Annual Review 2019

Exploring for Better Global
Governance Based on Holistic
Approaches to Achieve Welfare,
Equality & Security
17 articles have been selected for the Annual Review 2019 from the six issues of the past year.
May/June 2019 Issue (#225)
July/August 2019 Issue (#226)
September/October 2019 Issue (#227)
November/December 2019 Issue (#228)
January/February 2020 Issue (#229)
March/April 2020 Issue (#230)

https://www.jef.or.jp/journalEditorial Committee Members (Listed inalphabetical order by surname, as of April 2020)
Mohan Gopal
Representative Director, Art of Living Japan
Mohan Gopal is an Indian national who has been living in Japan for
29 years. He has held several positions including Japan Country
Manager for Tata Infotech, CTO of Camel International Group,
Sales Enablement Leader for Japan at Hewlett-Packard Enterpriseand Product Marketing lead at Sybase. In addition to being an IT
industry professional, he has been a sales and business
communications coach and university visiting faculty for many
years. He has been a volunteer for over two decades with the Art of
Living Foundation, an international NGO promoting yoga andpeaceful thinking. He actively presents his views on varied topics
including business, culture, history and technology in Japan.
Nobuo lizuka
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 lizuka is one of the mostcredible economists and commentators on the short-term outlook
for Japanese business and economy. His economic analyses arealways based upon his sharp, intuitive observations of business
data.
Ken Karube
Journalist & Professor of Teikyo University
Ken Karube was a former executive writer for Tokyo-based wire
service Jiji Press, which he joined in 1979 after graduating fromWaseda University. From 1992 to 1996, he was a correspondent inWashington DC and from 2004 to 2009 he was chief of the Washington
and New York bureaus. Before taking the executive writer’s post, he
was deputy managing editor at the Tokyo head office (2010-2013).
Among his books are Failure of Economic Policy Management (1999),
The Bubble Economy (2015) and Japanese Bureaucrats with their
Abenomics (2018).
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.

Keiichiro Kobayashi
Research Director of the Tokyo Foundation for Policy Research &Professor of Department of Economics, Keio University
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.
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
Partner, Global / India Japan Partnership Fund (GIJPF)
Sanjeev Sinha is a partner of GIJPF and a keen promoter ofinvestments and technology from Japan to India and Asia. He
previously worked with Goldman Sachs, Mizuho Securities, and PwC,
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 (Shincho), Indo to Nihon ha Saikyou Combi (Kodansha), Sugoi
Indo Business (Nikkei), and Indian Ways of Karma and Jugaad – allpublished in Japanese, and with a Chinese translation of Sugoi Indo.
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 in Delhi, and at Soka University and Keio University inTokyo. He is presently advisor to the South-Asia Research Center,
Soka University. He co-authored the book Representing India,
which provides a commentary on politics, literature, media and theIndian diaspora over the past two centuries. He has conducted
seminars on global cultures and counseled Japanese universities
on academic exchange and PR strategies. His favorite 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 lndustry in Tokyo as an English editor and checker for
more than a decade. She now lives in New Zealand, where she iscurator of the Japan Library: Pukapuka, as well as a freelance
writer, translator, and interpreter, and often visits Japan.

Table of Contents
Japan SPOTLIGHT Annual Review 2019

Introduction
1.

Roundtable Discussion on a Rules-Based Global Economy

2.

Restoring Social Cohesion – a Crucial Issue for the G20 in 2019

3.

The G20 & Global Governance4.

Economics & Security: Key National Interests for Discussion

5.

The EU & Japan: Partners for Stability in the Indo-Pacific?

6.

Contrasting Policies Regarding North Korea & Iran

7. The North Korean Economy After Economic Sanctions
8.

Institutionalized Income Inequality Hampers Social Mobility

9.

Income Inequality Destabilizes Business Cycle & Lowers Growth

10.

Companies Have a Crucial Role to Play in National Security

11.

Japanese Business Leader Is Cautiously Optimistic About the Global Economy

12.

OECD’s Business & Industry Advisory Committee Could Contributeto Achieving Rules-Based Global Economy

13.

Elderly Workers – Key to Achieving a Sustainable Super-Aging Society in Japan

14.

Japan’s Long-Term Care Insurance System & Community-Based Integrated
Care System

15.

Bridging Africa & Japan – Entrepreneurial Engagement for a Young African

16.

Learning Management Will Help Bridge Madagascar & Japan

17.

The Legacy of the Rugby World Cup 2019 in Japan Will Be Good for
the Olympic & Paralympic Games Tokyo 2020

The Opinions expressed in the articles published in Japan SPOTLIGHT are those of the authors and do not necessarilyreflect the views of the Japan Economic Foundation. Materials may not be reproduced without written permission.
Copyright © 1982-2020 Japan Economic Foundation. All rights reserved.

Introduction
Japan SPOTLIGHT’s Annual Review 2018 highlighted an article on the digital society and it
depicted digitalization as volatile, uncertain, complex and ambiguous. This description can also be
applied to the new globalization. At the start of FY 2019 we began our Cover Story with remarks onsuch issues as income inequality, trade, and aging societies that were set to be discussed at the G20
Osaka Summit in June by some distinguished think tank leaders known as the T20 (global think tanks
whose mission is to provide analytical materials for G20 leaders so that they can make better decisions
in their meetings). This was when Japan SPOTLIGHT started to highlight stories on the issue of global
governance. The decline in social cohesion among developed nations triggered by expanding income
inequality was a crucial issue, as it is considered a reason for rising nationalism against globalization,a principal source of volatility and uncertainty in 2019. Complexity and ambiguity are also intensified
by another aspect of the new globalization, namely the advance of digital technologies. All this meansthat global governance in 2019 truly faces significant challenges.
Digital technologies are complex by nature, since they can have an impact not only on the economy
but also on national security, depending on how and for what purpose they are used. Their impact onnational security is ambiguous. Only private business people engaged in working on developing or
applying these technologies really know exactly which ones would be sensitive to national security
concerns. Digital technologies would also transform North-South international relations. With digitaltechnologies, knowledge – the most important production factor in the digital age – could be easilytransferred from developed nations to emerging nations. This would bring about a great convergenceof economic performance among nations rather than great divergence. Thus fast-growing emerging
nations could be a serious threat to developed nations and provoke anti-globalization or nationalistic
sentiment among the latter. This is one interpretation of the background to the US-China tech cold war.
This geopolitical risk and other rising ones such as North Korea or Iran could transform the major
nations’ foreign policies.
Bringing national security discussions into the technology domain has another consequence for
global governance. As technology has a crucial impact on the economy and one that should be largely
positive, while its impact on national security is mostly negative, we would need to find a balance
between economics and security. This means that we would have to find a good global governancevenue for discussing economics and security together. Better global governance thus has two
connotations: first, maximizing the benefits of globalization by mitigating income inequality, andsecond, doing so also by mitigating national security concerns.
Some issues for reflection upon the changing nature of globalization:
1. September/October 2019 Issue (#227)
Cover Story 2
Roundtable with Dr. Satoshi Inomata, Masashi Kurose, Michitaka Nakatomi & Dr. Shujiro Urata
Roundtable Discussion on a Rules-Based Global Economy
By Japan SPOTLIGHT
2. May/June 2019 Issue (#225)
Cover Story 2
Interview with Dr. Dennis J. Snower, President of the Global Solutions Initiative, Senior
Professor of Economics at the Hertie School of Governance, Berlin; Senior Research Fellow at
the Blavatnik School of Governance, Oxford University; and Non-Resident Fellow, Brookings
Institution & former President of the Kiel Institute for the World Economy
Restoring Social Cohesion – a Crucial Issue for the G20 in 2019
By Japan SPOTLIGHT

3. May/June 2009 Issue (#225)
The G20 & Global Governance
By Sachin Chaturvedi & Priyadarshi Dash

Cover Story 8

4. March/April 2020 Issue (#230)
Cover Story 1
Economics & Security: Key National Interests for Discussion
By Naoyuki Haraoka
New global geopolitical risks that should be noted by business and public policy officials in the new
globalization:
5. January/February 2020 Issue (#229)
Perspectives on Global Risks: the 3rd JEF Global
Risk Symposium 1
The EU & Japan: Partners for Stability in the Indo-Pacific?
By Eva Pejsova
6. January/February 2020 Issue (#229) Perspectives on Global Risks: the 3rd JEF Global
Risk Symposium 2
Contrasting Policies Regarding North Korea & Iran
By Mark Fitzpatrick
7. January/February 2020 Issue (#229) Perspectives on Global Risks: the 3rd JEF Global
Risk Symposium 3
The North Korean Economy After Economic Sanctions
By Yong Sueng Dong
Assuming that mitigating income inequality would be a path to achieving better globalization, what
can economics contribute to the solution and thus save the world from rising geopolitical incertitude?
8. November/December 2019 Issue (#228)
Cover Story 3
Interview with Dr. Heather Boushey, President & CEO of the Washington Center for Equitable
GrowthInstitutionalized Income Inequality Hampers Social Mobility
By Japan SPOTLIGHT
9. November/December 2019 Issue (#228)
Cover Story 4Interview with Dr. Mark Zandi, Chief Economist, Moody’s Analytics
Income Inequality Destabilizes Business Cycle & Lowers Growth
By Japan SPOTLIGHT
Another vehicle for better globalization is to achieve a balance between economics and national
security. What role can be envisaged for business in doing so?
10. March/April 2020 Issue (#230)
Cover Story 3
Companies Have a Crucial Role to Play in National Security
By Elisabeth Braw
11. March/April 2020 Issue (#230)
Cover Story 5Interview with Teruo Asada, former Chairman and Executive Advisor of Marubeni Corporation
Japanese Business Leader Is Cautiously Optimistic About the Global Economy
By Japan SPOTLIGHT
12. March/April 2020 Issue (#230)
Cover Story 6
Interview with Phillip O’Reilly, Chairman of BIAC
OECD’s Business & Industry Advisory Committee Could Contribute to Achieving
Rules-Based Global Economy
By Japan SPOTLIGHT

Japan has been considered a country very slowly changing in its economy and society to keep up
with the trends of the global economy. However, its significant changes during the Heisei Era(1989-2019) are noteworthy. Though women in Japan are not yet well established as business orpolitical leaders in society compared to, say, the Scandinavian nations, they started to take someleading positions from men during the Heisei Era. The hierarchical order of Japanese companies does
not seem as appealing as before and many young employees today leave their companies afterworking for a certain number of years, having given up the possibility of promotion to pursue theirindividual interests. Thus at the beginning of Reiwa Era we can see more independent men and womenin Japan. Meanwhile, Japan preserves its social cohesion with its attention to elderly people. Japan’slong-term care insurance system is one example. Will an employment system that encourages older
people to work longer with the support of such an insurance system help Japan to mitigate thechallenges of aging societies in Asia and other parts of the world?
The changes in globalization are also reflected in Japanese foreign policy, which has started to adopt
more regionally balanced diplomacy. Prime Minister Shinzo Abe’s “Initiative in Africa” is a good
example. Some interviews with young Africans on this initiative are available in this review. Last,but
not least, the Rugby World Cup 2019 in Japan has left unexpectedly good memories for Japanese at
the start of the Reiwa Era. The interview article on this topic suggests how this legacy could be further
enriched by the Tokyo Olympics and Paralympics 2020, leading to a new growth strategy in Japan.
13. July/August 2019 Issue (#226)
Cover Story 5Interview with Dr. Atsushi Seike, President of the Promotion and Mutual Aid Corporation forPrivate Schools of Japan (PMAC)
Elderly Workers – Key to Achieving a Sustainable Super-Aging Society in JapanBy Japan SPOTLIGHT
14. July/August 2019 Issue (#226)
Cover Story 8
Japan’s Long-Term Care Insurance System & Community-Based Integrated Care System
By the Health and Welfare Bureau for the Elderly, Ministry of Health, Labour and Welfare
15. September/October 2019 Issue (#227)
Special Topics 5Interview with Nico de Wet from South Africa working at the Global Business Division of
SoftBank Corp’s Enterprise Unit
Bridging Africa & Japan – Entrepreneurial Engagement for a Young African
By Japan SPOTLIGHT
16. September/October 2019 Issue (#227)
Special Topics 6
Interview with Juvencia Deschamps Ralay Harisoa from Madagascar working in the Public
Relations Group, Administration Department, of GPSS Holdings Inc. in Japan
Learning Management Will Help Bridge Madagascar & JapanBy Japan SPOTLIGHT
17. January/February 2020 Issue (#229)
Cover Story 6
Interview with David Bickle, President of the British Chamber of Commerce in JapanThe Legacy of the Rugby World Cup 2019 in Japan Will Be Good for the Olympic &Paralympic Games Tokyo 2020
By Japan SPOTLIGHT

