Annual Review 2018

Exploring the Risks,
Challenges & Opportunitiesof the Future

Editorial Committee Members(Listed in alphabetical order by surname, as of April 2019)

Mohan Gopal

Keiichiro Kobayashi

Mohan Gopal is an Indian national who has been living in Japan for
28 years. He has held several positions including CTO of Camel
International Group, strategist at Hewlett-Packard Enterprise andProduct Marketing lead at Sybase. He is an IT industry professionaland has been a business communications coach and university
visiting faculty for many years. He has been a volunteer for overtwo decades with the Art of Living Foundation, an international
NGO promoting yoga and peaceful thinking. He actively presents
his views on business, culture and technology in Japan.

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.

Representative Director, Art of Living Japan

Nobuo Iizuka

Professor of Department of Economics, Kanagawa University &Adviser of Policy Data Lab at the Tokyo Foundation for Policy
Research
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 Iizuka 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 business
data.

Ken Karube

Executive Writer, Jiji Press
Ken Karube is executive writer for Tokyo-based wire service Jiji
Press, which he joined in 1979 after graduating from Waseda
University. He was a correspondent in Washington from 1992 to
1996, before becoming deputy editor of the economic news sectionin Tokyo. From 2004 to 2009, he was in the United States as chiefof the Washington and New York Bureaus. Before taking his current
post, he was deputy managing editor at the Tokyo head office(2010–2013). Among his books are Failure of Economic Policy
Management (1999) and Money Politics in the United States(2009).

Sota Kato

Professor of International University of Japan & Executive Directorof the Tokyo Foundation for Policy Research
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.

Long Ke

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

Copyright ©1982-2019 Japan Economic Foundation. All rights reserved.

Research Director of the Tokyo Foundation for Policy Research &Professor of Department of Economics, Keio University

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

President, India Japan Partnership Group/Fund (IJPG)
Sanjeev Sinha is president of IJPG and a keen promoter ofinvestments between India and Japan. He previously worked withGoldman Sachs, Mizuho Securities and as chief representative of
Tata Asset Management in Japan. He has lived in Japan since 1996
and is the author of four books - Sugoi Indo (Amazing India), Indoto Nihon ha Saikyou Combi (India-Japan: The Most Powerful
Combination), Sugoi Indo Business, and Indian Ways of Karma andJugaad - all published in Japanese.

Mukesh Williams

Professor, Soka University & Visiting Faculty, Keio University
Mukesh Williams is a university educator, media writer and poet. He
has taught literature, media and cultural history at St. Stephen’sCollege, Soka University and Keio University. He co-authored thebook Representing India, which provides a commentary on politics,
literature, media and the Indian diaspora over the past two centuries.
He has conducted seminars on global cultures and counseled
Japanese universities on academic exchange and PR strategies. Hisfavorite authors are Haruki Murakami and Saul Bellow.

Nariyasu Yamasawa

Professor of the Faculty of Management at Atomi University
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.

Jillian Yorke

Interpreter & Translator
Co-author of several books, Jillian Yorke worked for the Public
Relations Office, Minister’s Secretariat of the Ministry of Economy,
Trade and Industry 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.

Materials may not be reproduced without written permission.

Table of Contents
Japan SPOTLIGHT Annual Review 2018

4

Introduction

What Are Anxious Individuals in Japan Thinking About How to Live a Proactive Life in an Age ofGrowing Uncertainty?

6

Roundtable on the Future of Japan with 3 Young METI Officials

New Technologies Affecting Economic Society (Space & Digital Technology)

12
15
19
24

The US-Japan Space Alliance – the Most Critical Bilateral Relationship for Peace & Prosperity
The Digital Economy & Privacy Protection: the Challenges Ahead
Digital Capitalism & Japan
A VUCA World in Digital SocietyInternational Relations in Turbulence

29
33
39
45
49

Struggle for Global Hegemony – Real Implications of the China-US Trade War
Roundtable Discussion on the Chinese Economy – Opportunities & Challenges
US-China Rivalry: Implications for East Asia
Indo-Pacific Cooperation from Indian Perspectives
Jing Forum – a Venture for Youth Exchanges Between China & Japan

Changing Global Geopolitics

55
57
61
66

Overview on Understanding the Structure of Geopolitical Risks
The European Battleground: Geopolitics & the New Nationalism
Kim Jong Un’s North Korea – What Has Changed?
North Korea: Myths & Reality

Future Design for the Future Generation

70
73

Future Design Research: the Issues
Future Design Applied in the Town of Yahaba in Iwate Prefecture
Published in April 2019

The opinions expressed in the articles published in Japan SPOTLIGHT are those of the authors and do not necessarily reflect the views of the Japan Economic Foundation.

Introduction
As artificial intelligence (AI) develops, it is said that unemployment willrise since AI would replace many human jobs. But if human beings are
more intelligent, they can get more sophisticated jobs and leave theless sophisticated ones to AI. Thus, in our future, education andlifelong self-learning will be crucial for us to maintain job opportunities.
Knowledge will be a weapon with which to protect ourselves from thesevere competition from AI. This is also the core message of JapanSPOTLIGHT Annual Review 2018. It will hopefully be useful for readers
to know what kinds of risks, challenges and opportunities await us in
the future and how to be well prepared for them. Our key message isthe need to learn about the future by oneself in order to survive it.

■ Interview with Dr. Saadia M. Pekkanen, Job and Gertrud

What Are Anxious Individuals in Japan Thinking
About How to Live a Proactive Life in an Age ofGrowing Uncertainty?

■ Interview with Dr. Tsuyoshi Abe, Senior Vice President &Tamaki Professor at the Henry M. Jackson School ofInternational Studies and Adjunct Professor at the
School of Law, University of Washington

The US-Japan Space Alliance – the Most Critical Bilateral
Relationship for Peace & Prosperity
By Japan SPOTLIGHT (July/Aug. 2018, Cover Story 1)■ The Digital Economy & Privacy Protection: the Challenges Ahead
By Marc Rotenberg (Nov./Dec. 2018, Cover Story 1)■ Digital Capitalism & Japan
By Takeshi Mori (Nov./Dec. 2018, Cover Story 6)

General Manager of the Marketing Headquarters,
Yokogawa Electric Corporation

A VUCA World in Digital Society
By Japan SPOTLIGHT (Nov./Dec. 2018, Cover Story 8)

Anxious individuals surrounded by uncertainty are now standing on thethreshold of the future. What are they anxious about? How can they live
a proactive life in an uncharted era? We started Japan SPOTLIGHT
2018 by responding to those fundamental questions in our May/June
2018 issue, highlighting a METI young officials’ report titled “Anxious
Individuals & Governments at a Standstill” that had attracted a greatamount of attention on the Internet.

International Relations in TurbulenceInternational relations today also expose us to an uncertain future wherea so-called G-zero world is spreading. Two superpowers are confronting
each other: one, the United States, now seemingly less interested inleading global governance and more keen on protecting its national
interests only under an “America First” policy, and the other, China,
seemingly eager to take on a leading role in global governance but not yet
knowing very well how to do so. In this struggle for global hegemony – inparticular, in the high-technology security domain – the world is now
becoming more chaotic as rules-based governance diminishes. The two
superpowers’ struggle for global hegemony was well described in ourinterview article in the November/December 2018 issue. How to restore
global governance will be a crucial question in making our future moreproactive. We assigned some space to discussing the future of China, ourimportant neighbor. In particular, the METI White Paper on International
Economy & Trade 2018 highlighted the opportunities and challenges of
the Chinese economy, which was further examined by our roundtablediscussion among economists in our September/October 2018 issue.
Stable regional relations would contribute to stable global governance,
and in this belief we examined how we could explore future relations inEast Asia. How can East Asia mitigate the negative shock of the US-China“techno Cold War” and keep its momentum toward prosperity andcontinue to play a key role as a locomotive for global growth? We
highlighted these questions in our January/February 2019 issue.

■ Roundtable on the Future of Japan with 3 Young METI Officials
By Japan SPOTLIGHT (May/June 2018, Cover Story 1)

New Technologies Affecting Economic Society(Space & Digital Technology)
One aspect of the future is that technology and innovation will lead us
to a new economic society where we can enjoy opportunities brought
about by these new technologies but where we will also face risks andchallenges stemming from them. For survival in such a society, we willneed to learn about technologies, regardless of what we studied in highschools or universities, since knowledge of technologies will help ingetting well-paid jobs or maintaining security from the risks of newtechnology. We chose space technology and digital technology as theissues for our cover stories of the July/August 2018 issue andNovember/December 2018 issue, respectively. We believe that thosetechnologies will have the largest impact upon our daily life and our
future will be utterly changed depending on how we can maximize theopportunities and mitigate the risks and challenges they will bring.

4■ Interview with Dr. Junhua Wu, Research Director & Chief■ Kim Jong Un’s North Korea – What Has Changed?
By Yong Sueng Dong (March/April 2019, Perspectives on Global
Risks: The 2nd JEF Global Risk Symposium 3)

Senior Economist of the Japan Research Institute

Struggle for Global Hegemony – Real Implications of the
China-US Trade War
By Japan SPOTLIGHT (Nov./Dec. 2018, Special Interview)■ North Korea: Myths & Reality
By James E. Hoare (March/April 2019, Perspectives on Global
Risks: The 2nd JEF Global Risk Symposium 4)■ Roundtable by Long Ke, Muneo Kurauchi, Prof. Kazuyuki

Motohashi & Prof. Mariko Watanabe

Roundtable Discussion on the Chinese Economy – Opportunities& Challenges
By Japan SPOTLIGHT (Sept./Oct. 2018, Cover Story 2)

Future Design for the Future Generation
Why is it that we are so anxious about the future? For whom would we
be worrying or searching for solutions? It may be true in most casesthat it is for our own interest. However, depending on the issue,
concerns about the future may not be related to us, the present
generation, but to the future generation. How to deal with global
climate change or how to be well prepared for an aging society – thesequestions go beyond the current generation’s lifespan and continue forfurther generations. The future generation’s interests are often ignoredin policy discussions by the current generation, and so achieving
sustainability of inclusive growth in responding to the needs of elderly
poor people in the future or the global environment would be difficult.
Future Design, highlighted in our March/April 2019 issue, supported
and promoted by promising Japanese experts on a wide range of
specialties, tries to tell how the future could be sustainable for the
future generation as well.

■ Interview with Dr. Vinod K. Aggarwal, Travers Family

Senior Faculty Fellow and Professor of Political Science &Director of the Berkeley APEC Study Center (BASC) at
the University of California, Berkeley

US-China Rivalry: Implications for East Asia
By Japan SPOTLIGHT (Jan./Feb. 2019, Cover Story 1)■ Indo-Pacific Cooperation from Indian Perspectives
By Sachin Chaturvedi & Priyadarshi Dash (Jan./Feb. 2019, Cover Story 2)■ Interview with Yixuan Zhang & Shu Kittaka, Presidentsof Jing Forum 2018

Jing Forum – a Venture for Youth Exchanges Between China &Japan
By Japan SPOTLIGHT (Jan./Feb. 2019, Cover Story 7)■ Future Design Research: the Issues
By Keiichiro Kobayashi (March/April 2019, Cover Story 2)

Changing Global Geopolitics
Surveying and examining geopolitical risks globally is one of ourimportant tasks in anticipating the future. The Japan Economic
Foundation (JEF) conducted a second round of global risk symposiums
in September 2018, following the first one in 2017. You can see asummary of the symposiums and the principal contributions from thepanelists in our March/April 2019 issue.

■ Future Design Applied in the Town of Yahaba in Iwate Prefecture
By Ritsuji Yoshioka (March/April 2019, Cover Story 3)

Finally, I would like to repeat that lifelong self-learning will be anecessity for survival in the future, since only knowledge will help
people in anticipating what lies ahead. This is similar to the proposition
that regular physical exercise is vital for people over 60 in order forthem to maintain good health.

■ Overview on Understanding the Structure of Geopolitical Risks
By Naoyuki Haraoka (March/April 2019, Perspectives on Global
Risks: The 2nd JEF Global Risk Symposium 1)■ The European Battleground: Geopolitics & the New Nationalism
By Sir Graham Fry (March/April 2019, Perspectives on Global
Risks: The 2nd JEF Global Risk Symposium 2)

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

5

What Are Anxious Individuals in Japan Thinking About How to Live a Proactive Life in an Age ofGrowing Uncertainty?
COVER STORY • Anxious Individuals & Governments at a Standstill — METI Envisages How to Live a Proactive Life in an Uncharted Era • 1

Roundtable on the Future ofJapan with 3 Young METI
Officials

By Japan SPOTLIGHT
The Ministry of Economy, Trade and Industry (METI), formerly known as the Ministry of International
Trade and Industry (MITI), has been playing a pivotal role in strengthening the foundations of Japan’s
economic progress during the postwar era through its unique capacity to formulate creative policy
proposals. Given the transitions in the Japanese economy as well as the unprecedentedly large changes
in the global economy, as seen in continuing low growth, geopolitical changes in international politics,
and the ongoing Fourth Industrial Revolution, what do young METI officials responsible for the future of
the Japanese economy and industries think about these challenges?
Young METI officials published an interesting and stimulating report on the future challenges forJapanese society in May 2017. The report was titled “Anxious Individuals & Governments at a Standstill”,
and was drafted after spontaneous discussions between then METI Vice Minister Ikuro Sugawara andseveral young officials. Thus the project is called the “Vice Minister and Young Officials Collaboration
Project”.
It is rather unusual in a Japanese government office with a hierarchical structure for young officials
such as deputy heads or chief staff of a division to have spontaneous free discussions on any policy
issue with a vice minister. This unique attempt has drawn much media attention and their report has been
looked at by a large number of Japanese on the Internet since its publication. We are thus very happy tointroduce the report by way of a roundtable discussion among three young METI officials involved in thisproject. The subtitle of the report is “How to Live a Proactive Life in an Uncharted Era” and their
discussions not only covered the challenging issues we are facing but also possible solutions.
(Roundtable on March 16, 2018)
Participants

Erina Enomoto

Keigo Hidaka

Introductions

Takanori Itous, and have worked for METI for 12 years. Since joining METI in
2006, I have been working on specific policy tool making, such as
for establishing laws or taxes, and I started feeling that I was only
working in a narrow area and wanted to get out of specific domains
and view METI’s policies overall in the light of the whole industrial
society from a wider perspective. This project consisted of twostages, the first for only nominated members and the second formembers selected by a public application process. I am a member of

JS: Could you please briefly introduce yourself andexplain how you got involved in this project?
Hidaka: I am Keigo Hidaka, deputy director of the Service Affairs
Policy Division/Education Industry Office of the Commerce andService Industry Policy Group. I am 37 years old, the oldest among

https://www.jef.or.jp/journal/

4 Japan SPOTLIGHT • May / June 2018

6

COVER STORY 1

the second stage. I was also motivated by working with former Vice
Minister Sugawara whom I respected very much having worked
under his leadership on behalf of the director general of theIndustrial Science and Technology Policy and Environment Bureau
during the Great East Japan Earthquake disaster in 2011. The projectin the first stage also published a report titled “Questions from the
21st Century to Japan” in 2015.
I am now very happy to be involved in the project, since my current
official job in the education service industry is closely related to theproject and I am also convinced that my views will be expanded byworking with younger colleagues in METI with diverse opinions.

project. While working in this secretarial job, I got a chance toparticipate actively in the discussions and also contributed to someextent to drafting the report.
Enomoto: I am Erina Enomoto, assistant director of the Investment
Facilitation Division at the Trade and Economic Cooperation Bureau.
I joined METI in 2008, right after graduating from senior highschool. I was not involved in the discussions or report drafting forthis project, but after its publication in 2017 I became interested in
the report and decided to join the group as a new member when
I participated in a Brown Bag Lunch seminar for METI officials on the
published report and had a chance to talk with some project
members.

Ito: I am Takanori Ito, assistant director of the Technical Regulations,Standard and Conformity Assessment Policy Division. I am now in
my fourth year since joining METI. Like Mr. Hidaka, I was interested
in gaining a wider perspective on METI’s policies and our economic
society having worked for METI for a couple of years. I was notselected by public application but assigned to the secretariat of theEnhancing Individualism in Japanese Society
JS: The report describes changes concerning thefuture of Japan that should be debated (Chart 1). In

CHART 1

Global megatrends & scope of current debate
International politics

Economy‐ Rise of emerging countries‐ Nationalism in major countries‐ Geopolitical changes in the Asia-Pacific region‐ Collapse of nations and refugees‐ Prolonged low growth rates‐ Slowdown of growth in emerging countries‐ Monopoly of information by global companies‐ Concerns over sustainability (food, energy, etc.)

Races, cultures and religions

Technology‐ Rise of fundamentalism‐ Conflict between conservative and liberal values‐ Fourth Industrial Revolution, singularity‐ Progress in biotechnology‐ Monopoly over new cutting-edge technologies‐ Growing importance of cybersecurity

Society‐ Change in and diversification of individual values‐ A low birthrate and change in demographics‐ Widening and perpetuation of inequality‐ Information society
Source: Vice Minister and Young Officials Collaboration Project, Ministry of Economy, Trade and Industry (METI)

Japan SPOTLIGHT • May / June 2018

7

5

COVER STORY 1

particular, it is noteworthy that Japanese society isundergoing a significant change in individual values
and those values are diversified. In short, Japaneseyouth are increasingly pursuing their own options inlife. As the majority are non-permanent employees
and most Japanese organizations, unlike in the past,
are today not run on a lifetime employment andseniority-based salary or promotion system, young
employees do not share a sense of loyalty to theirorganization with their predecessors. Family ties also
seem to be much looser than in older, more
traditional Japanese families. While young Japanese
used to be governed by authoritative bodies like acompany or a family, they are today free from thoseauthorities and have a wide range of choices on jobs,
marriage and the other crucial decisions in life.
So Japanese society is moving from beingorganization-centered to individual-centered. Youngpeople are free but they will increasingly need to takerisks on their own and thus will feel anxious about
their unpredictable future. Could you give us yourcomments on this observation in the report which I
think is an essential part of it?

Reforms to Achieve “Orderly Freedom”
JS: What kind of institutional reforms do you think arenecessary to achieve “orderly freedom”?

Hidaka: The report mentions three things as necessary reforms.
Firstly, we would need to create a social environment in Japan where
elderly people even beyond retirement age can continue to work andcontribute to society instead of being taken care of by others.
Secondly, we should invest more in education. And finally, the many
challenges we face would need to be resolved not only by thegovernment but also by individuals endowed with passion andcompetency.

Ito: We note today that a talented individual could earn lots of moneyas in the case of successful entrepreneurs or a genius hacker who
could threaten the international order. We are certainly living in an
individual-centered society rather than an organization-centered oneeven in Japan. But it will indeed make people feel anxious about the
future that an individual can have so many options in going throughlife.
Enomoto: I think this part of the report won great sympathy among
the public in Japan. One of the reasons is that it focused on whatmany Japanese youth had been feeling in their heart.

Enomoto: I think individuals should change their preconceptions
about seniority or the way they work. As we live much longer today
than people of earlier generations, we should have our own life plan
after retirement. I also wish we could have a safety net for failures toencourage young people to start up businesses or any new project.

Hidaka: The report stressed the need to promote institutional reformin Japan in order to meet the change in values among young people.
Social institutions such as providing a safety net for entrepreneurs ora social welfare system ensuring an individual’s security or reformsof working style to support an individual preference for selfrealization are not well established yet in Japan in responding tosuch changes in values. The report strongly advocated for the needfor structural reform in Japan. We should create “orderly freedom” inwhich an individual can take risks in his or her own choices byinstitutional and structural reforms of economic society. This is how,
I believe, we can build up our own life by ourselves without
depending on any authority.

Ito: It seems that our Japanese management and employment
system is no longer successful. But we haven’t found yet a new
system that can mitigate our anxiety over this collapse. The
uniqueness of our project, I believe, is in proposing that the public
think about a solution together with us. This is different from theJapanese bureaucrats’ approach so far, which was always to provide
solutions by themselves. We were happy to see so many readers of
our report agree to collaborate with us in finding solutions, andI would like to continue to encourage such collaboration.

6 Japan SPOTLIGHT • May / June 20188

COVER STORY 1

CHART 2Children from poor families cannot escape the cycle of poverty
Life course after graduating from senior high school byhousehold annual income bracket (FY2005)

Breakdown of employment status
by highest academic degree (2013)

The higher the parents’ annual income is, thehigher the rate of children’s university enrollment.

Around half of people with a junior or senior high-school
diploma work as non-regular employees.

(%)
100

Highest academic
achievement

Others

Non-regular employee rate

Junior high school

Universities

62%

Senior high school

50

43%

Specialized training
colleges/specialized courses

Vocational schools/
junior colleges

36%Technical colleges/
junior colleges

40%

Getting a job
0
0

200

400

600

800

1000

|

|

|

|

|

|

200

399

599

799

999

1199

1200
or
more

Universities

Householdannual income(10,000 yen)

20%

12%

Graduate schools

Overall average: 36%(2012)Per capita annual education expenditure by household income bracket

Average annual income by employment status (2014)(2009; when the child is in ninth grade)

The annual income of non-regular employees isa third of the income of regular employees.

Education expenditures increase in proportion
to the annual household income.

(10,000 yen)

(10,000 yen)

600

80

67

60
40

45

359

300

20

200

170

100

Non-regular
employees

0
5 million

7 million

532

400

33

3 million

478

500

53

9 million

(Yen)

0

Household annual income

Regularemployees

Total

222
148

Men

Women

Source: Prepared by the Ministry of Economy, Trade and Industry from “Employment Status Survey”, “Labor Forces Survey” and “Statistical Survey on Private-Sector Salaries”, Ministry ofInternational Affairs and Communications; “Survey on Attitudes Toward Life”, Japan Institute of Life Insurance; and analysis by the Research Institute for Advancement of Living Standards
and Boston Consulting Group.

JS: Japanese bureaucrats today have been working

Mitigating Poverty

well with NPOs or NGOs in pursuing policy goals.
This is pretty much different from the old style ofgovernance.

JS: Another important issue in this report is poverty.
The poverty of single-mother families, nonpermanent employees or the cycle of poverty (Chart 2)
should be central to mitigating individuals’ anxiety inJapan. But the Japanese government is at a standstill
due to its increasing debt. Instead of increasing
support for poor families, the government is now
trying to reform working styles in favor of workers’
interests. What do you think about these issues
related to increasing poverty in Japan?

Hidaka: Yes. As people’s needs are increasingly diversified, thenational government alone would not be able to respond to eachneed specifically. Therefore, NPOs or social businesses are expected
to fill the gap between these needs and the government’s capacity.
So I believe a good partnership between the government and NPOs
will be key to enhancing our governance capacity.

Japan SPOTLIGHT • May / June 2018

97

COVER STORY 1of their reason for living. Without a fixed retirement age, the elderly
can live a more proactive life.
Enomoto: Japanese society should accept the diversity of individual
values. On the question of the poverty of divorced single motherswith children, I guess there is still a prejudiced view in Japan thatsingle mothers should be responsible for their life after divorce, as
divorce would be their choice. But I guess it will be necessary forsociety to be ready to support their individual choice without any
preconceptions, such as that divorce is the wrong option and socially
unacceptable. Preconceptions about age should be eliminated aswell. Without such a culture denying the diversity of views, I believethat we could live a more proactive life.
JS: There is another preconception concerning job

security in Japan. While most Japanese youth seek
self-realization in their job, Japanese labor practices
among business firms care only about job security.
This is another area where we would need an
institutional reform to meet the needs of the laborside. Employers and employees should conclude ajob contract specifying the types of jobs to be done
and specific requirements on the employers’ side sothat employees will be able to choose a job after
judging whether it would be consistent with their goalof self-realization. If either side finds the concluded
contract is not favorable to either of their interests,
then after negotiation between the two the contract
could be ended. In other words, if employees find thejob not useful for their self-realization, they can quit,
and if employers are not happy with the employees’
performance, they can fire them after consultation.
This is how we could gauge high individual value.

Ito: The question of income inequality in Japan has always been
discussed only in the context of the elderly poor. However, we foundthat single-mother households suffer from poverty mostsignificantly. We also found the cycle of poverty as you mentioned.
That is the most serious issue in the case of poverty in Japan. A
single mother starts working, but in many cases she cannot work
full-time because she has to take care of her kids at home as well. So
she has to choose a non-permanent job, but the salary in this job islower than otherwise. The low income will not enable her to let her
kids continue to study at a university or other advanced educational
institutes. Children ending their academic career at junior or seniorhigh-school will find it difficult to get a well-paid job. This cycle ofpoverty needs to be cut off by some structural reform, like theintroduction of a salary system based on job performance rather
than working time, so that working single mothers can be paid
better.
As for the elderly poor, in the light of the increasing financial
burden to pay for their pensions in line with their longer lifespans,
we should encourage them to work longer, for example, until the ageof 75. Many elderly people in Japan are today very eager to work
longer as their good health is also prolonged. By providing them withsuitable working venues, they would be happy to work and then thebudget for pensions would be reduced and the financial burden on
the young generation would be less.

Hidaka: Yes, that is certainly a desirable direction for institutional
reform to clarify an individual’s responsibility and jurisdiction andthus enhance transparency. I think an institutional reform in general
would meet with resistance from groups with vested interests in theexisting system. For example, in the case of regulatory reform of
dismissal legislation to enhance labor mobility by easing
requirements for dismissal, male permanent employees would
strongly oppose it. As our economy today faces an extremely rapidchange of industrial structure and to respond to such a high-speedtransformation of industries, we would need to have more labormobility, but this holistic optimum is not necessarily corresponding
to a specific group’s optimum. Pursuing specific optimum would notlead to overall optimum; this is a fallacy of composition, according toeconomic theory, and we often find it.

Hidaka: When we ask the elderly at a nursing care facility what theywant to do most, they answer that they would like to work, even forany short time whenever their physical condition is good. This shows
us how important it is for a human being to work and earn money
and thus be convinced that they contribute to others. The current
system of setting a retirement age seems even to deprive the elderly
8 Japan SPOTLIGHT • May / June 201810

COVER STORY 1

Ito: I think it will be important to create a good working environment
for working people. A job contract would be one of the tools toachieve it.

CHART 3

Elderly population rates in Asian
countries(%)
40

Innovation & Education

Experiencing the aging
of society 20 years earlier
than other Asian countries

35

JS: What would be the best education for stimulating
innovation? This is another core question covered by
the report. As we live in the era of the Fourth
Industrial Revolution, education is important not only
for creating innovation but also for turning theworkforce to jobs that cannot be replaced by AI or
IoT. What do you think?

30

Thailand

25
20

Japan

China
South
Korea

15
10
5
0

Hidaka: I think what is most important for future education in Japan
is to raise individuals who can think and act on their own without
simply following their teachers’ instructions. In a Japanese school,
we still keep a tradition of group-oriented activity. All the students
are expected to follow a teacher’s instructions unanimously. They
have been raised to adjust themselves to life in a group and they are
not expected to think and act independently. But without thinking andacting on their own, it would be difficult to initiate innovation. We willneed human resources in the era of innovation who can discoverissues and work on resolving them by themselves. I would assume
those human resources should know exactly what they would like todo and then they could discover the issues to be resolved bythemselves. AI would not be able to do this. AI could replace jobs
that require less intelligence, but human beings could do morecreative jobs such as finding issues to be resolved in business, theeconomy, and the community where they are living. We should
spend the time saved by the efficient work of AI on creative activities.
So I think education should be shifted in the future towards raising
the capacity for independent thinking and acting. In achieving this, it
might be better for a school teacher to take the students outside aclassroom so that they can have contact with the real life of businessor cultural activities, instead of just learning from a textbook in aclassroom. Customized education in accordance with the diversity ofacademic performance would be preferable as well in order to raise
each student’s creativity.

1975

2000

2025

2050

2075

Source: “World Population Prospects, the 2015 Revision”, United Nations. The elderly
population rate refers to the proportion of the population of people aged 65 or older inthe overall population.

like to continue to work on discovering new values. Without changes
born from new values, we will not be able to evolve.
Ito: I think individuals’ attempts to solve social problems areimportant and to increase such attempts we should change theJapanese education system as Mr. Hidaka said. I would like tocontribute to changing it and solve social problems as well withthose who have passion and competency.
Enomoto: We should accept diversity of opinions as well as diversityof people. I also believe that we should be more generous about
failures such as those in start-up businesses.
JS: Japan might be now in a transition period andpeople may suffer from anxiety about the uncertaintyof the future. However, as the report says, individuals
are doing their best in all areas to pursue a proactive
life and mitigate their anxieties.

Hidaka: Finally, Japan is a pioneering country in aging among Asian
nations (Chart 3). We are now working on creating a successfulmodel for an aging society. This is an example of our pursuit of aproactive life. I hope our model can be a good reference point forother Asians in the future.

Final Comments
JS: Could you tell us finally what you would like tostress in this report or continue to explore further
hereafter?
Hidaka: This project was an unprecedented attempt by government
officials and a good experience for me. Encouraged by this, I would

Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • May / June 2018

11

9

New Technologies Affecting Economic Society (Space & Digital Technology)
COVER STORY • The Future of Space as Global Commons • 1

Interview with Dr. Saadia M. Pekkanen, Job and Gertrud Tamaki Professor at the Henry M.
Jackson School of International Studies and Adjunct Professor at the School of Law, University ofWashington

T

he US-Japan Space Alliance — theMost Critical Bilateral Relationshipfor Peace & Prosperity

By Japan SPOTLIGHT
When we talk about national security today, space security is critical to ensuring peace, as the numberof nations participating in space development is increasing and no national territory is defined in space. In
light of the intensified competition among nations and space business firms, how can this important
domain be managed by rules or international cooperation? How will the US-Japan alliance, the mostimportant bilateral relationship in the world in terms of security and economic prosperity, work well toachieve this purpose? The Maureen and Mike Mansfield Foundation, which fosters US-Japan friendshipamong academics, business people and politicians in both countries, organized the US-Japan Space
Forum in 2014. The details of this forum are presented by Ryan Shaffer, the foundation’s director ofprograms, in another article in this issue. Here we introduce an interview by e-mail with Professor Saadia
Pekkanen of the Henry M. Jackson School of International Studies at the University of Washington, who is
co-chair of the US-Japan Space Forum. She is an expert on outer space security, law and policy as well as
on international relations involving Japan and Asia. She is also a contributor to Forbes on the spaceindustry.
(Responses received May 21, 2018)

Introduction

Forum, under the auspices of the Maureen andMike Mansfield Foundation. I have learned anenormous amount from the diverse
perspectives of the forum’s stakeholders, as
they come from government, business, andacademia. We have become a great transpacificcommunity to learn from, and to build
consensus views on outer space affairs and thepossibilities of collaboration between our two
countries.

JS: Could you please briefly

introduce us to your work on spacein security and industry and also
US-Japan relations in spacecollaboration?

Pekkanen: I work at the intersection ofinternational relations and international law,
specializing in the economic, legal, and security
implications of the space industry worldwide.
Space as a Venue for Business
My specific regional focus is on Japan’s foreign
JS: How do you estimate theaffairs, and given my broader interests I havepotential of the space industry andfollowed very closely the trajectories of thebusiness in the future?
country’s space law and policy over the
postwar period. Japan is one of the world’s top
Pekkanen: The global space economy today is
space powers around today, and the changing
Dr. Saadia M. Pekkanen
estimated to be around $330 billion. There areaspects of its commercial and national security
projections that it will go beyond $1 trillion by the 2040s. This is all
space directions deserve close attention. For the United States,
thrilling and exciting for sure. But I think nobody can be quite sure ofJapan is an ideal partner for space collaboration along multiple
where the industry and business will actually head, or which private
dimensions as human economic activity begins to extend beyond theand public competitors will rise to the top in the years ahead. Rightplanet, and as a range of natural and deliberate dangers in space
now, it is a very fluid situation, and I would say we are all somewhere
threaten the promise of those ventures. Over the past four years,
near the starting line.
I have had the tremendous honor of co-chairing the US-Japan Space
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COVER STORY 1

JS: What will be the main impact of spacet h i n k t h e s o - c a l l e d S i l i c o n Va l l e y m o d e l(interdependency among business, science, lawfirms or the public sector) would work as well in thespace industry as it did in IT?

Pekkanen: We usually think of the space industry in terms of
rockets, spacecraft, satellites, and so on. But we have to begin
rethinking what we know about them, and how we connect them toother policy trajectories among the world powers today. Reusablerockets are one development that we have to keep an eye on because
of innovative players like SpaceX and Blue Origin in the US that arebacked by billionaires. In Japan, we also see a similar phenomenon,such as Interstellar Technologies developing the country’s firstcompletely private rocket. This too has the backing of a Japanesebillionaire. The more important point is that the high-profile nature of
the billionaire rockets masks the way that reusable launch capability
is critical not just for civilian or commercial markets but also national
security space architectures. Another entrepreneurial trend that is
worth marking is one that connects space assets like small satellites
to big data and machine learning. If things stay the course, thistrajectory promises to transform how we map, see, and strategize
about human activities across civilian, commercial, and military
domains on Earth.

Pekkanen: Frankly, it is too early to say anything about any one
space start-up, as we have yet to get concrete results on profitabilityof the many space ventures around us, whether in or out of the US.
I think the so-called Silicon Valley model is good at drawing attention
and funding to certain configurations of technologies for sure — andthis is certainly important — but we need to be careful about
painting too rosy a picture of its causal impact on businessoutcomes in the long run in any industry. There are surely variationsin terms of business successes and failures, booms and busts, evenin the IT field with which the model is so often associated. So
I expect that we will probably see the same nuanced patterns in awide variety of space products and services in the years ahead,
whether in the US or abroad.

development on the existing industry? Do you thinkspace will become one of the most promising venues
for ventures and entrepreneurs?

