crucial. So, it will be vital to supplement the function of the US
alliance network worldwide and strengthen it to deter any Chinese
military attack on Taiwan.
Ito: I think it is important to maintain and strengthen Japan’s
strategic indispensability. We must protect intellectual property
rights, expand R&D investment and allocate more resources forhuman resource development. It is to be assumed that products
considered strategically important are used well in the Chinese
market to take advantage of such indispensability.
On the other hand, as the importance of the Chinese economy to
the Japanese economy increases, we cannot ignore earnings frombusiness with China as sources for increasing the indispensability ofsuch goods.
From these two points, in order to strengthen strategic
indispensability, it is necessary for us to explore stable Japan-China
relations. In this regard, I believe we need to keep collaborating with
China on common issues such as climate change, aging and disasterprevention and mitigation.
We also need to secure our strategic autonomy. Japanese private
businesses have already started a wide range of strategies ranging
from diversification of procurement of components and raisinginventory levels to changing local production for local consumptiontype supply chains. They are now increasingly conscious of market
diversification.
However, private business involvement alone will not promote thenecessary changes very smoothly. Providing hard and soft
24 Japan SPOTLIGHT • March / April 2023

infrastructure for the regions or countries under consideration fordiversification of production bases or markets and supporting theircapacity building are needed. It is also important to reduce tradebarriers through the conclusion of FTAs and I believe we should
redouble our efforts in this regard.
Industrial policy to secure specific important materials andtechnologies is also important, but more than that we need toharmonize our efforts with our allies and partners. We should pay
attention to consistency with international trade rules and prevent
proliferation of “my country first” policies. Through this, we should
ask China to exercise discipline in its industrial policy and trade
policy.
In other words, maintaining and building up a businessenvironment to achieve fair competition will be crucial for raising theresilience of supply chains. In this light, as China’s Central Economic
Work Conference advocates for China’s joining the CPTPP, it will be
important for us to keep asking them for rules-based actions
consistent with the WTO, RCEP and CPTPP.
Finally, continuous strengthening of economic, financial and fiscal
foundations is recommended in Japan’s recently published public
document “National Security Strategy” and I think above all it is vitalto clarify the route to fiscal reform for its reconstruction. Market
pressures on fiscal disciplines are increasing, and we must face thisissue squarely and build a solid national consensus.
Toyoda: Thank you all so much for your invaluable thoughts andcomments.

Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Corporation.

March/April 2023

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