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

COVER STORY • White Paper on International Economy & Trade 2019 • 2

RRoundtable with Dr. Satoshi Inomata, Masashi Kurose, Michitaka Nakatomi & Dr. Shujiro Urata

oundtable Discussion on a
Rules-Based Global Economy

By Japan SPOTLIGHT
The year 2019 will be remembered as a year of rising protectionism. The US-China tech cold war is at thecenter of the risks facing the global economy due to restrictions on trade. METI’s White Paper on
International Economy & Trade 2019 highlights the background and the demerits of protectionism as wellas the need to recreate a new rules-based international trading system. This new rules-based systemshould be discussed with due regard to business interests, as businesses would be the primary actors
affected by the rules. Thus, the White Paper is not a theoretical argument but is based on practical ideas
and discussions with business people.
In this light, our roundtable discussion on the White Paper consists of leading thinkers in Japanknowledgeable in both theoretical thinking and real business practice. Dr. Satoshi Inomata, chief seniorresearcher at the Institute of Developing Economies (IDE-JETRO), is a distinguished trade economist who
has devoted many years of research to the analysis of global value chains (GVCs). Masashi Kurose, apatent attorney and president of Kurose IP Management, is an expert on IP dispute settlements in Asia.
Michitaka Nakatomi, vice chairman and senior executive director of the Japan Machinery Federation (JMF),
is a former METI official who has engaged in many trade negotiations and also a distinguished trade
policy researcher as consulting fellow of the Research Institute of Economy, Trade and Industry (RIETI).
Finally, Dr. Shujiro Urata is professor of Economics at the Graduate School of Asia-Pacific Studies at
Waseda University and a well-known economist with expertise in international trade.
The former director of the Policy Planning and Research Office of the Trade Policy Bureau and author of
the White Paper, Mineko Ota, leads the discussion with the following introductory remarks. She iscurrently director of the APEC Office at METI’s Trade Policy Bureau.
(Roundtable on July 11, 2019)
Participants

Satoshi Inomata

Masashi Kurose

Michitaka Nakatomi

Introduction
Ota: I would like to mention three major points in this White Paper.
First, our quantitative analysis shows that in our global economy all
nations are closely interdependent through expanded trade andvertical division of labor in the manufacturing industry, so-called
GVCs, which is also expanding. Rising trade friction between the
United States and China would affect not only the two superpowers
18 Japan SPOTLIGHT • September / October 2019

Shujiro Urata

Mineko Ota

but also Japan and the rest of the world because of thisinterdependency.
Second, we strongly warned readers that current trade tensions
could be the most serious crisis for free trade since theestablishment of the WTO. We pointed out rising economic disparity
as the background to the crisis, in that expanding inequality has
provoked the belief that trade is the main culprit of rising income
gaps. We also focused on suspected market-distorting practices by
https://www.jef.or.jp/journal/

COVER STORY 2

China such as low interest rate financing or subsidies, as well asinternational competition in high-tech areas, as the subjects of ouranalysis. In addition, we have done a number of analyses on how
protectionist measures or trade restrictive measures would affect the
global economy. Our conclusion is that those trade restrictive
measures would affect extremely negatively not only the nations
directly involved in trade wars but also third countries and eventually
the overall global economy. Based on these analyses, we strongly
recommended strengthening WTO functions as quickly as possible
to roll back such protectionism.
Our third point is, against such a background, to recommend theJapanese business community enhance its overseas presence not
only in the manufacturing industry but also in retail and service
industries to avoid too heavily depending upon the manufacturingsector in the international arena or to move towards other growing
markets rather than Asia, such as Africa or Latin America, where
Japanese businesses are not yet fully active.
JS: Thank you for your introduction. I think a major point is how to
respond to protectionism. The first issue is how protectionism is to
be interpreted in the context of GVCs. Dr. Inomata, could you pleasestart the discussion?

Current International Relations to Be
Revisited in the Context of GVCs
Inomata: GVC studies have shown notable development in the last
10 years or so. They aim to capture the dynamics of global
production systems evolving from the time of the Industrial
Revolution. In the 19th century, a country exported products whichwere produced within its national borders using only domestic
production factors. However, thanks to the rapid advancement intransportation modes and information and communication
technology, production systems have undergone significant changes
in recent years. Consider the case of producing a shirt; theproduction process can now be fragmented into designing by a
Milanese designer, patterning by a tailor in London, and final massproduction at a factory in Dhaka, in a way that each task istransferred to the place where it can be performed most efficiently.
In line with the fragmentation of production processes, many
developing countries, notably China and Asian Newly Industrializing
Economies (NIEs), have achieved remarkable economic growth. Thisis because GVCs allow individual countries to choose and specialize
in particular segments of a production process as appropriate for
their own technological levels, and hence enabling them to produce
even a high-tech product such as a smartphone at the global scale.
At the same time, it also generated an intense competition overvalue chains between developed and developing countries. As seenin the US-China trade friction as a symbolic example, there is a
growing disharmony of views on how production should be sharedacross borders. Developed countries fear that their domestic jobs,
especially those using unskilled labor, will move out to developing
countries in search of a cheap labor force, while developing
countries are worried that their economies will be “locked in” to thelow value-added segments of supply chains. As a result, we observea rise of protectionism in developed countries, on the one hand, andaggressive industrial promotion in developing countries, on theother. I would call this phenomenon the “New North-South Divide” inthe age of globalization, which is indeed nothing but a battle for value
chain dominance from the GVC perspective.
Urata: The critical question is the speed of such transformations.
The drastic change in international division of labor has happened
only in these last two or three decades. As Dr. Inomata mentioned, indeveloped nations the demand for unskilled labor is decreasing,while the demand for skilled labor or experts is increasing and thus
the wages of the former will be lowered and the wages of the latter
will rise. This results in increasing income gaps. I would also like topoint out that some capitalists are earning tremendously high profits
in this system. I think it would be better to think about them inreferring to increasing income gaps caused by GVCs, in addition to
the gap between skilled and unskilled labor.
Inomata: Returns on capital became extremely high. GVC-driven
globalization is indeed a process in which capital factors of advanced
countries coalesce with unskilled labor factors of developing
countries. This has a rather ironic implication for the US government
that, in the light of protecting the benefits of US global firms, theanti-China campaign is quite self-contradictory in the line of GVC
logic.
Urata: In a situation where the US-China trade war is intensified andChina finds it difficult to export its products to the US, will GVCs bereconstructed to exclude China? Or, in the case of goods being
produced and sold only in Asia, would there be a regional value chain
instead of GVCs to take advantage of the big market in China?
Inomata: I am not sure if supply chains will be continuallyreconfigured in a way that production bases are shifted amongdeveloping economies, from China to other Asian countries, forexample. Rather, I am more concerned about reshoring (or nearshoring) of production capacities back to advanced economies,
which is made possible by the introduction of new technologies suchas automated robotics or additive manufacturing (3D printing).
Nakatomi: The big issue is that international rules and domestic
regulations are not keeping up with the rapid progress of innovation.
Without the relevant rules and regulations, business will not gain thefull benefits of GVCs brought about by new technologies. In thedigital economy, we have such issues as privacy and consumer
protection, localization of data and IPR protection. We welcome the
Osaka Track established by the G20 Summit in Osaka in 2019 where
the G20 countries declared they would start a rule-making process
for the digital economy. But it is still uncertain where we should
resolve this question. If we cannot achieve it and fail to catch up withthe reality of such rapidly progressing innovation, there would be aworld without disciplines where the more powerful will dominate
against the interests of the others.
Japan SPOTLIGHT • September / October 201919

COVER STORY 2

Inomata: I share that concern. In particular, in relation to thecompetition over future digital platforms, 5G, between the US andChina.
Kurose: There are products that only China can produce and not
Vietnam or any other place. I think many Japanese manufacturing
companies would have no way but to maintain their production in
China or some companies may even invest more in China.
Urata: I think the growth rate of Japanese business investment in
China is now lower than before. This is because of rapidly rising
wages in China due to a labor shortage as well as US-China trade
friction. I think there are many Japanese firms transferring theirproduction bases from China to Vietnam or some other Southeast
Asian countries.
Another question is the possibility of lost job opportunities
increasing in developing countries as production bases would be
returned to developed nations due to labor-saving technologicalinnovation, as Dr. Inomata mentioned.
Inomata: While labor costs are rising in developing countries,
Industry 4.0 (the Fourth Industrial Revolution) is under way inadvanced countries, making a human labor force less attractive.
Accordingly, lead firms in advanced countries will find it increasingly
expensive to move their production bases to developing countries.
This may bring an additional divide to a group of developing
countries, between those which managed to dodge or get out of the
middle-income trap by introducing new technologies and thosewhich have failed to do so.
Kurose: That is true. I think developing nations are today
increasingly keen on promoting innovation by strengthened patent
protection against such a background.

Background to Rising Protectionism –Chinese Market Distorting Policy Measures& Business Customs
Kurose: There is a research report issued by the USTR in March2018 in accordance with the US Trade Act, Article 301. Among thefour points mentioned in the report, there is a claim that the Chinese
government is unfairly accessing through hacking US companies’
computer networks to obtain confidential data including intellectual
properties, technological data, trade secrets, etc. This has led to FDI
restrictions but at this moment the restrictions are modified. There isalso a claim that the US companies are forced to transfer theirtechnology to Chinese companies if they are doing business in
China. This is a matter of business customs and not a matter ofregulation, as a few remaining regulatory problems were all
eliminated by the Chinese government soon after the publication of
the USTR report. So what the USTR pointed out as issues in thereport do not exist anymore explicitly, though there could be someissues to be resolved in terms of business customs.
The largest issue for Japanese companies is that Chinese law
20 Japan SPOTLIGHT • September / October 2019enables Chinese companies to improve the technology brought
about by overseas companies. “Improvement” is not clearly defined
and thus a mere change of design could be interpreted as
improvement. One big issue was the Japanese Shinkansen. The
Japanese initially thought they could win orders from China byteaching them the technology. But the Chinese improved it and got
many patents for the improved technology, since the Japanesetechnology is basically just know-how that is not patented. They cansell these improved technologies even to the US or other nations.
There were also some regulations enforcing technology transfer,
such as enabling a licensee to continue to use the borrowed
technology even after the termination of a technology license
contract. However, those were eliminated after the publication of the
USTR report.
China, at the beginning of economic reform in the 1980s, pursued
the import of technologies from overseas and digested and absorbed
them. Around 2006 and 2007, they changed direction to recreationand improvement of the borrowed technologies. And thus we see adrastic increase in patent applications.
Another important issue is technical standards. We would have toapply Chinese domestic standards to our products manufactured in
China for the big Chinese market. There was a case of a law suit a
couple of years ago in which Sony Inc., being required to use a
Chinese technology based on Chinese standards for selling theirsmartphones in China, lost to a Chinese company with a patent for asmartphone telecommunication system based on Chinese standards,
and Sony had to pay them a license fee.
Finally, as the US often points out, China is promoting unificationof military technology and private business technology as the latterhas been well developed. Thus, today, private businesses in China
are now working on military technology development. Patentapplications for national defense-related technologies which should
be received by the National Defense Patent Office are increasing.
When the Chinese authorities assume a specific technology is anational defense-related one, it would be categorized as such.
In the case of those technologies, the patent applications are notopen and thus for example in the case of 5G or othertelecommunication systems, we would eventually find existing
patents in China which are not known to us.
Chinese patent applications based upon the Patent Cooperation
Treaty (PCT), those to be applied abroad, continue to increase every
year. In particular, Huawei has so many patents based on PCT.
Huawei could bring law suits in the US by using those patents.
I think what bothers Japanese businesses most today on thisissue is that they would not be able to achieve joint research or otherjoint activities with a Chinese company if the US expels Huawei fromglobal business or starts more serious economic sanctions against
China. The case of development of a driverless car would be the one
possibly most seriously affected by this. Without joint cooperation
with Chinese companies, its development would be significantly
retarded. Ultimately, we will need global rules to mitigate theseconcerns.
Nakatomi: On the question of global rule making, the Agreement on