JS: How do you estimate the potential of Japanesestart-ups in the space industry? Are they still in thestage of infancy?

Pekkanen: Today we talk about a space-based economy, with alleyes on the commercial players. If we are really looking at only thebusiness of space, then many if not most of the up and comingcommercial ventures will be subject to market pressures and realities
in situations where returns on investment may be stretched out overtime with a lot of uncertainty. So this is an important thing toremember as we think about the continued funding and resourcesfrom the Silicon Valley model that we just discussed. Nobody quite
knows how things will work out when, for example, you are talking
about commercializing asteroid mining or orbital debris cleanup or
the general public going up and down as space tourists. Nobody
quite knows also the size of the eventual market, if any. And nobody
knows quite how long it will all take. So I would say that Japanesestart-ups are in the same place as all other competitors in the world.
They are lining up like a lot of other players at the starting line inwhat promises to be a long new space race. What kinds of spacetechnology products and services will stand or fall over time, and
who will have staying power in the competition ahead remains to be
seen. Meanwhile, Japanese companies can draw on the country’s
long-standing industrial strengths — such as electronicminiaturization and robotics — that should not be underestimatedand that will be critical for advancing space technology frontiers in
new ways and perhaps in the context of cross-border collaborations.

JS: How do you view intensified competition in the

future space business, in particular possible rivalries
among nations?

Pekkanen: Countries are already competing in the space game, but
expectations about the competition have shifted with thecommercialization of the space industry. However, I think
governments are going to be critical shapers of the ecosystem forthe new space industry. And today, both in the developed anddeveloping world, governments are still figuring out how to position
their countries in the emerging space-based economy. I think one
important aspect of the intensified competition for governments isgoing to come in securing human talent worldwide for creating nextgeneration space products and services. Governments are going tohave to step up their efforts to shape the development of a space
workforce that can then use such products and services in whateverdomain they happen to be employed in. Shaping and sustaining aspace workforce is going to be a challenge for established powers
like Japan, China, India, Europe and the US, but also others who
might want to get in the game such as the UAE. It will also be
important for public-private efforts to advance the frontiers of space
both in the commercial and military domains in the long run.

Space Start-Ups
JS: There are a number of distinguished US start-ups
in Silicon Valley. How do you think they willcontribute to future space development? Do you
Japan SPOTLIGHT • July / August 201813

5

COVER STORY 1

Driving Force & Impediments to Space
Industry

Wakayama Prefecture by 2021.

Future Development of US-Japan
Collaboration in Space

JS: Could you explain in detail about what you

mentioned in one of your Forbes articles, “Fivefactors that will shape the space industry over the
next five years”? What do you think will drive thedevelopment of space business and what do you
think will be possible impediments to development?

JS: How do you see the future development of

US-Japan collaboration in space? Do you think it will
be strengthened for security reasons?

Pekkanen: I mentioned the US-Japan Space Forum earlier, and how
it has had a huge impact on opening my mind to many possible
paths forward for the US and Japan as allies in space. If I could bringin the famous saying by Ambassador Mansfield in which heemphasized the importance also of economic and security linkages,
I would say that today the US-Japan space alliance is the mostimportant bilateral relationship out there, bar none. There have been
a number of steady moves on the part of both countries to deepen
their cooperation, especially if you think about the fact that spaceassets from the ground to the various orbits represent the criticalinfrastructure for war strategists and fighters back on Earth.
Needless to say, the future of the space economy depends on thisreality as well. In 2011, the US and Japan issued a joint statement,
stating their interest in the protection of and access to space. So
both sides need to devote resources to and work on solidifying a
united and seamless front. Ensuring space security means preparing
for peace.

Pekkanen: To be honest, I think these kinds of headlines do not dojustice to the complexities of the space realities around us today. At
the moment, I can pinpoint a few things that are going to be critical
for the space economy in the years ahead. One of the most important
aspects is the leadership of the new space companies, and the ways
the new generation of CEOs are plugging their companies into adiverse global talent pool and workforce in order to better position
themselves in the upcoming competition. This was one of the firstthings that struck me when I began to take a look at the compositionof the new space companies in Japan. A second important factor thatwill contribute to the rise and spread of new space ventures is thelegal and regulatory ecosystem. This is not only critical for stabilizing
expectations today for both established and newer space companies,
but also serving as a signal of government interest in facilitating the
progress of the future space economy. Finally, we do have to worry
about impediments. To my mind, as offensive counterspace realities
come to the fore with alarming frequency, the single biggest danger
to all the commercial ventures is the possibility of a space conflict.

JS: If you do not mind, could you tell us about yourfuture projects, in research or mediation, between
business and public policy or academia?

JS: In particular, on space start-ups, what do you think

will be necessary to promote their activities as
government policies, regulatory frameworks or
subsidies?

Pekkanen: Right now I am fortunate to have a two-year project
funded by the Center for Global Partnership (CGP), focusing on newfrontiers in space security and mapping new space strategies forJapan and the US. My collaborators on this project are John
Mittleman, from the US Naval Research Lab; Setsuko Aoki, professor
at Keio University Law School and vice director of the Center forSpace Law at Keio; and Hiroshi Yamakawa, from Kyoto University,
who has just become president of JAXA. We are a highlyinterdisciplinary team with backgrounds in engineering, politicalscience, law and policy, which of course makes our work stronger
but also more challenging to manage. So I am doing the systems
integration on this project, so to speak! I am deeply honored to workwith and learn from researchers and policymakers of their caliber.
Together we are doing our bit to advance scholarship and policy
outreach in various trajectories in the emerging space frontier,focusing at present on small satellites and big data in the maritime
domain.

Pekkanen: Governments and their actions of course are not the only
things that will shape outcomes in the space economy. But as I havebeen saying, I think governments will remain important players,either as buyers or backers, as the space economy takes shape. Thisis especially important in the context of the Asian space competition,with different traditions and cultures of government-businessinteractions. Take India, for example. The government-backed Polar
Satellite Launch Vehicle (PSLV) launched 104 small satellites in one
go in February 2017, and 31 satellites again in January 2018.
Governments can also give significant backing through setting legal
and regulatory expectations, and a number of them have establishednational laws and acts to foster the competitiveness of their spaceindustries. In Japan, for example, the Japanese government’s newlaw related to space activities is already bearing fruit in very
interesting ways. Consider the recent moves that are bringing
together the different competencies of Canon Electric, IHI Aerospace,
Shimizu Corporation, and the Development Bank of Japan toconstruct the country’s first private launch site, possibly inFormatted by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT &executive managing director of the Japan Economic Foundation (JEF).

6 Japan SPOTLIGHT • July / August 201814

New Technologies Affecting Economic Society (Space & Digital Technology)
COVER STORY • Digital Society — Issues & Challenges • 1

T

he Digital Economy &Privacy Protection: theChallenges Ahead
Author Marc Rotenberg

By Marc Rotenberg

The transformation is taking place rapidly. Services and sectorsthat were once distinct are now being joined together through digital
networks. The thermostat in a home now connects to a cell phone. A
car is connected to a computer network. A camera at a street corner
broadcasts images to a police station far away.
These changes, brought about by the digital revolution, have alsobrought about far-reaching questions of law and policy. Some of thechallenges are familiar — will automation lead to unemployment or
will it create new, more advanced jobs? What is the appropriatebalance to promote innovation while safeguarding important rights,
such as privacy? Some questions appear new — should robots ortheir designers be responsible for the consequences of their acts?
Does artificial intelligence (AI) mean that we can no longer assess
the basis of outputs generated by automated procedures? For
governments, business leaders, and representatives of civil society
these problems are real and complex.
As new technologies converge in this information-enabled
economy, I propose a central focus on transparency andaccountability. The American inventor Thomas Edison once
remarked, “What we create with our hands, we must control with ourhead.” It is good advice as we explore this rapidly changing world.

the unique authenticating details upon which security and financialtransactions rely.
There is, therefore, real urgency to ensure that governments
establish comprehensive programs for privacy and security tosafeguard the personal data that is stored by both the private sector
and government agencies. Central to the structure of modern privacy
law are “Fair Information Practices”, the rights and responsibilities
associated with the collection and use of personal data. The
allocation of rights and responsibilities is necessarily asymmetricbecause the individual loses control over the use of personal datawhen it is transferred to another party. That is why organizations inpossession are responsible for its protection. It is also the reason
that individuals are given rights when their personal data isbreached, misused, or expropriated.
There is also a need to develop, what I have called, “Privacy
Enhancing Techniques” that minimize or eliminate the collection of
personally identifiable information (Testimony of Marc Rotenberg,
United States Congress, Privacy in the Commercial World, March 1,
2001). Such techniques include stored-value cards for transportationand communications that enable services without capturing theidentity, or placing at risk the personal details, of the user. Robust
techniques for de-identification and anonymization also permit theuse of aggregate data and minimize the risk to the individual.
The European Union has taken a leading role in the development of
a new legal framework to address the data protection challenges of
the Internet age and to encourage the development of innovativetechniques to provide consumer safeguards while safeguarding
privacy and identity. The General Data Protection Regulation (GDPR),
which went into force in May 2018, sets out a comprehensive
approach to privacy protection. The GDPR builds on the Data
Protection Directive of 1995 which was the first internationalframework for data protection.
The Japanese Act on the Protection of Personal Information,
which came into force in May 2017, is part of the effort to build
privacy frameworks that establish trust and confidence in the digital
economy. Although there are some differences in the EU approachand the approach in Japan to data protection, the two frameworks
have much in common. At a historic meeting in July 2018, the EU
and the Japanese government agreed to work together to provide
protection for personal data. Such an agreement will avoid the needfor complicated business arrangements, such as standard
contractual clauses, binding corporate rules, or privacy certifications.

The Internet Age & the Protection of Privacy
Over the past two decades, we have witnessed the rapid changebrought about by the Internet. The transition from a centralized voice
network to a distributed data network has made possible theemergence of new businesses, new government services, and newforms of economic activity. But the Internet economy has alsobrought with it growing concerns about the loss of privacy, financial
fraud, and identity theft. In the United States, the Federal Trade
Commission (FTC) reports that identity theft is the second-biggest
concern of American consumers, just behind debt collection (FTC,
Annual Summary of Complaints Reported by Consumers, March 1,
2018). Data breaches are on the rise in the US, as there in much of
the world, and there is growing concern that the attacks on personaldata, stored by well-established companies with a commitment to
privacy and security, are engineered by foreign adversaries. Again,
the US has a warning tale for other countries. In 2015, thegovernment records of 22 million federal employees, their friends,
and family members were breached by foreign adversaries. The
records disclosed included also the 5 million digitized fingerprints,
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COVER STORY 1

The outcome will be the largest trading region in the world for theexchange of digital information with legal assurances of privacy
protection. While it is too soon to evaluate whether the laws are
sufficient or what new challenges may arise, both the EU and Japanare to be commended for this important step forward in theevolution of data protection.

The Consumer Product Safety Commission, the agency tasked withprotection for consumer products, has stated that the security ofInternet-connected devices falls outside its domain. It is a surprisingconclusion when products such as Google Home Mini are producedwith a manufacturing defect that permitted remote monitoring of
conversations within the home with no action by the user (CNN,
Google admits its new smart speaker was eavesdropping on users,
Sept. 11, 2017).
In contrast, the response in Europe to Internet-connected dolls
appears very different. After a Norwegian consumer organization
determined that the toy “My Friend Cayla” allowed the remotemonitoring and recording of a child’s conversation, European
regulators responded quickly (Forbrukerradet, Connected toys violate
European consumer law, Dec. 6, 2016). The German consumer
agency banned the dolls and warned families that had purchased
them to destroy them. The French data protection agency, the CNIL,
warned the company that sanctions would be imposed if safeguards
were not established.

The Internet of Things (IoT)
Still, the new challenges ahead are substantial and worrisome. The
Internet has made possible not only the transfer of personal data
across national borders, it has also connected physical devices toelectronic networks on a mass scale making possible both theremote monitoring of machinery and services and also remotehacking. For example, in March 2018, Atlanta, Georgia suffered aransomware attack that crippled the city’s ability to provide services
and to collect payments. City employees had been instructed to
disconnect computers and perform their jobs manually.
In 2017, hackers using a ransomware program called “WannaCry”
infected more than 300,000 computers worldwide, crippled the
National Health Service in the United Kingdom, and disabled
numerous international companies, including Federal Express.
Hackers have demonstrated the ability to remotely deactivate thebrakes on an Internet-connected car, disable door locks at a hotel,
and adjust thermostat settings in networked home devices. Security
experts, such as Bruce Schneier, have warned that we are seeing
only the beginning of the risks of Internet-connected devices (Click
Here to Kill Everybody: Security and Survival in a Hyper-connected
World Book, by Bruce Schneier, W. W. Norton, New York, 2018).
Unlike the early challenges, which focused on privacy and dataprotection, these new challenges increasingly implicate public safety.
Current safety regulations should be extended to take account of therisks of Internet-connected devices. The National Cyber Security
Centre in the UK, perhaps drawing on the lessons from the attack on
the NHS, urged the adoption of new measures to boost cybersecurity in Internet-connected devices. Critically, “manufacturers of‘smart’ devices will be expected to build-in tough new security
measures that last the lifetime of the product.” (National Cyber
Security Centre, Secure by Design, March 2018). This approach
follows also earlier recommendations from the Aspen Institute 2015
conference on communications policy which recognized the ongoingrisk that consumer devices would likely become more vulnerable toattack over time and that it was therefore necessary to establish arobust security plan for the lifetime of the device.
The US has been slow to recognize the growing threat of the IoT.

Competition & Innovation
Another challenge facing societies today concerns the relationshipbetween data protection and both competition and innovation. It is
certainly true that personal data enables scientific innovation,
medical breakthroughs, and the more efficient delivery of
government benefits and private sector services. But the general
proposition that data is useful does not answer the question whether
firms should have unrestricted access.
Consider, for example, the decision by regulators to approve
Facebook’s acquisition of the popular messaging service WhatsApp.
At the time the deal was proposed Facebook and WhatsApp offeredcompeting services though with very different business models.
Facebook relied on the advertising derived from knowledge of theuser’s interest and was able to offer the service, without muchprivacy, at no cost. WhatsApp chose instead to rely on a subscription
model that offered strong protection for users but also required asmall annual payment. Internet users had a choice of two messaging
services.
Facebook’s acquisition of WhatsApp created a real problem forregulators. In Europe, Facebook assured the European Commissionthat it would be unable to join the data sets of the two firms. In the
US, Facebook told regulators it would respect the privacy
commitments that WhatsApp had made to its users and not use
personal data for advertising purpose. Both statements turned out
not to be true. In fact, Facebook could join the data sets and did
Japan SPOTLIGHT • November / December 201816

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COVER STORY 1

indeed plan to break the commitments to Internet users WhatsApp
had made. The Commission fined the company 110 million Euros(New York Times, E.U. Fines Facebook $122 Million Over Disclosuresin WhatsApp Deal, May 18, 2017). In the US, it remains unclear
whether the FTC will impose any sanctions on the company.
Putting aside the business ethics associated with Facebook’s
acquisition of WhatsApp, it is important to consider whether suchmergers promote data protection, innovation and competition, or
whether the outcome is the opposite. Speaking at the World
Economic Forum in Davos earlier this year, the American investor
George Soros offered a clear warning about the future direction of theInternet economy, noting that Internet companies have often played
an innovative and liberating role but also observing “as Facebook and
Google have grown into ever more powerful monopolies, they havebecome obstacles to innovation, and they have caused a variety ofproblems of which we are only now beginning to become aware.”Soros has proposed “the fact that they are near-monopoly
distributors makes them public utilities and should subject them tomore stringent regulations, aimed at preserving competition,
innovation, and fair and open universal access.”
I share his views. Increasing consolidation of Internet companies
is not only bad for data protection, it has also stifled innovation andcompetition. Government regulators should be particularly skepticalof claims that joining mass troves of personal data will lead tofurther innovation. I have already described the growing risks of data
breaches and the growing threats from foreign adversaries. After the
mistaken decision to allow Facebook to acquire WhatsApp, we see
also a collapse in competition in a key market for Internet services(The Facebook-WhatsApp Lesson: Privacy Protection Necessary for
Innovation, Techonomy, May 4, 2018).

consumers are evaluated for loans and other commercial
opportunities have never been made available with much precision.
That will soon change.
With the adoption of the GDPR and the updated Privacy
Convention of the Council of Europe, a new effort is underway tomake transparent the algorithms that make decisions about
consumers in the marketplace, that determine the placement of news
on Internet platforms, and that make decisions in the criminal justicesystems. Provisions of the GDPR now require that individuals be
given an explanation and access to the logic of automatedprocessing. Newly required data protection impact assessment will
also require data processors to assess the use of rule-based
decision-making. And the Council of Europe seeks to ensure that theprotection of human rights and democratic values remain at theforefront of public policy concerning AI and algorithms (Council ofEurope, Algorithms and AI Development, https://www.coe.int/en/
web/freedom-expression/algorithms-and-human-rights).
Japan is now a leader in the effort to establish a comprehensive
framework for the use of AI. Beginning in 2016, Japan urged theadoption of global policies for AI at the meeting of the G7. At thetime, communications minister Sanae Takaichi described aninternational set of basic rules for developing AI (The Japan Times,
Japan Pushes for Basic AI Rules at G-7 Tech Meeting, April 29,2016). The “AI R&D Principles” seek to “achieve a human-centeredsociety where all human beings across the board enjoy the benefits
from their life in harmony with AI networks, while human dignity andindividual autonomy are respected.” (The Conference Toward
AI Network Society, Draft AI R&D Guidelines, July 28, 2017). The
Principles address such issues as collaboration, transparency,
controllability, safety, security, privacy, ethics, user assistance, andaccountability.
There is growing support for this approach among the member
countries of the Organization for Economic Cooperation andDevelopment. Scientific societies also support the effort to establish
a global framework for AI. The Association for Computing
Machinery, one of the world’s largest computing societies, hasstated, “the ubiquity of algorithms in our everyday lives is an
important reason to focus on addressing challenges associated withthe design and technical aspects of algorithms and preventing bias
from the onset.” (U.S. Public Policy Council of the Association for
Computing Machinery, Statement on Algorithmic Transparency andAccountability, Jan. 2017). The IEEE-USA has said, “Effective
AI public policies and government regulations are needed to promote
safety, privacy, intellectual property rights, and cybersecurity, as wellas to enable the public to understand the potential impact of AI on

Algorithmic Transparency & Accountability
Among the greatest challenges today in the digital economy is also
one of the most familiar challenges in modern privacy law: how toensure the fairness, accuracy and accountability of decisions
concerning individuals? This central concern, more so than secrecy
or confidentiality as privacy is often understood, is also at the core of
our modern right to privacy. Throughout the world privacy laws
guarantee individuals with the right to know what information about
them is held by others and how it will be used. Banks in the US, forexample, have an obligation to explain the reason that a loan
application was denied. And consumers are entitled to know thegeneral factors that are considered in the creation of credit scores.
But the precise factors, and the weight they are given, when
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COVER STORY 1

society.” (IEEE-USA, Artificial Intelligence Research, Development
and Regulation, Feb. 10, 2017). And the European Commission
recently appointed 52 experts to a new High Level Group on Artificial
Intelligence, with broad representation from academia, business, andcivil society. The group will examine “issues such as fairness, safety,
transparency, the future of work, and more broadly the impact on
upholding fundamental rights, including privacy and personal dataprotection, dignity, consumer protection and non-discrimination.”(European Commission, Commission appoints expert group on AI
and launches the European AI Alliance, June 14, 2018).
There is also support in the US. Former US presidential candidate
Michael Dukakis has called for a global accord on AI. Governor
Dukakis has recently launched the Artificial Intelligence World
Society to make AI “safe, trustworthy, transparent, and humanistic”(The Michael Dukakis Institute, Boston Global Forum and Michael
Dukakis Institute will recognize two world leaders for achievements
in Artificial Intelligence (AI) this April, https://dukakis.
bostonglobalforum.org/tag/aiws/). The proposals set out by the
AIWS build on the recommendations of the Japanese government
set out at the G7 in 2016.

growing over the possibility that government will adopt techniques toscore citizens. In China, for example, a social scoring system isunderway that will create detailed profiles and ratings for each
person in China. The rating system will determine opportunities forindividuals in education, employment, housing, travel, and more. We
believe such a government rating system is contrary to the principles
of individual liberty and democratic society. There is even a risk thatcountries that create such systems may lose control over theircreation as the systems become more complex and more decisionmaking is delegated to machines.

The Public Voice
This brings us then to our final challenge of data protection in theinformation age — to ensure that the public has a meaningful voicein the decisions made by government about the deployment ofAI techniques. Earlier this year, EPIC submitted a formal petition to
the US Office of Science and Technology Policy urging the creationof a public process to the development of AI policy for the US (EPIC,
Scientific Societies Call for Public Input on U.S. Artificial Intelligence
Policy, July 3, 2018), Leading scientific organizations in the US,
including the American Association for the Advancement of Science,
the Association for Computing Machinists, the Federation ofAmerican Scientists, and the IEEE, have joined the EPIC petition.
Together we believe it should be possible to create policies to govern
the use of AI that will preserve the dignity, autonomy, and freedom of
the individual. And we have reported our call in statements to the US
Congress.
We are therefore at a critical moment in our ability to regulate thetechnologies we create. The EU and Japan have put forward
important legal frameworks to update protections for privacy in our
digital age. We see also the new threats arising from the IoT, thegrowing concentration of Internet companies, and the increased
dependence on AI techniques for a wide range of government andprivate sector services.
It would be a mistake to assume that either technology or markets
alone will solve these challenges. Wise public policy, guided byevidence and meaningful public participation, is the key to our digital
future.

Algorithmic Transparency
We at the Electronic Privacy Information Center (EPIC) welcome
these developments. We first urged recognition for Algorithmic
Transparency at the OECD Global Forum for the Knowledge Economy
in Tokyo in 2014. We explained then that companies are too secretive
about what they collect and how they use personal data. We called
for the swift enactment of the Consumer Privacy Bill of Rights andthe end of opaque algorithmic profiling.
The progress over the last several years is notable. But so too are
the new challenges. In May 2017, EPIC urged the FTC to investigate
a company that had launched a new commercial service for thesecret rating of young athletes. We explained that neither the athletes
nor their families could determine how these scores were assigned
and that the rating system could determine not only success in
sports, but also educational opportunities and scholarships. We said
that it was very unusual to assign secret scores to athletes as mostathletic achievement, whether measured in time or distance, isobjective, public, and easily verified. We pointed also to the ELO
system, the non-proprietary, scientific technique used to rate chessplayers that has been adopted in other activities.
More than a year has passed since we filed our complaint and still
there is no action from the FTC. The secret and unaccountablescoring of young athletes continues. Moreover, concerns are

Marc Rotenberg is president of the Electronic Privacy Information Center in
Washington, DC, a non-partisan research center that focuses on emerging
privacy and civil liberties issues. He has served on expert panels for theAmerican Association for the Advancement of Sciences, the American Bar
Association, the Aspen Institute, the International Working Group on Data
Protection, the National Academies of Sciences (US), the OECD Science,
Technology, and Innovation Directorate, the US Senate, and UNESCO.

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New Technologies Affecting Economic Society (Space & Digital Technology)
COVER STORY • Digital Society — Issues & Challenges • 6

Digital Capitalism &Japan
Author Takeshi Mori

By Takeshi MoriA Sense of Greater Well-Beingand other means”. It can be observed quantitatively here that the useof information technology has risen dramatically with the result thatthe standard of living can be sustained on a higher level even as
income has remained stagnant.
GDP figures tell us that the Japanese economy is stalled. At thesame time, the people experience well-being in their daily lives. Dig
into this a little deeper and we realize that digitalization is providing
us with something that does not show up in GDP statistics.
What digitalization has offered is a decline in price levels that was
unthinkable before. Consumers can be thorough in comparing prices
on the Internet, which puts relentless downward pressure on retailprices even if production costs remain unchanged. Online vendors
can interact directly with consumers, eliminating the cut for the
middleman. A report published by the Bank of Japan (BOJ) estimatesthat Internet retail sales could account for a price reduction of
approximately 0.3% (“Impact of the Growth in Online Retail Sales”,
Bank of Japan Review, June 2018), but it is possible that pricedecline is even larger in certain areas. Music and other merchandise

The digitalization of daily life took off in 2014, when 4th-generation
smartphones began to be widely adopted. Data clearly show that thiscaused a significant change in the sense of well-being in the daily
lives of the Japanese people.
The “sense of one’s standard of living compared to the rest of theJapanese public” as given in the response to the “10,000-Responder
Survey on Life in Japan” conducted by the Nomura ResearchInstitute (NRI) every three years shows an increasingly large numberof participants giving their standard of living as “upper” or “upper
middle” since 2006 (Chart 1).
Why has the sense of well-being among the Japanese publicgrown during this period even as GDP and wage levels stalled, andincome disparity is said to have widened in Japan? What the people
who responded “upper” or “upper middle” have in common is thatthey responded that they had “become able to consume wisely bycollecting information on daily life and bargains through the Internet

CHART 1

Sense of one’s standard of living among the Japanese public
100%
90%

9.6

8.0

9.2

53.8

53.1

53.1

8.4

14.8

16.6

52.1

52.3

33.1

2009
(10,252)

Upper/
upper middle
18.8

20.0

80%
70%
60%

49.7

50%

Middle
53.7

54.6

31.0

27.5

25.3

2012
(8,821)

2015(8,718)2018(8,431) (Number of responses)

40%
30%
20%

36.6

38.9

37.7

41.8

10%
0%

1997
(10,052)

2000(10,021)2003(10,060)

2006(10,071)

Lower middle/
lower

Note: No responses excluded from aggregation

Source: “10,000-Responder Survey on Life in Japan” conducted by the Nomura Research Institute (NRI) (1997-2018)

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COVER STORY 6

that can be digitalized can be copied at negligible cost, reducing
overall production costs dramatically. Even when a product isfunctionally unchanged from its analogue days, its price and cost are
greatly reduced by digitalization.

the Ministry of Internal Affairs and Communication (MIC), theaverage Japanese spent 86 minutes per weekend day on the Internet
on average in 2013. This figure rose to 120 minutes in 2016 (MIC,
Survey on Time Spent on Information Communication Media andInformation Activities 2017). The numbers vary greatly between age
groups. While the 10-19 and 20-29 age groups logged significant
time, at 225 and 216 minutes respectively, the 60-69 group onlyused it for 43 minutes. The information and digital services provided
over the Internet are making our daily lives so convenient, and muchof this is being provided free of charge.
Erik Brynjolfsson, professor at the MIT Sloan School ofManagement, and Joo Hee Oh, assistant professor at the Rotterdam
School of Management (RSM), Erasmus University, developed amodel to express the consumer surplus that these free digital
services produce in monetary terms and applied it to the UnitedStates (The Attention Economy: Measuring the Value of Free Goodson the Internet, 2012). According to this study, value equal to 2.3%
of GDP was being produced on average between 2002 and 2011. The
same model applied to Japan indicated that consumer surplus fromfree digital services could be worth up to 90 trillion yen per year, orthe equivalent of 17% of GDP between 2012 and 2016. Japan has
been gradually slipping from 20th among 63 countries in 2013 to27th in 2017 in the IMD World Digital Competitiveness Ranking
published by the International Institute for Management
Development. As the IMD report notes, it is true that Japan lacks
human resources in digital technology and Japanese businesses are
slow to adopt digital technology. However, as the 90 trillion-yen
consumer surplus shows, Japan is at the forefront in the acceptanceof digital technology in the daily lives of its people.
The consumer surplus being produced by digital technology
explains the paradox of the rising sense of well-being in the face of astalling GDP. Digital technology is generating a significant increase in
consumer surplus, i.e. the unmonetized value.

Producer Surplus & Consumer Surplus
When someone purchases a merchandise or service, there is a
maximum amount that the person is willing to pay for that particular
content. This is the “willingness to pay (WTP)”. The difference
between the WTP and the actual price is the “consumer’s surplus”.
Think of the consumer’s surplus as the degree to which consumers
can feel that they have made a profit or secured a bargain.
On the other hand, the producer is actually producing its productat a lower cost than the price. It is gaining the difference between theprice and cost as the producer’s surplus. This is the profit of the
producer. Digitalization can influence WTP, price and the cost ofthings, but it seems price and cost have been lowered even though
the WTP has not changed much. This is causing the consumer’s
surplus to grow and the producer’s surplus to shrink.
To go back to the relationship between the impact of digitalization
and GDP statistics, the key point is that the producer’s surplus isquantified and reflected in GDP statistics but the consumer’s surplus,
given its subjective nature, is not measured and therefore goesunaccounted for. Thus, we look at GDP statistics without recognizing
the consumer’s surplus that digitalization has amplified and sensethat there is a gap between the economic trends and our impressions
from our daily lives.
The sum of the consumer’s surplus and producer’s surplus iscalled total surplus, or economic welfare. This overall surplus could
be viewed as the value-added in the true sense created by themerchandise or service. Overall surplus consists of the producer’s
surplus, which can be objectively measured, and the consumer’s
surplus, which can only be grasped subjectively. Overall surplus isdifficult to identify as data. However, subjective matters can bequantified, as the NRI confirmed in its questionnaire survey. In aworld where digitalization is progressing, it is becoming difficult tomeasure value with GDP as the sole indicator. The time is ripe for a
new benchmark.

History of Capitalism
Digitalization is causing significant changes in the daily lives of theJapanese. It is also changing the economic system and capitalism
itself, as can be seen from the significant loss in the effectiveness of
traditional economic indicators (such as GDP). Let’s take a look at
the characteristics and history of capitalism.
In this essay, capitalism will be defined as a “system for pursing
the permanent accumulation of capital by obtaining profits throughFree Digital Services in Japan
Internet usage is rising rapidly in Japan. According to a survey by
24 Japan SPOTLIGHT • November / December 201820

COVER STORY 6

discovering, utilizing, and creating differences”. Let’s call the firststage of capitalism “commercial capitalism”. This will be easy tounderstand if you imagine a merchant who engages in long-distance
trade. The merchant buys merchandise at a low price in one country
and sells it at a higher price in another. In other words, this is anactivity that finds existing differences in the price system and earns
profits from them.
The system following it, created through the 18th-century
Industrial Revolution in the United Kingdom, is called “industrial
capitalism”. The Enclosure Movement turned communally-owned
land into private property, chasing out the farmers there, who beganselling their labor as if it were merchandise. Capitalists amassedlabor, land, and other resources and achieved mass production
though massive investments and division of labor. Under industrial
capitalism, profits are accumulated by utilizing the difference
between labor productivity and wages and creating products that are
distinguished from those of competitors through innovation.
Actually, there is no consensus among experts over whether theongoing digital revolution is creating a new stage in capitalism. Thereis a wide range of opinions, as some say that capitalism is nearing
its end while others say that industrial capitalism is becoming evermore sophisticated. Still others say that a new type of capitalism,
one that we haven’t seen before, is emerging.
Klaus Schwab, the originator of the World Economic Forum, calls

the ongoing digital revolution the Fourth Industrial Revolution, and
the German government is promoting what it calls Industry 4.0. As
the terms show, these people believe, or hope, that industrial
capitalism will be enhanced through progress in digitalization.
By contrast, as Peter Drucker stated, “That knowledge has become
the resource, rather than a resource is what makes our society ‘postcapitalist’.” Dr. Katsuhiko Iwai, emeritus professor of the Universityof Tokyo, states that the era of post-industrial capitalism has begun
and points out that the capitalism at the dawn of the Internet actually
has the characteristics of commercial capitalism, the primeval formof capitalism, in that it creates value from differences in information.

The Arrival of Digital Capitalism
This report agrees with Dr. Iwai that capitalism has
metamorphosed into a new form, which I will call “digital
capitalism”. There are several reasons for this. First, those who callthe ongoing digital revolution the Fourth Industrial Revolution andIndustry 4.0 are the main players of industrial capitalism. The morethey are invested in the existing capitalism, the more likely theirmindset is unconsciously biased and that they have a vested interestin denying that industrial capitalism is coming to an end.
Next, a comparison of the ongoing process with industrial
capitalism shows that value is coming to be created in a

CHART 2

Industrial capitalism & Digital capitalism<Industrial Revolution><Digital revolution>

Manufacturing and transportation revolution

Revolution in data collection and analysis

Industrial capitalism

Digital capitalism“Maximizing producer’s profit”“Maximizing user’s subjective utility”(18-20C)(21C-)

Player• Industrial capitalist• Platform provider

Venue for value creation• Factory/market• Digital platform

Value pursued• Maximizing production and profit• Optimal use/maximizing utility

Source of value• Labor• Activity information

Source: NRI

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COVER STORY 6

fundamentally different manner. The Industrial Revolution, in short,
was a revolution in production and transportation. There, theindustrialist was the value creator, and physical factories were theplaces where the value was created. The value being pursued wasquantitative expansion; growth through mass production andconsumption was the aim. And labor was an important source of thisvalue.
By contrast, the digital revolution is a revolution in the capacity fordata collection and analysis. Here, digital platforms become thevenue for value creation. The core value is no longer mass
production and consumption, but optimal utilization by or
maximizing utility for the user. The sharing economy is theframework that embodies this value and is difficult to conceive under
the industrial capitalism framework. The development of car-sharing
services increases options for the user, enhancing convenience, but
it is likely to reduce the number of cars sold as its share grows. As aresult, while the frequency of travel and the market for car-sharing
grows, production in the automobile manufacturing sector declines,
with a possible negative net impact on GDP. This is the paradox that
may arise when GDP, a benchmark of industrial capitalism, is used.