COVER STORY 2

Trade-Related Aspects of Intellectual Property Rights (TRIPS) is
beyond the scope of the Doha Round negotiations. This was adecision strongly supported by the US, but it must have made thewrong decision. If there were loopholes in global rules then, WTO
members should have initiated global rule making first, and it shouldhave addressed its claims in accordance with those rules. I
understand the US made a big mistake.
Kurose: TRIPS is annually reviewed by the WTO to see that members
are observing the law. However, the technologies covered by thereview are now rapidly changing and reaching much higher levels
than before. Digital technology is one example. In this light, weshould elaborate the rules on TRIPS, but many developing countries
and recently the US are not ready to do so.
Nakatomi: This is probably because it thought it would be difficult toreach a consensus to further improve the agreement in the WTO.
However, no matter how difficult it may be, all nations should dotheir best to revise the basic global rules on it. At this moment,
without such efforts, we see great ambiguities concerning rules andtheir implementation. I think that is a big problem.
Kurose: The TPP covers the issue of Intellectual Property Rights(IPRs), but TPP11 fails to cover it. The RCEP does not have any
binding rules on IPRs. Thus, unfortunately, the rule-making process
for the IPRs does not seem to be working well.
Nakatomi: I was in charge of negotiations on the Anti-Counterfeiting
Trade Agreement (ACTA) on behalf of the Japanese government. Thiswas successfully concluded at the Quadrilateral Trade Ministers
Meeting in October 2010 in Tokyo but due to opposition by European
NGOs it could not be implemented. I share the view that the major
nations should work together for global rule making to avoid a power
game.
Urata: In China, is the issue of intellectual property rights now
considered critical among Chinese companies? If so, we can be
more optimistic in regarding China as rule abiding on intellectual
property rights.
Kurose: Japanese businesses now believe that Chinese regulations
on intellectual property rights protection are much improved and the
US Bar Association also has the same evaluation. They are adapting
well to rapid technological progress.
Inomata: Prof. Richard Baldwin, a distinguished trade economist,
advocates for regulatory convergence and the establishment ofcommon norms for 21st century global governance. Can China
conform its own domestic rules to them?
Kurose: We do not have common rules now. China complements theincomplete WTO/TRIPS rules by its own domestic laws for digitaltechnology.

Inomata: Without common global norms, there is a danger that two
economic superpowers may pursue the entrenchment of their own
specific rules, which would lead to system bifurcation andpolarization.
Kurose: On the issue of patents, harmonization of rules is critical.
Between China and Japan, their patent specialists have been closely
working together to have common judging criteria for patent
protection. Thus what is acknowledged as a patent in Japan will not
be rejected by the Chinese.
Inomata: The number of China’s patent applications is remarkable.
However, in view of the “quality” of the patent applied for, can we still
say that China has significantly accumulated technological capacity
over time?
Kurose: It is certainly true that though they have so many patentapplication cases, there are many for applied technologies rather
than basic ones. But against the background of an overwhelmingly
large number of patent applications, the Chinese could win many law
suits.
Nakatomi: Regulatory convergence is also an important issue. The
WTO and Regional Trade Agreements (RTAs) cannot meet the needsof new rules reflecting the rapidly progressing technologicalinnovation at this moment. In this situation, unless regulatory
convergence is promoted sector by sector, business itself could becritically affected. We will need to utilize all the policy tools available
and work together for a solution of this issue. On the issue oftechnology, I think we should eventually integrate the results of all
those efforts into the WTO framework in the future.
Inomata: On regulatory convergence, strong leadership by advanced
countries is the key for making common rules. For example,
advanced countries may request developing countries to engage indomestic reforms in exchange for capital transfer (foreign direct
investments (FDI)). Prof. Baldwin once described it as “my-factoriesfor-your-own-reform” strategy.
Now, such a strategy is effective only if there is a huge difference
Japan SPOTLIGHT • September / October 201921

COVER STORY 2

in bargaining power, largely based on the amount of disposable
capital, between developed and developing countries. In the near
future, however, newly emerging superpowers such as China or India
are likely to find the deal less attractive since these countries may
have built up sufficient production capacities by then, so that they
can afford not to give in to such a bargain. The terms of trade foradvanced countries will rapidly deteriorate as time goes by. So howquickly we can realize common rules is an issue of particularimportance.
Nakatomi: It is certainly true that regulatory convergence could be
increasingly difficult to achieve today. But, first of all, it isindispensable to achieve collaboration among developed nations on
this. At the same time, it will also be important for us to convince
developing nations of the merits of regulatory convergence inpromoting their own economy with the introduction of newtechnologies. Otherwise all of us would be losers. This must be
understood by all.
Urata: I agree with you, but we should not forget that large market
nations like India and China might have the illusion that their markets
are sufficiently large to attract FDI even without regulatory
convergence. These countries should realize that regulatory
convergence would not only attract more FDI but also facilitate theircompanies to expand their business abroad.
Nakatomi: The WTO has failed to achieve a global consensus on
making rules on such important issues as trade and investment, ortrade and environment, both of which were initially adopted as partof the agenda of the Doha Round.

Consequences of Rising Protectionism
Provoked by US
Nakatomi: Protectionism is contradictory to GVCs and nullifies the
merits of international trade. It also damages the stability ofinternational trade rules and the predictability of business.
Protectionism can be simply defined as a violation of theinternational rules embodied in the WTO. Looking back at the historyof the development of international trade rules, we can find thebackgrounds and reasons for today’s rising protectionism.
In 1995, with the establishment of the WTO, the prohibition of
unilateral measures and an enforced dispute settlement mechanism
were introduced. The adoption of panel reports by negative
consensus (meaning a report will be adopted unless all member
nations unanimously oppose it), and clarification of retaliation
procedures against violations of WTO rules were also introduced andall member nations must generally observe the same rules, except
for “special and differential treatment” for developing nations. Rulemaking in the WTO peaked around 1997, as shown in the achievedagreements on information technology (ITA) in 1996 andtelecommunication and financial services in 1997. Since then, theonly multilateral agreement was an agreement on trade facilitation in2017.
22 Japan SPOTLIGHT • September / October 2019

Consensus in principle, an enforced dispute settlement
mechanism, single undertaking (meaning all member nations inprinciple are obliged to follow the same rules), and definition of adeveloping country by its own announcement – these WTO
principles have made it extremely difficult to carry out rule making in
the WTO. The possibility of a free ride for developing nations, Special
and Differential treatment for developing nations, andinstitutionalized retaliation against violations of WTO rules have all
made it difficult for the WTO to do decision making and rule making.
Since around 2000, regional trade agreements (RTAs) havebecome the main tools for trade liberalization and rule making. In
recent years, mega-FTAs such as TPP11 and the Japan-EU FTA, havecontributed to rule making and trade liberalization. WTO rules havebeen basically on border measures and have not been able to keep
up with the changing reality of international trade and business after
1993 when the Uruguay Round reached a consensus in substance.
For example, revisions of the General Agreement on Trade inServices (GATS) or TRIPS rules or in-depth exploratory studies of
those agreements in the light of reality have not made good progress
and new rules could not be adopted on important new issues suchas trade and investment, trade and environment and e-commerce.
The issue of IPRs that the US considers critical in US-China trade
friction was even beyond the scope of Doha Round negotiations thatstarted in 2001. Such an unfortunate historical background has
generated significant energy for an explosion of protectionist
measures today.
It is extremely difficult to try to respond to today’s complex tradeissues only with the interpretation of the principles adopted by the
WTO in 1995. It is true that judicial processes cannot work without
appropriately functioning legislative processes. Thus, it was foreseenin advance that the WTO dispute settlement mechanism would beparalyzed, assuming that the details of the rules were not clarified
and developed.
Therefore, I believe that restoring and strengthening the functionof international trade rule making is indispensable to mitigate risingprotectionism. The best venue for this must be the WTO and if it is
not possible, we should try to do it in plurilateral agreements or
RTAs. Of course, we must commit to preventing proliferation ofprotectionist measures and avoid using the paralysis of the WTO’s
rule making functions as an excuse. In this regard, the G20’s
message of doing its best to realize a “free, fair, non-discriminatory,transparent, predictable and stable trade and investment
environment” and keeping markets open is crucial, though notenough. In particular, proliferation of protectionist measures, using
national security as a blanket exclusion clause, will be criticallydangerous to the global trading system.
For Japanese industries that have achieved progress based on free
trade and GVCs, proliferation of protectionist measures will have aserious impact. Decoupling of supply chains and rules ofinternational trade would create a difficulty in responding to thecrisis. Decoupling of supply chains would be a disaster for all
nations’ industries. I think the White Paper’s analysis of the impacts
of protectionist measures is very significant.

COVER STORY 2

Urata: I would like to point out that protectionist measures are
increasing not only in the US but also elsewhere. For example, at the
global level, anti-dumping measures considered to be Non-Tariff
Barriers (NTBs) are increasing. The reason for this increase at the
global level is that more and more people are suffering from thedemerits of globalization, such as those working in the Rust Belt in
the US who have been robbed of job opportunities by globalization.
There is research done by a group of distinguished economists
proving several million jobs have been lost in the US due to imports
from China. This finding has been used to justify protectionist
measures. However, the researchers recommended raising mobility
in the US labor market rather than protectionist measures so that thedamage to labor due to the imports would be mitigated. Trade
Adjustment Assistance, expected to encourage such labor mobility,
should be effectively employed.
I believe, the demerits of globalization may as well be resolved notby protectionism but by a more flexible labor market or better
functioning of market mechanisms. However, there are of course
political issues behind protectionism, as advocates could win
political support from those workers exposed to immediate threats
from imports.
On the issue of the impact of a trade war on the global economy,increased uncertainty will definitely discourage trade and investment,
slowing down economic growth. A number of quantitative analyses
using a general equilibrium model show a negative impact on thenations waging a trade war, in this case the US and China, but apositive impact on the rest of the world due to trade diversion
effects. For example, with the decline of Chinese exports to the US,
Japan could enhance its export opportunities to the US, partly
replacing that decline.
On the other hand, a macroeconomic analysis like the IMF’s World
Economic Outlook shows that global GDP growth will slow down due
to further intensification of the US-China trade war. This would
negatively affect Japanese business as well. I think while the generalequilibrium model is only static and does not take account of
uncertainties due to the trade war, the macro approach shows animportant aspect of the conflict, namely a negative impact overall
upon the global economy.
In order to cope with protectionism, first of all, I think Japan
should clearly explain to the US and China that all nations would bedamaged by a trade war. Second, assuming that US protectionist
measures would be adopted against unfair Chinese trade practices,
the US should work with Japan and European nations together tocorrect Chinese practices and not alone. That would, I guess, lead toa WTO rule-making process. Japan should convince the US of theutility of this approach and should advise China to observe
international rules and understand well that observing them would
have an extremely favorable outcome in the long run.
Lastly, I would like to stress the importance of maintaining andexpanding a rules-based trade and investment environment toachieve global economic growth. Specifically, for Japan it isnecessary to expand membership of TPP11 founded under Japaneseleadership. It is also important to conclude other Asian-based megaregional FTAs such as the RCEP or the China-Japan-South Korea FTA

as promptly as possible.
Inomata: The research paper that Dr. Urata mentioned demonstrates
only a negative impact of China’s exports on US employment.
Apparently, there is also a positive impact from supplying low-costintermediate inputs to US firms, which raises their productivity. The
aforementioned research does not shed light on this point.
Urata: Yes, I agree with Dr. Inomata. Another factor that is often
missed in the analysis is positive impacts on US exports to China.
Though US imports from China are five times as large as US exports
to China, the growing Chinese market could be part of the reason forgrowth in US jobs and production. Thus it would be misleading if we
analyze only the impact of Chinese exports to the US. On theeconomic impact of Chinese exports, I am now conducting researchon the impact of Chinese exports to Japan on the Japanese
economy. My preliminary research reveals that the damage is seen
as a decline of jobs in Japanese small and medium-sized enterprises(SMEs).

How to Revitalize Multilateral Trading
System & What Would Be Japan’s Role?
Urata: In the WTO, rule-making negotiations have not been working
at all and the existing rules are outdated, and the dispute settlement
mechanism is not working well due to the outdated rules. But nocountry has ever started an action towards WTO reform, eventhough all nations mention the importance of WTO reform.
Its unanimous consensus-based decision making has made it
impossible for the WTO to initiate any flexible action for fixing trade
frictions. To make a breakthrough on this, as Mr. Nakatomi
mentioned, there are two alternatives: one is plurilateral agreements
on rules on specific issues to be decided by a voluntary group ofnations, and the other is RTAs and FTAs, in which fewer nations thanin the case of plurilateral agreements get together and create aframework of comprehensive agreements such as the CPTPP. It is
important to expand the membership of such RTAs or FTAs. With
these two categories of agreements expanded, we would eventually
upgrade and modernize the WTO. To carry out such an approach, thefour important players – the US, China, Japan, and the EU – have tocome to an agreement.
Nakatomi: I think the WTO’s comprehensive regime for supporting
free trade and its dispute settlement mechanism are unique andcannot be replaced. Nobody could stop rapid technologicaldevelopments and resulting changes in international trade. The world
without the WTO would be a world without rules and only the winnerof the power game could dominate, and thus a variety ofdisharmonies and inconsistencies would proliferate. Until the WTO isback in the driver’s seat, it is necessary for the time being to promotesimultaneously plurilateral agreements, RTAs, regulatory
cooperation, and strengthened alliances with other internationalorganizations. It would, however, be critical to secure the WTO as thebasic venue of multilateral trading systems. In this regard, it isJapan SPOTLIGHT • September / October 201923

COVER STORY 2

important for the G20 to perceive the need for WTO reform. It will be
indispensable for the reform to tackle its decision-making
mechanism to restore its legislative function.
As to what can be done immediately, I think strengthening
notification procedures and securing transparency including stronger
penalties for violations, utilization of regular committees andconfirming implementation of existing rules and strengthening them,including in particular the rules on subsidies covering State-Owned
Enterprises (SOEs), is important.
As for the role of Japan, it is important to lead WTO reform on
restoring legislative functions and securing judicial functions,
including solutions to the issue of the Appellate Body which has
played a key role in dispute settlements at the WTO. Japan should
also work to promote plurilateral initiatives and RTAs to maintain free
trade and GVCs. Possible plurilateral initiatives can include those on
digital trade and rules on subsidies. As for RTAs, expansion ofmembership of TPP11 and conclusion of the RCEP should beaccelerated by Japanese initiatives.
The WTO is a lighthouse leading global trade. We must not turn off
the light. I believe the role of Japan is significant in the midst of the
trade war between the two superpowers.
Kurose: In the domain of technology, international standardization is
the most crucial issue. For example, without having global standards
for chargers, electric cars cannot be exported. In the case ofdriverless cars, we would have to decide on a global standard on
telecommunications. There is what we call standard-essential patentclaiming, meaning that an invention must fulfil some specifictechnical standards. In some cases we must use it. We would needto set up license rules as well. We will not be able to wait for a WTO
decision under rapid technological progress. Developed nations havealready started discussions on these matters. Thus, I think rulemaking efforts are making good progress in the domain oftechnology.
Urata: In order to encourage the US to return to free trade, theintegration of the CPTPP and the EU-Japan FTA could be a good idea
for Japan to promote. Another point is to restore the WTO’s
credibility, and the WTO’s secretariat functions such as researchneed to be expanded.

Final Comments on Global Economy& Free Trade
Inomata: I pay close attention to the issue of how new technologies
will impact globalization. As I mentioned earlier, some sorts oftechnological innovation are causing a shift of production capacities
back to advanced countries away from developing countries, giving apoorer prospect for economic development of the latter. The
technological progress in this direction may dampen the
globalization momentum.
On the other hand, the digitalization of production processes, suchas e-commerce, FinTech, or “virtual presence”, can offer huge
opportunities to firms/individuals in developing countries for joining
24 Japan SPOTLIGHT • September / October 2019

GVCs through advanced communication networks. This gives afurther leverage to GVC expansion. Whether or not GVCs willcontinue to develop depends on the net impact of these opposing
forces. The issue of inequality, domestic or international, is then up
to how technologies work for GVCs.
Kurose: About China, it is such a vast country and there are huge
gaps in development among the regions. In terms of intellectual
property, Shenzhen, the most advanced place, has 47% ofinternational PCT patent applications in China, while there are someunderdeveloped regions with no PCT patent applications at all.
Inequality of wealth has been rapidly increasing among the regions.
The Chinese government has carefully addressed the existence ofregional disparities in the country. At the same time, in order tostrengthen international competitiveness, the government is
promoting policies to promote further development of advanced
regions. Most Chinese seem to support the current policies of theadministration.
Nakatomi: We can stop neither globalization nor innovation. But wemust be aware, for example, that digital technology can introduce
such problems as privacy and consumer protection, competition
issues and digital divide, while it can bring enormous benefits to allusers and countries. We will need to find solutions to these
consistent with globalization. Development of GVCs means that no
single country will find solutions on its own, so we will need tocontinue our best efforts for international rule making without falling
into protectionism. Japan has a responsibility to pursue this and thatwould protect Japanese industries’ interests.
Urata: We would have to think about mitigating the income gap andhow all people could benefit from economic growth andglobalization. One way to achieve it is redistribution of income andassets. However, redistribution policy could hamper economic
vitality and dynamism. A better policy would be to support
disadvantaged people or groups, in order for them to be able tobenefit from globalization and economic growth. For example, SMEs
may be given technical assistance so that they can effectively use IT
to be engaged in GVCs, while women could be given appropriate job
opportunities to maximize the use of their talent and skills.
Kurose: I would like to add one more thing. In the domain of IPRs, it
is highly critical to create new international rules. It will be necessary
to elaborate TRIPS. I sincerely hope that international rule-making
efforts to meet the present levels of technology will be promoted
without fail. Otherwise, we will see disastrous confusion.
JS: We must ask Ms. Ota, who is now in charge of METI’s APEC
Office, to help activate the international rule-making process toachieve what her White Paper envisaged.

Written with the assistance of TapeRewrite Corporation.

COVER STORY • Global Governance at a Crossroads – a Roadmap Towards the G20 Summit in Osaka • 2

Interview with Dr. Dennis J. Snower, President of the Global Solutions Initiative, Senior Professorof Economics at the Hertie School of Governance, Berlin; Senior Research Fellow at the Blavatnik
School of Governance, Oxford University; and Non-Resident Fellow, Brookings Institution &former President of the Kiel Institute for the World EconomyRestoring Social Cohesion– a Crucial Issue for the G20
in 2019

By Japan SPOTLIGHT
Lonely elderly people in an aging society, the unemployed in the new Fourth Industrial Revolution, those
who feel left behind by globalization: all are symptomatic of growing social discontent and a lack of social
cohesion. This lack of cohesion seems to be hindering political and economic stability even amongdeveloped nations. The G20 will address this issue at its 2019 summit in light of its growing impact onworld peace and prosperity.
Japan SPOTLIGHT interviewed Dr. Dennis J. Snower, a distinguished labor economist who is presidentof the Global Solutions Initiative in Germany, a global collaborative enterprise to propose policy
responses to major global problems, addressed by the G20, the G7 and other global governance fora.
(Interviewed on Feb. 8, 2019)

Introduction

unemployment. In all of this, I have been
fortunate that my economic and theoretical
JS: Could you briefly introduce
interests basically overlap with my policy
your academic specialty, laboradvice interests. I have advised national
economics, and also the Kiel
governments (German, French, Spanish)Institute’s mission and main
but also at an international level including
activities.
the OECD, the World Bank and others.
The Kiel Institute is one of the very few
Snower: I am a specialist in labor
institutes in the world that examines the
economics and give advice to governments
global economy from a global perspective
on labor market policy, as well as on
as opposed to a national or regional one.
reforming welfare systems and how to get
From the perspective of the global publicmore incentives into the equitableinterest, how should global trade and global
distribution of opportunities. The basic idea
capital flows, global technological diffusion,is that we should move away from thebe designed? The Kiel Institute has models
redistribution of income, and insteadthat look at how the world’s environmental
redistribute economic incentives, enabling
systems are connected to the world’s
Dr. Dennis J. Snower
people to become employed and skilled. So,
economic systems in order to see how theyou take the most disadvantaged people and you give themeconomy influences climate and other aspects of our environment.
employment subsidies and training subsidies, and the longer the
We looked at the effects of offshoring and outsourcing worldwide,
duration of unemployment and the more disadvantaged they are, thehow value chains affect employment opportunities and how theyhigher these subsidies become. This has worked well in a goodchange because of digitalization. The institute also has a forecasting
number of countries, as an underlying idea.
department not only for Germany and Europe but for the world as aWith Assar Lindbeck – who was then the chairman of the Nobel
whole. Being president of the Kiel Institute gave me the opportunity
Prize Committee in Economics – I developed the insider-outsider
to look at the inter-linkages between many different domains that aretheory of unemployment, which shows under what circumstances
kept apart both in academia and politics. Climate, labor policies,
insiders whose jobs are protected in the labor market can benefit
social policies, demographic change – these are usually investigatedthemselves, but not the outsiders who are outside this job
separately but at Kiel we looked at how they interact, especially theprotection, and how this can explain the persistence ofinter-country linkages.
8 Japan SPOTLIGHT • May / June 2019https://www.jef.or.jp/journal/

COVER STORY 2

Role of Think-tanks in the G20
JS: Think-tank involvement in the G20 is a recent

development. How do you assess this involvement?