The digital revolution is also creating new sources of value: theinformation activities that we humans as well as machines are
generating. Just as human labor was separated and turned intomerchandise in the Industrial Revolution, all information activities byhumans and machines are currently being separated from theirsources and sucked into platforms to be conglomerated as Big Data,
from which value is extracted through analysis (Chart 2).

Flipping the Perspective on Industry“Mobility as a service”, or MaaS, has emerged as a concept intransportation. This describes service as a business that provides the
optimum means of travel from the user’s perspective, a concept thattranscends existing industrial categories such as automobile
manufacturing and transport. There, whether or not you possess avehicle is irrelevant. The choice between a taxi, ride-sharing like
Uber, or renting a car P2P depends totally on the level ofconvenience for the user.
Under industrial capitalism, business traced the supply chain inwhich the producer is the starting point. The producer makes the

CHART 3

Digitalization flipping the perspective 180°
Industrial capitalism

Automobile
manufacturingindustry

MerchandiseUse

Utility

Privately-owned
vehicleDriving

TravelDigital capitalism

Privately-owned
vehicleCar-sharing
BicycleMaaS

Driving
Sharinga rideRailway
Source: NRI

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(Mobility as a Service)

TravelCOVER STORY 6

product by procuring materials and the complex distribution channel
leads to consumers at the end. There, the preferences of theindividual consumer were given relatively little consideration. The“masses” were supplied with mass-produced merchandise.
By contrast, in digital capitalism, the user is the starting point. The
needs and references, the payment capability, indeed every elementof each user is analyzed using artificial intelligence (AI), thenreverse-engineered to find the optimal solution. Here, there is nosuch person as a standard-issue member of the “masses”, just awide variety of individuals that are connected by a wide variety of
networks so that they are both “I” and “we” in a mandala-like world(Chart 3).
The term “industry” will gradually lose meaning in a world likethis. “Industry” is a word used from the perspective of “what isbeing manufactured”, whereas “what kind of utility is being provided
to users” is the key perspective in digital capitalism.

Moreover, you are disseminating information on your activities
unintentionally such as where you are going through yoursmartphones and your preferences and interests through your online
searches.
Take the YouTuber, an emerging job category. YouTubers arepeople who make a living with the advertisement revenue from thenumber of views of the videos that they post on YouTube as theirmain source of income. They became a hot topic in Japan in 2018,
when they came in third in an annual survey of occupations thatelementary schoolchildren wanted to take up when they grew up.
The content and quality of the actions aside, this is an area that is
becoming increasingly active in the digital revolution. An actionsociety is emerging here.

Digital Capitalism & the Role of Japan
Finally, I would like to offer a few perspectives on the role thatJapan is playing in the age of digital capitalism. As I stated at the
beginning, I believe that the invisible value created by free digital
services (consumer’s surplus) is extremely large in Japan. Japanesebusinesses may be very slow to digitalize, but Japanese consumers
are highly receptive to digital technology and generally like newservices. In other words, Japan may play the global role of testing
ground for new digital services. Hosting the 2020 Olympic Games inTokyo will propel Japan in that direction.
Another major role that Japan is likely to play is as a global
showcase for the different ways that digital technology can be used.
It is widely believed in the developed countries in Europe and North
America that machines and AI threaten to replace humanity, but
Japan has a long history of using tools for extension and support of
the human being. This is a technological culture that complements
humans. Of course, it is not always appropriate to use technology tocomplement humanity. It will become necessary to use technology
selectively for both replacement and support. It is my belief that theways that digital technology is used in Japan will contribute to thesearch for that balance.

From Labor Society to Action Society
The role of humans also changes under digital capitalism. Let’s
explore this point using the framework provided by Hannah Arendt,
one of the most representative philosophers of the 20th century. In
her book The Human Condition, Arendt divides “active life” into three
types of activity: “labor”, “work” and “action”. She defines labor as
repeated processes, work as having a clear beginning and end, andaction as the means by which we disclose ourselves to others. She issaid to have explained the difference between labor and work as“kitchen and typewriter”. The kitchen is where labor takes place andthe typewriter is where writing, or work, is conducted.
Arendt goes on to call the industrial capitalism of the 20th century
the victory of “animal laborans” and states that among the three
categories, the proportion of labor has grown overwhelmingly large.
Then what has been the effect of the ongoing digital revolution on
the role of humans, or “labor”, “work” and “action”? First, labor iscoming to be replaced by machines and AI. Human labor is being
pushed out of the workplace, much as farmers were pushed off theland by the Enclosure Movement at the dawn of the Industrial
Revolution. Meanwhile, action by humans is increasing dramaticallyunder digitalization, albeit in cyberspace and many actions are still
done by hiding identity. It covers a wide range of activities usingsocial network services such as posting one’s activities andcommunicating with others on social networking sites as well as
posting reviews on Amazon, TripAdvisor, and the like.

Takeshi Mori is a senior researcher at the Nomura School of Advanced
Management.

Japan SPOTLIGHT • November / December 2018

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New Technologies Affecting Economic Society (Space & Digital Technology)
COVER STORY • Digital Society — Issues & Challenges • 8

Interview with Dr. Tsuyoshi Abe, Senior Vice President & General Manager of the Marketing
Headquarters, Yokogawa Electric CorporationA

VUCA World in DigitalSociety

By Japan SPOTLIGHT
Our key question in the Nov./Dec. 2018 issue is how digital technology, playing a key role in the Fourth
Industrial Revolution, will affect the nature of our social economy. According to a distinguished IT
engineer and business executive of Yokogawa Electric Corporation, Dr. Tsuyoshi Abe, digital society canbe described as a “VUCA world” — that is, a world of Volatility, Uncertainty, Complexity and Ambiguity.
How is it that digital society can be described as such? What are the key characteristics of this world?
How well can Japanese businesses adjust their management style to this world?
In the following interview, Dr. Abe introduces this VUCA world based on his wide range of working
experience in Intel and Yokogawa as senior vice president of the marketing headquarters withsemiconductor and IT engineering expertise. We will apparently need knowledge of both engineering andnatural sciences to survive in this digital society. Thus, the classical distinction between natural science
departments and social science departments at universities could become meaningless.
(Interviewed on Aug. 30, 2018)

Introduction

create new business. We are eager todevelop a new business that we have
JS: Could you please introduce
never tried. Yokogawa was founded inyourself briefly?
1915 as a measurement equipment maker
but these past 40 years has been engaged
Abe: I am the general manager of thein working on production and sales ofMarketing Headquarters at Yokogawa
control equipment for plant facilities toElectric Corporation, the largest
achieve process automation and design ofmeasurement and process automation
control rooms. I believe we are now at aequipment maker in Japan and the thirdpoint to reconsider our business for thelargest one in the world. Yokogawa has
future. In line with this thinking, webeen a leading company in the area offounded amnimo Inc. in May 2018, a newprocess automation in industrial
company aiming to provide Industrial
automation for a variety of production
Internet of Things (IIoT) services that canplant facilities, such as oil, gas/LNG,
be easily carried out by our customers.
refinery, chemical, pulp/paper, power,
This company is 100% affiliated to thefood, medicine and so on, since we
Marketing Headquarters, a non-profit
developed a distributed control system incenter.
1975 as a pioneer. Over the life cycle of a
The third activity is marketing for theplant facility, Yokogawa has been
existing industrial automation or process
Dr. Tsuyoshi Abe
providing optimal solutions for the
automation business. The R&D center,
efficiency of the facility as well as its
named the innovation center, is also undersafety and security.
our supervision, which is unusual. Market communication, product
Our Marketing Headquarters is a bit different from those of otherbranding, managing M&As and strategic alliances, activities relatedcompanies. We have 10 activities under our supervision (Chart), andto patents and global standards are also subject to our command.
this distinguishes us from others. The first one is to make mid-term
Finally, industrial design is another activity supervised by us, which
or long-term business plans and monitor them. We announced ais very unique. I believe it is only Yokogawa in Japan that has so
new mid- and long-term plan in May 2018. The second one is to
many business activities supervised by its Marketing Headquarters
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24

COVER STORY 8

The VUCA World

CHART

Accountabilities of Yokogawa
Marketing HQIndustrial
DesignStrategic
Standard
MGMT

Biz Plan(MTBP& LTBP)

Marketing
HQ(MKHQ)

Strategic
IP
MGMT

M&A /
Alliance
Branding

JS: VUCA world is a term describing digital society.

Could you explain to us exactly what this means byshowing us specific examples?

New BizDevelopment

Abe: Yes. In recent years, the World Economic Forum’s annual
conference at Davos in Switzerland has always covered topics related
to VUCA. This conference is an important venue for policy-oriented
discussions among leading politicians, journalists, businessmen andacademics worldwide. VUCA stands for Volatility, Uncertainty,
Complexity and Ambiguity.
VUCA is what the law of increasing entropy in the second law ofthermodynamics tells us about nature. Simply put, natural
phenomena always move toward disorder and diffusion, according tothis law. First, any natural phenomenon starts with stability, but astime goes by it becomes volatile and uncertain, and then cause-andeffect relations concerning this natural phenomenon will beambiguous. Under these circumstances, there will be an increasing
variety of responses to this phenomenon, because of this ambiguity.
There will be many exogenous variables which could influence thisphenomenon, and also many multiple interdependencies among
these variables will be observed. This increased complexity leads to
unpredictability about the future progress of the phenomenon. In the
final stage, the ambiguity of the cause-and-effect relations of thephenomenon reach extremity, and because these relations remaincompletely unknown we cannot apply empirical deductions toachieve a solution. This law of nature must be applied to our social
development today. As our society faces unprecedented large-scalechanges, we cannot predict the future of any social phenomenon.
For example, in the recent US presidential election, Hillary Clinton
won 64.2 million votes, while Donald Trump won 62.2 million votes.
But Trump won more electors than Clinton did and becamepresident. There were very few who predicted this outcome before
counting ballots started.
Looking at a company’s corporate value, in the taxi business Uber
has the largest corporate value in the world, I believe. However, they
do not own a single car. Likewise, Alibaba, with the largest sales
channel in the world, has no stock of any shop item. Assuming thatthe largest media in the world now is Facebook, it has no contents of
its own. Though Airbnb is supposed to be running the largest

IAMKTG(MI)

Innovation
Center(R&D)
MarketCommunication(MA)

Source: Yokogawa Electric Corporationand there are very few companies like us in the world.
I think these 10 business activities are all assets of marketing. We
are now living in a so-called VUCA world where the key to surviving
competition must be to make business decisions as quickly as
possible. Considering that we must fail fast and fail forward in thisvolatile and uncertain business world today, our Marketing
Headquarters must make decisions faster than environmental
changes. It will probably be difficult to survive in a VUCA world
unless even a factory makes a decision as quickly as the Marketing
Headquarters does.
I had been working for Intel for 31 years and transferred to
Yokogawa in 2016. I have knowledge about semiconductors and ICT
industries thanks to my experience with Intel. When I became
interested in working in other business areas like the energy industry
and the biology industry, I got the chance to be transferred to
Yokogawa.

Japan SPOTLIGHT • November / December 201825

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COVER STORY 8

accommodation-providing service in the world, it has no real estate.
You can see that companies with no fixed costs have the larger
corporate value. We have a limitless number of those examples.
I had been working in the semiconductor business while I was at
Intel. In the 1970s, American firms were leading the business and in
the 1980s Japanese firms like NEC, Fujitsu and Panasonic emerged
as its frontrunners. However, after the 1980s, Korean firms like
Samsung prospered and very few Japanese firms have survived therace until now. Thus we see changes in the leading companies in thisdomain very quickly. Prosperity and decline happened very rapidly.
There must be no other business area where such a speedychange among the principal players has happened every decade. In
our VUCA world, such speedy changes have become the new normal
and they occur now in many sectors. This is amazing and at thesame time terrifying.

characteristic of digitalization. Under such circumstances, any delay
in management decisions could be fatal for earning profits, as thebest market situation for a company will be over if management
remains reluctant to make a decision on changing the principal
products for sale. Such cases can be observed in many sectors inthis VUCA world.

Rules of the Game in the Digital Economy
JS: The speed of digitalization is high and the

Is platform business replacing it?

regulations necessary for smooth operation of digitalbusiness are lagging behind the trends. For example,
the European Union adopted General Data Protection
Rules (GDPR) in May 2018 to try to meet theincreasing need for privacy protection resulting fromthat enormous amount of private data being
processed by digital technology. But it does notseem to be good enough to achieve the goal.

Abe: Yes, it is. “Digitalization” or “digital transformation” is bringing
about this situation. In digitalization, anybody can copy any productor technology. When the Japanese manufacturing industry was
highly competitive, there was the Trinitron picture tube for televisionsets, which was a technology that made a clear and beautiful picture
in color for TVs. Such technology, or any other, can be copied easily
by anybody in our digital era. Thus, such new technology users
would lose competitive advantage in a very short period. Under thesecircumstances, any technological competitiveness would be lostquickly and price would be the sole factor determining the winner ofthe competition. Any TV maker successful in selling the product at
the cheapest price would dominate the market.
We have a hypothesis of an S-shaped curve concerning the life
cycle of a product. A company is gaining profits when its products
are on the upward trend of the curve. After that, arriving at the peak,
it will be a mature industry. It took more than 33 years for the
Trinitron picture tube to prevail in the market. As it expanded in themarket slowly, the producer gained profits over a long time and thisproduct assured the company of big profits. However, another more
recent component of TV sets — the liquid crystal panel — had asteeper S-shaped curve and it could bring in profits for only 10
years. Such rapid change in best-selling goods is a major

Abe: Yes, exactly. The GDPR is an attempt to deal with Complexity inthe VUCA world. Another issue could be related to taxation in termsof the macro-economy. Our tax system seems to fail to deal with theincreasing e-commerce emerging everywhere through digitaltransformation. Tax authorities have not found any countermeasures
yet to collect tax from such e-commerce. They have not decided yet
where to tax e-commerce — the venue of the server or thecompany’s headquarters. They cannot keep up with cyber business.
Governments must be pressed to find a solution as quickly as
possible.
The same is true of a company’s decision-making process. In
Japan, changing business decisions too frequently was traditionallyconsidered bad management. But today, a quick change of decision
is considered good management. This is a big change in thedecision-making process largely adopted by Japanese firms. PDCA
(Plan-Do-Check-Action) is not working any longer. Japanesebusinesses have been fully tuned to raising the quality of a productby the PDCA process. However, PDCA cannot keep companies up
with the rapid changes in market situations. Today another decisionmaking process has been adopted by some Japanese firms — OODA
(Observe-Orient-Decide-Act). Under this process, more decision
making is left to the factories or the shops working on the daily

JS: Our manufacturing industry is not solid anymore.

34 Japan SPOTLIGHT • November / December 201826

COVER STORY 8

business and facing the reality of the market directly. As a matter offact, Yokogawa’s mid- and long-term business plan adopted in 2018
recommended OODA, while also retaining PDCA. If we have thewrong plan at the starting point, then the PDCA process would
produce the wrong outcome, in which case we would need OODA.
To achieve OODA, we would need a different team in our shops or
factories. We would need a team of employees with a diversity of
talents and expertise, like those portrayed in films like Mission
Impossible or The A Team. Diversity is a key word. A team with thesame kind of talents or capacities would not be able to achieve thedesired outcomes. People with diverse talents and expertise at thebusiness spots directly dealing with customers will need to observe,
decide and act quickly.
JS: Consumers and producers have been consideredseparate entities. But from now on, will consumers
need to participate in the business decision-making
process to meet the needs of the market more
quickly?

Abe: Yes, that is true. They are successful in producing attractive
goods. I think the big question for them is marketing. A good
example is mobile phones. Japan has a population of over 120
million and the third-largest mobile phone market in the world, so
Japanese companies can survive just by selling goods only in theJapanese market. Their first priority would be the Japanese market,
while South Korea, for example, has a population of only 50 million
and thus naturally targets a global market. Which market a company
gives priority to would make a big difference between the sales
strategies of the two nations’ companies. In Southeast Asia, forexample, there are many contagious diseases spread by mosquitoes,such as Zika fever or malaria. Both Japanese and Korean companies
sell many air conditioners in Southeast Asia, but while Korean air
conditioners are equipped with ultrasonic technology to ward off
mosquitoes, Japanese ones do not have it. As Koreans target a
global market as their first priority, they produce goods on the basisof an ethnological analysis of the nations overseas to understand theauthentic needs of those countries. Japanese marketing strategy has
not reached that stage yet.
There are of course some success cases for Japanese companies.
For example, Panasonic’s washing machines have won a good
reputation in India. By sending their employees to live in India, theyfound that a sari, an Indian woman’s traditional clothing, was easily
damaged by existing washing machines. So they added a button for

Abe: Yes. In our VUCA world, innovators are not the enterprises
anymore. Since around the middle of the 2000s, end users in general
have been considered innovators, due to the influence ofdigitalization, namely in this case the emergence of SNS. I would say
at least 70% of innovators now are general end users. So it would bemeaningless for a company to think about future business on its
own. Corporations will need to collaborate with their customers evenfrom the stage of R&D. So I believe R&D will be turned into C&D(Connect and Develop), meaning product development bycollaboration between the corporation and the customers. Amongthe 25 projects running in parallel in my office, most of them aresuch C&D projects.
JS: It is often pointed out that Japanese companies

today fail to create attractive products for customers
and that Japan’s stagnant economy is due not only togovernment policies but to Japanese business firms.
But I guess many big Japanese companies are
beginning to understand what the VUCA world
means and are now prepared to produce goods thatmeet customers’ needs.

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COVER STORY 8

washing a sari specifically to their washing machines for Indiancustomers, which won great support from Indian women.

them, any attempt to achieve them in this process would need to beassessed. We have very few methods of assessment. But it is often
said that failure is the mother of success, so we will need to improve
our assessment methods. Otherwise, we will not be able to realize
large-scale innovations.

Human Resources Needed for Digitalization
JS: What kind of talents among human resources will

be needed in the age of digitalization?

Mitigation of Income Inequality
JS: Income disparity is rapidly growing in all capitalist

Abe: I think there are five key elements necessary for humanresources in this century as digitalization continues.
The first one is, needless to say, ICT literacy. You must be amaster of a PC and smartphone, and in addition data literacy for
analyzing statistical data would be desirable. The second one iscommunication capacity, including language capacity, as you may
need to be active anywhere in the world. The third one is competency
in collaboration — you will need the capacity to collaborate withdiverse colleagues and partners. The fourth one is leadership. We
will need leaders who can take initiatives in a transition period where
no fixed values are dominant. Last but not least, creativity. As
digitalization continues, robots and AI will replace human jobs toraising efficiency, so I believe that people will have to play a key rolein creating new jobs.
Concerning Japan in particular, I think we should have moreindividuals with dual or triple degrees. Thus in the age ofdigitalization we will need intrapersonal skills, which are lacking inJapan. People with such skills will be much more creative indigitalization where the distinction between social science andnatural science is blurred and an interdisciplinary approach would be
productive.

nations. Unless we mitigate it, capitalism may not besustainable. In the digital society, we can see a rise in
the sharing economy, for example Uber, which offers
a taxi-sharing service. Would this mean less income
inequality? Would it be considered a positive aspectof the digital society?

Abe: In my personal view, income disparity will not be mitigated but
will even expand in the digital society. The authentic sense of “digital
divide” will be literally “expanded income inequality”. However, I am
not pessimistic about the future of the digital society. I think thebasic philosophy of capitalism could be changed from an“egocentric” one to an “ecocentric” one. So many large enterprises
are now pursuing the 17 Sustainable Development Goals (SDGs)
announced by the United Nations in their next mid- and long-termbusiness plans. Among those SDGs, inclusive growth (growth basedon equality) and environmentally sustainable growth are included.
Yokogawa is no exception. We have decided to pursue all of thosegoals. Of course, we are trying to earn money, but the money must
be used for more ecocentric or altruistic purposes.

JS: In order to achieve such human resources, will weneed to reform the Japanese education system, andif so, how do you think we could change it?

Abe: It is difficult to change our education system. One thing I canclearly say is that we will have to change our working performanceassessment system in companies. The current Japanese working
performance assessment is based upon a zero-sum formula. If you
fail to achieve your goal, you will get a negative assessment and viceversa. We should give up this system.
Instead, we should set high targets and even if we fail to achieve

Written with the cooperation of Naoko Sakai who is a freelance writer.

36 Japan SPOTLIGHT • November / December 201828

International Relations in Turbulence
Special Interview
Interview with Dr. Junhua Wu, Research Director & Chief Senior Economist of the Japan ResearchInstitute

Struggle for Global Hegemony— Real Implications of the China-US Trade War
By Japan SPOTLIGHT
When China joined the World Trade Organization (WTO) in 2001, it was a symbolic development
signifying a change in the progress of globalization. The perceived decline in US global leadership and therising power of China are now in collision in the form of a trade war. This is a geopolitical crisis rather thanan economic crisis, since a political and ideological confrontation from rivalry to be the largest
superpower in the world lies behind the trade war. Therefore, conventional economic theory advocating
for free trade and a market economy will not work well as a remedy. Both nations have their own structural
backgrounds that have led to this stage and thus this trade war should be examined from a broader andhistorical perspective. In other words, it would be wrong to consider the US-China trade war as atransitory phenomenon.
We had a chance to interview an expert on China-US relations, Dr. Junhua Wu, research director andchief senior economist at the Japan Research Institute, a Tokyo-based think tank. She provided us with astructural and long-term perspective on this issue.
(Interviewed on Sept. 12, 2018)

Introduction

financial crisis, the relationship with the
US developed into a crucial factor for
China, and eventually US-China relations
became one of my subjects.

JS: Could you please introduce

yourself briefly, and in particular
your specialty?

Assessment of the Impact

Wu: I joined the Japan Research Instituteof Trade War Between
in 1990 after finishing my studies at a
China & US
graduate school. Then I was stationed
JS: As an expert on US-China
overseas from 1995 until 2016, first in
relations, how do you assess
Hong Kong, then Shanghai andthe global impact of the current
Washington, DC. In 2016, I came back to
US-China trade war as well as
the headquarters in Tokyo. I started myits impact upon both nations?
professional career as an economist
specializing in the Chinese economy, but
Wu: The current US-China trade war is notsince 2005 I have been looking at China
only the result of economic friction but
from a wider perspective, including
can also be interpreted as the two nations’political aspects apart from economic
Dr. Junhua Wu
struggle for hegemony in the world, whichaspects, and gradually expanding my
I called the Cold-Peace War. While there are certain similarities
interest towards the relationship between the United States andbetween the Cold-Peace War and the Cold War between the US andChina. At this moment, my main focus is US-China relations.
Soviet Union, it’s not a simple copy of the Cold War. As we all know,
The reason that I expanded my interests is that figuring out theduring the Cold War era the two opposing sides were completely
direction of China has been my ultimate goal. I started my career as
separated from each other — not only militarily but also politicallya China watcher right after the Tiananmen Square incident tookand economically. Thus their interests did not overlap. By contrast,
place. At that time, I believed that the economy would be the key
China and the US share common interests in many areas now andfactor determining the future of China. That’s why I became anthat makes the competition between the two countries much more
economist. However, around 2005, I found that domestic politics
complicated. That’s why I put the word “peace” after “cold” towould have more impact on China’s future than the economy. So
describe this feature of the current relationship of the US and China.
I expanded my interest to politics. Then, in the wake of the global
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Special Interview

In 2015, when I was still in Washington, DC, I saw a significant
momentum that transformed the people’s recognition of China.
Seeing China as a strategic rival to the US became not only the viewof the so-called Dragon-Slayers but also many of the so-called
Panda-Huggers. Although there have been growing economic andgeopolitical interests between the US and China, many Americans
realized that it’s highly unlikely that a transformation of the politicalsystem will happen in China along with economic growth.
Moreover, as a result of engagement policy, which has been
implemented for decades, China has developed to be the biggest if
not the only challenger to US global hegemony, not only
economically but also militarily and ideologically. Thus, I believe thetrade war was not started because of the protectionist attitude of thecurrent administration and President Donald Trump. It seems that it’s
the inevitable result of the manner of China’s rising.
On the assumption that the above judgement is correct, it might
be considered that starting such competition in the domain of theeconomy would be rational since a comprehensive ideological andmilitary struggle for hegemony would cost much more for bothnations and the rest of the world.
As the Chinese economy is a principal part of the global supply
chain, it is certain that this trade war will have a significant impact on
the global economy, including the Japanese economy. Given that the
Chinese economy is currently not in perfect health, the negative
impact of the trade war will be more significant from now on andhave longer-term effects.

capitalism”. Some even worry if “market capitalism” can remaincompatible with it. The other is the geopolitical impact of China’s
economic diplomacy, such as the “One Belt, One Road” initiative, theAIIB and significant aid provided to developing nations. Throughthese kinds of policy approaches China has enhanced its global
influence. As is well known, China has been taking advantage of the
WTO and gaining a huge trade surplus under the free trade regime
supported by the WTO. This surplus is the source of the increased
money supply that has enabled the Chinese government to enhance
its investment for building up its infrastructures and eventually
making its economy grow.
For decades, especially in the past 10 years, the trade surplus has
played a major role in China’s monetary easing. In China all foreign
currency amounts must be converted into Chinese yuan. The trade
surplus, which is the main source of capital inflows, has contributed
to an increase of base money in the shape of “funds outstanding forforeign exchange” and most of China’s trade surplus is with the US.
For instance, this year, from January to August, the ratio of the trade
surplus with the US to China’s total trade surplus was 97%.
The Chinese trade surplus with the US is also a key to China’s
foreign currency reserves. Its cumulated trade surplus in goods andservices with the US from 2001 until 2017 was $4.1 trillion, while
China’s foreign currency reserves at maximum were $3.9 trillion andare now $3.1 trillion. Thus it is not too much to say that China’s trade
surplus with the US has made it possible for China to achieve
investment-led economic growth and economic diplomacy.
There is a saying that there is no winner in a trade war. Probably,
it’s true. But it is also true that raising tariffs might be an effective
lever to move the relationship between the US and China since thetrade surplus with the US really matters to China’s economy.
There is some concern that as a retaliatory measure China may
sell US Treasuries. Yes, it might happen. For China, however, it’s adouble-edged sword because declines in US Treasury prices may
also hurt China.
As I mentioned before, a trade war is only the first battle ofcomprehensive competition between the US and China. We are now
standing at a critical historical turning point and thus we should lookat the issue from a much broader and deeper perspective. The
debate on the trade war and its possible economic consequences
seems to be based upon a rather myopic viewpoint and too muchengaged with only short-term aspects.

JS: There is a view of that there would be no

significant impact from the trade war, such as a
drastic decline in GDP growth. But you believe thata trade war will have significant negative impacts on
the economy.

Wu: Yes, I believe a trade war with the US would cause China
fundamental damage to its economy because its large trade surplus
with the US has been built on the Chinese economic growth formula.
It is indeed true that raising tariffs may not help the US economically.
It is also true, however, that raising tariffs is a method that is most
likely to function effectively, if not the only method for the US to
make China listen to it, though I am not sure whether Trump himself
is aware of it or not. In other words, in terms of competition for
global hegemony, the current US trade policy may work incountervailing China because China’s emerging has been particularly
backed by its fast-growing economy.
There are two growing concerns about China. One is the way ofChina’s economic development, which is widely called “party-state
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Special Interview

JS: Do you think this Chinese approach and thePossible Consequences of US-China
Confrontation for North Korea

common capitalism approach could converge
eventually?

JS: This question might also be too myopic, but the

US seems to be taking advantage of China’s
influence on North Korea to solve the issue of North
Korea’s denuclearization. Would this affect the
US-China rivalry?

Wu: Unfortunately, I don’t think so.
JS: How can we build an ideal world, then, where

China and all other nations can collaborate and live
together safely?

Wu: No, I don’t think so. It’s unlikely that the US would modify its
tough policy against China for the sake of the complete
denuclearization of North Korea. The issue of North Korea is certainly
an important one for the peace of the Korean Peninsula, but it is of adifferent nature from the US-China competition. The two issues
should not to be compared.

Wu: I wish we could, but wonder if the idea of building an ideal worldis realistic.

Global Governance in a New Age
JS: Under current international politics where US

JS: Will there be any compromises in the trade war

leadership in global governance is less expected,
how do you think East Asian countries cancontribute to global governance?

between the two nations?

Wu: China probably will offer more promises, such as protectingIntellectual Property Rights, reducing tariffs, and so on. But I am not
so optimistic that the dispute between the two nations can be solvedby those kinds of compromise.

Wu: Before I answer your question, I would like to say that I am notso confident in the argument that the decline of US leadership willcontinue. But whether the decline of US leadership will continue ornot, it is a reality that the US is no longer able to bear alone the costs
for global governance. Given that, it’s time for East Asian countries torealize that there is no free ride anymore. Two choices remain: one isto share a certain burden of the costs which have been mostly borneby the US, and the other is to collaborate with China, if they believe
they can go along with it well.

A Transitory Period of Capitalism
JS: Are we living in a completely new age where“state capitalism” represented by China and“market capitalism” represented by the US are now
in friction?

JS: What do you think about the role of APEC in

achieving better global governance?

Wu: I am not sure if “state capitalism” is the best term to describe
the state of the Chinese economy. We are facing an unprecedented
situation in many senses due to the manner of China’s emergence. I
cannot find yet the best terminology for the Chinese way ofdeveloping and governing the economy. About 10 years ago, I
created the term “bureaucratic-made capitalism” to describe theprocess of China’s economic development since 1978 but have toadmit that is not the perfect expression. The reason is “bureaucraticmade capitalism” may well describe the manner of China’s economic
development, but it covers neither its outcome nor its ambition. A
mixed approach of market function and absolute party control makes
China different from other economies. It’s difficult for a conventional
approach based on market capitalism and the rule of law to compete.
So, from the point of view of traditional economic theory, what thecurrent US administration is doing is not correct but might be useful.

Wu: I am not an expert on APEC but believe that any effort for betterglobal governance is worth it.
JS: What if East Asian countries take advantage ofChinese initiatives such as the AIIB and “One Belt,
One Road”, which are part of China’s attempts tocontribute to global governance? They could exploit
natural resources in cooperation with China for
infrastructure projects in resource-rich countries inCentral Asia, and could also meet the growing needfor infrastructure in Asia not only by ADB financebut also by AIIB finance.

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Special Interview

Wu: If East Asian countries are certain that the AIIB and “One Belt,
One Road” are win-win games, then do it.

long time for the WTO to reach a consensus in making a decisionand in addition, the WTO has no certain effective methods to force allmembers, including members who don’t share these values, tocomply with the rules.
Another notable consequence of post-Cold War globalization is thereversion of capitalism. For a long time, I thought that “capitalism”
was not the proper word to describe the developed economies
because capitalism had been evaluated on the basis of criticism by
Karl Marx. I didn’t ask why but just took it for granted. Now I realizethat the evaluation of capitalism during the Cold War era was a resultof the progress of liberal democracy. In a world that was divided into
East and West, the Western corporates had no choice but to adjust
their management compliance with the progress of liberal
democracy, such as protecting labor rights, environment friendly
management, and so on, because it was impossible for them tomove out from the West.
But in the post-Cold War era, corporates could move anywhere in
the world seeking profits mainly based on so-called comparativeadvantage. As a result, local communities such as the “Rust Belt”
region in the US began to collapse.
From the viewpoint of economic rationality, we must say that whatthese corporates have done is to respond appropriately toincreasingly intense competition. In fact, as an economist, until
recently I was a story advocate of globalization. Nonetheless, in theface of the degradation of local communities in the developed world
and the reality that China, as the biggest beneficiary of post-Cold
War globalization, has emerged to be a major challenger todemocracy and the market economy, my confidence in globalization
has been upset. A simple question is this: is profit all the value ofcorporate existence, especially at a time that we are approaching ahistoric turning point?
There is a phenomenon that any argument or policy that isdifferent from or against what the corporates and people did during
the post-Cold War era is protectionism or populism. Is this right?
Ignoring fundamental changes in the undercurrent of globalization
during the post-Cold War era and then advocating globalization as an
absolute good is at least a kind of negligence of thinking.
Yes, our democracy is facing a crisis but we also must remember
that, in a democracy, the common people’s views must be respected.
It’s certain that democracy needs to be reformed. Nonetheless, wehave no choice but to overcome all the distortions and problems of
democracy because “Democracy is (still) the worst form ofgovernment, except for all the others.”

Questions of Trade & Trade Policy
JS: On the issue of trade policy, how do you think we

can avoid serious outcomes from the trade war?
Would the WTO or TPP11 work to mitigate trade
friction in the short term?

Wu: I am not optimistic about the future of the WTO. It should havebeen reformed long ago. As I just mentioned when we talked about
APEC, however, any effort for a better world is worth making. I really
hope that the US, Japan and the European Union’s agreement on
WTO reform can achieve certain results, though I wonder if any
meaningful reform can be made under the WTO’s current“consensus” decision-making regime.
JS: How about the role of regional FTAs in mitigating

trade friction? If the TPP11, RCEP, China-JapanKorea FTA or EU-Japan FTA all work well inpromoting free trade, the US would have toreconsider its trade policies, since US companies
would lose the benefits of trade by being outside ofthose FTAs.