Snower: As you said, this is relatively recent. Under the German G20
presidency, we restructured the process around task forces which
produced policy briefs addressing the main issues of the G20
agenda. That proved to be very valuable to the German government,
both in terms of the recommendations that we generated but also interms of our overall narrative. We put all the recommendations under
the umbrella of what we called the “recoupling narrative”, whichbasically means that social progress in terms of people’s well-being
can become decoupled from economic progress. These sources of
discontent are not necessarily closely related to the rate of economic
growth, and therefore we recommended that the G20 should focus
entirely on trying to recouple economic prosperity with social
prosperity.
That, in fact, was very useful to the German government in thenegotiations leading up to the G20 Summit in Hamburg in 2017. At
that time, there were emerging protectionist activities, and President
Donald Trump decided to leave the Paris Agreement on climatechange, so it looked like the summit was in grave danger. The
protectionists said that they are the only ones who represent thedisadvantaged in the world, and as a result of our narrative theGerman government could say, “No, we are very concerned about
the disadvantaged and we have a lot of proposals here about how tohelp them and protectionism is not effective in this regard.”That helped change the discussion, and therefore we understandboth the recommendations and an overarching narrative. Since theGerman presidency, Argentina has followed this structure of task
forces and policy briefs related to the priority, and now of course inJapan there is another big step forward – the organization of the G20
process in Japan is extremely impressive. Many institutes are allcooperating with one another as well as with think-tanks abroad in
generating proposals that are very closely related to the JapaneseG20 priorities. Quality infrastructure, aging society, SME finance –these are all being pushed ahead under the Japanese presidency.
Although the summit will occur relatively early in the year comparedto other summits, the fact that the G20 has started its work in Japanso early meant that this has not been a problem.
JS: Would you agree that social cohesion is an inter-disciplinary issue, and as such is relevant to behandled by think-tanks?

Snower: The big challenge of our age is that we have witnessed theintegration of the global economy, and value chains have become
truly global. However, we have not witnessed a similar integration of
global society or global politics. Because societies and theirpoliticians remain fragmented, this creates tensions between our
economic interests and our social and political ones. Therefore, it is
not sufficient to look just at the economic interests because that
ignores something important in terms of social concerns and social
cohesion. The reason why we have so many protests at G20
summits is that the people on the ground understand that social
cohesion is often overlooked and that the G20 is depicted as ameeting of heads of state and technocrats to impose economic
solutions on people whose societies are fragmented. By looking atsocial fragmentation directly in connection with economic activity,
we can address the issue and make a real contribution to the G20
process.

Social Inclusion an Important Policy Goal
JS: You co-authored a book called Caring Economics.

Could you elaborate on this and the concept of social
inclusion?

Snower: Economists tend to assume that people are purely selfinterested, concerned only with their own consumption. Therefore,
economic policy provides incentives of a monetary nature and thatinduce people to follow their self-interest to take care of externalities
and other public concerns. However, this misses somethingimportant in human nature, which is the need for people both to care
for another compassionately and to affiliate or bond with one anotherin order to have a sense of belonging. When those needs are notmet, people become psychologically unbalanced and they become
unhappy. Taking those needs explicitly into account in our economic
models helps us work out how to create social contexts that generate
more of this cooperative activity. For example, we can choose at theworkplace whether we promote competition among individuals orwhether we have collaboration in teams. The same thing holds in our
school system and is very important in the health system. Therefore,
having a new approach to what motivates individuals can have very
far-reaching consequences in terms of what we do for economic
policy.
JS: This is particularly pertinent for an aging society.
Snower: Absolutely. The big challenge in aging societies is thechallenge of loneliness. Older people are left after their families have
moved away to work, or a spouse may have died, so they are left
feeling very lonely. How to address this issue, particularly in aging
Japan SPOTLIGHT • May / June 20199

COVER STORY 2

societies, becomes extremely important. Digitalization can help, andJapan is a world leader in how to connect older people to healthsystems, social services and so on through digital pathways.
However, digital technologies are not able to provide a sense of careand belonging. For that, you need other human beings. Humaninteractions to overcome loneliness require lots of time in terms ofinterpersonal interactions. The technological progress of humaninteractions does not proceed as rapidly as other areas; for example,
computers these days are millions of times more productive than 40
years ago, and we can do millions as many computations per
second, but we are not in a position where we can spend one
millionth of our time with our children and our parents and still havethe same quality of relationship. We are moving toward a society
where interpersonal interaction among different age groups and in
the caring profession will become increasingly important,
supplemented by the new digital technologies.
JS: To maintain inclusiveness of welfare, some kind ofpolicy measures would be necessary to avoid adigital divide in that context.

Snower: That is absolutely right. There are two things that elderly
people need: one is, they need more training than they have to
become socially skilled. To be able to interact well with other people
requires empathy; it requires perspective-taking, mind-reading,compassion. These things can be taught. Schools and universities
tend to train people in reading and writing and analytical skills –
cognitive aspects – but not so much in social skills. In the world of
the future, social skills will need to be taught much more.
We also need to teach digital skills that will enable us to use digitaltechnologies to promote these social interactions. Digital skills aregoing to become ever easier to acquire as time goes on because
computers are going to become much easier to handle. When I
started interacting with computers, you had to know various
computer languages, whereas nowadays you can talk to yourcomputer and it will answer. Look at how easy it has become to drivecars – 100 years ago you had to be a specialist to drive and it wasseen as the prerogative of the few. Now, virtually everybody can doit. Computers will become like this too. The challenge that we have is
to make lifelong learning and digital skills a fact of life throughout thewhole of society while understanding full well that the digital needsof old people will differ from those of young people. So, this lifelong
learning must give them the digital skills that they need – not for its
own sake, but primarily to help them interact better through these
digital technologies with other people. This will be a big source ofsocial cohesion.

10 Japan SPOTLIGHT • May / June 2019

JS: We are living in a globalized world, and so weneed to maximize the merits of globalization. At thesame time, we should minimize its demerits relating
to social discontent. There is the idea of structural
economic reform as a way to smoothen the
globalization process. One aspect involves
promoting efficiency through, for example,
competition policy. Another is achieving equal
opportunity for economic incentives. How can weachieve consistency or relevancy between these two
aspects?

Snower: Promoting efficiency can be done by internalizing theexternalities of economic activity, promoting competition policy, andproviding a better flow of information to avoid asymmetry of
information and market power resulting from that. Equality ofopportunity arises largely through redistribution of economic
incentives.
Looking at what different countries spend on training theirworkforce and lifelong learning, it is very revealing because in the
United States the percentage of expenditures per capita on this is far
lower than in Denmark or Germany or Japan, and this helps explain alot of the social discontent that you have there. However, that does
not cover all the main issues underlying the problem of social
cohesion; in addition to these economic opportunities, people have
two broad needs. One is the need for empowerment – that one can
influence one’s own future and destiny through one’s own efforts,that I can affect my fate by working hard or doing something throughmy own effort. That gives one a sense of empowerment.
Empowerment is an extremely important means for human beings,
and not always directly related to economic growth.
It is true that if people have equal opportunity then they become
equally empowered, but empowerment is broader than that.
Globalization has reduced people’s subjective empowerment because
global value chains are always adjusting, people adjust, and firms
adjust where they want to locate their activities depending on where
it is most profitable, so the people at the local level feel at the mercyof big international forces over which they have no control.
Multinational companies used to have great regard for the locality inwhich they operate, but that has become less pronounced as time
has gone on. Japan is an exception to this rule, but even in Japan
globalization has affected the way companies operate with regards totheir local workforce and local society. Globalization has clearly
promoted great wealth, especially in emerging economies, but also
has led to a sense of disempowerment in many places, which is
negative. The way to address this problem is to move away from theold concept of the welfare state to a concept of the empoweringCOVER STORY 2

state, whereby governments give people skills that will help them tomake a difference to their own lives. Let’s take one example in aging
societies: if you give old people who live in geriatric homes theopportunity to say when they want to eat, and give them a choice ofmenu, they will live longer, be healthier, and have a better immune
system, because they feel empowered. There are many ways inwhich we can empower people.
There is also a deep need that people have for social belonging
and interaction. This means that governments should also haveregard for how to strengthen local communities. People tend to livein small groups and these small groups should be strengthened, andglobalization has also affected this because people feel that theircommunities are often at the mercy of big global forces. Minimizing
the disadvantages of globalization involves not only more efficiency
and equal opportunity but also overcoming the problems of
empowerment and social estrangement that globalization causes.

Consequences of Immigration & Innovation
JS: Continuing with social cohesion, I think there are

two challenges facing society now: one isimmigration in a globalized era, and the other isinnovation in the Fourth Industrial Revolution. Bothcould affect labor markets. Could empowerment
work well to overcome these two challenges?

Snower: For immigration, the issue that economists have looked at
is how much more GDP per capita can immigrants provide? And ifthey provide significant positive returns in that regard, thenimmigration is considered good. Despite this, immigrants come fromdifferent countries and have different backgrounds, and this affects
the society in which we live and our social context. These effects areoften overlooked by economists and policymakers. The issue is not
only the economic integration of immigrants, but also what sort ofsocial integration is required so that people who live in the receiving
country don’t feel endangered. That means countries need to beclear about what they require of immigrants and also need to beclear in terms of how large the flow of immigrants is that they areable to absorb.
Japan has been a relatively closed society but is now considering
more immigration. Nowadays, I think that the issue of social
integration should be considered much more carefully. In a numberof countries, society is considered like a marketplace. If you tradewith one another and you gain from trade then everything is fine. Butsociety is not a marketplace, it is a place where people interact witheach other, and these interactions come with a lot of social
prerequisites: respect, care for one another, and deep culturallearning. This social integration part of the argument should not be
neglected.
Regarding innovation, there is another set of issues, more related
to empowerment. If innovation proceeds sufficiently rapidly, there isa big danger that people will become disempowered for the simple
reason that human skills – if everything goes well – grow at a rate ofmaybe 1.5% to 2% per annum. The skills of machines grow at therate of Moore’s law, i.e. double every two years. Even if machinelearning slows down a bit, machines will still be growing at a rate far
faster than what humans can keep up with. Policymakers will have totry to predict when the crossover point comes where machines takeover the routine jobs from human beings – because once thecrossover has taken place and machines take over those routine
jobs, there is basically no way humans can get those jobs backbecause their productivity will never grow fast enough. So, they will
have to look at different skills that are complementary to the machineskills, and those skills will largely be creative skills and social skills.

Income Equality or Economic Growth
Insufficient
JS: You mentioned that economic growth should notnecessarily be the primary goal considering theincreasing importance of social issues. However,
economic growth is still one of the most effective
ways to achieve social cohesion. As people become
wealthier, social discontent would go down and wewould see more social contentment.

Snower: Basically, there are no hard and fast rules on this issue. If
one lives in a society with a lot of social cohesion already and people
broadly feel empowered by their work, then simply promoting
economic growth is a very good thing because it will give them morepurchasing power, enable them to live healthier lives, and give themthe opportunity to partake of cultural goods. So in many respects,
people will be much better off. The problem arises when social
cohesion in a society is not very strong and people feeldisempowered. Take the American Rust Belt for example. Families
are broken, and people are laid off long-term. If you simply promoteeconomic growth, you may not solve these problems and we’ve seen
this in the US where people are left behind, and even if they are atwork and receiving salaries, they are still suffering from the lack ofsocial cohesion and disempowerment. Social prosperity must be
closely coupled with economic prosperity. If society is functioning
well, then focus on economics. But if society is not functioning well,then you need to look elsewhere in addition to economics.

Japan SPOTLIGHT • May / June 201911

COVER STORY 2

JS: In Japan, the issue of the Rust Belt in the US issometimes interpreted as a question of income
inequality. Is it the case that expanded income
inequality would always bring social dis-cohesion?

Snower: The greater the income inequality, the more likely it is thatyou will have social disintegration, for all the obvious reasons. Butthat is not the whole story. The opioid epidemic has not arisen
because people have too little money – in fact, they have too muchmoney with which they buy drugs; they are destroying themselveswith the money that they have. Self-harm is a good example of where
social prosperity becomes decoupled from economic prosperity.
Therefore, inequality is very useful to look at in societies thatfunction well. But when they don’t function well, economic inequality
is not everything. You need to be embedded in a social structure thathas sufficient stability for you to feel confident that you will besupported by family and friends.

Implications of Discussions on Social
Cohesion in G20
JS: Turning to global governance, when these social

issues are discussed at international fora such as theG7, what would be the merits of such discussions?
Anti-globalization sentiment is growing and perhaps
the G20 could be considered as one of the flag
bearers of globalization.

Snower: I think these international discussions are absolutely crucial
for the future of our world, not only with regard to social cohesion.
Through the process of globalization, we have produced lots ofglobal problems, including climate change, financial crises, andimmigration pressures. These can only be solved on a global level,and similarly for financial markets. Our challenge nowadays is tomake sure that people living in many different countries understandthat if they wish to be truly patriotic to their country, if they wish to
be a good citizen in their locality, then one of their jobs is to support
the multilateral process in order to solve global problems. If the
problems of climate change and financial crises are not addressed,then every country will be damaged. Therefore one should not see
nationalism and multilateralism as conflicting objectives, they should
be seen as complementary ones, and that will be the big job of theG20 to promote that idea.
JS: So, could these international discussions be

useful in mitigating populism, which seems to befueling protectionism?

12 Japan SPOTLIGHT • May / June 2019

Snower: What the G20 needs to do, in my opinion, is to acquire ahuman sense. The G20 needs to communicate that it is doing thesethings so that people in countries around the world can lead more
fulfilling lives. What the G20 does should be interpreted in terms ofthe needs of people on the ground. That’s what we encourage at the
Global Solutions Initiative. By doing that, it will create a lot more
understanding of multilateral processes and bring a different tone to
how it communicates with the general public. There is a big
understanding in the G20 under the Japanese presidency on thisissue and I very much look forward to seeing how it plays out.

Japan as a Model for “Caring Economics”
JS: What is your outlook for the Japanese economy?

Japan used to be quite well known for practicing the“caring economics” that you referred to.

Snower: Japan is an extraordinary country, where despite its
economic success it has not lost sight of the importance of social
interaction. The deep sense of customs and interaction that
accompany Japanese life help promote these social bonds. Thiscannot be exported as it is to other countries with different culturesand different associations; but the idea of promoting social wellbeing consciously – not only just between people but also in termsof government policy – is an important issue that other countries canlearn from.
At the same time, Japan is also in a leading role for aging societies
and how to handle the problem of people who become disconnectedfrom families and their localities. Connecting those older people withyounger people in ongoing relationships will be hard, as thepressures of work will pull them elsewhere. Machines will take overmore and more routine work, and if people do a lot of work that isroutine, that will require some very significant changes in the waythat we deal with economic challenges. It will also be an issue forsocial cohesion because most people’s work involves a lot of routine
elements, and if these routine elements start getting taken over bymachines, what will this do to social cohesion? This is a problem
that should be high on every government’s agenda.

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

COVER STORY • Global Governance at a Crossroads – a Roadmap Towards the G20 Summit in Osaka • 8

T

he G20 & Global
Governance

By Sachin Chaturvedi & Priyadarshi Dash

Introduction
A diverse set of “movers and shakers” have explained the contoursof global governance over the past decade. Some importantdevelopments that need mentioning in this parlance include thecollapse of the WTO Doha Round of trade negotiations, the originationof the financial crisis of 2008-2009 in the United States (the mostsophisticated financial system in the world), the unhealthy trade war
between the US and China, the so-called proponents of free trade,
protectionist and isolationist policies in the US, migration fromconflict-ridden Arab countries and Africa, and human rights violations
across countries. These unusual events happening across countries
regardless of their level of development tempts the intelligentsia andordinary citizens to question the relevance, adequacy and legitimacyof the existing superstructure of global governance. Moreover, theslow response to standard bailout and crisis financing packages by
the IMF in the wake of the financial crisis in 2008-2009 and theprolonged and uncertain recovery have exposed inherent deficiencies
in the current systems of global governance.
The post-crisis evolution of narratives on the role of multilateral
institutions and country configurations or reconfigurations has beenkaleidoscopic and introspective. While pressure on the institutions ofglobal governance such as the United Nations, IMF, WTO, World Bankand regional development banks to undertake necessary reforms intheir functioning, particularly on the issue of fair representation of
emerging markets and developing countries, continues to mount,
there is a greater recognition of the existence of a vacuum ininternational economic governance. Can the G20 fill this vacuum? Inother words, can the G20 demystify and blur the conventional country
configurations into stereotype categories of developed anddeveloping, and nurture mutually-reinforcing engagement among
countries?
Despite not having the legal status of an international organization,
the G20 has gained substantial influence as a global platform in recent
years, perhaps by leveraging the benefit of the doubt. This benefit ofthe doubt accrues from declining faith in the existing multilateralprocesses of promoting trade, investment and development
cooperation. In the 1980s, the G7 lost its importance as a platform forinternational economic policy coordination and this skepticism lasted
till the outbreak of the East Asian Financial Crisis in 1997. The severityof this emerging markets crisis in terms of contagious spread andmagnitude of output and employment loss created the space for the
32 Japan SPOTLIGHT • May / June 2019

Author
Sachin Chaturvedi

AuthorPriyadarshi Dash

G20 to emerge (“G20 and Global Governance” by Stephen Kirchner,
Cato Journal, 2016, Vol. 36, No. 3). Subsequently, the first meeting of
the G20 finance ministers and central banks was held in Berlin in
December 1999. Regardless of the efficacy of other countrygroupings, the expectations from the G20 appear to be high as thegrouping has graduated from playing a stabilizing role (in the context
of post-crisis inter-country coordination) to promoting development.
This has been manifested in the widening and broadening of the G20
Summit agenda from its focus on restoring financial stability andensuring global macroeconomic coordination in the first three G20
summits during 2008-2010 to a wide range of development issues
like global value chains, food security, skill development, women
empowerment, Africa compact, and so on. Being a club of developed
as well as emerging markets, the G20 envisages a world thatcherishes high and inclusive economic growth, protects the interestsof the poor and marginalized, prevents financial crises, and ensures
upward social mobility (poverty alleviation, food security, women
empowerment, etc).
Basically, the business of the G20 over the years has evolved in two
tracks – a finance track and a development track. Even though theleaders’ summits have not exclusively referred to these two tracks forpractical purposes, they define the sequence of activities in the G20
platform. As this year’s G20 host, Japan has cautiously identified thecore areas of these tracks. In development sectors, universal healthcoverage, aging, and quality infrastructure assume importance, while
the finance track will probably continue to implement regulatory
reforms in financial markets and envision new and innovative meansof fund mobilization for development projects.

Finance Track
As the name suggests, the finance track largely covers the areas ofglobal financial stability, fiscal and monetary policy coordination,exchange rate coordination, financial systems development, anddevelopment finance issues. The success of G20 initiatives in
restoring financial stability to the global economy is laudable.
However, a lot depends on the measures and commitments beyond
crisis prevention and resolution. The vitality of the finance track can
only be regarded as successful if finance contributes to inclusive andsustainable development in emerging and developing economies.

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

COVER STORY 8

Functioning of Global Financial Systems
The G20 assumed prominence during the global financial crisis of
2008-2009 when it facilitated joint efforts by the advanced economies
and emerging markets to restore financial stability and ensure acoordinated macroeconomic response, and resist resorting to beggarthy-neighbor policies. The smooth and coordinated implementation of
fiscal stimulus packages and adherence to monetary policy andexchange rate disciplines helped contain the crisis-related disruptionsin the affected economies. These issues dominated the commitmentsof the G20 at the first three summits. While short-term crisis
prevention and mitigation continued to occupy substantial attention insubsequent summits, the finance track of the G20 has widened
significantly in terms of issues covered and the scope ofcommitments. A good number of commitments refer to long-term
structural reforms, especially reform of international financial
institutions, the expanded mandate of the Financial Stability Board(FSB), mobilizing private capital for infrastructure financing,promoting institutional and long-term finance for development,
measures to address debt sustainability, and tax and accounting
reforms.
In October 2018, the G20 Eminent Persons Group (EPG) submitted
a report on the global financial system. The EPG was tasked with amandate “to recommend reforms to the global financial architectureand governance of the system of International Financial Institutions(IFIs), so as to promote economic stability and sustainable growth ina new global era; and to consider how the G20 could better provide
continued leadership and support for these goals” (G20 Secretariat,“Making the Global Financial System Work for All, Report of the G20
Eminent Persons Group on Global Financial Governance”).
Unfortunately, most of the proposals of the EPG do not reflect thiscentral mandate. On the contrary, the report reiterates continuation ofcertain practices which have long been the subject of criticism. A
number of EPG recommendations seek for the G20 to allow the IFIs tolead harmonization of regulations, standardization of risk assessmentand mitigation, mobilization of capital for infrastructure anddevelopment financing, and attracting private capital. There are many
contentious issues in the provision of and access to global
governance, especially in the economic and finance domain.
Developing, less developed, small and vulnerable economies would
ideally demand more space for representation in global affairs thanremaining dependent on their fortunate large and developed economy
peers.

In order to realize the full potential of a cooperative international
order, it is important that developing countries are given fair anddemocratic representation in the decision making of IFIs, particularly
the IMF and the World Bank. Despite repeated efforts by developing
countries including India for action on long-pending reforms of the
IMF and World Bank, not much has happened except some revision in
the IMF quota formula and inclusion of the Chinese currency, therenminbi, in special drawing rights. As it appears, taking forward the
EPG proposals in any manner would amount to empowering the IFIs,
and contribute to perpetuation of existing inequities. It could alsoerode the policy-making space of the sovereign nations. Moreover,the proposals sound self-defeating as they would re-establish theflawed pre-eminence of the IMF in global macroeconomic
governance. It is an over-optimistic claim that governance and humancapital development have been at the core of the IFI’s operations.
Among IFIs, the IMF has supported countries during balance of
payments crises as the lender of last resort but with conditionalities
and Structural Adjustment Programs (SAPs). The efficacy of SAPs fordeveloping countries implemented in the past has been mixed,
especially taking into account the experience of small developing
economies and Least Developed Countries (LDCs). The G20 should
work to suggest and commit to reforms that bring inclusive
development, not packaging old wine in new bottles.
The idea of country platforms or any kind of joint platform within
the G20 is indicative of an unhealthy trend of cartelization among the
IFIs. Without country platforms the G20 can unlock investments in themember countries. Creating an enabling environment for attracting
investment should be left to the member states rather than the G20 asa whole. The G20 should enable countries to explore various sourcesof financing for development. Instead of the G20 creating any suchplatforms, IFIs can pool their own resources in a common platform
without making countries party to that arrangement, and offer themdevelopment finance, if approached by any country. By that logic,
regional platforms for promoting cross-border investments andconnectivity are also not required. Regional platforms would have tonecessarily align themselves with the priorities of the member
countries in regional cooperative frameworks, like Bangladesh,
Bhutan, India and Nepal (BBIN), the Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation (BIMSTEC), etc.
In practice, the IFI community has placed excessive emphasis on
promoting financial liberalization in developing countries. So far, thisparadigm has not led to holistic social and economic development inJapan SPOTLIGHT • May / June 201933