Wu: If those FTAs could work well without the US, all those member
nations would probably not mind if the US joins them or not. They
could enjoy the benefits of free trade without the US. The problem is,however, it’s still hard to image that all those free trade frameworks
can make real sense without the US.
The nature of globalization was changed along with the ending of
the Cold War. During the Cold War era, globalization could only bepromoted partially, among countries such as the G7 nations. In otherwords, at that time globalization was promoted by countries sharing
the same values, democracy, rule of law and of course, market
capitalism. After the Cold War, however, globalization has been
expanded to countries that include those who don’t share thesevalues.
This is one of the most important reasons why the WTO disputesettlement mechanism has not worked well since this disputesettlement mechanism functions on the premise of belief in the ruleof law. Now you can see why the credibility of the WTO has fallen in
the past two decades. It is because, as a result of the expansion of
globalization during the post-Cold War era, the precondition of the
WTO dispute settlement mechanism practically collapsed. It takes a

Written with the assistance of TapeRewrite Corporation.

48 Japan SPOTLIGHT • November / December 201832

International Relations in Turbulence
COVER STORY • White Paper on International Economy & Trade 2018 • 2

RRoundtable by Long Ke, Muneo Kurauchi, Prof. Kazuyuki Motohashi & Prof. Mariko Watanabe

oundtable Discussion on the
Chinese Economy —Opportunities & Challenges

By Japan SPOTLIGHT
METI’s White Paper on International Economy & Trade 2018 highlighted the Chinese economy as a key
to global economic development and Japanese economic prosperity against the background of thegrowing digital economy in which the Chinese digital industry is playing a pivotal role.
Japan SPOTLIGHT, in highlighting this White Paper 2018 in the cover story of the Sept./Oct. 2018 issue,
organized a roundtable discussion on the current state and future of the Chinese economy by
distinguished experts.
Prof. Kazuyuki Motohashi, professor at the University of Tokyo’s School of Engineering, is an expert on
econometrics who is working on an econometric analysis on Chinese innovation capacity. Muneo
Kurauchi, advisor to MUFG Bank, Ltd, has been chairman of the Policy Sub-Committee of the Committee
on China of Keidanren (Japan Business Federation) for the past five years. Since 1995 he has watcheddevelopments in China as a leading banker responsible for business and strategy there. Prof. Mariko
Watanabe, professor at the Faculty of Economics, Gakushuin University, has been an expert on the
Chinese economy since she started her research on it as a researcher at the Institute of Developing
Economies in Japan, focusing on institutional changes, business strategy and industrial organization. She
studied at the University of Hong Kong (1996-98) and Peking University (2006-2008), and has conducted
research on Chinese firms and industrial organizations to discover the institutional background of China’s
high economic growth. Long Ke, a senior fellow at the Tokyo Foundation for Policy Research, is one of our
editorial committee members and one of the most well-known Chinese economists, and has been working
on Chinese political economy for many years.
(Roundtable on Aug. 2, 2018)
ParticipantsLong Ke

Muneo Kurauchi

Prof. Kazuyuki Motohashi

Chinese Macroeconomy in 2018

Prof. Mariko Watanabe

keeps rising. While China’s digital economy, which is the so-called new
economy, has been doing well, one of the key questions about the
Chinese economy is how it can restore the old economy suffering fromrising labor costs. But as for new economy, looking at theconsequences of the US ban on transactions by the government,
industry and military for national security reasons involving the
products of ZTE, this Chinese high-tech company has been forced tostop production because of this policy, and thus their technologicalbase is not well consolidated. Technology seems to be a bottleneck in

JS: First of all, we are all interested in the issue of theChinese economy in 2018. Mr. Ke, could you pleasepresent your view on it?
Ke: Yes. What is notable about the Chinese economy in 2018 is how it
underwent structural reform. The Chinese business model that took
advantage of cheap labor costs does not work anymore, as labor costs
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COVER STORY 2

business, even though they are losing competitiveness and there is no
economic rationale for them to be kept in the market. This could cause
a serious impediment to the economy. Another issue is that it is often
pointed out today that the semiconductor industry in China has been
too greatly subsidized and is thus suffering from excess production
capacity. Insofar as the Chinese government invests into state-owned
enterprises in the semiconductor industry, that industry’s production
will be controlled by the government and there would not be excess
production, even though part of its production capacity could be
wasteful.
On my first point, I think whether fair competition based on a levelplaying field is to be implemented or not would be an importantcriterion to judge if this subsidizing can be justified. However, whether
there is excess capacity or not will also depend on whether China canbeat the international competition. As Chinese companies become
more competitive, it will be difficult to define those capacities as
excessive.

enhancing the value-added of the Chinese industrial structure. Anotherconcern is the gap in science capacity between China and developed
nations. It would be easier to catch up with the advanced technologies
in developed nations, but it will be difficult to fill in the science capacity
gap. In China, the ability to create new technology is limited due to thislack of science capacity and the weakness of incentives to developscience.
Looking at the Chinese macroeconomy in 2018, consumption
growth is not expected to be high but will not be too disappointing. A
key structural problem for Chinese consumption growth will be thewidening income inequality and the lack of a well-established social
security system, such as insurance for caregiving in a rapidly aging
society. This is because Chinese consumption growth is not explosive.
Business firms’ investment cannot be expected to be high, sincebusiness firms in particular in the old economy are suffering fromexcess capacity in production facilities. The Chinese government has
thus recently announced new business cycle countermeasures tostimulate the economy, consisting mainly of an active fiscal policy
oriented towards public infrastructure investment. However, their highspeed railways and highways are already well established, as are theirport and airport facilities. So there does not seem to be any significant
need for public infrastructures at this moment.
Another growth engine, trade, is to be seen as rather negative. Even
before the trade war between the United States and China started,
Chinese export growth had been negative in 2015 and 2016 due torising labor costs. President Donald Trump’s protectionist trade policy
initiative further accelerated this downtrend in trade. In the light of thisnegative prospect for trade, China announced an active fiscal policy to
avoid a possible recession in the second half of 2018 and 2019. From
all this, I have a rather pessimistic view on the Chinese economy in
2018.

JS: What about Mr. Ke’s view on Chinese exports
today? In his view, the US-China trade war could
worsen the declining trend in Chinese exports and2019 will be a year when the Chinese economy falls
into serious difficulty. Do you all agree with him?
Kurauchi: Depending on the outcome of the trade war between China
and the US, it is certainly true that the Chinese economy could beseriously damaged. I guess Trump will maintain his aggressive policy
against China until the US mid-term elections in November to boost
the Republicans’ chances of winning. But after the elections, I think
there will be a change of policy, since neither China nor the US will
really want to continue the trade war seriously. I am not so pessimistic
about the prospects. On behalf of the Japanese business world, I hopefor stable economic policy management in China, as more than 30,000
Japanese business bases are active there now. The businessperformances of the headquarters in Japan will be seriously affectedby their arms in China. I believe that the Chinese government iscapable of managing the economy well for its stabilization and thus thetrade war will find a way for a soft landing.

Watanabe: The Chinese government clearly recognized the existenceof excess production capacity in the following five industrial sectors —steel, cement, aluminum, oil refinery and paper & pulp. In particular, inthe steel sector the government has been actively enforcing the
reduction of excess capacity as it announced and committed to at the
Global Forum on Steel Excess Capacity Ministerial meeting, aninternational surveillance mechanism for excess capacity. It is also
reported that growth of investment by state-owned enterprises shrankdrastically in 2018 and investment growth in total is lower than GDP asa whole. This has happened for the first time in the era of reform. It is
uncertain whether the supply side reform will definitely lead to an
economic slowdown, now that consumption has become a substantial
part of the macro economy. The new economy in urban areas is robust
and the expanded middle class will support the stable growth of
consumption more strongly than one or two decades ago. Thus, theChinese economy could grow steadily even without investment
growth.

Innovation in China
JS: China’s political stability must be a key toachieving such good governance of the economy.
The capacity for innovation is another important
issue in thinking about the long-term prospects for
the Chinese economy. Let’s talk about Chinese
technology.

Ke: It is surprising to see that 67% of Chinese exports ofsemiconductors in business-to-business (B2B) transactions are fromnon-Chinese affiliated companies in China, according to trade
statistics. In the light of this reality, I guess Chinese firms are nottechnologically competitive enough, though sales of semiconductors
in business-to-customer (B2C) transactions are enormous due to thefact that in China there are 800 million Internet users.

JS: Is there any possibility of excess production

capacity rising in any other industrial sector?

Watanabe: Yes. The excess production capacity issue could rise in the
sectors where a policy framework exists to preserve firms in theJapan SPOTLIGHT • September / October 201834

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JS: Prof. Watanabe, what do you think are the main

Watanabe: It depends on the domain. AI, for example, I believe is thedomain of science where researchers and business are collaborating,and in this domain Chinese scientists have a strong presence in theworld. I am not quite sure, in this light, whether you can say that
Chinese science is not competent.

characteristics of Chinese innovation? In what sector
is innovation rising? What do you think are theadvantages and disadvantages of the Chinese
economic and industrial system in starting
innovation compared with other nations? How doyou think Chinese innovation will evolve in the
future?

Kurauchi: They may be weak in science but they are very competent inturning the seeds of technology into business and winning money.
Chinese Internet facilities like Tencent or WeChat have achieved great
business success by using Big Data. Such Chinese companies are also
facing serious competition in the market, but this may enhance theircompetitiveness further.

Watanabe: Wherever you may be, today you will find that data is a key
asset for innovation. The firms with affluent data are overwhelminglycompetitive and can lead innovation. In this regard, Google andFacebook are the frontrunners but Alibaba and Tencent, both Chinesecompanies, are competing with them and have overwhelmed them insome particular fields. For example, Tencent is very successful inoperating Internet banking for consumers. It has controlled bad or
irrecoverable debt at surprisingly low levels and made profits due tothis efficiency. It computed the risks of borrowers more accurately
based on rich data from QQ or WeChat. Thus, it is so important tomanage data well to achieve innovation today, not only in China but
anywhere else.
Open networks of transaction, product and innovation are the key
organizational characteristics of China. This openness offers extensive
access to the new disruptive technology. The more open, the moreusers and suppliers are coming in, and this has accelerated new
encounters and innovation. This is a good environment for “disruptive
innovation” as defined by Clayton Christensen. This organizational
competence has accelerated innovation in Shenzhen and elsewhere.
The openness means the rapid spread of technology and homogenous
competition; the players are forced to innovate new benefits so as tosurvive.
In the future, China must get into a stage to implement another typeof innovation also mentioned by Christensen: “sustainable innovation”
where it is accumulating competencies and raising the level of its
technologies by itself. It has already appeared in China. For example,
Huawei, an information technology company which has already started
to design and produce semiconductor chips, has already reached thisstage. The quality of its chips is already next to the top runner in the
US.
In the domain of AI, Chinese researchers are literally thefrontrunners. Their papers outnumber Japanese researchers’ ones.
Meanwhile, open innovation-based industrial organization in China
survives and by taking advantage of it China will have good potential to
begin further innovations. Shenzhen and Hangzhou are the places
where you can find such open innovations.
China certainly seems to be rather behind Japan in the domain of
fine-tuning technology in which the Japanese excel. However, I think
China will catch up with Japan soon in this domain as well. There will
be very little the Japanese do that the Chinese will be unable to do. As
the Chinese population outnumbers the Japanese, theircompetitiveness is expanding in every domain.

Motohashi: I have a different view on Chinese science from Mr. Ke.
Chinese universities’ science research papers not only outnumber
Japanese ones but are also higher in quality, in that they outnumber
Japanese papers among the top 1% of the Highly Cited Papers
worldwide. The background of this outstanding academic performanceby Chinese scientists is, in my view, their internationalization at asignificant speed. In Chinese universities, many Chinese-speaking
American researchers are visiting their Chinese colleagues and talking
with them in Chinese. The Chinese government also encourages
Chinese academics educated overseas to mediate between Americanor European academics and Chinese academics. The Chinese
Education Ministry is also spending a large amount of its budget on
raising the academic level of science.
On technology, although 10 years ago many Chinese patentapplications were not necessarily well qualified, their scale of businessand human resources has been instrumental in raising the quality.
With the significant internationalization of business as well, theirperformance is outstanding and clearly Chinese technology is catching
up with Japanese and others. In sectors like telecommunications
equipment or electronics, their research costs are rather high and nonChinese firms’ subsidiaries in China are the main exporters of theseproducts to the overseas market, but today the percentage of those
non-Chinese exporters is decreasing. In contrast to this, in theautomobiles sector, this percentage is still high. Thus I see the Chinese
auto industry’s competitiveness as not so strong, and probably not sostrong either in sectors like materials and robots.
It is certainly true that Chinese Internet business companies like
Baidu, Alibaba and Tencent are showing outstanding performances. For
example, Google and Baidu are the only companies in the world with theLevel 4 technology for driverless cars which would enable a driverless
car to work perfectly in some specific places. You would need a map inorder to enable it. Baidu owns a map of the whole Chinese continent and
so Google cannot do the business of a driverless car in China. Such a
map is devised by data that is the product of engineering rather thanscience. However, the data can be used only in China. This is true ofother business transactions including finance for consumers.
JS: Prof. Motohashi, could you please elaborate on
the cultural and business background to theemergence of those creative digital technology
companies in China, such as Alibaba and Tencent,compared with Japan?

JS: What do you think about science in China? Do you
agree with Mr. Ke?

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Motohashi: One striking difference from Japan is that in China there
has been no credit card use for payments. Therefore, for e-commerce
there is no way of paying without using cash but Fintech. Anotherthing is that those digital platforms have created financial instruments
for the management of their clients’ savings. Their offered interest rate
was much higher than the market interest rate. So they have beensuccessful in attracting large sums of money. Another thing to havepushed this platform business is that they adopted a method to
identify individuals by just reading QR codes without using a specific
PC with high security. Now wherever you go, you can use a QR codeas your identity. The digital platform companies like Alibaba have beensuccessful in creating trust on a nationwide scale, having expanded
trust among relatives and family members in their traditional culture toa much wider scope of human relations through this easy way of
personal identification.
Another Chinese tradition that has helped promote the digitalplatform business is one that allows people to be generous about
experimentation. They do not mind so much about details in thebusiness. For example, a QR code is good enough for identifying
individuals and very few worry about the other means to ensure
security, which is significantly different from Japanese culture. I guess
those are the reasons why the digital platform business is prosperous
in China.

services provided by Alipay or WeChat.
Kurauchi: Payment and settlement are core and legacy businesses forJapanese banks. I think there must be a risk in leaving thosebusinesses with Chinese financial IT services. As such, there are
obstacles for Japanese banks in introducing a cashless financial
system like in China. However, we would need to transform ourfinancial system to catch up with the innovation in the digital market.

JS: Mr. Kurauchi, could you please tell us how ourJapanese companies can become involved in thisChinese digital business or in the digital market
overall?

Ke: On the issue of driverless cars that Prof. Motohashi mentioned,
Baidu bought a map from the Chinese military forces that would be
crucial to national security. It is impossible for any non-Chinesecompany to get this map and they cannot get into the Chinese market
for driverless cars.
On the question of the business and cultural background of Japanbehind its lack of capacity to create a competitive digital platformbusiness model like those created by Alibaba and Tencent, I guess
there are three reasons for this. First, there are so many systemengineers in Japan who know about technology but have no businessmentality. Second, whenever Japanese try to do anything new, they
start thinking about rules first. However, this digital world is a new
economy and there have never been any rules in it. Whereas Alibaba
and Tencent propose possible rules while they are actually engaged in
the business, Japanese wait for rules to be adopted by thegovernment. Third, Japanese firms have a strong sense of businessterritory. So there is no single Japanese company owning the data of
80 million inhabitants out of the total Japanese population of 127
million people. Meanwhile, digital platform companies like Alibaba andTencent in China are creating only business models and not unique
technology. The technology is provided by other nations.
In China, they can introduce a driverless car, but they cannot fully
introduce electric cars. In 2017, 2.9 million cars were produced in
China and the percentage of electric cars to total auto production was
only 2-3%. Even those produced electric cars were for taxis or buses
rather than vehicles for individual use. Why won’t Chinese consumers
buy electric cars for their households? Because the batteries in thecars are weak in terms of durability and safety. This is how, I believe,
Chinese science capacity is truly limited.
If we define science as learning derived from a university’s
Department of Science or Department of Medical Science, such as

Kurauchi: The key question on our bankers’ side would be how muchinformation must be protected. In the case of China, even in buying an
express train ticket, personal data would be revealed. Can we Japanese
accept such a disclosure of private information? I am afraid we cannot.
Another concern is that payment by Fintech is almost monopolized
by the two digital payment services, WeChat and Alipay, in China andso there are much fewer alternatives for payment than in Japan. I am
afraid this may prevent Chinese society from being an authentic
affluent society where people can enjoy many alternatives. I do notthink Japanese society would go in the same direction as Chinesesociety, though the latter may be more efficient.
On the other hand, Japanese banks are now studying a variety ofFintech payment and settlement frameworks in order to ride this global
trend.
Motohashi: IT and financial services are today interacting with eachother closely. Financial institutes employ many AI experts. Digitalfinancial services are also employing financial experts from the banks
and thus they are pursuing a mixed industry of IT and finance. This isa supply-side story.
On the demand side of this business, it is necessary to make a
distinction between business in Japan and business in China. In orderto do business in China, you would have to be a Chinese company byacquiring capital in a Chinese company. You would have to observe a
Chinese law prohibiting people from bringing out their acquired datafrom China. Meanwhile in Japan, Japanese banks are not adopting theJapan SPOTLIGHT • September / October 201836

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seriously by taking advantage of this pressure from the US as apossible positive development. The Chinese economy could enjoy
higher growth with this, while structural economic reform in China has
been slowing down.

studies in biochemistry or cells, there are very few Chinese students
studying these things in US universities among the 300,000 Chinese
studying in US universities in total. We have the largest number ofChinese students in business schools and the second largest incomputer science schools. This is because they believe that studying
science would not be helpful in earning money. So I think it would be amisunderstanding to exaggerate Chinese economic supremacy. They
clearly have a weakness in innovation capacity.
Electric cars produced by BYD, a Chinese automobile company,
cannot run longer than 100 kilometers unless they are equipped withso many batteries. With many batteries, their fuel consumption
efficiency would be significantly worsened. This means in the old
economy like the auto sector, Chinese innovation has not achieved agood performance. There is still a large technology gap between
Chinese automakers and German, Japanese and American ones. Theirlabor force with technology skills is not well developed yet.
In the steel sector, there is the largest generator producer, Dongfang
Electric, in China. Though their generators are of high quality, theirimportant materials, such as special steel, are all imported from Japan,
since all special steel made in China is not qualified. In shipbuilding, itscore part, engines are also all imported from overseas.
It is certainly true that in the new economy where no legacy isnecessary in promoting business, China has strength. This is because
it has 800 million data users controlled by the government with all of
their IDs. But this strength remains all inside the Chinese border.

Kurauchi: After the US mid-term elections, if the Americans find thatthey have to buy more expensive goods from China due to higher
tariffs imposed by the US government and that their benefits from tax
cuts would be offset by paying for those higher tariffs, they could havea negative reaction to Trump’s protectionism. This might be anotherpossibility for a soft landing.

China-Japan Business Relations
JS: Mr. Kurauchi, could you give us your thoughts on

the possible opportunities for Japanese businesses
in China and also the challenges for them in the
Chinese market, including the issue of investment
climate? What market do you in particular believe hashigh potential in China?

Kurauchi: The Chinese economy is now as important as the US forJapanese business in terms of scale, growth potential and global
business strategy. In 2017, Japanese exports to China reached around
15 trillion yen, nearly equal to those to the US. Recently, as Chinese
tourists in Japan are increasing, e-commerce beyond borders is also
increasing to reflect the growth in demand for Japanese consumer
goods. The Chinese government is also working on import promotion
today and Japanese companies are trying to take advantage of thisinitiative.
On FDI, according to annual surveys by the Japan Bank forInternational Cooperation (JBIC), the top-ranked destination for FDI by
Japanese companies within the next two to three years had been India
since 2012, though it used to be China before that. However, China
became the top-ranked destination again according to their mostrecent survey published in November 2017. This means that Japanesecompanies have acknowledged again that the size and growth potentialof the Chinese market is still attractive and important in the mediumrun. A JETRO review also clarified that half of their surveyed Japanesecompanies were planning to expand their business in China in one or
two years by reinforcing sales functions or increasing production ofhigh-value added goods.
METI’s White Paper 2018 mentioned that the sales figure of
personal services-related companies from Japan to China was lower
than those of US or European nations. Western big names like
Starbucks, IKEA and ZARA have subsidiaries in China and they are
enjoying their business. In contrast, Japanese service industries’
presence is still limited in China. We understand that there exists
enough space for Japanese companies to go into expanding service/consumer-related business in China. Of course we know that it is notthat easy to win the competition there.
On the question of Chinese firms to invest in, healthcare, caregiving
and medical services were mentioned as a potentially high growth
sector on the occasion of Chinese Prime Minister Li Keqiang’s visit toJapan in May 2018. Those services are the core of the Chinese

Trade & Investment Issues
JS: Let’s move to the questions of trade andinvestment. Mr. Ke, could you please give us yourview on the prospects for the US-China trade war?

Ke: Trump has started a trade war with the US mid-term elections in
November 2018 in mind. I have heard from US sources that he wanted
to fight against China exhaustively, bearing in mind that President
Ronald Reagan brought about the collapse of the Soviet Union in the
1990s. He wants to leave a legacy in history like Reagan by causing
Chinese socialism, the last surviving such regime in the world, tocollapse.
On the other hand, in spite of the trade war, there have been no riots
attempting to attack American symbols in China such as Walmart,
Starbucks or GM so far, though in past international conflicts withJapan or European nations their supermarkets or coffee shops or
automobiles were destroyed by Chinese mobs. It can be understoodthat the Chinese government is preventing riots, being afraid of further
US reaction. In this light, I think China will seek a solution for a softlanding from this trade war. Deputy Chairman of the Chinese
Communist Party Wang Qishan will be a key person in achieving this.
He may propose to the US government a menu of Chinese economic
reforms including opening markets or reduction of excess production
facilities. A compromise between the two would depend on how Trumpvalues the menu. I think there would be a further negative impact upon
the Chinese economy at this stage if China sticks to aggressive
retaliation against the US protectionist policy. Of course, this trade war
could work in favor of the Chinese economy, if China starts reforming
20 Japan SPOTLIGHT • September / October 201837

COVER STORY 2

Cooperation, to be attended by a wide range of companies andrelevant ministers.
Japanese companies are interested in cooperation with Chinesecompanies in Africa, the Middle East and the Commonwealth of
Independent States (CIS). I believe that Japan’s participation in deals will
increase the transparency of the project and it must be welcomed by allconcerned parties. However, there are various types of risks which mightchallenge business viability. Another issue is finance. For collaboration,
we need to adjust and build the framework quickly as there is adifference in the lending policies between the JBIC and Chinese policy
banks, such as the China Development Bank and the Export-Import Bankof China. I hope we find solutions to these issues in theintergovernmental discussions with the private sector’s cooperation.

government’s policy to promote national health. Those services arealso ones where Japanese business can be fairly competitive against
US and European firms in terms of providing safety, soundness andtrust. This area could be a potential opportunity for Japanese business,
I believe.
As for the business climate, rising labor costs, tough competition,
non-transparency in implementation of laws, insufficient protection of
intellectual property rights, and regulations on foreign exchanges andremittances are expected to remain the issues as before. The Chinese
government is strengthening its regulations on the environment and it
will be a challenge for Japanese business. The Japanese Chamber ofCommerce in China in its annual white paper published in June 2018
made three requests to the Chinese government for economic
reforms. The first is to correct a commercial system that prevents faircompetition and achieve equality between Chinese and non-Chinesecompanies. The second is further elaboration of administrativereforms such as simplification and speeding up of government
procedures, achieving a common interpretation in implementing laws
and providing private businesses with sufficient time for adjustment tochanged rules and regulations. The third is further modification ofentry regulations for non-Chinese companies into the manufacturing
and service sectors in China.
I believe we should keep requesting the Chinese government andthey may continue to respond to our requests in our favor, such as
lowering social insurance fees and revising the list of non-Chinesecompanies for market entry under administrative surveillance.

Final Remarks
Watanabe: The key message from Japan to the world must be
commitment to maintaining a free and fair world trade system. The
White Paper 2018 clearly declares this point. I think the Japanese
government needs to keep on communicating this message. The
government must carry out two tasks. First, it is important to takeadvantage of the existing rules and policy measures to achieve a free
and fair world trade system. For example, we should work on
elaborating a policy recommendation on the competitive neutrality
problem and subsidy issues under the WTO framework. Active
implementation and utilization of institutions under the current WTO/FTA framework is desirable. Particularly in East Asia, although theinvestment agreement clearly provides a scheme of intergovernmental
communication, it is very rare for the member governments to use thisclause for communication, even if any of the member governments’actions allegedly violate the interests of foreign investors, due todiplomatic reasons. For example, the Lotte group of South Korea wasforced to close its supermarket business in China in 2017. The incident
was allegedly related to the placement of the THAAD anti-missile
defense system by the South Korea government, as the group agreed
to sell its real estate for the site in South Korea. Consequently, it wasreported that the Chinese government ordered the closure of 112
supermarket stores in China due to inadequate fire protection facilities.
This issue should have been addressed by the existing investment
treaty among Japan, China and South Korea. In this treaty, private
business can require the government to look into possible cases
where competition between domestic firms and foreign subsidiaries in
the host country could be distorted by politics. But no action was
taken by either South Korea or Japan.
The other task is building new institutions for adapting to this newenvironment — new issues like data protection or the implementationof competition law in which we have not yet had any harmonized rules.
We will need to work on international harmonization of rules for thoseissues.

JS: A prolonged trade war between the US and China

will seriously harm supply chain networks. Would
this be Japanese business people’s biggest
concern?

Kurauchi: Yes, it is one of our concerns. Stable management of theChinese economy will be most important for Japanese businesses towork in China. The US-China trade war could also affect Japaneseintermediary goods production through supply chains by way ofexports from China to the US. In this regard, we hope trade friction willfind a way for a soft landing soon.
JS: What do you think about the possibility ofcollaboration between Chinese firms and Japanesefirms in third countries, such as Central Asian
countries or African nations?

Kurauchi: While China promotes its “One Belt, One Road” initiative,
Japan is promoting a free and open Indo-Pacific strategy and there
must be some duplication between these two. We will need to pursue
collaboration with transparency, openness, economic efficiency andthe fiscal health of the third country as the basic principles ofcooperation. Based on these principles, two platforms were
established as well for collaboration on the occasion of Premier Li’s
visit to Japan in May. One is the committee for the promotion ofbusiness cooperation between Japan and China in third countries, tobe led by the governments with participation from the private sector,
and the other is the Japan-China Forum on Third Country Business

Motohashi: I agree with Prof. Watanabe. Japan should make clear its
stance of fully supporting the WTO system, and strongly oppose
Trump’s protectionist policies.
Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • September / October 201838

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International Relations in Turbulence
COVER STORY • Exploring Future Relations in East Asia • 1

Interview with Dr. Vinod K. Aggarwal, Travers Family Senior Faculty Fellow and Professor of
Political Science & Director of the Berkeley APEC Study Center (BASC) at the University ofCalifornia, Berkeley

U

S-China Rivalry:
Implications for East Asia

By Japan SPOTLIGHT
With an apparent decline in US leadership and an increase in political rivalry between China and theUnited States in Asia, East Asian nations are expected to play new roles as they face more volatility in theregion, both economically and politically. Japan SPOTLIGHT interviewed Dr. Vinod Aggarwal, Travers
Family senior faculty fellow and professor of political science, and director of the Berkeley APEC Study
Center at the University of California, Berkeley, to discuss how political-structural issues in the US could
make the East Asian political economy more volatile and complex. Is there room for optimism about the
future roles of East Asian nations in global governance and how can they use their soft power for
economic cooperation?
(Interviewed on Oct. 15, 2018)

Declining US Leadershipsomeone like Donald Trump has
emerged. As a consequence, I think
populism will last on and off for a
decade – but not forever. I don’t seethat the political problem will be
resolved very easily and we might see
some alternation between an outwardlooking US and an inward-looking US,
which of course is not very good
because it does not provide stability
for the US in its engagement withinternational institutions.

JS: The US seems to find it

difficult to play a leading rolein global governance today,
due to its economic structuralproblems. How do you
assess this decline in US
leadership in global
governance? Is it temporary
or structural?

Aggarwal: In my view, this is a
Dr. Vinod K. Aggarwal
political structural problem, which in
JS: How do you think thisstructural problem in the US
some ways is more important than an
economy can be resolved?
economic structural problem. By that I mean that there is a sharp
divide in the US between those who support an isolationist policy
Aggarwal: It’s not just an economic problem, it’s a political problem.
and those who are more internationally oriented. I think that we see
There’s no simple political solution, and ironically a political solution
this in the transition from the Obama administration to the Trump
is more difficult than an economic solution. The US is still an
administration. Part of the Republican Party is very isolationist, andextremely strong and dynamic economy with a strong stock market.
part of the Democratic Party is also isolationist, and unfortunately
So I don’t think there’s a fundamental economic problem with the US
the US bipartisan consensus has eroded over time. I think that this is
economy, but I think there is a fundamental problem with growing
more of a fundamental problem than US leadership. Although I thinkinequality, which has led to a lot of people feeling like they have been
the US economy is still strong and going well, it faces several
left by the wayside due to globalization. I think the real issue isunresolved issues, such as the failure to have real structural
whether we can move to some kind of political consensus on helping
adjustment to address changes in the global economy. The US has
the US to adapt to the global economy. Unfortunately, I don’t see any
failed to bolster job transition, education at the lower levels is not as
quick solution to this at this juncture.
strong as it used to be, and I think that the lack of the ability to adjust
the economy to the changing global system has led to unhappinessin various parts of the US. These problems help to explain why
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US-China Political Rivalry

the Chinese use various policies to get technology from the US,
Europeans and other countries, the more it gives them a geopoliticaladvantage. The Chinese have been using their growing militarycapabilities to be more aggressive in the East and South China Seas,and the Americans are now very concerned about this kind of“technology-based Cold War”. One American response has been thepassage of FIRRMA – the Foreign Investment Risk Review
Modernization Act – that will enhance the review process of theCommittee of Foreign Investment of the US. I think that the US
remains skeptical about some of the Chinese investment coming in,
because they view it as Chinese companies coming in and trying totake American technology. Whether that is true or not, that is theview of the Trump administration. In that sense, my prediction is the
US-China trade tension will continue for a while.

JS: Will the US-China trade war be a short-term

problem or will it continue for many years andbecome an economic and cultural war?

Aggarwal: I am not sure that a cultural war would develop. I think
this is really a political and economic issue, and if you look at the
Trump administration, advisors like Peter Navarro have made it veryclear that they would like to – in my view – create a bipolar world
similar to the Soviet Union-US relationship, which means there will
be little trade between the US and China and relatively lessinvestment between the two countries. We would then see countriesaligning with either the US or China, and I think that China for its partis taking the initiative to develop a system based on its own
economy. If you look at the kind of tariffs that we’ve seen – $250
billion – I don’t think they are going to go away anytime soon
because it’s not clear what the Chinese could do to make theAmericans happy in the short run. The US has said it would like to
see an elimination of China’s “Made in 2025” industrial policy, but
the Chinese show no inclination to do so because their wholedevelopment strategy has been based on aggressive industrial policy.
I think that most economists are naive and fail to understand that the
Chinese have been very successful in their industrial policy, and so inthat sense Navarro is right that the Chinese have used their industrial
policy successfully, just as the Japanese and the Koreans usedindustrial policy after the end of World War II. The difference is thatwhen the Japanese and Koreans used industrial policy, they wereboth allies of the US, and were dependent on American security. As aresult, the US could pressure both South Korea and Japan when thegovernment faced domestic protectionist lobbying, but it’s much lesscapable of doing that with China because it is not an ally or
dependent on the US for its security. When people compare
US-Japan and US-South Korea and US-China relations, they fail tounderstand the context in which US-China relations exist. The US
and China are peer competitors in geopolitics, and not just theeconomic realm, and therefore the Chinese have no interest in
getting rid of their industrial policy.

JS: On the issue of a US-China technology-based

Cold War, do you think security risks form the main
perspective in thinking about future risks to tradeand investment?

Aggarwal: I think that what the Trump administration is trying to do– and the Department of Defense has just issued a planningdocument in September 2018 called “Assessing and Strengthening
the Manufacturing and Defense Industrial Base and Supply Chain
Resiliency of the United States” – is to argue that the US supply
chain has lots of vulnerabilities, including its reliance on foreign
firms. These vulnerabilities mean that we are reliant on China andother countries that are not friendly to the US. In this way, they aretrying to frame the debate in a way that makes it look like we need todecrease trade and investment with a lot of these countries because
of security risks. The problem I see is that it is very popular to lookat every import or investment as a security risk and I think that whatthat leads to is a lot of American firms seeking protection, claimingthat there is a security risk where there isn’t one. So I think that thedanger is that all imports will be seen to be a security risk. In the
1950s, for example, the woolen blanket industry argued that the US
had too much dependence on Japan as a supplier because woolen
blankets would be needed to protect people against radiation in caseof an atomic war! I think there is also a kind of false framing of
security when it comes to trade and investment. It is very likely thatwhile there are some important security risks in some parts of tradeand investment. I don’t think that for basic steel, for example, there
are many security risks given that there are many suppliers of steel
outside of China. One could argue that much of the trade war isreally a domestic protectionist effort on the part of American firms.

JS: The US and China are political rivals in the

security system. Does this mean that this trade war is
to be interpreted not as a simple economic conflict,but a competition for political hegemony in theworld?