COVER STORY 8

the developing world. The pitfalls of such an approach were
anticipated by Gunnar Myrdal long ago. Myrdal, in three volumes ofAsian Drama: An Inquiry Into the Poverty of Nations and other works,
underscored the importance of making a fine balance between alaissez-faire economy and state intervention. For example, Brazil had avery active stock market which virtually disappeared following
liberalization that allowed local companies to be listed on the New
York Stock Exchange. The EPG also argues for convergence of early
warning systems, which is a no brainer. Early warning systems havenot been effective in predicting financial crises in the past. Although
there is a need for continuous surveillance and assessment of riskbuild-up, it is more efficient to have independent systems of macroeconomic risk assessment by institutions such as the IMF, FSB and
the Bank for International Settlements than the integrated system. It
will help maintain the plurality of early assessment systems as well as
contribute and validate the predictive ability of the alternative models.
IFIs have failed in anticipating the occurrence of financial crises in
Asia and Latin America in the past and most importantly in the UnitedStates and the Southern European countries in recent years.
Moreover, the post-crisis policy prescriptions offered by the IMF andother IFIs to the crisis-affected economies proved counterproductive
and resulted in unwanted economic adjustments. Interestingly, in theearly years of these institutions, Harry Dexter White and John
Maynard Keynes, eminent economists in this field, were apprehensiveof the role and contribution of the IMF and World Bank in pursuit ofgrowth and full employment.
The idea of reorienting development finance by involving the nonG20 constituencies and the IFIs appears to be an unnecessary step.
This is an attempt to legitimise the leadership and intervention of the
IFIs in G20 matters. This could be a barrier to developing country
institutions such as the New Development Bank and the AsianInfrastructure Investment Bank in developing their own procedures.
The G20 is not a legitimate global platform; therefore it would be afutile exercise for the G20 to take the responsibility of reorienting
development finance by involving IFIs and non-G20 constituencies as
it may not be acceptable to the global community. After all, at themeeting in Busan, the developed countries had attempted
harmonization of approaches to aid which was rejected by thedeveloping countries.
The report is misleading as it apparently assigns more weight topreventing short-term financial crises as an indicator of healthy
development compared to the role of other important development
34 Japan SPOTLIGHT • May / June 2019parameters. The IMF is mandated to primarily provide short-termbalance of payments financing. The idea of combined assessment ofdevelopment risks recognizes the undue emphasis on crisis
prediction and management, which is unnecessary at this stage of theevolution of the G20. Financial stability and macroeconomic
coordination were the over-riding objectives of the G20 in theimmediate years following the financial crisis in 2008-2009. Since
then then G20’s agenda has expanded to include various development
issues. Now that the global economy is seeing buoyancy after aprolonged slowdown following the financial crisis, the G20 should
prioritize expeditious implementation of its commitments on various
development goals.

Leveraging on Private Capital
Private capital, especially cross-border capital flows, has not been
efficiently harnessed by developing countries. This pattern more orless holds across all regions, although there are slight differences.
Most countries have relied on official aid flows and concessional
funding which would not suffice given the extent of development gaps
in developing Asia and Africa. Developing countries in Asia, Africa andLatin America need massive investment in physical and social
infrastructure in the next 20 to 30 years. It would not only require
efficiency in existing resource use but identifying new and innovative
sources of funding, with significantly large contributions of private
capital. Paradoxically, globalization has inverted traditional economic
views of the desired direction of international capital flows. Rather
than encouraging capital to flow to places where it is scarce, globallymobile capital flows to places where it is most secure. This pattern iscreating distortions in the efficiency and equity of investment aroundthe world, especially of government investment.
While public investment would remain a vital component ofdevelopment finance, the G20 should take proactive steps now topromote a more efficient allocation of private capital through newforms of public-private partnerships. A unified ecosystem, good
governance and investment in human capital would attract private
capital into desired sectors of investment. Blended finance and local
currency financing facilities are novel supplementary financing
windows. Small and medium enterprise (SME) financing andagribusiness have been dynamic sectors. Private financing in lowincome countries and fragile states is feasible as healthy mobilization
ratios (total cost of investment per unit of IDA resources) of 8:1 havebeen realized (International Development Association. IDA18 IFC-COVER STORY 8MIGA Private Sector Window (PSW): IDA18 Mid-Term Review. 2018).
The G20 should promote long-term institutional capital from G20
countries into investments related to the Sustainable Development
Goals (SDGs). Some countries face particular issues, especially lowincome countries, fragile states and selected LDCs. For example, there
are 12 LDCs that will graduate from this group in the next few years
with consequent loss of duty-free, quota-free preferential market
access and aid for trade under the WTO window. They may needspecial attention for financing to manage their current account deficits
during this transition. A balance is needed between macro, micro andaffordability/access concerns that should be based on detailed
country considerations. Rules of thumb are not good proxies in thesedebates.

Financing Global Public Goods
Global public goods cannot be created with pure commercial termsof funding. There is a need for special or dedicated funds.
International collective action is warranted to fund non-rival and nonexcludable functions like research and knowledge sharing, control ofpandemics and mitigation of global warming, and global standard
setting, visioning, convening and advocacy on policies, such as the
Food and Agricultural Organization’s principles for responsible
investment in food and agriculture (“We Need a Consensus on the
Definition of ‘Global Public Goods for Health’,” by Gavin Yamey,
Osondu Ogbuoji and Kaci Kennedy McDade, Brookings Future
Development, Nov. 20, 2018). G20 members constitute the largest
economies in the world and hence will be the main contributors tothese potential funds. They should negotiate on such funds. They
could learn from the experience of the UN in its new Funding Compact
which strives to rectify the imbalance between stagnant core
contributions and rising non-core, voluntary contributions that haveto be continuously renegotiated. Wise use of new innovative sourcesof funding would be a pragmatic step in this endeavor.

Development Track
Unlike the finance track, the development track or the Sherpa trackcovers a whole range of sectors and issues which have larger
development implications. To name a few, food security, economic
empowerment of women, agriculture, and skill development havesignificant bearings on the lives and livelihood choices of the poorand excluded sections of the people. In the last 20 years, andparticularly since 2008, the G20 agenda has had commitments on
various development issues. Some areas that could be potential gamechangers in the development track are discussed below.

Science, Technology and Innovation (STI) for Meeting SDGs
Technology development, deployment, dissemination and transfer
to developing countries require suitable responses. Current
institutional arrangements are not equipped to meet the genuine
needs of developing countries in technology development andtransfer. The UN has undertaken several initiatives over the years in
the area of technology transfer, including 1) the Multilateral Fundunder the Montreal Protocol; 2) the Green Climate Fund, 3) the Global
Environment Facility (GEF); and 4) the Climate Technology Centre andNetwork of the United Nations Framework Convention on Climate
Change (UNFCCC). These are necessary and are not sufficient as
more is needed in terms of research and development, funding,technology transfer and adoption and in terms of synergy among
them. The 2030 Agenda, prima facie, has only produced a roughskeleton of the proposed Technology Facilitation Mechanism (TFM).
Mapping of capacity gaps in developing countries for technology
assessment, particularly in the domains of development andsustainability in tune with the SDGs should be undertaken. Proper
ecosystems with specific (cost-effective) technology solutions shouldcome up in individual countries and contribute to the global
repository. A universal technology bank should be created as the core
institution of the TFM. The activities around a TFM technology bankand dissemination of technologies require careful policy design tomitigate informational asymmetries and address market failures andother systemic challenges.
Novel models for incentivizing innovation, such as open source,
open innovation, crowd sourcing and innovation prizes, can be
explored and adopted. In this regard, the literature on successful
examples and models and their adoption in different sectors, ranging
from agriculture to drug discovery, is growing. Addressing
technology-related issues from a public goods perspective will enablefinding workable solutions. Global public goods can be produced andadopted to find cures for communicable diseases, enhance
productivity in agriculture, protect environmental commons, andenable access to information and knowledge. Successful examples ofsuch cooperation include the Consultative Group on International
Agriculture and the European Organization for Nuclear Research.
Further, integrating the SDGs in STI cooperation has not happened
Japan SPOTLIGHT • May / June 201935

COVER STORY 8

and there is a disconnect between STI cooperation and strategies for
the SDGs. There is a strong case to use STI cooperation to meet theSDGs by developing specific programs and mechanisms. The current
frameworks and agreements in STI cooperation can be analyzed froman SDG perspective, and institutions that facilitate STI cooperation
can be asked to integrate relevant SDG targets as an objective for STI
cooperation.

Global Value Chains
As production fragmentation intensifies globally, countries canbenefit from integrating into global value chains (GVCs). Currently,
trade flows and positioning in GVCs in Sub-Saharan Africa are far
below their potential. Lower tariffs, better access to credit for theprivate sector and a conducive business climate can enable better
integration of Sub-Saharan countries into GVCs. Since the G20
already has the Africa Compact initiative, GVCs may strengthen theexport prospects of African countries. The same would apply todeveloping economies in Asia and Latin America as well. Tradefacilitation in the form of modern customs and border procedures
have the potential to facilitate efficient integration of African
economies into GVCs as trade flows in intermediate products are
more sensitive to trade facilitation changes. As wages rise in East
Asia, production can be pushed to relatively low-wage areas, possibly
Africa. However, Africa can only tap this opportunity provided
appropriate policies are in place for developing requisite skills among
the local workforce, as well as investment in institutional reforms,
particularly in technical education and training. At the same time,liberal foreign direct investment regimes may attract investment into
industrial sectors in Africa which would fuel local industrialization andstrengthen participation in GVCs.

Trade Finance
Globally, one-third of international trade is backed by one or two
trade finance instruments. By providing financial support andinsurance for uncertainty in payments by importers and delays inmeeting orders, trade finance instruments support the trading firms.
In Africa, trade finance is a relatively low-risk portfolio for commercial
banks. The overall default rate is 5% whereas SMEs face the risk of a
14% default rate. Better provision of trade finance would help
integrate SMEs into the mainstream economy and expand theircapacity to export. Lack of adequate collateral and poor
creditworthiness often leads to rejection of applications by the banks.
36 Japan SPOTLIGHT • May / June 2019

Development banks like the African Development Bank and African
Export-Import Bank could fill this perverse gap in trade financing andactivate the hidden triggers for export growth in African economies.
The G20 should enable adequate provision of trade finance todeveloping countries so as to enable them to benefit from tradeliberalization, particularly from GVCs.

Conclusion
Good global governance is a sine qua non for achieving sustainable
and equitable development in the world. The G20 has to play a criticalrole in this endeavor. Since countries have already embarked uponachievement of SDGs, the G20 must envisage and steer effective
inter-country cooperation mechanisms for realization of this goal. Toomuch dependence on the IMF, World Bank and other IFIs would not
help. In other words, the G20 relegating responsibility to IFIs using
their own platforms would not serve the purpose. In fact, IFIs should
undertake reforms of their organizations on their own. The financetrack must keep the onus on reforming the Bretton Woods institutions
and other institutions of global governance.
Global governance is not just about providing finance but putting inplace institutional mechanisms that adequately address thevulnerabilities of countries in the long run. Private capital must
supplement public investments in infrastructure development andother critical areas of social infrastructure. Cooperation in STI will be
an important pillar in developing partnerships in the future. The G20
must nurture such partnerships which would not only help achieve
SDGs but provide indigenous technological solutions to numerous
development problems. GVCs offer vast opportunities for developing
countries to benefit from integration with the rest of the world. Tradefacilitation and financing would enable the countries to expand
exports and create millions of jobs. With respect to contributions to
global governance, the G20 should assign topmost priority toattainment of inclusive and sustainable development and promote
global institutional architecture for minimizing country vulnerabilities.
In that endeavor, the G20 should proactively advocate for necessaryreforms in the existing institutions of governance and adhere to thespirit of mutually beneficial international cooperation.
Sachin Chaturvedi and Priyadarshi Dash are director general and assistantprofessor respectively at the Research and Information System for Developing
Countries (RIS), a New Delhi-based think-tank.