Aggarwal: Yes, I think that is the way the Trump administration sees
it: the more we have trade and investment with China and the more

JS: In my understanding, no international rules body
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COVER STORY 1

like the WTO or regional free trade agreements havementioned security risks. From now on, do you thinktrade negotiations for international treaties will touchon the issue of security risks much more?

an issue for countries that are middle powers like South Korea. For
its part, Japan is bigger than a middle power but not a superpower. I
think these countries are trying to make accommodations. If you
look at South Korea, for example, it has agreed to revise the South
Korea-US Free Trade Agreement and has made some concessions
with regard to auto exports. At the same time, South Korea has good
relations with the China. So if we move to what the Trumpadministration wants in terms of protectionism and industrial policy,
it may not necessarily be directed against every country in the world.
Indeed, a lot of the protectionism may be focused on trade andinvestment between the US and China. At the beginning of the Trumpadministration, US policy targeted a large number of countries onsteel and aluminum and autos, but I think we are slowly evolving to apolicy where the main focus of the US is on China. So the realquestion is, will the middle, small, and large countries be able to playa game where they can work with the US and continue to trade andinvest in China without the US balking? This raises a big issue forthese middle powers in terms of policy. At UC Berkeley we are doinga major project collaborating with scholars from South Korea,
Taiwan and others on middle power strategies in a rapidly evolving
geopolitical and economic landscape. Although US-China tension will
have a global impact, that does not rule out that countries can sell toboth the US and China and receive investment from both countries.
So, while I am not advocating a bipolar economic world between the
US and China because there will obviously be damage to supply
chains, one can imagine that there will be a kind of restructuring of
the global economy so that some of the supply chains will be tied toeach of these two poles.

Aggarwal: That’s not accurate because the GATT already had aprovision for national security risks (Article XXI). There are generally
provisions for national security in trade agreements so I don’t thinkthat is new. What is new is that the US and possibly other countries
will use the security argument to get protection, to avoid retaliation,and to basically maneuver around the rules of the WTO by sayingthat all of these things are security issues and not just economic
issues. In simple terms, there is a reframing of import competition
as security competition.
JS: You mentioned that the US has become concerned

about Chinese or other countries’ investment in the
US usurping the industrial or technological base of
the US. Has that concern resulted in a significant
decrease in US internal FDI in 2017?

Aggarwal: I think that it’s difficult to attribute the decline ininvestment in the US to these new rules because there was also adecline from 2016 to 2017. Inward foreign investment into the US
was $146 billion in 2016, and in the first quarter of 2017 it was $90
billion, and this was when Trump was just elected. So I don’t think
we can attribute all of this to Trump’s policies. Over the long run, if
there is growing anti-globalization sentiment then we will see less
FDI. But looking at any one year-to-year decline of $51 billion and
immediately claiming that this is a transformation of the global
economy and that investment is stopping is not good analysis. It isalso worth remembering that the rules have really gone into effectimmediately, and have not blocked large amounts of investment.
These developments are also complicated by new tax laws andconcerns about Chinese investing more in Asia, so I don’t think we
can attribute all of this to anti-globalization.

JS: As you said, most of the East Asian countries are

middle powers. How do you see the role of East Asia
in mitigating the negative impact on the global
economy?

Aggarwal: When you say East Asia, I assume you mean East Asia
without China. If we look, for example, at Japan and South Korea, I
think these countries are now in a difficult situation because they
have a lot of economic interdependence with China. The Chinese
have been buying products from these countries and often are
subsequently transforming these products for export to the US. You
may recall that during the 2008 financial crisis there was a lot of
impact on the non-Chinese East Asian economies due to therecession in the US through this supply chain. So I think there will besome wrenching of supply chains, and if South Korea and othercountries were selling to the Chinese and the Chinese were notselling to the US, these supply chains would no longer exist to thesame extent. So I think that there will be a reorientation of theseRole of East Asia in Mitigating Trade Wars
JS: On the economic side, given increased

interdependencies among nations, the policy
implications of protectionism by big countries likethe US and China would be enormous. Assuming thisfriction continues, how can we mitigate this negative
impact?

Aggarwal: That is right to some extent, but I think that this is really
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supply chains for domestic demand in China and in the US. I thinkthat what people are missing is the new NAFTA agreement, which is
now called the US-Mexico-Canada agreement. This is an example oftrying to create more supply chains within North America. I think thatpart of the strategy of East Asian countries including Japan andSouth Korea is to invest in Mexico or invest in the US and be part ofthose supply chains for American-oriented economies. That will haveto continue if the US becomes more protectionist, but in general it
has not been very protectionist against Japan or South Korea or
European countries. Indeed, the Japanese have agreed to startnegotiating with the US on a bilateral FTA and this serves as an
example by which Japan can get around some of the conflicts
between the US and China.
I should mention that I don’t think this is a great outcome; I am
just giving a realistic assessment of what is likely to happen.
Restructuring of supply chains would be costly to the middle power
economies, for American, Chinese, and Japanese corporations, andfor firms in the supply chains in both Asia and North America. We
should also remember that ASEAN countries comprise a market ofover 600 million people, and that Japan and South Korea may be
paying more attention to ASEAN countries given its relative size andgeographical proximity.
There are also alternatives to looking to North American or East
Asian markets. India, for example, has approximately the same
population as China and will eventually surpass China in terms ofmarket size, so I think there are other important markets that middle
powers in Southeast and Northeast Asian countries can focus on.
Africa, where the Chinese have had a free hand and invested
aggressively, also represents an untapped market for these players.

power after the war by pursuing an aggressive industrial policy inshipping and steel. From the 1950s to the 1980s it served as anextremely successful development strategy for both Japan and South
Korea. Contrary to what most economists claim, their strategy was
not just good macroeconomics. Liberal market economics simply
ignores the large amount of literature that shows theinterconnectedness between politics and economics and the fact thatsome countries under some circumstances successfully pursue
industrial policy – and that the WTO is not structured to cope with
that, especially when a large country is doing it. So it’s not that the
Chinese don’t understand free trade, but that their interpretation offree trade is very different from neoclassical economists.
JS: I read an article by Harvard Professor Dani Rodrik

in the Financial Times recently, in which he seems tobe advocating the idea of global trade rules being
adapted to economic diversity. Since emerging
economies play an important role in the global
economy, we cannot force them to accept the valuesof OECD nations unanimously.

Aggarwal: This is hardly a new idea. In 1964 we had the creation ofUnited Nations Conference on Trade and Development (UNCTAD)
and since then developing countries have received special anddifferential treatment. In many of the multilateral agreements,
developing countries are treated differently. The real problem here isthat China is not a developing country, so to say that we should give
developing states benefits and help is fine, but that’s not the samething with massive, successful economies that now pose a threat tothe global trading system. So I think we have had special rules for
emerging economies and I support those rules by and large, but I
think that’s very different from saying we should have special rules
for China or Japan or India, which are large, dynamic economies.

JS: Another way might be to persuade China and the

US to accept the idea of free trade as being importantto achieve global economic prosperity. It is aclassical economics textbook argument.

JS: As you mentioned, China understands free tradevery well. But what seems to be lacking in Chinese
foreign policy is the idea of reciprocity. Could APEC
or a more free and open approach towards
international rules be a good way for China toparticipate in the discussion.

Aggarwal: I think this argument is ridiculous. I think economists
have created this problem, because they have been naive about thegeopolitical implications of trade. The other problem is that countries
have continued to pursue industrial policy and the WTO has not been
set up to deal with these countries. There are regulatory measuresthat can be taken on a global basis, but if you are a small country
pursuing industrial policy, the US and other countries may ignore it.
If you are a heavy rider such as China with industrial policies
fundamentally in contradiction with the WTO and with free market
economics – economists cannot understand this. Economists simply
claim the Chinese are inefficient, and that industrial policy is a failure,
all the while ignoring the fact that Japan became a great economic

Aggarwal: I think this is a good point but fundamentally
misunderstands the Chinese view. The Chinese understandreciprocity completely; they simply don’t want to pursue it. It’s notthat someone has to teach them economics and how countries
should behave; they have some of the leading economists andpolitical scientists in the world. It is a matter of choice, and theJapan SPOTLIGHT • January / February 201942

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some initiatives regarding good global governance.
Unfortunately, this seems unrealistic in terms ofpolitics, but in terms of the economy or culture it
might be possible to achieve a more meaningfulforeign policy among countries in East Asia, namely
Japan, South Korea and China. How do you think we
can achieve such good relations and a good foreign
policy among these three countries?

Chinese choose not to have reciprocity because having an aggressive
industrial policy in which they support domestic firms over foreigncompetitors is fundamentally incompatible with an open marketbased global trading system. In a global trading system designed by
the GATT and the successor organization, the WTO, the logic wasmarket-based players with minimal government support. The level ofgovernment support and the use of regulations in China and othercountries pursuing industrial policy are fundamentally incompatible
with the WTO.

Aggarwal: I think it is simply impossible, and I think the reason that
there is no Northeast Asian agreement of any significance is becauseof political disagreements between the three countries. There’s theJapan-South Korea dispute over islands and Japan’s conduct during
WWII, there’s a similar China-Japan dispute over territory, and theSouth China Sea controversy has continued in the broader region. I
think it is naive to believe that economics and politics can continue
on separate paths without colliding. We had that for some time, butthere was always a lot of tension, and the Chinese have stopped
following Deng Xiaoping’s view of the world which was “Let’s have apeaceful rise” and have now decided to be much more aggressive inthe political and security realms. I don’t think you can have very
good economic and open relations when the political system and the
security system start closing down. I think we had that for some time
because the US was very much involved in East Asia and China wasfollowing a policy of trying to develop its supply chains and buying
products from all over Southeast Asia to sell to the US, but I believethat world is coming to an end.

JS: How about the TPP11? Could it encourage

competitive trade liberalization and even induce
China and the US to join?

Aggarwal: Competitive liberalization is completely nonsense. It isdisastrous because it encourages the US to pursue bilateral trade
agreements, to pursue sectoral trade agreements, and to essentiallyignore the WTO. The Peterson Institute for International Economics
kept thinking that somehow, competitive liberalization would lead toa conclusion of the Doha Round by 2007 if the George W. Bushadministration pursued bilateral trade agreements. That iscompletely incorrect – the US pursued bilateral trade agreementsthat simply undermined the coalition for free trade that would havesupported the WTO. I am a big fan of the WTO, and I believe it is avery important organization that manages disputes.
As far as the TPP11 is concerned, I support it too, although I
prefer the WTO as a forum. Just because the US has pulled out, it
does not mean that Japan and other countries like Singapore should
not trade within a minilateral framework. If the US and China decideto join the TPP11, I think it would be great, but I don’t think we cancall that competitive liberalization. The Chinese and Americans
understand TPP well and, in fact, the US tried to convert it into a
political security instrument for domestic political reasons. Initially,
the US was not blocking China’s membership but then it became
popular to use security arguments and create a TPP without China.
We must also bear in mind the Transatlantic Trade and Investment
Partnership (TTIP) effort between the EU and US – which also ofcourse does not include China. The Obama administration’s goal
became to create two institutions, the TPP and TTIP, which both
excluded China and set the rules for the global trading system. That
has now been replaced by a direct bipolar strategy of the Trumpadministration, which is to ignore the TPP, pretty much ignore theTTIP, and simply focus on blocking trade and investment with China
as a way of punishing the Chinese for their industrial policy strategy
that they have pursued successfully for many years.

Role of Economic Relations & Soft Powerin Mitigating Political Confrontation
JS: Wouldn’t a recognition of the merits of economic

relations be to some extent helpful in mitigating
political conflicts?

Aggarwal: I think that sounds good, but I am not a believer in thetheory of “commercial peace”, which argues that growing economic
interdependence leads to global peace. I simply don’t believe that
proposition. Norman Angell expounded this in 1913, and then WorldWar I took place in 1914 shortly after the book was published. The
notion that trade and cultural relations will help overcome
fundamental political problems is unrealistic. I don’t think that
economic cooperation will suddenly lead to peace and harmony.
Until there is a fundamental approach to dealing with these politicaland security problems including their territorial disputes and China’s
unwillingness to abide by judicial rulings from the Permanent Courtof Arbitration, states in East Asia have little reason to shift their

JS: I think East Asia, including China, needs to take
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policy. In fact, by continuing with economic exchanges with China
and closing one’s eyes to what the Chinese are doing, I think it justconvinces the Chinese that they can continue what they have been
doing, which is being aggressive in terms of their territorial demands
and guaranteeing their economic supply chains.
Instead, the Trump administration has set out to address China’s
industrial policy. I am not a great fan of the Trump administration
with regard to other policies so I am not advocating that it is doing agood job. We should remember that the Obama administration was
also very concerned about China – as evidenced in several WTO
filings arguing that the Chinese are undermining American industry
and engaging in behavior detrimental to the global trade regime. The
fundamental difference is that the Trump administration is much
more aggressive. Ironically, there is much more continuity in US
policy toward China with respect to trade and investment than wemight think.

unilateral power to push the Japanese into voluntary export
restraints in textiles, in steel, in televisions, and automobiles during
both Republican and Democratic administrations. The problem now
is that the Chinese have no inclination to do this because they are notdependent on US security. My problem is that the WTO, which I
strongly support, is not designed for countries like China or evencountries like Japan. But with respect to the latter, Japan’s relianceon the US led to bilaterally agreed-upon policies that helped toovercome the problem. I don’t see that happening in the case of
China. The WTO works well for countries that are willing to abide notjust by the rules of the WTO, but by the norms. The norms are very
important and while I don’t care much for soft power, there arenorms that influence behavior, and I don’t think the Chinese areinterested in these norms.
JS: How do you think the WTO could be

strengthened?

JS: I’d like to ask about soft power. What do you thinkin general about the role of soft power? For example,
there are many tourists coming to Japan from China
today. They seem to have a good impression ofJapan, and so could this to some extent have someeffect in mitigating political confrontation?

Aggarwal: It is very difficult to strengthen the WTO in the current
environment. China is a member of the WTO and the WTO operates
in terms of unanimity, and so I really don’t see any particular strategy
to strengthen it at this point beyond procedural improvements suchas expedited rulings. In general, I support WTO rules and believe thatthe dispute resolution process is very useful, despite it being slow
and easily circumvented.
As I noted, I am not sure if you could design a better WTO in thecurrent environment, although in practice I wish we could. There has
been talk of majority rule and I am not against such an idea, but how
do you reconcile countries pursuing aggressive industrial policy withan institution that is explicitly designed to punish state intervention
in the market? This question has fundamentally not been resolved by
the WTO and its member states. I think that one can talk about ways
to fix the WTO but until the Chinese make some commitment to it ina serious way, I think the US will remain skeptical of it, as alreadydemonstrated by the Trump administration. In my mind, the GATTand WTO were the greatest trade institutions in the postwar era, andunfortunately they have been undermined by countries seeking a freeride.

Aggarwal: My view on this is very negative. I am a strong believer incultural exchanges and in educational exchanges and I think tourism
is a good thing. However, if we believe that these educational
exchanges and tourism will lead to global peace, then that is very
naive. I don’t think that Japan or South Korea or any state shouldbase their policy on hoping that more Chinese tourism will lead theChinese to have a more favorable impression of their country.
Tourism is undertaken by individuals, while policy is made at a highlevel by Chinese government officials. In a strong authoritarian state
like China, there is a strong disjuncture between the population andthe government. I support tourism, but I don’t think it will do muchin terms of changing Chinese policies.

WTO’s Role in Global Trade Conflicts
JS: Finally, I would like to ask about the WTO. You

seem to support the WTO strongly, but unfortunately
it does not seem to be working very well today.

Aggarwal: The problem is that the GATT/WTO was designed for asystem of free market economics where countries would by andlarge desist from intervening in their economies. When the US did
not want to use the GATT against Japan, the US simply used

Edited with the cooperation of Joel Challender, who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.

Japan SPOTLIGHT • January / February 201944

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International Relations in Turbulence
COVER STORY • Exploring Future Relations in East Asia • 2

I

ndo-PacificCooperation from
Indian Perspectives
Author
Sachin Chaturvedi

By Sachin Chaturvedi & Priyadarshi Dash

Introduction

AuthorPriyadarshi Dashamong the countries in the Indo-Pacific region. India and Japan may
initiate this process of engagement in the form of investment inphysical and social infrastructure, technology transfer, skill
development, local industrialization, capacity building and people-topeople interactions. By following the principles of development
partnership, other countries in Asia and Africa can jointly envision acommon roadmap for attaining inclusive growth and development in
the Indo-Pacific region. This may be explored in the framework ofgrowth theories that facilitated development in the successful
developing countries.

The Indo-Pacific region has assumed importance as a source of
global stability and peace. The prevailing contestations in the watersof this region have given rise to security and strategic formulations.
However, in last few years the Japan-India partnership has given theregion an important perspective on international development.
Further, India and Japan has been vocal in promoting a free and open
Indo-Pacific (FOIP) for peace and prosperity in the region. FOIP is a
joint initiative by India and Japan for cooperation in Africa in various
development projects (Brendon J. Cannon, “Grand Strategies inContested Zones: Japan’s Indo-Pacific, China’s BRI and Eastern
Africa”, Rising Powers Quarterly, 2018, Vol. 3, Issue 2). Other
countries that are likely candidates for FOIP are Bangladesh, Sri
Lanka, Myanmar and Indonesia. FOIP sets a vision for the common
future of the people in the Indo-Pacific region.
Further, the region covering two oceans — the Indian Ocean and
the Pacific — is not only home to a diverse set of countries but isendowed with precious natural, mineral and human resources. From
India, Bangladesh, the Maldives and Sri Lanka in South Asia to
Myanmar, Indonesia and Thailand in Southeast Asia, to Japan andAustralia in the Pacific and to Kenya, Tanzania, and Madagascar in
Eastern Africa, the Indo-Pacific region has witnessed several variantsof development experiences. For instance, while Southeast Asian
economies experienced faster industrialization and high GDP growththrough export-led growth strategies and development state models,
India and other South Asian countries experimented with a mixed
economy in their post-independence periods and subsequently
cautious liberalization and privatization. At the other extreme, Japanis a developed country in Asia characterized by a prolonged period of
growth stagnation and an aging population.
These different development models in these Indo-Pacific subregions have produced divergent outcomes manifested in thecoexistence of high economic growth and abject poverty and income
disparity. Although a host of factors may explain this mixed
development outcome despite similarities in resource endowments,
there exist some serious gaps in resource allocation and enabling
policy environments in these countries.
In terms of crude development indicators, countries in South Asia
and Sub-Saharan Africa are dramatically different from the level ofdevelopment in East Asia and Southeast Asia. It therefore presents acase for a virtuous model of international development cooperation

Growth Poles — Catalyst for Balanced Regional
Development
Several paradigms dominated development thinking in developing
countries in the postwar period. While Roy F. Harrod and Evsey D.
Domar, Albert O. Hirschman, Ragnar Nurkse, Joseph Schumpeter
and others provided alternative approaches towards development in
the 1950s through the 1970s, several institutional innovations wereconceptualized to realize the outcome of these development models.
“Growth poles” is one such mechanism, originally coined by
Francois Perroux in 1955, that propagates a growth trajectory withthe prior knowledge of unequal industrialization and development indifferent regions even within the geographic boundaries of a country.
By “growth pole” he meant a center in abstract economic spacefrom which centrifugal forces emanate and to which centripetal
forces are attracted. This connects some urban centers (or dominantfirms) where economic activity is concentrated. Thus “growth poles”
can act as growth engines for the hinterland (remote or backward
areas) which would ultimately lead to higher job creation, raise percapita income and mitigate income inequality. Perroux tried to buildon the theory Schumpeter proposed on innovation and the role oflarge firms, which itself was dependent on discontinuous spurts in a
dynamic world. Perroux tried to break away from the limiting
geographical dimensions adopted in central place theories.
A similar concept — “economic corridor” — captures themechanics of achieving the predictions of the growth pole theory. An
economic corridor, which borrows the spatial perspectives,
envisages a gradual path of evolution of a growth corridor —starting from a transport corridor to a logistics corridor, to an
economic corridor, and then to a growth corridor.
As per this approach, improved connectivity would facilitate

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COVER STORY 2

efficient utilization of natural and human resources in the hinterlandand enhance urbanization and industrialization in the growth centers.
This approach appears to be the most feasible option to meet thedevelopment aspirations of the countries in the Indo-Pacific region(“Asia Africa Growth Corridor: Partnership for Sustainable andInnovative Development — A Vision Document”, RIS, May 2017).
Following this model, high-saving economies can deploy theirsurplus financial resources in building infrastructure and logistics inlow-saving economies in the region which, in turn, would result ingrowth pole effects by incentivizing local firms in the invested
economies to expand and diversify industrial production and move
up in the value chains. Parallel to investment in connectivity projects,
skill gaps in local industrial sectors can be bridged through training,
capacity building and customized on-the-job training. The net result
would be higher economic activity in the local economy in the formof local industrialization, greater participation in regional value
chains, remunerative employment of local labor and, possibly, higher
standards of living.
To begin with, India and Japan can extend support to Africancountries to augment their capability to achieve higher economic
growth and meet the United Nations’ Sustainable Development Goals(SDGs). India and Japan have their own development cooperation
projects in African countries, but their joint initiative under the IndoPacific strategy would expand the scope of cooperation and be more
effective. Since the Indo-Pacific region is a huge maritime area, thecountries can leverage their marine resources for sustaining growth
and alleviating poverty and unemployment. The blue economy
includes several vibrant sectors which can be suitably brought under
the purview of FOIP for effective coordination of the use andgovernance of marine resources in the Indo-Pacific region (Sachin
Chaturvedi, “Asia Africa Growth Corridor (AAGC): Implication for
Indian Ocean Regional Cooperation (IORA),” Presentation at Foreign
Policy Analysis Forum at Bandung, Indonesia on Aug. 31, 2017).

2016 in Tokyo. They both recognized that India’s active engagementin the region under the “Act East” policy and Japan’s “Free and Open
Indo-Pacific Strategy” have the potential for deeper bilateral
cooperation and synergy. It was stressed that improved connectivity
between Asia and Africa is vital for the prosperity of the entire IndoPacific region. In this regard, Japan and India have decided to
explore synergy between India’s “Act East” policy and Japan’s“Expanded Partnership for Quality Infrastructure” for close
coordination both bilaterally and with other partners, to strengthen
regional integration through improved connectivity as well as
industrial networks based on the principles of mutual consultationand trust.
During his recent visit to Japan in October 2018 for the annual
India-Japan Summit, Modi reiterated the unparalleled potential fordevelopment of relations between the two countries. He also
recognized that the India-Japan relationship has been transformed
into a partnership with great substance and purpose and is acornerstone of India’s “Act East” policy. In a similar tone, Abe
underscored the basic importance of the India-Japan relationship forregional order and is determined to advance the “new era in IndiaJapan relations” so as to further cooperate for the peace, stability
and prosperity of the Indo-Pacific region. Based on their sharedvision, the two leaders reiterated their commitment to working
together for FOIP. They also affirmed that ASEAN unity and centrality
are at the heart of the Indo-Pacific concept, which is inclusive andopen to all. They shared their willingness to expand concrete
cooperation with the United States and other partners. The two
leaders’ vision for the Indo-Pacific region is based on a rules-basedorder that respects the sovereignty and territorial integrity of nations,ensures freedom of navigation and overflight as well as unimpeded
lawful commerce, and seeks peaceful resolutions of disputes withfull respect for legal and diplomatic processes in accordance with theuniversally recognized principles of international law, including thosereflected in the UN’s Convention on the Law of the Sea, without
resorting to the threat or use of force.
The two prime ministers reviewed with satisfaction thecooperation on development of connectivity via quality
infrastructure, and other projects including capacity building forshared prosperity, carried out bilaterally and with other partners, inan open, transparent and non-exclusive manner and based oninternational standards, responsible debt financing practices, and inalignment with local economic and development strategies andFree & Open Indo-Pacific
An Indo-Pacific strategy has been in vogue over the past two
years. Both India and Japan have expressed strong interest in thisinitiative for a peaceful and prosperous Indo-Pacific. Indian Prime
Minister Narendra Modi and Japanese Prime Minister Shinzo Abe
had emphasized the rising importance of the Indo-Pacific region as a
key driver for global prosperity during their meeting in November

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priorities. This synergy is embodied in collaborative projects between
India and Japan in the Indo-Pacific region, including in Sri Lanka,
Myanmar and Bangladesh as well as in Africa. In this regard, Modi
and Abe welcomed the discussions for establishing the “Platform forJapan-India Business Cooperation in the Asia-Africa Region” tofurther enhance exchanges between Japanese and Indian businesses
toward developing industrial corridors in the region.
The FOIP vision can be fulfilled through the following pillars:

Skill Development and Capacity Building : Education and skill
development are important areas of capacity building. Countries in
the Indo-Pacific region can share their experiences with othercountries to meet skill gaps. For instance, India has an advantage inthe healthcare sector, medical training and other capacities. Similarly,
India and Japan can collaborate in Africa in mining and mineral
exploration sectors. It would also be essential to synchronize
capacity building and skill development to industrial demand at the
ground level. Entrepreneurship Development Institutes can beestablished for creating cadres of future entrepreneurs in the region.
People-to-People Partnership : People-to-people exchange isimportant for sharing of experiences at the grassroots level as well
as for improving human potential through capacity building andtraining. Public understanding enhances the durability of any project
or institution, but most people engage only when their personal
interests are addressed. The gains from economic interdependence
are more secure when they are widely understood. Tourism andeducation are the major mechanisms of people-to-peopleinteractions. Universities can play a key role in strengthening greaterinteraction among the people of the region for fulfilling the dream of
FOIP.

Quality Infrastructure and Connectivity : FOIP would encouragebuilding of robust institutional, industrial and transport infrastructurein growth poles among countries through quality infrastructure.
Physical connectivity will improve trade facilitation and promoteinter-industry linkages, and offer opportunities to countries tochoose new product lines and shifts in production lines. Quality
infrastructure may include power projects such as smart grids,
renewable energy projects like the International Solar Alliance (ISA),
telecom infrastructure, and so on.
Focus Sector Development Cooperation : Agriculture, health andpharmaceuticals and disaster management could be the focus
sectors of development cooperation among the countries.
Agriculture and agro-processing is an important field of cooperation
among countries in the Indo-Pacific region. The specificdevelopment cooperation projects may include establishment of a
supply chain for crop seeds and agricultural machinery, joint
establishment of regional manufacturing for machinery andimplements to boost farm mechanization, marketing networks for
agricultural machinery, arranging finance and credit systems, andmeasures to reduce post-harvest losses of farm commodities suchas pulses, cereals, oilseeds, eggs, meat, milk, and dairy products.
The two important pillars of cooperation in health are advancing
health research collaboration and medical education as well as
industrial cooperation in the pharma and healthcare sector. Some
prospective areas include health systems research, strengthening thecreation of a surveillance network including for precise real-time
epidemic tracking, pandemic preparedness for emerging andre-emerging infections, drug resistance surveillance for diseases like
TB, HIV, development of point of care diagnostics, anti-microbial
resistance, etc. In the field of disaster management, India’s
experience with management of natural calamities such as floods,
tropical storms, drought conditions, etc. can be shared with othercountries in the region.

Southeast Asia has extremely rich experience in this regard. The
saga of economic growth in the ASEAN region has several
fascinating stories of economic corridors and growth poles
eventually leading to regional integration. The economies of ASEAN
countries could evolve a balance in hard and soft elements that
optimize a corridor’s competitiveness. In this effort inter-sectoral
multilevel approaches could provide growth impetus for small andmedium enterprises.
India has recently implemented several development schemes
which can be replicated in other countries for desired impact on thesocio-economic conditions of the people. In recent years, India has
stressed paradigm shifts in policy approaches to initiate and expedite
economic transformations promoting inclusion, well-being andsustainability. The comprehensive approach to policy making ismeant to link nodes, spread policies and fill the voids in policy
interventions to make transformations effective and credible. Thislargely overlaps with the integrated approach of the SDGs. The mostnoticeable change in approach has been initiated to make economic
and social inclusion a robust, time-bound and self-sustaining
process. The approach has been to move beyond entitlement to

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empowerment and to entrepreneurship. This is being achieved
through measures beyond temporary income transfers. Modi’s
scheme for financial inclusion known as “Pradhan Mantri Jan Dhan
Yojana”, aimed at bank accounts for all with an assurance of social
security benefits linked with such accounts, has been hailed astransformative. Likewise, schemes of financing for small
entrepreneurs, such as MUDRA, and the same for the marginalized
and women under the name of “Stand Up” India offer unprecedented
opportunities for transformation. The social sector agenda has been
set straight through exemplary focus on saving and educating thegirl child, protecting and caring for maternity and comprehensive
efforts to eradicate malnutrition.
Under-development in India has meant lowly living conditions,poor sanitation and open defecation among the underprivileged. The
government’s “Clean India” campaign is meant for time-boundresults. India’s focus on clean fuel and renewable energy is massive
and magnificent at the same time, setting global standards. India has
undertaken huge programs on supply of subsidized clean cooking
gas reaching maximum households and benefitting women. India is
on a steady path of energy conservation and efficiency withavailability of the cheapest LED bulbs globally and has reached lower
per unit costs for solar energy than thermal. Finally, in India highspeed broadband connectivity with the Digital India Programme shallbe reaching all villages. India’s policy efforts on localizing
development and thereafter contextualizing SDGs are a valid modelfor emulation in the Indo-Pacific region. India is ready to shareknowledge, expertise and institutional designs with other countries
for a robust partnership on the SDGs. Moreover, India’s maritime
projects such as Sagarmala and Chabahar port are a reflection of its
emphasis on developing economic corridors in the Indo-Pacificregion.

The advantage with Japan is in its specialization with quality
infrastructure, which in the forms of roads, railways, airports andseaports would reduce the cost of transport of goods and ensure
greater mobility in the urban space with much lower carbon
footprints. The challenge would be to motivate leading actors fromJapan to bring Africa into their roadmap, although the Tokyo
International Conference on African Development (TICAD) VI hassuggested several ways for leveraging business partnerships in
Africa. There are increasingly encouraging results one comes across.
Japanese business presence in Africa has steadily increased in thepast 10 years. Official figures estimate that in 2017, 795 Japanese
corporations were operating in the continent, up 7.7% from 738 in2016 (Chika Kondoh, “Strong Call for African and JapaneseBusinesses to Deepen Ties on Eve of 2018 TICAD Ministerial Meetingin Tokyo”, Oct. 5, 2018 UNDP, Tokyo).
India, through the India-Africa Forum Summit (IAFS), has alreadyformally structured its age-old relationship through new context
partnerships with several countries. The last IAFS in Delhi had arecord 41 of the 54 leaders of the African Union (AU) come together,compared with the previous participation of just 15 leaders or less in2008 and 2011. This shows the impact that the government of India
has evolved over the years with its partners.
In the sectors identified above, including agriculture and agroprocessing, health and disaster management, the specific modalities
of implementation of cooperation projects may be formulated. FOIP
should devise proper governance structures for optimum and legal
use of marine resources for economic growth and well-being. Native
coastal communities dependent on fisheries, shipping, coastal
tourism and other sectors may be given inducements to invest, takeownership and advance knowledge in the blue economy. Under the
FOIP strategy countries can think of creating special funds forexpediting certain cooperation projects on a priority basis.

Future Roadmap
Complementarity between different countries in the Indo-Pacificregion has to be studied and explored further for deeper
understanding. Projects in different sectors can be identified basedon local needs and development priorities. Since FOIP envisages
partnership, the joint mechanisms of identification, financing andimplementation of projects involving two or more countries may be
encouraged. Physical connectivity is the precondition forstrengthening economic and growth corridors.

Sachin Chaturvedi and Priyadarshi Dash are director general and assistantprofessor respectively at Research and Information System for Developing
Countries (RIS), New Delhi.

Japan SPOTLIGHT • January / February 201948

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International Relations in Turbulence
COVER STORY • Exploring Future Relations in East Asia • 7

JInterview with Yixuan Zhang & Shu Kittaka, Presidents of Jing Forum 2018

ing Forum — a Venture for
Youth Exchanges Between
China & JapanBy Japan SPOTLIGHT

Have you heard of Jing Forum, a venue for academic discussion between students at the University ofTokyo and students at Peking University? Friendships made at a young age can be invaluable and canoften last a lifetime. If such friendships involve people of different nationalities, they could help thosenations achieve better relations in the long run. Is this a sentimental or idealistic view? Japan SPOTLIGHT
interviewed a Chinese president and a Japanese president of Jing Forum in October 2018 in Tokyo. We
found them both to be forward-looking and optimistic about the future, as most young people are.
(Interviewed on Oct. 4, 2018)

Jing Forum Presidents

Japan as a neighbor, because Japan is
one of the first countries I grew up toknow; I came from Shandong Province,
which is just across the sea from Japan. I
have seen a lot of activities sponsored by
Japanese corporations so I basically grew
up influenced by Japanese culture. So,
when I got to Peking University and had
the chance to join Jing Forum, I saw it asa good opportunity to deepen myunderstanding of Japan. So I stayed in theforum for three years and found it a great
experience.

JS: Please introduce yourself

and tell us how you joined thisforum.

Kittaka: My name is Shu Kittaka, and I ama senior at the University of Tokyo,
majoring in International Relations. I’mgoing to work for my country as abureaucrat from next spring and I joined
Jing Forum because a friend of mine wasparticipating in it two years ago andrecommended it to me. I also found that
this forum gives us the chance to discuss
What Is Jing Forum?
interesting topics with top students from
JS: Could you give a brief
China and through that process I wanted
background to Jing Forum?
to get a deep understanding of what
Also, it seems there is a very
Peking University students think about
detailed procedure for
their society and politics and so on. I
publishing reports orparticipated last year as a delegate and
Ms. Zhang Yixuan and Mr. Shu Kittaka
conclusions, so could you
enjoyed the discussion, so decided to
explain about this procedure?
become the president and manage the forum this year.

Kittaka: Basically the forum was founded in 2005 and at that time
there was strong mistrust between China and Japan over Prime
Minister Junichiro Koizumi’s visit to Yasukuni Shrine. So, some of themembers of the University of Tokyo thought they could do something
to ameliorate relations, and asked students at Peking University if theywould like to come together in a forum to discuss such issues. That isthe basic foundation of the forum. We have three sections for eachyear. This year we have cultural diversity, regulations in cyberspace,and competition and justice. Each section has five people from the

Zhang: My name is Zhang Yixuan and I am a senior student from
Peking University. I major in Spanish Language and Literature in the
School of Foreign Languages, and after graduating I intend to continue
studying law. I have been in Jing Forum for three years, as I joined asa freshman in 2016, and was a delegate to the section on social
justice. Later on I became vice president in charge of academic
preparation, and that year we had three section topics: gender, elitismand globalism. This year, I am in charge of Jing Forum and myreasons for participating are multifaceted. I really want to understandJapan SPOTLIGHT • January / February 2019https://www.jef.or.jp/journal/

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JS: I am also curious about the process of topic

University of Tokyo and five people from Peking University, and thenwe also each have four members of committees, making 19 students
from each university. We have discussions around the table, but alsointerview professors or people in companies to deepen our
understanding of relations between our countries or social problems ineach country.

selection. You explained about the procedure, but is
it a spontaneous discussion, not based upon any
public information? Do you just get together and talkabout recent news or topics in the media?

Zhang: Basically, for topic selection, the various section leaders havedifferent disciplines and so their academic background pretty muchcontributes to their topic section. A student majoring in international
relations was a member of the globalism section last year, and afterthat discussion she wanted to try to explain why both our societies are
becoming more diverse, and so she raised the topic of cultural
diversity as the main topic. We finally decided on that topic, and that isjust one example of how it works. One student with a particular
academic background comes up with a proposal, does some academic
preparation work, and tries to identify a topic that is pertinent tocurrent debate. Then, that person will be in charge of introducing that
topic and explaining its significance. Although it is a spontaneous
discussion, sometimes it is a little bit more like a debate because weare trying to clarify our positions and persuade other people regardingthem.

Zhang: Maybe I can add something about the procedure. In early April
we have a pre-session, which is for topic selection. A University ofTokyo student will fly to China and join us for topic selection, and so
we will recruit members at our respective campuses and then collectsome basic proposals for our general topics. In that session in April,
we get together to select the three final topics for the year. Afterwards,
with the help of professors and also other students, we prepare otherinteresting topics from our respective universities. Then in September,
we have the Beijing session, which lasts for a week, then the Tokyosession in October. After these sessions, we summarize our
discussion results and publish the report books, one in Chinese andone in Japanese. Basically, we then start to recruit more members andstart to prepare for next year’s discussions, so we are busy all year
round.
JS: So you publish your report on a particular website

Kittaka: Most of the board members of the committees are from theJing Forum of the previous year, and then we recruit section leaders
around January. When we interview them, they bring up some ideasthat they want to discuss. When we go to Peking University in March,
section leaders from both universities decide on what they will talkabout. So the topics are all up to them in a sense.

for this forum?

Kittaka: Yes, we post them on the website, and also publish an actual
booklet for supporters.
Zhang: On the Chinese side we have various ways of publishing our
results tailored to different sections of the public.

Zhang: The section leaders from each country will probably havedifferent ideas about what they are going to discuss, so that is why weneed to gather in April, to try and combine these ideas into a unified
topic.

JS: How about language? One in Japanese and theother in Chinese?

JS: For example, this year’s topics are very

Zhang: Japanese and Chinese. We use English in our discussions, andsometimes when we make a report book to target our Japaneseaudience, we use English.

interesting: cultural diversity, cyberspace,competition and justice. I think these are relevant to
the global economy, not necessarily to bilateralrelations between Japan and China. So are you
focusing on issues from a global context or abilateral one?

JS: I am curious about the participating students. Are

they mostly majoring in international relations orpolitics, or economics?

Kittaka: Some are majoring in international relations, but there are also
law faculty students, and even science and computer science students.

Zhang: I think we need to take both into consideration. We thinkglobally sometimes because we discuss these issues in English. Also,
sometimes I find that our universities have a lot of similarities, so weusually select topics that are pertinent to worldwide debate. This is aninteresting point because it shows that our individual identity is also
diversified; we do not just focus on one country or international

Zhang: This year we have cyberspace regulations, so that is why wehave computer science students. A wide range of students participate
in the forum.
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COVER STORY 7

relations between two countries. As academia often involves
international exchanges, our backgrounds are becoming more diverse.

JS: I am very interested in the third issue: competition

Kittaka: For this year, the topics are related to the global economy andglobalization, but looking back five or six years ago we discussed theeducation systems in both countries. There were also times when we
discussed leadership, labor or social gaps, which means that the
topics are not necessarily related to economy.

Zhang: Competition and social justice is interesting because of its
continuity. Through discussions over 13 years in Jing Forum we havefound a lot of issues related to social justice. I myself joined the social
justice section in 2016. Competition can somehow contribute to more
efficient work, but can also be harmful to society because it can fuelinequality, and especially on equality of outcomes and opportunities
there is a lot of philosophical debate. We want to cover education andbusiness because these are topics related to everybody, and everybody
can have something to say. We illustrate the differences between
Japan and China in high school education, and can figure out different
levels of high schools and why they are different, whether theyemphasize comprehensive education or education that merely focuseson getting higher grades. We are comparing these different factors andhow they affect competition and whether they affect equality. We havediscussed, in the context of China and Japan, whether some
corporations are creating a monopoly, and whether that can affect bothindividuals and society in general. After graduation, students in bothcountries want to go to big firms to work, and in the recruitment
process they want to find out if there are any factors relating to genderor other issues.

and justice. What was generally discussed?

Zhang: Although those topics are related to worldwide issues, when
we hold debates we tend to focus on cases that are more familiar to
Chinese and Japanese audiences. For example with cyberspace
regulation, this year we focused on regulations in each country andtheir differences, so for any given topic we will look at the situation inboth countries.
JS: I am curious about both universities’ faculty’s

involvement in Jing Forum. Could you tell me if thefaculty are also involved in your forum and if so, how
are they involved?

Kittaka: For Jing Forum in 2018, Professor Akio Takahara andProfessor Tomoko Ako supported us, and Prof. Takahara actually cameto our opening ceremony in Tokyo and made comments about thethree sections. He sometimes introduces companies or people who
can support Jing Forum, or helps us find conference rooms or otherspaces for discussion. They only support us, but do not actually takepart in the discussions.

JS: This is a very important issue, as there is now atrend toward populism in various parts of the world,
including in the United States and Europe. What isbehind this? Is it due to expanding income inequality
between the rich and poor? This is often interpreted
as an outcome of competition. In your discussions,do the majority of students support the idea of social
justice, or competition? Was there a consensus?

Zhang: We also receive similar support, usually from the office ofInternational Relations of Peking University. Teachers from thatdepartment help us with logistics, to recruit members, and to provide
academic guidance. Some professors come to our Opening Ceremonyand enlighten us regarding issues in Japan or China.

Zhang: Personally I don’t think that social justice and competition are
in conflict. As for the trend of populism, actually last year we covered
two topics related to that: globalism and elitism. The idea is that
globalization only contributes to the welfare of the elite class and thatthe public in some societies are suffering. My personal idea is that,when it comes to abstract terms like social justice, of course
everybody will support it, but when it comes to specific cases we cansee a lot of factors involved and there might be differences between
Chinese and Japanese standards. We need to remember that ourdelegates from each country do not represent our respective societies
in general as we have similar educational backgrounds. We readsimilar books and accept similar ideas that are quite Westernized, so
we have to keep this in mind. We try to use statistics from bothcountries to compare our ideas.

Discussions in Jing Forum 2018
JS: How is this year’s Jing Forum going so far?
Kittaka: On the topic of cultural diversity, they discuss more abstract
ideas — the questions are about cultural identity or whether all
cultures are equal. What they are doing is to analyze this globalized
world and seek a desirable model in which a majority culture cancompromise with a minority culture. They are also looking at more
specific cases such as the Okinawa problem in Japan or the Xinjiang
issue — the separatist conflict in the far northwest province of China— or gender issues.

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JS: This is a very important point. The students

represent individuals rather than the country.

Zhang: When it comes to your personal identity, it is hard to separatethat from the identity of the community.
Kittaka: Yes, and many of the delegates in the Tokyo forum come fromthe Kanto area rather than regional areas and so their opinions are
somewhat city-oriented and do not represent the rural areas. We try tokeep in mind that we’re not representing our country. The delegates in
Peking University may be more diverse and represent different
regions.
Zhang: On the composition of delegates in Peking and Tokyo, in lastyear’s discussion they actually compared the individual background ofeach delegate, and it showed that most Tokyo delegates are from the
Kanto area and have a similar background, while the Chinese students
had more diverse backgrounds. Also, Tokyo delegates see themselves
are being the elite, while the Chinese students do not see themselvesthat way and feel it is hard to regard yourself as one of the elite in
China as it is so competitive to become one.

Forum’s Merits
JS: It seems that exchange of opinions, informationand values between students of both countries is amajor priority for this forum. This will certainly enrich
your knowledge and experience and be very usefulafter graduation in whatever you do in your work.

Kittaka: In Tokyo, students felt that they were among the elite just byhaving entered the University of Tokyo, while this was not necessarily
the case with Peking University. There they need connections topolitical power to join the elite. So when it comes to fairness, there is a
big difference in values, as University of Tokyo students’ emphasis ison individual rights or individual backgrounds when thinking about
competition. In China, there might be more emphasis on social
mobility than in Japan in terms of getting into a top university.

Kittaka: I agree. Our main goals are to exchange information and see
the fundamental differences in our values. Sometimes we try to reacha conclusion about what an ideal society is and how to get there, but
we found that is very difficult because we have completely different
societies so actually cannot imagine such an ideal society.
JS: What does the conclusion look like after each

Zhang: We have different perspectives on these issues and different
results. When it comes to the University of Tokyo, I think most
students come from urban areas, especially in Tokyo. But the process
is fairer because there are unified tests for students of all regions. In
China, we have different tests for different regions and this gives
different outcomes. If you live in Beijing or Shanghai you have a goodchance of entering top universities, but if you come from a province
like mine, it is increasingly hard. When it comes to the results, it
seems that we don’t have that high a concentration of students from
Beijing or Shanghai. Social mobility in China is kind of diminishing
because when it comes to the process of development it is a global
trend — social mobility improves alongside development. In our
debates and thought experiments, I think delegates are not justrepresenting themselves; they are trying to summarize social impacts
that they perceived themselves.

debate?

Zhang: Sometimes it is hard to reach a conclusion about what an ideal
society looks like in the context of fairness, so in our report book wehave some interesting conclusions, and we just truthfully record our
discussion process and also whether people are reaching a
consensus, and the reasons why we cannot reach it. We don’t look fora one-sentence conclusion but more to identify the reasons why there
are differences, and to analyze the roots of those differences. I thinkthat reaching conclusions and making policy suggestions is not themain goal; rather, it is about mutual trust and mutual inspiration and toreally understand our respective societies.
JS: Having listened to your comments, I think this is avery useful forum for improving friendship because
you discuss many important issues as individuals.

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COVER STORY 7

The forum was founded in 2005 and has been goingfor almost 15 years, so friendships must have growna great deal. Do alumni of the forum sometimes
address you or talk about their experiences?

trade wars or other rising geopolitical risks?
Kittaka: Of course, many students are interested in these issues but
they are a little far removed from our daily lives so it is hard to talkabout them individually, based on our own individual values. It is going
to be based more on research or academic background provided byprofessors; we need to focus more on the actual discussion process.

Kittaka: Sometimes we have the chance to meet alumni, and we invite
them to the party after the final presentation. Other than that, I
sometimes hear that alumni chapters gather in places like New York,or that alumni end up working together in the same companies, forexample in the banking sector.

Zhang: Especially when it comes to the trade war, it is more relevant toChina so perhaps Peking University students should be more familiar
with that issue; I personally feel it is more of a zero-sum game, butwhen it comes to the Jing Forum discussion, the idea is to say no to azero-sum game. We prefer the idea of a plus-sum game, and that is
why we are trying to reach that goal through cooperation andcommunication.

JS: You have made these friendships at a young age

and they last a long time.

Zhang: Yes, and not just delegates of the forum, but also university
students whom we present to, because we promote our ideas andfriendship to them. When we introduce Jing Forum to Peking
University students, we are trying to show them how wonderful
Japanese society is and to attract them to our forum, by which we canpromote friendship. We are not just providing them with images; weare trying to invite them to join us in order to find the answers to theirlong-held questions. Through this process, we can create mutual trust
and understanding, and discover that while we have many differences
there are also lots of similarities. We are also trying to understand ourown identities: my first time in Jing Forum was very enriching as I
didn’t have a clear identity as to who I was and who I represent, but
through debating these ideas I think I am able to understand myself
more deeply.

JS: What do you think is particularly important when

considering how to maintain good relations between
Japan and China?

Zhang: I think that economy and trade are definitely important. To use
my experience in international exchange and student forums, I thinkthat people-to-people relations are also important. For example, China
and Australia have very close trading relations, but on the level ofpolitics or people-to-people we are not so close. However, between
China and Japan, there are very strong linkages between Japanese andChinese people and these take place irrespective of the policies
between the two countries. We know that over history there has beencommunication between our two nations and even in difficult times
our cooperation never really stopped. We learn a lot from Japan, and a
lot of more abstract words that we use enter our lexicon from Japan.
These two countries have influenced each other throughout history
and so it is not just about economy or trade, but really about people
and people relations. When Chinese tourists come to Japan, even if
they can’t read everything, they feel a sense of familiarity and this is
the foundation of mutual trust.

JS: Whatever you do after graduation, this experienceis very useful. Are any of your senior members in
China living in Japan or vice versa?

Kittaka: Yes, I know some alumni from Peking University now living inJapan.
Zhang: One of our past delegates was interested in the environment,
and after graduating he worked in Japan for seven years and thenreturned to China, where he gained an MBA. I interviewed him and had
a deep impression of how Jing Forum can impact on your future life. I
also know a student from Peking University who worked in Japan for
nine years after graduating. The friendship and inspiration that they got
from Jing Forum was certainly a big help to them.

JS: So you think people-to-people relations are an

important element of this forum. Also, I believe that“soft power” is very important for such relations.

Kittaka: Yes, when I ask Peking University students why they areinterested in Japan, they often say that it was because they saw
Japanese movies or animation, and so I think that soft power is indeed
important as a way of getting people to develop an interest in Japan.
This is very different from the formality of newspapers or thegovernment. I am sure that trade and economic relations are very
important between our two countries, as the Japanese economy is

Next Year’s Topics & Future Issues
JS: We mentioned topic selection, but are there any

topics selected for next year, such as the issue ofJapan SPOTLIGHT • January / February 2019

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certain to go down over the next 50 years. Meanwhile, I am a little
pessimistic about political relations because over the past 100 years
we have fought against each other, and it is kind of inevitable for theJapanese and Chinese governments to try and blame each other. That
is why soft power can play an important part in forming people-topeople relationships.
JS: Will your forum discuss these cultural matters in

the future?

Zhang: Yes. One reason why Chinese students join Jing Forum is thatthey grew up watching Japanese cartoons and are attracted toJapanese. On the other hand, China has not traditionally had such astrong cultural industry and its soft power is weaker, so it is somewhat
curious as to what exactly attracts Japanese students to join Jing
Forum.
Kittaka: The reason why I joined Jing Forum is because I was studying
China and Chinese language too, and when I was entering the
University of Tokyo people told me that this is the era of China and that
China would dominate economically, so I thought it would be good tounderstand China better. I think it is easier for us to have a discussion
with students from China using English, because it is a second
language for both of us, so it is easier than discussing with English
natives.

sense, attraction to another culture to study its language
spontaneously will have a big impact. My personal wish is that China
and Japan can be more attracted to each other to bring about mutual
prosperity and understanding of each other’s cultures.
Kittaka: When we debate, we realize how our cultures are really similar
to each other, and while we usually use English, we sometimes find it
difficult to define terms such as culture or Westernization. In that case
we sometimes write down the kanji, and then we can express what wemeant in English. It takes a lot of effort to learn each other’s language,
and I think that using English makes the discussion kind of neutral
rather than Chinese or Japanese dominant.

Zhang: When it comes to soft power, it has a foundation in hard
power. Especially with China’s burgeoning economy in the last few
decades, Japanese students are very interested in understanding
China, so it is a combination of hard power and soft power that forms
the attraction of understanding each other.

Zhang: Another thing is that in academic research English is thedominant language, and this is really hard to change. We have to use
English for the academic background to our debates. I am actuallyquite optimistic about our future, because if the world is more andmore focused on cultures of civilizations, Japan and China actually
have a lot of similarities compared to other nations. We have easieraccess to transport and communication, so when these barriers comedown we will have even more opportunities to communicate with eachother and understand each other, and when we can put aside ourdifferences and understand each other, we can enjoy a more
harmonious relationship.

JS: My last question is about language. Someone told

me that in Japanese schools we pick up Chinese as asecond or third language. Could there be a mutualline where China expands Japanese education andJapan expands Chinese education? This could help
promote good relations, as language is an important
form of soft power. In the future, could Jing Forum beheld in either Japanese or Chinese exclusively?

Zhang: A lot of the delegates in the University of Tokyo are learning
Chinese, and can speak it as their third language. Similarly at Peking
University, delegates are learning Japanese and are doing thisvoluntarily rather than as a compulsory course. Personally, I feel that
language barriers are diminishing around the world — studying aforeign language will become easier, and sometimes less important —because we have a lot of resources to help us communicate. In thatWritten with the cooperation of Joel Challender, who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.

36 Japan SPOTLIGHT • January / February 201954

Changing Global Geopolitics
Perspectives on Global Risks: the 2nd JEF Global Risk Symposium 1

Author Naoyuki Haraoka

By Naoyuki Haraoka

The Japan Economic Foundation (JEF) has been studying theimpact of geopolitical risks on the economy since 2013, in the belief
that global geopolitical risks such as North Korea or the Middle East
could seriously affect the global economy, as well as economic
developments such as the world financial crisis in 2008. In 2017, JEF
hosted a symposium in Tokyo on risks linked to the global economic
performance which could have a deep impact on business strategies.
This first symposium was an attempt to draw the attention ofJapanese business people to some geopolitical risks as factors that
could influence their business decisions. The second symposium in2018 highlighted the fact that each risk involves a wide range ofplayers and needs to be analyzed in terms of their different
perspectives and the relations among them. With such a holistic
overview of the nature of the risks, firms could better work on theirglobal business strategies.

be sources of geopolitical risk, so we could continue to see
economic fragility, which could also be expanded by deeper
fluctuations in exchange rates as well as stock market volatility that
could cause serious turbulence.

Overview of the Structure of Geopolitical Risks
Geopolitical analyses should be free from any subjective andemotional views, such as “anti-American” or “anti-Russian”. Thinktanks must obviously take a neutral and objective approach to any
actual event or issue to present the public with the evidence. Whileeconomic developments are mostly analyzed from this perspective,
geopolitical developments are occasionally seen to be biased. Thispossibly originates from the Cold War period when nations werecategorized into a group of either capitalist or socialist countries.
Today, even after the end of the Cold War, we can see a “proChinese” or “anti-Chinese” bias in some geopolitical views. These
were not shared by our symposium’s organizers and speakers. The
symposium has a mission to provide factual analyses and a varietyof views on geopolitical events. I think business leaders can bestlearn from such objective analyses to help them with their businessstrategies.
We are living today in what has been termed a VUCA world –meaning a world with volatility, uncertainty, complexity andambiguity. In particular, it should be noted that under globalization
the interlinkage between national economies is greatly enhanced, sothat a policy or incident in any given country could affect the global
economy overall. In addition, developed countries’ economic
performances have tended to converge today, as each one has cometo a mature stage and even many developing nations have begun toreach that stage. Thus, the trend is for national economies to besynchronized, and in such a world the blurred relations between
domestic economies and the international economy make issues
more complex and ambiguous.
The increase in anti-globalization sentiment seen in many nations
today stems largely from the excessive globalization of businessactivities, and this kickback itself has started to affect theinternational economy in the form of protectionism. With this trend,
uncertainty is exacerbated by stock market or exchange rate
volatility. In such circumstances, the need for a bird’s-eye view of the
global economy is increasing. For example, Japan’s labor market
reform will attract a non-Japanese labor force into Japan and thus

Why Does the Global Economy Feel So Fragile?
At the beginning of 2019, a few months after our second global
risk symposium, some new geopolitical risks emerged, such as thetrade war between the United States and China, as prime sources ofconcern for economists in their predictions for the global economy.
At the symposium, we discussed Russia’s influence on politics inEuropean nations, as well as views on Brexit, geopolitical stability
possibly to be provided by cooperation in the Indo-Pacific Ocean
region, and the likely direction of North Korea. As time goes by,
however, geopolitical risks evolve like an animal: we see new ones
emerging and old ones changing.
For business people, perhaps the key question in 2019 will be why
the global economy feels so fragile. This concern about fragility
could stem partly from a possible breakdown in the global politicalorder, creating severe economic disruption probably through acollapse in trade resulting from US-China trade frictions and a rise inprotectionism. Other geopolitical events could also be sources offragility, as well as the possible unmanageability of accumulated
public debt among leading OECD nations. Although political centrists
may hope that anti-globalization movements led by the right willfounder, as perhaps seen in the US mid-term elections where theRepublicans led by President Donald Trump lost their majority in theHouse of Representatives, there are also such movements led by theleft, as seen in the election of Andrés Manuel López Obrador aspresident of Mexico in 2018. Populist movements may continue to
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Perspectives on Global Risks: the 2nd JEF Global Risk Symposium 1

facilitate more FTAs involving Japan thanks to a greater flow ofhuman labor. It may also encourage Japan to conclude an Asia-wide
regional FTA, which could be instrumental in convincing the US or
the other trading partners of the utility of free trade again.
Globalization itself should encourage geopolitical analyses to beholistic, given the deeper interlinkages among national interests andthe world becoming more close-knit. Focusing only on any given
geopolitical incident will not enable business leaders to create
relevant strategies.
Sir Graham Fry, a former British ambassador to Japan, pointed out
in the symposium in 2018 that although Brexit could gravely affectthe future of the European Union, the geopolitical crisis in Europe
should be seen more in terms of the rise in nationalism among
European nations and the increase in Russian influence in this area.
We should not forget that Russia would be the main beneficiary of
any collapse in Western capitalistic and democratic values. The
situation in Europe should be analyzed not only from the UK’s
perspective but also from that of other players, including Russia.
Deonanan (Raj) Makoond, chairman of Business Mauritius
Regional Energy Working Group, mentioned the crucial role of the
Indian Ocean for geopolitical stability in the world. The conclusion of
the CPTPP (Comprehensive and Progressive Agreement for TransPacific Partnership) was a successful step in efforts to integrate
Asia-Pacific economies. Broad economic cooperation among East
Asia, India and South Asia, and Africa would help achieve peace andprosperity by mitigating geopolitical risks caused by China’s
aggressive foreign policy in this area and also encourage
development in Africa and reduce the risk of terrorism by extremely
poor Africans. Thus the Indian Ocean region is important not only forJapan but also for stable growth of all the nations in this region.
Dr. Yong Sueng Dong, a former member of the Council of Policy
Advisors to the President of the Republic of Korea, and Dr. James E.
Hoare, an associate fellow of Chatham House and consul general at
the British Embassy in Pyongyang at the time of its establishment,
told the symposium that when trying to analyze North Korea it isimportant to recognize how it is linked with other countries and tounderstand the viewpoint of North Korea itself. It is necessary to lookat the key players – China and Russia – as well as the US, South
Korea, Japan and even Europe and Africa. It is also important to see
the interlinkages between geopolitical risks. For example, today it issaid in the media that China may use its power over North Korea toachieve its denuclearization in the hope of persuading the US to

JEF-KRA Global Risk Symposium 2018, Thursday, Sept. 20, 2018 at Iwasaki Koyata
Memorial Hall of the International House of Japan in Tokyo

accept a compromise in China’s favor in their trade negotiations.
Three of the four speakers mentioned above have contributed
articles to Japan SPOTLIGHT largely consistent with theirpresentations at the symposium in 2018. Readers will gather fromthem that looking only at risks could simply result in making
business become cautious. It is more important to think about
solutions. A view of geopolitical risks that takes account of different
players’ views and the interlinkages among them – an overview ofthe structure of geopolitical risk – could provide clues to such
solutions in clarifying the meaning of each geopolitical issue.
This is particularly important for the interests of multinational
enterprises since they are doing business all over the world. They
will need a holistic overview of geopolitical risks in formulating theirglobal business strategies.

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

Japan SPOTLIGHT • March / April 201956

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Changing Global Geopolitics
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Author Sir Graham Fry

By Sir Graham Fry

International affairs today are strongly influenced by two factors.
The first is geopolitical: the economic and strategic relationshipbetween the United States and China is now the most important in
the world and increasingly characterised by rivalry rather thancooperation. The second is ideological: in a range of countries we areseeing a backlash against globalization and the rise of a newnationalism: this is, for example, expressed by the administration of
US President Donald Trump as putting “America first”. These factors
have created heightened risks for Europe as well as other regions.

nuclear power stations. But more recently awareness of security
risks has risen in Western Europe: examples are the growing
concerns about China’s moves to obtain advanced technology, e.g.
by acquiring European high-tech companies, and about the potential
security threat from the supply of 5G telecoms equipment by
Huawei. The European Union shares many of the concerns
expressed by the US about China’s industrial and trade policies. If
the US had been looking for allies in its struggle with China, it could
have probably have obtained support from the EU, but it was not.

Europe/China

Russia: China’s Best Friend …

Japan was much quicker than Europe to see that the growth of
China’s economy was changing the global strategic balance. The
strategic “pivot” to the Asia-Pacific region by the administration offormer President Barack Obama was one wake-up call. President
Trump’s more aggressive approach to China has broad backing in
the US. European policymakers may grasp the importance of China
intellectually, but on a day-to-day basis they tend to be more
preoccupied by their own neighborhood, including Russia and the
Middle East.
For many years, they have seen China in commercial terms as a
growing market for European firms and a source of infrastructure
investment. As part of the Belt and Road Initiative, 16 countries
participate in a partnership called “Cooperation between China andCentral and Eastern European Countries”, and even in the United
Kingdom, Chinese companies participate in plans to build new

A different context is provided by the alliance of convenience
between China and Russia. For 20 years they have been the leading
partners in the Shanghai Cooperation Organization and its
predecessors, and they now engage in bilateral military exercises onland and sea. This has echoes of the Sino-Soviet relationship, but thebalance of forces has been reversed. China’s economy is now eighttimes bigger than Russia’s and growing faster. In 2017 Russia was
the top supplier of crude oil to China, and it has dropped its
inhibitions about selling its latest military equipment, as shown by
the supply of Sukhoi Su-35 fighter jets.
But what draws the two countries together is not so muchpractical considerations of this kind as shared objectives. Both ofthem see the US as their principal adversary, constraining their own
exercise of power and influence. They both aim to weaken
Washington’s international alliances and challenge the international
order, which was largely created by the US and its allies in the
postwar era. Both resist international efforts to promote democracy
and human rights. The leaders of both countries see such policies asadvantageous in defending their own internal legitimacy and gaining
popular support. No wonder Chinese President Xi Jinping has called
Russian President Putin his “best, most intimate friend”. If China
aspires in the long term to become the dominant force on theEurasian landmass, then Russia is an essential partner.

Photo: http://kremlin.ru… But Poses a Strategic Threat to Europe
It is not, however, inevitable that Russia should be drawn soclosely into China’s orbit. From a European perspective, it is wellunderstood that Russia is an important neighbor, a major energy
supplier and a large potential market for trade and investment.

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Russia’s position as a permanent member of the UN Security Council
and its influence in international affairs should make it an important
strategic partner. From Russia’s perspective, Europe can provide
much of the investment and technology which is needed to create amodern, industrial economy. There is a strong mutual interest in
developing dialogue and cooperation.
The problem is that Putin has made a different choice. There ismuch debate about the reasons for this; but Russia’s behavior inrecent years has made it virtually impossible for European nations tohave a constructive relationship with it.
One after another, Russia has used their internal divisions todestabilize neighboring countries and to take over part of theirterritories by force. Ever since the war with Georgia in 2008, it hasexerted effective control over two regions of that country, Abkhazia
and South Ossetia, which it claims are independent states. A similar
situation obtains in Moldova. In 2014 Russia responded to unrest in
Ukraine by sending troops without official uniforms into Crimea andannexing it. This amounted to the first forcible annexation ofEuropean territory, and the first forcible re-drawing of a frontier,since 1945. The vast majority of the international community
condemned it, and the EU and US imposed sanctions on Russia, but
its illegal occupation of Crimea continues. Russia followed this byintervening with similar methods to support separatist movements ineastern Ukraine, where the war, which has probably claimed over
10,000 lives, continues: a significant part of Ukraine’s territory
remains outside government control. Although Russia’s attention has
recently been diverted to its intervention in Syria, its seizure of three
Ukrainian naval vessels last November shows that it is keeping up
the pressure.
Not surprisingly, this pattern of Russian behavior has caused
anxiety that it could be repeated in other neighboring countries with
Russian-speaking minorities, including the Baltic States, which are
NATO and EU members. Since the Georgian war, Russia hasembarked on a sustained program to modernize its forces andimprove their capacity for joint operations. This includes annual
large-scale exercises on a rotating basis in each of its five MilitaryDistricts, plus a series of no-notice “snap” exercises. These can be,
and have been, used as a cover for military intervention. In addition,
Russia has increased its incursions into the airspace of NATOmembers. In response, NATO has been improving its own capability
for rapid reaction. It has, for example, stationed four allied battlegroups in the Baltic States and Poland on a rotating basis, andincreased the size and speed of the NATO Response Force. This is
not a return to the dark days of the Cold War since conditions in
Europe have changed in numerous ways, but it is striking that,
whereas 15 years ago NATO felt confident enough to launch
operations outside its Treaty area (e.g. in Afghanistan), its attention
is now focused back on the direct threat to its members from a moreaggressive Russia.
That threat is not just a conventional military one: it is a form of
hybrid warfare, involving the deployment of conventional andirregular forces in conjunction with psychological, political and cyber

Photo: https://mail.ex.ua/76677715

Unidentified soldiers at Perevalne military base in Ukraine in 2014assaults. Russian media outlets have become channels not merely
for putting forward Russia’s point of view but for advancing
conspiracy theories and throwing doubt in the public mind aboutinconvenient facts. This in turn is amplified by Russian activity onsocial media, which has been shown to be extensive and mainly
designed to stir up anger and division in Western societies. Last
year, for example, US prosecutors published considerable detailabout how the Internet Research Agency, a troll factory in St.
Petersburg, used social media to interfere in the 2016 US
presidential election.
The Russian government is also widely using its capability forcyber-attacks and doing so in a way which blurs the boundaries
between criminal and state activity. A few examples have been
publicized. In February 2018, the US and the UK identified Russia as
the source of the NotPetya ransomware attack, which originallytargeted Ukraine but is estimated to have caused over a billion
dollars of damage to companies in Europe, the Americas and Asia. In
October, the UK identified Russia’s military intelligence agency, the
GRU, as responsible for a number of other specific hacking andransomware attacks and listed 12 aliases which it had used. Amongits targets were the Organisation for the Prohibition of Chemical
Weapons (OPCW) and the World Anti-Doping Agency (WADA). At
the same time, Dutch authorities revealed how they had caught GRU
operatives in the act of spying on the OPCW in The Hague and how
one of their laptops linked them to a WADA conference in
Switzerland. Their interest in WADA derives from the revelation in2014 that the Russian state had been involved in systematic dopetaking by Russian athletes, and the subsequent investigations.
Their interest in the OPCW had an even more sinister origin – theattempted murder of Sergei Skripal and his daughter in the UK in
March 2018. The OPCW confirmed that a rare nerve agent of a typecalled Novichok had been used. Later, a British woman unrelated to
the Skripals found the residue of the Novichok poison in a waste bin
and was killed by it. All the evidence points to the GRU as having
been responsible for this too. The leaders of France, Germany, theUS and UK jointly condemned “the first offensive use of a nerve
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Perspectives on Global Risks: the 2nd JEF Global Risk Symposium 2

agent in Europe since the Second World War”, and 30 nations andinternational organizations together expelled over 150 Russian
diplomats in protest. The incident recalled the murder of Alexander
Litvinenko in London in 2006 with a radioactive substance calledpolonium.
This European experience of Russian behavior may well havelessons for Japan’s leaders in their relations with Putin and his
government.

to some of the certainties of the past appear attractive.
b) The second is cultural. During my lifetime the UK and other
European countries have gone through rapid social change. New,
more liberal attitudes towards gender, race, religion etc. havebecome accepted in the media and enshrined in laws, but not
everyone is comfortable with these changes, particularly outside thelarge cities. The nationalist parties claim to be defending traditional
values (and in some cases Christian ones), and often win greater
support in rural areas and small towns and among older people.
c) Both these strands come together on the issue of immigration,and if there is one thing which has boosted the far right, this is it.
The large inflow of immigrants from the Middle East in 2015 was adefining moment. In Germany, the Alternative fur Deutschland (AfD)began as a party opposing government policy on the euro but only
really took off when it switched in 2015 to focus more on
immigration: it is now the leading opposition party in the Bundestag.
The Hungarian government built a fence along its southern borderand continues to play on fears of immigration. In Italy, Matteo
Salvini, the interior minister, has increased his party’s poll ratings
through his tough line on immigrants coming by boat across theMediterranean. And there are plenty of other examples.

Europe’s Ideological Challenge
Meanwhile, within Europe itself, there has been a rapid increase insupport for nationalist parties in recent years. In Hungary and Poland
such parties form the government; in other countries including
Austria, Italy and Slovakia, they are part of a government coalition;and in many others they have increased their share of the votes inelections. The history, policies and leaders of these parties vary, butthere are some clear common themes:• Hostility to the “elites”, who are seen as pursuing their own
interests at the expense of ordinary people;• Support for the nation-state, and hostility to internationalorganizations, including the EU;• Hostility to immigration and multiculturalism (and in some cases
to Islam), which are seen as threatening national identity.
Such parties and such attitudes have existed for many years. Whatis new is the upsurge in support for them, and there have been many
attempts to analyse what lies behind it. I suspect that there are threefactors above all.
a) The first is economic. Globalization has benefitted many people
around the world, but some in developed countries who lackadvanced education and skills feel it has brought rapid change andinsecurity but little, if any, improvement in living standards. Theirdissatisfaction with their prospects and their sense of having beenleft behind seem to have come to a head when the financial crisis of
2008, followed by the euro crisis, brought a period of economic
stagnation. Strongman leaders offering simple solutions and a return

European Integration at Risk?
There is, therefore, a strong challenge to the established politicalorder in Europe, and in some ways that may be no bad thing. Thereseem to me two aspects, however, which could pose fundamental
problems for the EU. The first is the hostility of the nationalists to the
EU itself as a supranational organization, and the second is that insome instances they challenge the basic democratic values on which
the EU is built.
On the first of these, the evidence so far is reasonably reassuring
for the EU. The UK is the only country which is seriously thinking ofleaving. Even at the height of the euro crisis Greece decided not to
do so. Across Europe there continues to be widespread support inopinion polls for EU membership. In some countries nationalist
parties have even decided to tone down their anti-EU rhetoric when it
appeared to be a vote-loser. The central European countries whichhave rejected some EU policies, such as fixed quotas of refugees,
derive substantial benefits from the EU single market and its
structural funds. The present Italian government which initially talked
up its determination to challenge the EU’s limits for national budget
deficits has in the end compromised.
Moreover, it would be wrong to believe that the nationalist wave
will continue unabated. It is in the nature of the democratic processthat parties wax and wane, and there appears to be a limit at least inWestern Europe to the share of voters who are willing to support the
far right. The situation varies considerably from country to country,
and by their nature nationalist parties do not naturally cooperate witheach other. Although they are expected to increase their number ofseats in the European Parliament elections next May, they do not sit
as a united bloc but belong to four different groupings. If the key to

Photo: EPP Summit, Brussels, March 2017

Hungarian Prime Minister Viktor Orban and German Chancellor Angela Merkel

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their growth has indeed been immigration, mainstream parties aredeveloping new policies in response, and action by key governments
has already produced a sharp drop in arrivals on the two main routes
into Europe. Indeed the main impact of the nationalists in the longterm may turn out to be changes made, for better or worse, to thepolicies of mainstream conservative parties.
None of this is intended to minimize the importance of this trend.
There will be more tough arguments and difficult elections, andfurther progress in developing EU integration may be slowed down.
But the main reason at present for blockages in EU reforms is not somuch the rise of the nationalists as more traditional policy
disagreements, such as in the eurozone.
In the long term the challenge to fundamental EU values may be
more serious. The Hungarian government, for example, has taken aseries of measures to limit the independence of the media and the
judicial system and to restrict the activities of civil society. A
particular target has been the Central European University foundedby George Soros, which had to move most of its courses out of
Hungary last December. Attacks on Soros have sometimes had antiSemitic overtones. The Polish government has also carried out aseries of judicial “reforms”, which have been criticized for reducing
the independence of the judiciary. Such developments challenge thevery basis of the EU as an association of democratic countries
committed to the rule of law and human rights. Nor are they only an
issue in countries with right-wing governments: recent actions by
the Romanian authorities to weaken anti-corruption institutions havealso caused concern.
Such issues are not easy for the EU to tackle. Under Article 7 of
the Treaty on European Union a member state can be deprived of its
EU voting rights by a unanimous decision of EU leaders if there is aserious and persistent breach of EU values, but the process islengthy, and Hungary and Poland are likely to defend each other.
Moreover, this is a highly political issue, and a punitive approach
may only serve to strengthen nationalist feeling. Skilful tactics andstrong political will are required, and it may well be hard for the EU
to obtain clear-cut results.

Photo: https://www.flickr.com/photos/whitehouse/42444673425/in/album-72157697284924301/

US President Donald Trump with NATO Secretary-General Jens Stoltenberg, July 11, 2018

leaders, seems to admire Putin, is a big fan of Brexit and has evensometimes sounded doubtful about NATO. The US Congress hastaken a harder line than the president against Russia and in defenceof NATO, but perhaps the biggest risk that Europe faces is outside its
own control – the unpredictability of the present US administration.

Brexit: an Error, But Not the End of the UK
In the midst of all this, the British people have decided to leave theEU. I believe that this is a historic mistake. All the factors I identified
earlier as being behind the rise of nationalist parties in Europe
contributed to it. As I write this, I have no idea on what terms Brexit
will happen or even whether there will be a second referendum.
Even so, it is possible to exaggerate the negative impacts.
Economically, the British economy (the fifth or sixth largest in theworld) will suffer slower growth in the transition to new trading andregulatory arrangements. But UK business has many strengths and it
will adapt: the City of London, for example, will continue to be one of
the two largest financial centers in the world. A quick look atinternational comparisons shows that the UK has four of the top 10
universities in the world, the second-highest total of Nobel Prizes,
the second-largest exports of services, the third-largest ODA
spending and the seventh-highest defense spending. Even outside
the EU, it will continue to be an active participant in world affairs, asa permanent member of the Security Council, a leading member ofNATO and other international organizations, and one of the larger
countries in Europe. Moreover, when the excitement about Brexit has
calmed, the UK will still need to cooperate closely with its European
neighbors, and they with it. That is an unchanging geopolitical fact.

The American Angle
The two issues I have highlighted – the Russian threat and theupsurge of nationalism – converge. Putin likes to claim that he isdefending Christian civilization and values, and many (but not all) of
Europe’s nationalist leaders have close links with him and oppose theEU’s sanctions on Russia. The risk is therefore that Europe’s
response to Russia becomes divided and ineffective.
In such circumstances Europe has often benefitted from a strong
lead provided by the US. Moreover, in military terms, although
European governments are promising to spend more on defence andthere is even talk of a European army, the reality is that NATOdepends heavily on American military might. It is therefore aproblem that Trump shares almost all the attitudes of thenationalists. He has been highly critical of mainstream European

Sir Graham Fry was British ambassador to Japan (2004-8) and Malaysia(1998-2001), and is now an advisor to international companies.

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AuthorYong Sueng Dong

By Yong Sueng Dong

Introduction

strategy of fortification to protect North Korea, Kim Jong Un isemploying an active military strategy to defend it. The sanctions
against North Korea and the strategy of increasing pressure that the
US is employing are improving the stability of the regime. Kim istrying to bring changes to North Korea through denuclearization
negotiations. The country is still a feudalistic society, but Kim istrying to change it into a modern one. But paradoxically, maintaining
a feudalistic society provides stability for the regime. There aresimilarities to the times when Western powers demanded East Asian
countries that still maintained a feudal society to open up in the 19th
century. The frequency with which Kim is providing local guidance
while displaying his anger towards unchanging North Korean
officials and organizations is increasing. In spite of economic
sanctions, he is flaunting the progress of developments such as theMirae Scientists Street, Ryomyong Avenue, and Wonsan Kalma zone.
What Kim is demanding of North Koreans is to have the resolve forchange, so that the sanctions would not be a problem.
North Koreans are scrambling to procure the financial resources
for various developments. When Kim orders development, the Party
allocates financial resources to each organization. Each organization
then distributes the allocated resources to North Koreans. Kim
checks each site through on-the-spot guidance and pushes
development forward. It should be noted that the focus of such
movements is on restoring the North Korean economy’s selfrehabilitation capacities. The economy’s dependence on the outside
world is low. It is a typical feudalistic society. The commercializationof North Korea simply means the distribution method for internal
resources is switched from a planned economy to a market
economy. It is not that the economic pie has got larger and themarket has expanded. Kim wants to enlarge the pie. Because theprocurement of internal resources has its limits, he is actively trying
to obtain external resources.
To this end, North Korea has been negotiating with the US with its
only bargaining chip, denuclearization. If the pie becomes larger,
North Korea’s dependence on the outside world increases and it will
become an opportunity for North Korean society to switch from a
feudalistic society to a modern one. The market will exceed thechange in method of distributing North Korea’s internal resources
and the nature of the economy itself will be forced to change. This
will fundamentally change the method of assessing the stability of
the North Korean regime. Kim accepts these risks.

The situation on the Korean Peninsula evolved rapidly in 2018. The
three inter-Korean summits and the North Korea-United Statessummit were events that we could not have predicted just a few
months ago. At the center is Kim Jong Un, chairman of the State
Affairs Commission of North Korea. Kim took over the leadership ofNorth Korea at a young age. While North Korea maintains a socialist
state, in actuality we can see it being ruled by a dynasty like in feudal
times. North Korea has pursued extremely closed policies since its
foundation, which has contributed to building up its mysterious
image and increasing concerns about its military power under adictatorship, and this has served as a source of its competitiveness.
South Korea’s assessment of Kim has changed dramatically. The first
South Korean special envoy that visited Pyongyang and came into
contact with Kim for the first time stated that “Chairman Kim Jong
Un was well-versed not only in the relationship between the Northand South, but also with the details of the background and history ofinternational affairs.” While this is only natural for a leader who bears
responsibility for a country, this assessment of Kim was a clear
expression of the outside world’s perception of the young andinexperienced leader. The world, as well as some in North Korea, has
generally considered Kim an extraordinary dictator who has, since
taking power in 2012, threatened the international community with
nuclear and missile development and did not hesitate to do awaywith not only powerful men, but even relatives such as Jang Song
Thaek and Kim Jong Nam. In this way Kim’s radical conduct
significantly increased concerns about the political risks posed by
North Korea for South Korea and the rest of the world.
However, since Kim became leader, North Korea has shown many
internal changes. The international community did not take muchinterest in such changes as they were overshadowed by the nuclear
problem. Since 2018, Kim has started to show himself to the outside
world and assessments of him have changed. China has even called
him “a great young leader who will move the world”. This article willassess the stability of the North Korean regime based on the changes
that have occurred since Kim came to power.

Changes in & Assessment of North Korea
A North Korea that Accepts Risk
Currently, North Korea is accepting risk. While Kim Jong Il used a
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A Change of the Method of Assessing the Stability of theNorth Korean Regime Is Necessary

CHART

Correlation of the stability & opennessof the North Korean regime in the J
Curve

③

stability

The international community’s economic sanctions against North
Korea have become a means to obstruct its changes. In order tobreak through the Kim Jong Il era’s fortification strategy, theinternational community employed a carrot-and-stick strategy and it
is still clinging to this way. Many people who have visited North
Korea see improvement in the economy to the extent that theyquestion whether North Korea has really had sanctions imposed on
it. Of course, this is only after seeing some major cities such as
Pyongyang, but if the sanctions have any effect they would impact
Pyongyang as well. North Koreans are used to using the country’s
financial resources through the distribution method of the market.
North Korea overcame through the market a situation of economic
difficulties stemming from dysfunctional distribution in the past.
However, by circulating internally goods that should be exported
outside the country due to the sanctions, a situation in which there
are more goods is occurring. The sanctions are serving to maintainthe stability of the feudalistic society.
Peace on the Korean Peninsula will start from changes in North
Korea. Its menacing behavior towards the world with its nuclear
capabilities threatens peace not only on the Korean Peninsula but
also in Northeast Asia, as well as globally. This was Kim Jong Il’s
fortification strategy. As a result of economic sanctions by the rest of
the world in order to stop such menacing acts, North Korea raised its
level of threat. However, Kim Jong Un switched to an active military
strategy for defense. What he is asking for is to become a member ofthe international community, since he is prepared to stop menacing
acts even though possessing nukes. He is trying to increase theNorth Korean economy’s dependence on the outside world.
The US has a toehold on the solution. Both China and Vietnam
started to reap the benefits of reform and opening-up since
improving their respective relationships with the US. The US ispresenting denuclearization as a condition for North Korea to qualify
as a member of the international community. Since Kim Jong Un
commenced direct negotiations with the US, he has made his
intention for denuclearization clear continuously and also stated thisintention in the Pyongyang Joint Declaration at the inter-Korean
summit last September. North Korea revealed the destruction of thePunggye-ri Nuclear Test Site and pledged the closing of the
Dongchang-ri Missile Engine Test Site. It also stated that the
Yongbyon Nuclear Scientific Research Center could be dismantled.
The US has stated that North Korea must first do everything toward
complete denuclearization and has not eased up on sanctions. South
Korea and other countries such as China and Russia are of theopinion that a certain level of easing sanctions is necessary, but the
US shows no sign of backing down. This is forcing North Korea tomaintain its feudalistic society and return to Kim Jong Il’s
fortification strategy that had threatened the international
community. From such a viewpoint, we must change how we assess
the stability of the North Korean regime going forward.
This situation can be explained by Ian Bremmer’s J Curve.

②①

openness
Note: ★ shows the current position of North Korea.

Source: Ian Bremmer, The J Curve (2007), Seoul, Veritas

Bremmer states that in the process of reforming and openingsocialist and less-developed closed countries, Zone 2 naturally
exists. Applying this analysis to North Korea, the situation can be
explained as shown in the Chart. The era when Kim Jong Il’s
fortification strategy was employed corresponds to Zone 1. If Kim
Jong Il favored the opposite of openness in order to maintain thestability of the regime, Kim Jong Un, who employs an active military
strategy for defense, is considering the direction of Zone 3. However,in reality, as negotiations take place between the US and North
Korea, the emergence of Zone 2 is inevitable. Therefore, if North
Korea-US negotiations are to come into full swing in the future, amethod to assess the stability of the North Korean regime that will
emerge in Zone 2 will be necessary.

Five Core Indicators
The core indicators that express the level of stability and change in
the North Korean regime can be identified in two areas: changes in
the internal environment and changes in the external environment.
Looking at its internal environment, the North Korean regime has
seemed to be a feudal absolute monarchy rather than a socialist
regime. Socialism has been used as a means of maintaining such a
feudal monarchy. If Kim Il Sung established the North Korean regime
and Kim Jong Il consistently protected the regime from internal andexternal threats through fortification, Kim Jong Un leans heavily
toward an active military strategy for defense (defense equipped withoffensive weapons). The traditional indicators to assess the North
Korean regime were selected during the fortification era of Kim Jong
Il and they are not suitable for the changes of the times.
That is to say that the international community considered North
Korea to be stable if it maintained its current feudal characteristics
and unstable if it switched to a modern society. However, now weshould consider it to be the opposite. Kim Jong Un is trying to bring
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North Korea out of a feudalistic society and lead it to a modern
society. However, this has the risk of increasing instability in theregime. Even with the same assessment indicators, the standards toevaluate differ.
Changes in the internal environment are also being pushed byKim. For changes in the external environment, the core concerns arelikely to be changes in the environment accompanying the power
struggle between the US and China and it will signify North Korea
becoming a normal state within the international community.
However, there is a possibility that North Korea becoming a normal
state might conversely increase the instability of the regime.
Overall, Kim is directly taking the lead in pushing forward workthat could potentially increase instability in North Korea. It is unclear
whether Kim is aware of such an outcome. The question of whether
normal development of the North Korean regime is proportional toNorth Korea’s political stability remains unanswered. Some hold theview that if Kim’s work that harms the stability of North Korea goes
too far, there is a possibility that it will whip up a backlash within
North Korea. Nevertheless, because Kim is conducting work that
increases instability in North Korea, the method by which we assess
the regime’s stability must change.
The core indicators to assess the stability of the North Korean
regime can be summed up in the following five points.

Korean nuclear problem, but the crisis reemerged with North Korea’s
nuclear experiments and has continued until recently. Kim Jong Un’s
North Korea declared the completion of its development of nuclear
weapons and has resumed negotiations with the US premised on
denuclearization. The US abandoned its existing method of indirect
involvement and has begun directly communicating with North
Korea. The North is demanding security guarantees for its regime
from the US. For the US, this demand means halting hostile military
actions and lifting economic sanctions. In short, it is a demand tocreate conditions for North Korea to act as a normal state within theinternational community. In return, it would go into the nuclear orderthat the US maintains. Comprehensively, this would signify that
North Korea would come under the US nuclear umbrella. If therelationship between North Korea and the US progresses to the pointof establishing diplomatic ties, it would bring about tremendous
change in the regime. North Korea’s international standing would
transform from a rogue state to a normal one. On the other hand, theNorth’s national power would virtually be reduced to the lowest level.
That is to say that the progression of North Korea-US relations will
result in making the North Korean regime less stable.
(2) North Korea’s Relationship with China

The relationship between North Korea and China has traditionallybeen equal. Nevertheless, China is the North’s most important
supporter. The relationship began to show signs of misalignment
with the establishment of diplomatic ties between China and South
Korea in the early 1990s. In a situation in which the US and Japan
had no diplomatic ties with North Korea, its most trusted supporter
China suddenly established diplomatic ties with South Korea without
prior consultation with the North. At the time, because the results ofthe economic reform and opening-up of the Chinese market had yet
to be seen, there hadn’t been a much economic exchange, but they
had maintained a close political relationship. The economic
relationship between China and North Korea started to become very
close around 2010. Japan started to strengthen sanctions against
North Korea in 2006 due to the abduction problem and South Korea
cut all ties with the North with the May 24 measures of 2010. It wasaround this time that China’s economy expanded dramatically andNorth Korea naturally started to depend on China.
Currently, North Korea’s relationship with China accounts for over
90% of its external economic relations. It is an absolute relationshipof dependency. This means that if North Korea remains content
under the protection of China, there is no particular problem inmaintaining the regime’s stability. In order to maintain the North’s
feudalistic system, it is actually more beneficial to maintain its
dependency on China. However, if the international community’s
sanctions against the North were to be eased and its external
relationships become diversified, the North Korea-China relationshipwould be less close. This will possibly result in increased changes
and instability in North Korean society. On the surface, if therelationship between the North and China were to deteriorate, it ispossible that the outcome would be the same – the assessment that

(1) North Korea’s Relationship with the US

North Korea’s relationship with the US is the core concern ofchanges in North Korea’s external environment. This changes
according to the security of the regime that North Korea demands
and the degree of denuclearization that the US demands. Before
North Korea’s declaration as a nuclear power, the US tended tocontrol North Korea indirectly through China and South Korea.
However, it has been controlling the situation through direct dialogue
with North Korea since 2018. Since the 1990s, North Korea has been
attempting to join the international community in various directions.
In 1992 it adopted a basic agreement with South Korea, held highlevel talks with Japan on eight occasions, and attempted to normalize
relations. However, there was strong opposition, with the US
bringing up the allegation of North Korea’s nuclear development andits withdrawal from the Non-Proliferation Treaty. With the US
considering military action over this, the bilateral relationship cooled
rapidly (first nuclear crisis). However, as instability in the North
Korean regime rose with the death of Kim Il Sung, the US concluded
the Agreed Framework with North Korea in October 1994 to suspend
the proliferation of North Korea’s nuclear technology. The US was tomake arrangements for two 1-million kilowatt light water reactors by
2003 as a condition for North Korea to suspend its nuclear
development. We know that at the time, the US made this agreementwith North Korea on the premise that the regime would no longer
exist in 10 years’ time.
However, the North Korean regime continued to exist, and in 2002
the North Korean nuclear crisis was reignited (second nuclear crisis).
The Sept. 19, 2005 agreement seemingly put an end to the North
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instability in the regime would heighten – but in actuality it would not
deteriorate, but rather its dependence on China would decrease.
North Korea would be able to employ a survival strategy ofequidistant diplomacy with the US and China. China would continue
to provide the proverbial carrot to North Korea to maintain its
influence, and the US would likely present a different carrot to theNorth to distance it from China. North Korea is trying to takeadvantage of such a conciliatory game. The less close its relationshipwith China gets, the more the regime’s stability will decline.

numerous vested rights, but Kim Jong Un diverted the military’s
vested rights to the living of the people. It is not too much to say that
the North Korean military currently only has the rights necessary tomaintain it. Because the market to sell military goods is cut off
internationally, simply put, the military has become extremely poor.
Up to now, the military had enjoyed privileges to be able to maintaina separate economic power called the second economic category.
Since Kim came to power, the military has lost most of its privileges
and its dissatisfaction is growing. Furthermore, Kim is attempting tocurtail the enlarged military. Recently, due to a military agreement
between South Korea and North Korea, the military’s position isfurther declining.
Such movements have the possibility of aggravating the military’s
concern about Kim’s political power and the possibility to attempt achange in political power (a coup d’état) cannot be ruled out. This isdue to the military no longer being able to maintain itself on a statelevel distribution of resources alone and being forced to explore an
independent means of survival. There is a possibility that theeconomic activities of the military will expand along with changes inthe external environment. This will lead to the military expanding its
independent power, increasing the relative possibility of
independence of political power. Additionally, in the process oftransitioning to a republican form through a constitution, not only isthere a possibility of the military’s political neutrality or
independence emerging, it could also be an opportunity for the
military’s traditional force to enhance itself. Therefore, theindependence of the military will be inversely proportional to thestability of the North Korean regime.

(3) Kim Jong Un’s LeadershipNorth Korea has a socialist constitution. The system of thisconstitution means that North Korea takes the form of a republic.
However, it is actually in the form of a monarchical state. It is a
feudalistic monarchy in which the king has absolute authority. Kim’s
authority surpasses the constitution. In such a system, challenges tothe absolute authority cannot be accepted. Kim Jong Il was seen as
the favorite to succeed Kim Il Sung in the 1960s. After more than 10
years in a power struggle with his stepmother Kim Song Ae’s faction,
he was officially named successor in 1980. In the end, it can be said
that he fought for the position of successor with his stepbrother Kim
Pyong Il. Kim Jong Un also fought for power until the mid-2000s
with his stepbrother Kim Jong Nam. However, due to the sudden
death of Kim Jong Il, he took power without being able to end thepower struggle himself. It ended up creating a situation in which
kingmaker Jang Song Thaek aimed to become regent. Kim Jong Un
brutally disposed of Jang Song Thaek who challenged the absoluteauthority, and is maintaining a regime of terror worse than that of
Kim Jong Il.
The change in Kim Jong Un’s leadership is the most importantbarometer of change in North Korean society. Within thecharacteristic of a feudalistic monarchy (hereditary monarchy) led by
Kim, we must focus on the process of divine right (the power of theking) being separated from political power (republican form) throughthe process of modernization. The reason for this is because thechanges in North Korea being advanced by Kim, in other words
processes to be a normal state, can only trigger separation of theking’s power and political power. The emergence of political power
based on a constitution is the basis of political modernization. It is
unclear whether Kim is aware of this. Nevertheless, we must assess
the stability of the regime from the perspective that it is inversely
proportional to the weakening of Kim’s power.

(5) Trends in North Koreans’ Lives

Public sentiment is divine will. Of the core indicators that affect thestability of North Korea, the trends in North Koreans’ lives should
always be included. North Korea maintains a planned socialist
economy, but this virtually fell apart during the famine of the 1990s.
North Koreans were used to daily necessities being provided at low
prices and usage expenses, residence expenses, and education
expenses of social overhead capital. They simply had to provide
labor. However, at the same time as the planned economic systemfailed, North Koreans were forced to resolve their living problems on
their own. Their solution was the market. In the early stages, themarket expanded as a barter system. Gradually, currency became
involved and in order to maintain the stability of the value of thecurrency, it was replaced by foreign currency (US dollar, Chinese
yuan, etc.). The biggest interest of North Koreans was how to earnmore. As long as they had money, they wouldn’t have a problem
finding food and they could even use electricity. They could become
the proprietor of a company and they could place their children ingood schools. They could even make opportunities to go abroad.
The North Korean authorities have repeatedly gone back and forthfrom allowing the spread of the market to a limited extent tosuppressing it. However, since Kim came to power, the market has
been officially recognized. Each company earns its own money and(4) Movement of North Korea’s Military

North Korea’s military is currently completely under the yoke of
Kim and the Workers Party. It is believed that there was a coup d’étatin North Korea by the new military guards led by Jang Song Thaek inthe summer of 2008 when Kim Jong Il suffered a stroke. They were
gradually purged before the execution of Jang Song Thaek and withthe purge the military reverted to being the military of Kim and theParty. It was Choe Ryong-Hae who orchestrated this. During themilitary-first politics of Kim Jong Il, the North Korean military had

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laborers who work for each company are responsible for their own
living. Cooperative farms have also been given back the right todispose of the goods they produce themselves. Cooperative farms
existed only in name and since 1979 farmers had been pushed to
become laborers, receiving monthly cost-of-living allowances in
effect. Naturally, the decline in productivity of cooperative farms
could not be avoided and farmers concentrated on cultivating
vegetable gardens and terraced fields in which they could produce
the goods that belonged to them. As the situation worsened during
the North Korean famine, the dramatic decline in the productivity offarms was inevitable. Now, cooperative ownership is permitted in
effect. Farmers are devoting themselves to cooperative farms. This isbecause they are allowed to take home the fruits of their labor. The
goods produced by companies and on farms are traded in themarket. Sole proprietorships are also increasing.
However, because the current situation is mainlycommercialization utilizing national resources, its expansion islimited. North Korea shifted from a planned economy to a market
economy, but the living of North Koreans remains poor. This isbecause the economy is not growing with the inflow of new funding.
It is simply a reconstruction of part of the hardware broken in thepast and changed to a form of distributing it in the market. The workthat Kim is pushing to change North Korea from inside will provide
opportunities for the economy to grow through the inflow of new
foreign resources. A change will occur in the negative accumulation
method, which will bring about change in North Korean society. A
substantial modernization process will be realized in the lives ofNorth Koreans. With the expansion of mobile phone usage,
enhancement of a commercial system, expansion of business sizes,
and the birth of an affluent demographic, among other things, North
Korea is bound to form a new social network which will, in turn, be
the driving force to change society. If the lives of North Koreans
improve, the stability of the regime will weaken.

with North Korea now. If bilateral relations remain at the same level,
the North Korean regime will be unable to change and it will maintainits stability. Because its dependence on China will increase, its
stability will also improve. Kim’s leadership forces change without
being able to provide new things so it will reach its limit, but since
there is no driving force to change the political regime it will remain
stable. The military will also be forced to remain the military of the
Head of State and the Party. The commercialization of North Koreans
will likely expand, but since a substantive expansion cannot be
expected the market will not have the power to bring about evenmore change or instability. Therefore, if North Korea-US relations
remain at the same level, the regime’s stability will increase.
On the other hand, should bilateral relations develop, North Korea
will become a normal state, and at the same time its international
standing will fall. That means it will actually weaken the stability ofNorth Korea. There is a possibility that after North Korea’s weakening
continues until it enters into a stage of full-blown economic
development, it will gradually strengthen its national power. This
would be the so-called J Curve effect. Its dependence on China will
decrease and the stability of the regime will also weaken. Kim’s
leadership will strengthen in the early stages, but it will likely
gradually decline. If his leadership strengthens, North Korea will bestable, but if his leadership weakens, it will become unstable. Thereis a possibility that the independence of the military will gradually
increase. The military is negative about the regime’s stability. North
Koreans’ lives will improve and this will also affect the regime as adestabilizer. Such a process will repeat itself over the next few years
and assessments of the North Korean regime will also change
repeatedly. At present, the regime is stable. This is because it has yet
to ride the waves of change.
Kim wants to negotiate with the US using denuclearization asleverage to create a new North Korea. He is pushing forward changes
in spite of the fact that they will make the regime less stable.
Therefore, we must aid Kim. Currently, he is the only person who canchange North Korea and it is not an exaggeration to say that if hecannot do it, there is no other way. The surrounding countries canhelp him to escape from isolation. It is not even necessary tooverestimate him. However, doubting and restraining the only
alternative could hinder progress. Kim is appealing to us to believe in
him now. To hastily pressure North Korea now to come forward withboth hands in the air will only aggravate the situation. The higher the
hurdle the international community sets that Kim cannot accept, thelower the possibility for a resolution. Kim is young and patient. If we
do not act now, it will only serve to allow North Korea to improve its
nuclear weapons and raise the level of threat against the international
community. There is also the possibility that South Korean President
Moon Jae In will fret about the situation and leave it up to the next
administration.

Conclusion
The stability of the North Korean regime is rooted in the continued
maintenance of a feudalistic monarchy. If the feudalistic absolutemonarchy collapses or changes, during that process the regime will
become unstable. Kim is advancing the reform and opening of North
Korea through his own absolute power. He is taking action thatconflicts with the stability of the regime. From such a viewpoint, theinternational community’s blockade of North Korea is actuallypreserving the stability of the North as it is a factor that suppresses
Kim’s efforts for reform and openness.
Opening a way for change begins with North Korea-US relations.
Improvement in the relationship with the US will provide theenvironment for North Korea to transform from a special state to anormal state. Unlike past US administrations, the administration of
President Donald Trump is prepared to offer such an environment. If
it could not speed up such an offer due to the midterm elections, theTrump administration can concentrate on and accelerate dealings

Dr. Yong Sueng Dong is CEO of Oriental Link Inc. He was previously a seniorresearcher of Samsung Economic Research Institute (1989~2015) and amember of the Council of Policy Advisors to the President of the Republic ofKorea (2009~2012).

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Changing Global Geopolitics
Perspectives on Global Risks: the 2nd JEF Global Risk Symposium 4

Author James E. Hoare

By James E. Hoare

Introduction: North Korean Experts
Are Rare Birds!

with little knowledge of history, it is the North that is blamed for thedivision. But the process that saw the emergence of two separate
states on the peninsula started long before the Korean War. Outside
powers – the United States and the Soviet Union – carried out theinitial division. Their intentions were initially limited to taking theJapanese surrender. The Cold War intervened, and the two powers
oversaw the development of separate states on the peninsula. The
leaders of both states wanted unification. Each denied the other’s
right to existence. (To some degree, they still do, summit meetings
notwithstanding.) Belligerent noises and threats came from both.
The North struck first. Although the smaller in population, it had themeans to do so thanks to the Soviet decision to give it an army. The
US made a different decision. South Korea had a lightly armed superpolice force that proved no match for the forces from the North. If
there had been no outside intervention, the problem of Korean
unification would have been solved in 1950. But intervention there
was, and the war settled nothing. Now two even more hostile states
faced each other across the division line, initial hostility made worseby the bitterness of war.
Relations between the two Koreas were not helped by the rest of
the world. During the war, the United Nations had set up acommission – the UN Commission for the Unification andRehabilitation of Korea (UNCURK) – that pledged to bring about the“rehabilitation and reunification of Korea” which followed on from its
1948 declaration that the South was the “only legitimate governmenton the Korean peninsula”. Although the wording did not say that it
was the only government on the peninsula, it acted as though thatwas what was meant, a position that Western countries went alongwith. Not until the early 1970s, with the first substantive contacts
between the two Koreas since the Korean War and the winding-up of
UNCURK, did the position change and Western countries begin toopen diplomatic links with the North.
From the war onwards, the default mode outside the North forreferring to the two Koreas was “Korea” for the South and “North
Korea” for the North. The implication, clearly, was that the South was
the real Korea. (Something similar happened in the case of divided
Germany and Vietnam.) The North was odd, an aberration. Of
course, there were ways in which the North contributed to thisimage. It was a tough totalitarian regime that maintained a fierce
independence. Few visited it. Even among the socialist states, it wasseen as a difficult partner; it was grasping and needy and it went its
own way as far as it could.

First a word of caution. Kim Jong Il, the leader of North Korea
from 1994 to 2011, told a group of visiting journalists from South
Korea in 2000 that anybody who presented themselves as an expert
on his country was a fool. Having studied the North since the mid1970s, visited several times, and lived there for 18 months in 20012, I am inclined to agree. Just when it seems obvious how things
work in the country, a new twist throws you off balance and thecertainties of yesterday are swept aside. It is not just me. The
number of predictions about the future policy or the chances ofsurvival of the country that have been proved wrong is legion. North
Korea is adept at allowing visitors to see only what it wants them tosee. It is not impossible to get around this. To do so, however, youmust keep your eyes and ears open. Do not take things at face value.
Probe as much as you can but do not be rude and do not break therules. What would cause no problems in most countries may not betreated with much tolerance in North Korea as some have found totheir cost.

Demonizing Is Easy
Demonizing North Korea is easy. For many commentators, it is thedefault mode. They do not analyze the country nor try to understandit. They know that it is evil, or that its policies are wrong. The most
famous exponents of this view were probably US President George
W. Bush and his senior colleagues, who famously did not negotiatewith evil, but, they said, destroyed it. Unfortunately for them, theneed to deal with the reality of the North Korean nuclear program
proved stronger than the unwillingness to negotiate. But Bush andhis men were by no means alone. North Korea arouses strong
emotions. The strength of those emotions can spill over into vitriolic
exchanges on social media, in conventional media and even inacademia. Nuance disappears, black and white prevails.
The process begins early. Few use the country’s official title – theDemocratic People’s Republic of Korea – or even the abbreviation
DPRK. Some avoid the official usage because they do not want togive legitimacy to a state that, in their view, has no right to exist. To
them, there should be no division on the Korean Peninsula. Korea
was one for over 1,000 years. It should not be divided. Even theJapanese colonial administration did not do that. For many people

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Photo: Copyright 2011 J E Hoare

Photo: Copyright 2011 J E Hoare

Pyongyang September 2018 - The show city

Pyongyang Autumn 2001 - Also a show city, perhaps

The Odd Placeyears, then stopped predicting.
The fact is that the North has survived despite war, invasion, thelongest sanctions regime in the world, economic collapse and theend of its main trading partners, famines, floods and drought. Soviet
forces had liberated the north of the peninsula in 1945. The Soviet
Union may have enabled the Communist forces to dominate the area
and undoubtedly played a major role in the establishment of North
Korea. Dependence on Soviet guns to maintain its position wasended by 1949. It was China that saved it during the Korean War, notthe Soviet Union. Unlike the states of Eastern Europe, from the
1950s onwards it moved to a more independent position, drawing as
much on Korea’s historic past and even on the practices of theJapanese colonial administration to give the state legitimacy. The
collapse of the Soviet Union, which caused the collapse ofCommunism in Eastern Europe, worried the North, but it did nothave the same effect on it as it did on the European states.

The North was seen as a threat but also as a strange, bizarre place.
Both themes persist. Exaggerated claims about its military mightabound. Its rhetoric is indeed ferocious. Yet it is in reality cautious,
behaving like many small states surrounded by much bigger states,
all far better equipped. When not dealing with its alleged threat toworld peace, most press reports on the North are dominated by what
is seen as its weird nature. In recent years, these themes haveincluded the claim that the North believes in unicorns, or focused on
the strangeness of the leader’s hairstyle, while in July 2016 theBritish newspaper, the Daily Mail, reported that Kim Jong Un wasdevastated by international sanctions on luxury goods because of his
love of Swiss cheese and watches. We have had giant rabbits, catfish
and a regular diet of weird leaders doing odd things – all are jumbled
together whether true or not. To many it is the worst country in theworld in a host of areas from human rights (yet look at some Africanor Middle Eastern countries) to architecture (most former Soviet
cities could compete on that score).

Unification?
The complication for North Korea is in some ways similar to that
faced by the German Democratic Republic (East Germany) in 198990. Once the Soviet leader Mikhail Gorbachev made it clear that theSoviet Union would no longer support their Communist leadership,
states such as Hungary or Poland could change government without
fear of challenge. East Germany, however, had until 1945 been partof a unified Germany. Its people had been exposed to the German
Federal Republic (West Germany) through radio, television and directcontact. Many wanted a return to a united Germany. There was some
opposition from other countries that had fought Germany in WorldWar II and feared a united Germany would be too powerful. This was
overcome, and the two German states merged into one. But an EastWest divide persists. Although they had not fought each other, as the
Koreas had, divisions had grown up between them that proved hard

But It Will Not Just Fade Away
A persistent theme is that the North is doomed to collapse any day
now. Even the failure of this to happen so far does not stop thepredictions. As with those who believe the end of the world is near, if
it does not happen at the predicted time, it will certainly do so nexttime – or the time after that. In 1949, the British Cabinet noted areport from the Seoul Legation that the North Korean army wasdisaffected, there was widespread starvation in the country, and thatthe regime was on the point of collapse. Forty years later, the British
commentator Aidan Foster-Carter wrote, following the collapse of theSoviet Union, that North Korea would be next, if not in two years,
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to overcome. East Germany had a smaller population than the West.
Its economy, although widely regarded as the strongest in the former
Soviet sphere of influence, lagged well behind. Its industries were
old fashioned compared to the West. In some areas, it is true, it wasahead. Social security and health provisions were more evenly
distributed in the East, based on need rather than the ability to pay.
There was one other problem in the relationship. Suspicions of theEast in the now dominant West led to many job losses amongst
those who had worked for the East German regime. Some were triedand sentenced for having carried out state policies.
All this resonates with North Korea. The elite are aware of what
happened in East Germany, in Libya and Iraq. Some of that group are
well aware of the voices in South Korea that call, not forreconciliation, but for revenge. At best the senior leadership seesloss of status and loss of jobs. At worst they see the prospect of
being executed or imprisoned. It is preventing this outcome thatkeeps them loyal to the system and its leader, not the bottles ofbrandy or even the fast cars that Kim supposedly gives out from time
to time. To quote an old proverb, they hang together – stay united –or they hang separately.
Even if the worst did not happen, the North Korea leaders have had
clear indications over the years that there is a quasi-colonial attitude
towards their country in the South. This was made abundantly clear
during the Lee Myung-bak and Park Geun-hye presidencies. In South
Korea, companies and the government see the North, if not quite
virgin territory, as ready for exploitation. The South will help with
developing existing resources and looks forward to exploiting aliterate and obedient workforce. This does not bode well. Many willknow how hard it is for those from the North who have gone to theSouth to fit in, whether they are from the non-political classes orfrom the elite.
In the South too, there are doubts about the idea of reunification.
Back in 1989, the South witnessed a brief surge of enthusiasm forthe idea, as Eastern Europe was transformed. It was not long,
however, before doubts began to creep in. Having only just begun toreap the benefits of the economic development since the early
1970s, many looked askew at giving them up to pay for sorting out
the North. The famine years of the 1990s made things worse. It
became clear that the North was no paradise. Most of its muchvaunted achievements were well in the past, indeed if they had everexisted outside the pages of glossy magazines. Costs of reunificationin Germany proved far greater than anybody had expected.

Dealing with Reality Not Dreams
Unification thus seems unlikely in the foreseeable future. Perhaps
one day, when all those who experienced the Korean War years havepassed on, and when the two sides get to know each other better, it
may happen. But there is a long way to go. So, there is little choice
but to deal with the North as it is, not as one might hope that it mightbe.
Here it would help if one got away from the overheateddiscussions on the threat from the North. Nobody would deny that
the North has been an irritant to its neighbors, but beyond the South
it is not a threat to their existence. Even in the case of South Korea,
2019 is not 1949. The balance of power has shifted in most mattersto the South. Even the possession of nuclear weapons does not givea real advantage. The use of such weapons on the peninsula would
not only lead to massive retaliation but could have an effect on the
North itself.
Photo: Copyright 2001 J E Hoare

Photo: Copyright 2004 J E Hoare

Militarism – Army First poster, Pyongyang

Less militarism – army and navy at Kaesong, Autumn 2001

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A real threat to the US or, even more unlikely, to Europe, seems
far-fetched. Former US Secretary of Defense William Perry pointed
out the huge discrepancy between the North and the US. If theformer were to use any of its tiny nuclear arsenal against the US, it
would face a counterattack that would certainly mean the end of theregime and possibly the complete destruction of the country. This
would be President Donald Trump’s fire and fury with a vengeance.
And while the North has shown that it will practice brinkmanship, it
has not shown itself suicidal.
Yes, Kim Jong Un has made threats and shown warlike scenes.
The armistice agreement has been denounced and declarations of
war are regularly flung about. But nothing happens. The North still
respects the armistice. There have been so many assertions that thisor that development is an act of war that it is hard to take them
seriously. Kim in the control room would look more authentic if thecomputers were plugged in and the telephones were connected. Oreven if the map on the wall did not look suspiciously like a blown-up
airline route map rather than the rocket trajectories against the US
that it claimed to be. What is forgotten is that such pictures areprimarily for internal consumption, designed to show a leader incontrol and standing up to the enemies of the North.

Pyongyang and raised the issue, I was told that North Korean law
would not permit this. We could have telephone and fax
communications, but no embassy or international organization could
have access to the Internet. The World Food Programme, whose
staff travelled all over the country, was particularly anxious for
improved communications but had been regularly turned down.
In our case, the standoff continued for a year. I raised the issue ona regular basis, and North Korean officials visiting London were also
bombarded with the same message. As I drew near the end of mytime in Pyongyang, I thought I would try a different tack. Since I wasgoing straight into retirement, I had nothing to lose! So one evening
at my apartment where they had come for dinner, I told the European
Department that they were running the risk that I would recommend
to London that we abandon the idea of a resident embassy since we
could not work as we were. The usual objections were aired but,perhaps by coincidence, a week later I was called aside at a party andtold that we could have our communications. The Note authorizing
this arrived the following day. As it happened, the budget wasoverspent so there was no change while I was there. But mysuccessors benefitted as did other embassies and internationalorganizations. And there has never been any attempt to go back on
the agreement.

You Cannot Trust Them!
What Should Be Done?
That North Korea does not stick to its treaties and agreements isby now a well-established mantra. It is certainly a tough negotiator.
Like other East Asian countries, it is usually more attached to thegeneral spirit of a document than to the precise text. If, however, it is
to its advantage to be more precise, it will be. What its negotiators
do expect is that there will be equal and mutual advantage. If there isbacktracking or a lack of reciprocity, to the North that excuses it frommeeting its side of the bargain. Essentially that is what happened
over the 1994 Agreed Framework. The North believed that it had
stuck to the agreement since it had capped and halted its plutoniumbased nuclear program. That was all that was covered in theagreement. When the US did not seem to be pursuing its side of theagreement – by 2002, it was estimated that it was eight years behindschedule, while the new George W. Bush administration was
showing signs of hostility – the North began pursuing an alternativeroute towards its original goal. If the administration had wanted, it
could have raised its concerns quietly under the terms of the Agreed
Framework, as the administration of President Bill Clinton had done.
But eager “to confront evil”, it chose a different path. It was not wise
since it opened the way to the situation we have today. Yet the lesson
was not learned, and agreements continued to founder because of awish to add new conditions or to change the terms.
The United Kingdom had a more successful, if minor, experience.
In the document establishing diplomatic relations signed in
December 2012, it was clearly stated that we would be allowed
secure communications as we did everywhere else. When I got to

For most of the period since 1945, North Korea has been seen as
an awkward nuisance at best or as a potential source of trouble atworst. Rather than engage with it in the hope of effecting change, theway to handle it was to isolate it. In the light of where we are today, I
find it hard to argue that such a policy was unsuccessful, especiallygiven what happened during the short period (1998-2002) whenSouth Korea and the US followed a different approach. Yes, it costmoney but there were real achievements. A nuclear program wascapped. The South began to build a new relationship with its
neighbor, as did the US and many other countries. Even Japan began
to benefit. Nobody got all they wanted from the better relationship,
but it was the start of a process. If the momentum had been kept up,
who knows where it might have led? The developments in 2018, themoving away from the threats and counter-threats of 2017, offer aglimmer of hope. Moving away from sanctions would benefit
ordinary North Koreans as would the development of trading andother links. Rather than isolating the North, some of the effort that
goes into implementing sanctions would be better used in providing
training and opportunities to see how things are done elsewhere.
Kim Jong Un has shown an interest in getting away from
confrontation. Perhaps we should build on that.
Dr. James E. Hoare has a Ph.D. in Japanese History and joined the Research
Department of the British Foreign Office in 1969. He was posted to Seoul,Beijing and Pyongyang. He now writes and broadcasts.

50 Japan SPOTLIGHT • March / April 201969

Future Design for the Future Generation
COVER STORY • Future Design – Thinking About Our Legacy to the Next Generation • 2Future Design Research:
the Issues
Author
Keiichiro Kobayashi

By Keiichiro Kobayashi

Future Design Goals

were able to grasp the big picture and reconcile the interests of thecurrent and future generations” and noted that they were very
pleased with what they viewed as progress. These changes indicate
the possibility that people engaged in the study could change theirthinking processes.
Prof. Tatsuyoshi Saijo, funding director of the Research Institutefor Future Design at Kochi University of Technology, calls these
individuals “imaginary future persons”. The ultimate goal of FD is tocreate political players comprised of these imaginary future persons(such as a “Ministry of the Future” in the central government or a
“Future Planning Section” at government offices) in order to bringthem into the political decision-making process; and also to renderthese organizations capable of impacting current political decisionmaking from the perspective of future generations.

One of the working goals of Future Design (FD) is to bring players
into the current political decision-making process whose job is torepresent the interests of future generations. A typical illustration ofthis approach can be observed in a psychology experiment
presented in “Future Design – Evidence and Insights from
Participatory Deliberations” by Tatsuyoshi Saijo and Keishiro Hara,
Journal of Japan Society on Water Environment, 2017, Vol. 40, Issue4). In 2015, we were asked to compile a long-term FD plan (for thecurrent point in time through 2060) for the town of Yahaba in Iwate
Prefecture. Residents were divided into two groups: one to represent
the current generation and the other to take the position of a future
generation, specifically of the year 2060. Each group held
deliberations to devise long-term future plans.
In brief, we held a role-playing game – a type of psychology
experiment – with a group representing the people of Yahaba in theyear 2060. The group representing the current generation drew up aplan within the context of current limitations and issues, while thegroup representing future generations created a plan designed toconsciously draw on regional advantages to solve difficult issues.
These results highlighted clear differences in approaches andopinions.
Particularly interesting were the deliberations on water andsewage charges. Yahaba waterworks had a fiscal surplus at the timeof the role-playing experiment. The group representing the current
generation agreed that the surplus should be returned to residents inthe form of lower water and sewage costs. In contrast, the grouprepresenting future generations were looking at waterworks in 2015
from the perspective of the year 2060. In their deliberations they
were extremely conscious of the fact that the water pipes and otherwater supply facilities would need to be replaced during the period
from 2015 to 2060. Because a huge capital outlay would be required
to complete the work, they decided that water and sewage charges
should be raised for residents, regardless of the surplus, to coverthese costs. The deliberations had so much of an impact that the
town of Yahaba in fact decided to raise water and sewage charges.
It is worth noting that the researchers involved in this project
believed that this FD experiment engendered a significant
psychological change in the residents assigned the role of the future
generations. In interviews conducted in Yahaba six months after theexperiment, the group representing future generations stated “We

How Does FD Work?
For researchers in the field of FD, there are two issues in particular
to mention. First is the question of whether a governmentalorganization such as a Ministry of the Future run by “imaginary
future generations” would actually be workable. That is, even if wecreate an organization like the Ministry of the Future, would it reallybe a feasible undertaking since it is in fact run by people of thepresent? Would these individuals truly operate in the interests offuture generations?
The results of the social experiment described above, however,showed that the participants were actually able to become imaginary
future persons in their own minds. If the concept of creating
imaginary persons could be generalized and the viewpoint of thepeople representing future generations could truly change, anorganization such as the Ministry of the Future could potentially work
well. Because the staff of the Ministry of the Future would act onbehalf of future generations, they would effectively take on thecharacter of the imaginary future persons.
The hypothesis here is that if people are assigned the
responsibility to make better choices, we can casually compare thisto the ideas emphasized by Adam Smith in his Theory of Moral
Sentiments (1759). The individuals assigned the role ofspokespersons for the people of the future could win the approval of
their colleagues by fulfilling this responsibility.
The satisfaction garnered through the approval of colleagues helps
to solidify the idea that representing future generations is itself aJapan SPOTLIGHT • March / April 2019https://www.jef.or.jp/journal/

70

7

COVER STORY 2

form of justice. This belief would then more strongly be supported
and maintained among the staff of a political organization comprisedof imaginary future generations. In another similarity to Smith’s
Theory of Moral Sentiments the individual is transformed into an“impartial spectator”. If this could actually occur, an organization run
by imaginary future persons could truly work on behalf of future
generations, at least subjectively.
To prove our hypothesis, it is necessary to scientifically clarify the
self-formulating mechanism of imaginary future persons describedhere by statistical analysis in the fields of neuroscience andpsychology. Researchers of FD are considering, for example, a future
design social experiment examining the brain using MRI imaging toassess changes in brain activity.

themselves unaware of what their own position would be in a newsociety (physical and mental capacity, wealth, etc.), that is, obscured
by a Veil of Ignorance, then the system will be fair and just.
According to this theory, under the Veil of Ignorance, if people fearthat they might be born in the most unfortunate circumstances, thenthey will agree to a political system where there would be thegreatest positive impact on people in unfortunate circumstances.
This theory holds that where there will be disparity in a newsociety – particularly in regards to income and assets – compared toa set of conditions where there would be no disparity, the people
would make choices for the benefit of the most disadvantaged.
Rawls called this theory the “Difference Principle”. Citing thisprinciple, Rawls argued that extensive social insurance systems indeveloped countries following World War II were justified,rationalizing the welfare state according to political philosophy.
Under the Veil of Ignorance, if people agree to social security
systems maximized for the benefit of the disadvantaged, they agree
to policies in line with the social welfare state. Since social welfare
systems chosen under the Veil of Ignorance are justified, it follows
that social security programs are justified as well. This is Rawls’
logic.

Justification by Political Philosophy
The second issue is whether the establishment of a neworganization run by imaginary future generations (such as a Ministryof the Future) could be justified under a democratic government. If
we can scientifically confirm that we can generate a stable supply of
imaginary future persons, we can say with certainty that new
systems such as the proposed Ministry of the Future will help toimprove circumstances for future generations. However, to create
this kind of new system – and garner broad public support – it needs
to be justified under our current democratic system. For instance, if
we move to create a Ministry of the Future, it will lead to limitations
on the rights and benefits of the current generations of people,
though there will undoubtedly be dissenters.
In another example, the Demeny voting system (in which children
are given voting rights but their parents or guardians vote on theirbehalf) has been suggested as a way of voting that would betterreflect the interests of future generations. Resistance to the idea isdeep-seated, however, amongst legal and political scholars arguingthat the very basis of democracy is “one vote per person”. If the sole
reason for making such changes to our government is to benefit
future generations, the said changes will not necessarily be popularwith a wide swathe of people spanning diverse backgrounds.
To garner broad-based support from the public, politicalphilosophy rationalizing and justifying the installing of imaginary
future generations is key. By invoking the social contract theory ofJohn Rawls’ “Veil of Ignorance”, we can argue the point. If people
can agree to a political system comprised of people imagining

The Imaginary Future Generation
as a Social Contract
The second issue is the justification for establishing imaginary
future generations in the context of political philosophy. I will explain
how it might be chosen as a social contract under Rawls’ Difference
Principle.
When a group of individuals are about to enter into a social
contract – assuming that they are obscured by the Veil of Ignorance
and therefore unaware of what kind of circumstances they will beborn in – they fear that they will be among the most unfortunate (ageneration subjected to damage caused by conditions such as global
warming and financial collapse). Therefore, in order to lessen thesuffering of generations of people who would endure such a fate, therepresentatives of the different generations agree to the “JustSavings Principle”, under which the people of the different
generations save a fair amount of resources for future generations.
This rule states that each of the different generations agrees tocontrol the expansion of public debt and implement fiscal restraint.
The Just-Savings Principle is agreed upon under the Veil of

8 Japan SPOTLIGHT • March / April 201971

COVER STORY 2

Ignorance. There is, however, more to the story.
The fact is that even if the Difference Principle is agreed uponunder the Veil of Ignorance, in our current democracy – where
imaginary future generations do not exist – once the Veil of
Ignorance is removed and the course of history resumes, any said
agreements will inevitability break down. Under the Veil of Ignorance,
people fear that they will be part of the generation plagued by themost disadvantageous circumstances, making decisions accordingly.
In reality, once the veil is removed, people realize that they are not infact the most disadvantaged of the population, at which point theytend to work for their own benefit. Instead of saving a certain amountof resources for disadvantaged future generations, they decide that
consuming said resources during their time is more advantageous.
This means that a significant level of greed will arise because
people will wish to break the promises made under the Just-Savings
Principle. What is still more important here is the fact that even if thepeople of the present break promises made under the Just-Savings
Principle, there is no “penalty” applied to future generations. Even if
the people of current generations break promises to the people of the
future, since these individuals are still children or have yet to beborn, they are unable to “punish” the people of the present. As aresult, there is little reason for the current generations to hesitate tobreak the promises made under the Just-Savings Principle. Any suchpromises are therefore easily broken.
To summarize the above, though agreement may be reachedregarding the Just-Savings Principle under the Veil of Ignorance,
once the veil is removed the promise of Just-Savings is broken.
Further, the issue is time-inconsistent. Agreements may be reachedunder the Just-Savings Principle, only to be subsequently broken.
Compared to the work of Rawls, which states that a social contract
is entered into under the Veil of Ignorance, clearly any agreements
made between generations under the Just-Savings Principle will betime-inconsistent. The social security system justified by Rawls isessentially an issue of redistribution among the same generation.
Let’s take social welfare as an example. Under the Veil of Ignorance,
people agree to the creation of social welfare systems, but once theveil is removed, they then learn whether they will be among thewealthy or poor classes.
Those who join the ranks of the wealthier classes tend to lean
toward the abolition of social welfare systems, yet this is difficult toachieve. This is because the poor classes exist at present, in contrast
to future generations, where they do not. If the wealthy classes wereto recommend that social welfare systems be abolished, the poor
classes would immediately block such a move. Because poor people
greatly outnumber wealthy people, the wealthy are unable to abolishsocial welfare simply because they wish to do so – at least under ademocracy.
Tools to achieve time-inconsistent Just-Savings work to create
imaginary future generations. If, as noted above, an organization ofimaginary future generations is created, it will actually work for the
benefit of future generations, leading the people of the present to apolitical decision-making process that matches the interests of thepeople of the future.
Under the Veil of Ignorance, because the people are aware of theabove, they are in agreement with the idea of creating a system of
imaginary future persons in order to help alleviate the poverty of themost disadvantaged people of the future. Since the installation ofimaginary future generations is agreed upon under the Veil of
Ignorance, we can call it a fair social contract.
In addition, the organization of imaginary future generations will
not be abolished by the people of the present. This is because theperpetuation of such an organization itself enjoys sufficient support
from flagging altruistic behavior across generations of the people ofthe present. If an organization of the people of the future issustained, the work of that organization will impact the decisionmaking process of many people of the present day. The result is that
distribution of resources falls in line with the Just-Savings Principle.
FD is not social science. Harboring the seeds for revolutionary
human development, it works through multiple areas of study
including neuroscience and thought as well as philosophy.
Expectations are high for interdisciplinary, diverse research in thefield.

Dr. Keiichiro Kobayashi has experience in the economic policy-making
process as a former government official at the Ministry of Economy, Trade andIndustry. His interest in economic research led him to join RIETI and pursue anacademic career. His current interests cover areas such as innovation andincome inequality.

Japan SPOTLIGHT • March / April 201972

9

Future Design for the Future Generation
COVER STORY • Future Design – Thinking About Our Legacy to the Next Generation • 3

Future Design Appliedin the Town of Yahaba
in Iwate Prefecture
Author Ritsuji Yoshioka

By Ritsuji Yoshioka

Introduction

The Waterworks Social Dilemma

The waterworks of Yahaba in Iwate Prefecture, launched in 1966,
now service 96% of the district’s population. However, 50-plus years
have passed since the facilities were built and they are deteriorating.
So it is clear that significant future work will be required to replacethem.
Despite their importance, waterworks are paradoxically the kind of
infrastructure that people tend to take for granted. As long as they
continue to benefit from water services, consumers are unlikely toconsider upgrading and earthquake-proofing decrepit water pipes asa high-priority project. This renders it a difficult task to garner theunderstanding of the public required to raise waterworks fees, whichshould logically be the revenue source for pipe replacement projects.
In addition, amidst a socioeconomic environment where thenation’s population is declining, it is important to create a scenario
where people are aware of the crucial role that waterworks play inthe local area – the goal being to ensure that waterworks are aservice that everyone can continue to access into the future. To
achieve this, residents should have a good grasp of the issues,
including the question of how to pay for renovation work. They must
not only agree on waterworks policy but also consider structures
such as water pipes in terms of how many centuries they will lastinstead of how many years. It is not sufficient simply to optimize thecurrent system: we also need to think about the interests of people
who will be using waterworks in the future.

From a financial perspective, it is natural for individual residents towant lower waterworks rates. If everyone thought this way, pressure
would mount for lowering prices and the government would have no
choice but to authorize a lower fee structure. The issue is that if the
majority of individual residents were to consider only their own
benefit, revenue sources would prove insufficient and projects to
replace aging facilities would fail to move forward. This would mean
a greater safety risk over the long term, which would in turn result ina greater financial burden. Paradoxically, the public benefit ofwaterworks safety would also be lost over the long term.
The “social dilemma” referred to here is as follows: actions thatcompromise public interest over the long term benefit individualinterests in the short term (“uncooperative behavior”), while actions
that compromise individual interests over the short term benefit
public interests over the long term (“cooperative behavior”). One of
the two must be chosen over the other (Prescription for Social
Dilemmas by Satoshi Fujii, Springer, 2017).
Not only do needs for waterworks, as perceived by the generalpublic, fail to consider the interests of future generations, but in fact
the current generation is unwittingly choosing uncooperative
behavior, which also means loss of profit for the waterworks sector
at present.

Waterworks Needs of the General Population

Next, we look at the question of how we can solve this social
dilemma by way of changing attitudes through a Waterworks
Supporters Workshop. This workshop is an opportunity for people todirectly participate in the formulation of policies that affect them. At
the first workshop, the format was the same as for our outreach
initiatives. People were asked to simply give their opinions, thoughno specific questions were asked. At this time we arrived at the same
result as above. Respondents wanted lower rates but at the sametime continued to demand safe waterworks and good-tasting water.
At Yahaba, in order to ensure that deliberations held during theworkshops covered the important topics, the workshops featured
hands-on activities including tours of water purification plants andtasting sessions. The goal is for attendees to truly get a sense ofwhat the waterworks sector is all about. Workshops from that point
onward involved deliberations focused mainly on audio-visual“Waterworks Supporters” Workshop

Based on the idea of multilayered participation [comprised of 1)
public comment procedures, 2) outreach methodology, 3)questionnaire surveys, and 4) direct participation by consumers – forpurposes of this paper called “waterworks supporters”], we
employed outreach methodology to assess the needs of the silent
majority.
Outreach involves going to the target audience in order to better
communicate with them. Instead of a questionnaire with pre-devisedquestions, Yahaba opted to gather information from 1,000
individuals on their current needs. We received a total of 954
answers. Our results have clearly indicated that respondents wanted
lower rates, but at the same time continued to demand safety ofwaterworks systems as well as good-tasting water.
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COVER STORY 3

material. Content was then recorded using facilitation graphics,
which are utilized at subsequent workshops to make the deliberation
process more visible.
Materials presented at workshops should be very specific andeasy to understand. At Yahaba, in addition to information gained byasset management initiatives by utilizing the information for theassessment of the waterpipe project, they are trying to improvevisibility on potential impact and risk factors. In thinking about thequestion of renovation of facilities, we considered the issue of
whether preventive maintenance or corrective maintenance would be
the optimal choice, as well as what risks would be present in the end.
As the deliberations progressed, the focus became how tomaintain safety as well as customer peace of mind, and particularly
establishing criteria for acceptable risk levels. Everyone agreed thatthe cost burden was justified due to the indispensability ofwaterworks. As more sessions were held, more “waterworks
supporters” came to understand the situation to the effect that theyeven recommended an increase in waterworks fees. In other words,
instead of putting short-term individual needs first, they decided oncooperative behavior to ensure long-term public benefit – thus
solving the “social dilemma”.

The public interest was chosen instead of lower water and seweragecharges, which would benefit the individuals instead of the public,
thus resolving the dilemma.
These recommendations are the result of a significant change inawareness levels of our “waterworks supporters” brought about by
their participation in the workshop. Serving as a reference for othermunicipalities, a proposal was made to add ¥200 to waterworks fees
– without altering the essential fee structure – to serve as a future
reserve fund.
Let’s take the replacement of the decrepit pipes as an example.
Even supposing that people agree to an increase in waterworks rates
as revenue to pay for the pipes to be replaced, and we are able toraise rates by ¥200, the reality is that these funds will only be
sufficient to cover a few hundred meters of new pipes. This meansthat we are unable to solve the issues faced today. Even if the“waterworks supporters” have enough information to allow them tomake decisions on waterworks, because deliberations are held in thecontext of current circumstances, the results do not necessarilyreflect the issue of safety for future users.

Solving the Social Dilemma

Despite the fact that the short-sighted choices of current
consumers can be potentially disadvantageous to future generations,these future generations are unable to negotiate for themselves giventhat they do not yet even exist. This is the reason for Future Design(FD). A major attribute of the FD approach is to create groups ofpeople who will stand up for the benefit of future generations. Thatis, a set of imaginary future persons takes on the role of engaging
with the people of the present in negotiations and decision-making.
With the welfare of future generations in mind, this method works toovercome conflicts of interest between generations in the decisionmaking process.
Yahaba has implemented FD initiatives in policy formulation
including the “Comprehensive Strategy on Community, People, and
Job Creation” and the “Comprehensive Management Plan for Public
Facilities”. During the workshop on “Comprehensive Strategy on
Community, People, and Job Creation”, deliberations were held
between a group of people acting on behalf of the interests of future
generations – “imaginary future persons” – and the people of thepresent. The representatives of the current generation emphasized
current issues and unmet needs, attempting to provide solutions

Implementation of Future Design

There are two reasons why the “waterworks supporters” decided
on the cooperative behavior route in contrast to the general
population: 1) they had sufficient information needed to properly
consider and make decisions on waterworks, and 2) they employed
two-way communication between themselves and the waterworks
sector.
Since the general population lacks the information required for
decision-making, they naturally choose what is most beneficial tothemselves. Because people who use waterworks simply assume
that their water is safe without giving it much thought, they do nottend to make choices that would raise the cost burden, even if itmeans improving safety.
In contrast, because the “water supporters” employed two-way
communication in free discussions utilizing hands-on learningtechniques as well as visual materials, all of the participants decided
on collaboration with the water and sewerage departments. In
addition, water and sewerage department surveys had identified thehighest priority issues as safety and replacement of decrepit pipes.

Japan SPOTLIGHT • March / April 20197411

COVER STORY 3

with ideas subject to current limitations. Meanwhile, the imaginary
future persons offered long-term solutions and back-casting (“Future
Design – Evidence and Insights from Participatory Deliberations” by
Keishiro Hara and Tatsuyoshi Saijo, Journal of Japan Society on
Water Environment, 2017, Vol. 40, Issue 4).
Approximately six months after project implementation, a series ofinterviews were held with the people who participated in thisworkshop as imaginary future persons, at which time these
individuals noted that that there was “no conflict” between
themselves as imaginary future persons and their actual position as
people of the present. In fact, it was clear that they were looking atsocial issues from both present and future points of view. In
addition, they derived satisfaction from the fact that they were able toconsider the issues as imaginary future persons. Therefore, even in
their day-to-day lives, it was clear that they were now able to thinknaturally and effortlessly as people of the future (“Future Design” by
Tatsuyoshi Saijo, TRENDS IN THE SCIENCES, February 2018).
Following the workshop on “Comprehensive Management Plan for
Public Facilities”, the results of the workshop – a picture of Yahaba in
2060 – were used to help devise business strategies. Amidst
deliberations on strategy formulation the “waterworks supporters”
were given the role of imaginary future persons, deliberating on the
structure of waterworks in Yahaba in the year 2060. A dramatic
review of the waterworks fee structure was undertaken, withparticipants discussing how to secure funds for replacing waterpipes
in 70-year cycles.
Not limiting the deliberations on waterpipe selection to topics suchas cost, type of pipes, etc., people also gave opinions on issues suchas pavement repair and road maintenance. Since these kinds ofopinions had not been observed in the participants’ past experienceor in ordinary workshops, these opinions are clearly derived from thecreation of the imaginary future persons and the viewpoint of life in
the future.

future. This change in perspective remains with them as they go
about their everyday lives following the conclusion of their role
representing the people of the future.
Because services such as waterworks are extremely public innature – due to the fact that they are essential to daily life – thegovernment should not be able to make one-way determinations on
criteria and future direction. Instead, policy governing these services
should be developed according to a process. Since waterworks andother essential services play a critical part in the lives of residents, itis the residents who should shape them.
As can be observed in the example of the “waterworks supporters”
of Yahaba, no matter how much information may have been available
to them to consider the issues, because they are engaged indeliberations subject to the limitations of today’s socioeconomic
circumstances, their results do not tend to serve future generations.
Meanwhile, deliberations held to devise business strategies –which included having people experience the role of imaginary future
persons – served to further not only deliberations on waterworks but
on community-building as a whole for the benefit of future
generations.
Based on the experiences at Yahaba up to this point, acomprehensive plan to develop initiatives to increase the number ofpeople acting as imaginary future persons – and to perpetuate sucha program – must be devised using the FD framework. At the sametime a “Future Strategy Department” of some kind must be
established to provide recommendations from the perspective of
future generations in the formulation of important policy. This is the
key to sustainable community development.

Conclusion
FD tends to focus on the technical aspect of creating a group ofpeople of the present that would speak for the interests of future
generations, who are unable to negotiate for themselves.
It should be noted that individuals who have experienced the roleof imaginary future persons derive satisfaction from that role as they
view themselves as both people of the present and people of the

Ritsuji Yoshioka is assistant director of the Planning and Public Finance
Division of Yahaba in Iwate Prefecture. He works to promote resident
participation in town policy formulation as well as FD implementation.

12 Japan SPOTLIGHT • March / April 201975

March/April 2019https://www.jef.or.jp/jspotlight/latestissue/

Future Design – Thinking
About Our Legacy
to the Next Generation

January/February 2019

Exploring Future Relations in East Asia

November/December 2018

Digital Society — Issues & Challenges

September/October 2018

White Paper on International Economy& Trade 2018

July/August 2018

The Future of Space as Global Commons

May/June 2018

Anxious Individuals & Governments at aStandstill — METI Envisages How to Livea Proactive Life in an Uncharted Era

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