COVER STORY • Role of Business in New Global Governance • 1

Economics & Security:
Key National Interestsfor Discussion

By Naoyuki Haraoka

Geopolitical Uncertainty Influencing Global
EconomyThe IMF Economic Outlook published in October 2019 predicts
world economic growth for 2019 to be 3.0% and for 2020 to be
3.4%. However, there are big risks such as trade and currency wars,
cumulating government debt, and deep security tensions. Security
risks include an unstable Middle East, uncertainty on the Korean
Peninsula, China’s assertive foreign policy and an unpredictable US
foreign policy, and growing cyber risks, as well as weakening global
governance. Before the global financial crisis in 2008, an emerging
market could be defined as any country where politics mattered tothe market as much as economic fundamentals, while the G7
countries provided a much more stable and predictable politicallandscape. But since that crisis, politics has started to affecteconomic and market performance more directly, even among thosewealthy countries. The rising income gap between the wealthy andthe poor has been the background to increasing discontent among
ordinary voters, which has prompted moves against globalizationand the free flow of goods and services, as these can trigger
increases in unemployment or poverty among non-skilled workers.
The move toward nationalism has destabilized politics even indeveloped nations, and has also brought an end to US-led global
governance with Washington’s withdrawal from a number ofinternational arrangements for rule-making, such as the Trans-PacificPartnership (TPP) or Paris Agreement on global climate change.
Without solid leadership in global governance, geopolitical instability
becomes inevitable. Thus, today it is not economics but geopolitics
that is the main driver of global economic uncertainty.

Economics & Security Need to Be Discussed
Together
It is noteworthy that in this growing geopolitical uncertainty digitaltechnology plays a key role. Digital technology creates hugebusiness opportunities, but it also brings malicious factors such as
growing cyber risks and threats to national security through tradeand investment in sensitive technologies. Digital technology,
including quantum computing, machine learning and 5G, hastransformed most domains of human activity, such as people’sinteractions or exchange of information in business management,
and also in defense and security. The digital economy and society
4 Japan SPOTLIGHT • March / April 2020

Author Naoyuki Haraoka

has made countries vulnerable to cyberattacks by both state andnon-state actors. We now need to reflect on how to maximize thebenefits of digital technology in terms of economics, while paying
proper attention to those technologies’ implications for national
security, though economics and security have been viewed largely as
separate issues of national interest in the past. Economics andsecurity should now be discussed together as inseparable issues.
In particular, at this moment, the major developed nations seem
increasingly willing to advocate for their economic and security
interests unilaterally. This has enhanced the need to discuss bothissues together to create common rules. In this context, we shouldbear in mind that security will be key to achieving prosperity, andprosperity will in turn help pay for security. If social disharmony
brought about by rising income disparities increases economic andsecurity risks, then it becomes imperative to ensure social harmony
to achieve security and prosperity.
This means that the silo approach to studying economics andsecurity issues completely independently is now obsolete.
Prosperity, security and social harmony are the importantcomponents of national interest. All three matter, and they need to be
discussed together in order to mitigate the risks they face.

Tackling Risks to National Interests
Countries exposed to security risks need to balance possible
solutions against their strong economic interests. Mitigations of
security risks could be achieved by supporting market systems andpeople-to-people connections through migration or researchcollaboration rather than confrontation, as well as strengthened
domestic defense and security governance systems. In this regard,
globalization would not be contradictory to national security but
rather promote it. Interdependence among nations throughcooperation could lead to mitigation of security risks.
While defense and security are public goods to be provided bygovernments, risk mitigation can be provided by not only
governments but also business and civil society. Governments aremainly responsible for creating incentives for the private sector to
mitigate risks. Laws and governance institutions supported byeffective enforcement would help business and civil society incontributing to risk mitigation over time.
A scenario approach would be useful for such risk mitigation andmanagement, since risks are affected by a wide range of actors, suchhttps://www.jef.or.jp/journal/

COVER STORY 1

as domestic politics, international relations in hot spots like the
Korean Peninsula or the Middle East, and technological change andthe impact of data and digitalization. There could be a number ofscenarios depending upon those variables. Such scenario-making
would enable policy practitioners or private businesses engaged inrisk mitigation to have an analytical framework to eliminate arbitrary
thinking and achieve a logical and strategic approach to a complex
issue.
Strategic thinking is very useful in considering foreign direct
investment (FDI) in digital and telecommunications infrastructure.
First, we need to identify the risk of a cyberattack by malicious states
or companies which could disable key telecommunications
infrastructure. Then we should prepare strong defenses in firms andorganizations against cyberattacks, endorsed by enforcement ofstrong laws. We should build up a much less oligopolistic market,
since the risk of becoming a victim of cyberattacks will be loweredwith more players in the market. In building up digital networks,
creating more competitive and diverse market structures with lessconcentration of a small number of large actors would lead to betterrisk mitigation, rather than discussing only the issue of foreign
ownership of the companies involved in building up these networks’
infrastructures.
Another risk exists in data. There will be concerns about firms’
susceptibility to theft of personal data by cyberattacks. This risk
could be logically and strategically reduced by cyber defenses
strengthened and supported by the enforcement of strong laws on
the protection of privacy and by corporate transparency.
In order to meet the challenge of the risks produced by complex
new digital technologies, first it would be important to assess theserisks clearly and identify exactly what they are and try to use all kindsof standard knowledge to mitigate them. This must be done
creatively and strategically. Most importantly, we will needinternational collaboration rather than confrontation. New technology
has created the need for a new international cooperation order rather
than confrontation among nations. So we will need new global
governance for risk mitigation related to digital technology.

Japanese Leadership Needed to Achieve New
International Order
To realize a world in which the United States and China work
together on practical and mutually beneficial steps to address theirtech cold war, Japan would need to play a critical leading role. Japan
could boost cooperation with China and the US by taking advantage
of its unique position and providing each of them with incentives forcooperation in areas where their national interests coincide. Japan
could at the same time work with like-minded nations, such as
Germany, Canada, France and the United Kingdom, to defend andsupport existing international institutions and play a leadership rolein global rule-making for trade, data transfer, and innovation policies.
This could be possible in light of its achievements in having realized
the Comprehensive and Progressive Agreement for Trans-PacificPartnership (CPTPP) despite the withdrawal of the US from the TPP
in January 2017. Whereas the CPTPP was signed by 11 countries in
December 2018 and is open to the US, the Regional Comprehensive
Economic Partnership (RCEP), another Asia-Pacific regional FTA,
was agreed by 15 countries in November 2019 for signing into law in2020 and is open to India. These mega-regional FTAs could lead tothe foundation of a new multipolar global order.
In addition, APEC, a wider regional group of Asia-Pacific nations
including CPTPP and RCEP member nations, could be a good place
for ministers and officials to discuss economics and security
together to deliver prosperity, security and social well-being
simultaneously. APEC also has an advantage in its informal
connections with business and thus the private sector could express
their views and concerns regarding risks to their national interests
related to economics and security. Although APEC’s discussions may
have no binding effects, such informal exchanges of views on
economic and security policies could result in reasonable peer
review pressure upon the member nations. Japan, a member of allthese three groups – the CPTPP, RCEP and APEC – could contribute
effectively to policy discussions in APEC to initiate a new global
order to help resolve the issues of economics and security together.
Finally, as for cyber security, Japan could continue to work on acyber coordination and monitoring center. This would be useful inencouraging FDI in research and development which has been
declining during these days of the US-China tech cold war.
A world without leadership that people can trust would be
disastrous, especially in the light of digital technology. New
technology progresses rapidly. We may not have much time to create
a new order that people can count on.Naoyuki Haraoka is editor-in-chief of Japan SPOTLIGHT & executive
managing director of the Japan Economic Foundation (JEF).

Japan SPOTLIGHT • March / April 20205Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 1

Author Eva Pejsova

By Eva Pejsova

The European Union and Japan have never been closer. Although
they have always been like-minded partners, sharing the values of
democracy, rule of law and human rights, their bilateral relations
have almost exclusively focused on trade and economic issues,neglecting the potential of closer political and security cooperation.
However, the last two years saw an important shift. The signing of
the EU–Japan Strategic Partnership Agreement in June 2018
signaled the willingness to deepen consultations and cooperation on
global security issues. The EU–Japan Economic Partnership
Agreement, in force since February 2019, created the world’s
greatest free trade zone, connecting almost a third of the global
market. Finally, on the occasion of the visit of Japanese Prime
Minister Shinzo Abe to Brussels at the end of September 2019, theEU and Japan signed a “Partnership for Sustainable Connectivity” topromote “free, open, rules-based, fair, non-discriminatory andpredictable regional and international trade”, outlining a concreteroadmap for functional cooperation in the domain.
These upward developments are not only a sign of a maturing
relationship; they are a result of a growing number of shared security
concerns. First, the current Washington policy of putting “America
first” has led to the realization by many of its traditional allies,
including Europe and Japan, of the need to bolster their own security
profiles to defend their interests. The expanding influence of China in
Europe and its neighborhood, accelerated in the context of its Beltand Road Initiative (BRI), has made the EU more aware and moreconcerned about Beijing’s global strategic ambitions. Finally, thenegative impacts of the strategic rivalry between China and theUnited States and the polarizing effect it has on the broader IndoPacific region is another reason for like-minded countries to defend
more proactively the current multilateral rules-based order.
What role can the EU and Japan play in this changing strategic
environment? This paper first analyzes the emerging security
dynamic within the Indo-Pacific, defined by a new type of great
power politics, and the dangers it poses for regional stability. Itfurther highlights the type of foreign policy action that could ease
down these tensions, broadly defined by the concept of “middlepower diplomacy”. Finally, it suggests some concrete areas for the
EU and Japan to deepen their cooperation beyond connectivity, in thefield of maritime security and security in Africa.

62 Japan SPOTLIGHT • January / February 2020

The Indo-Pacific: a New Playing Field
Ever since Japan first officially presented its vision for a “Free andOpen Indo-Pacific” (FOIP) in 2016, the concept has become asynonym for the changing strategic dynamic in the region.
Geographically, the Indo-Pacific underscores the natural
confluence of the Indian and Pacific Oceans, shifting the regional
strategic balance westwards. It reflects the emergence of new
security actors and policies, including China’s BRI, the growing roleof India as a regional player, the diplomatic rapprochement between
Japan and India, and the increasing relevance of Europe.
Functionally, it focuses on boosting trade and connectivity togenerate growth, prosperity and cooperation, noting also theimportance of the African continent to Asian countries for trade andnatural resources. Finally, the concept is loaded with ideology,emphasizing values and principles that should underpin it, such as
freedom of navigation, free trade, and rule of law.
Although Japan’s original idea was to promote an inclusive andcooperative regional architecture, it has been widely interpreted by
China as an attempt to control its rise. Indeed, there is little doubtthat the FOIP concept has been formulated in response to China’s
growing strategic influence across the region. Since its launch in2015, large-scale investments in strategic infrastructure (ports,
telecommunications, energy) along its BRI in the Indian Ocean,
Africa and Europe have enabled Beijing to exert pressure on
governments to achieve political goals. Culminating debt-traps havebecome a growing concern for the international community.
After Washington formulated its own “Indo-Pacific Strategy” in
2016, the region has become a theatre for a rising great power
rivalry between the US and China. The decision of the US, Japan,
India and Australia to revive the Quadrilateral Security Dialogue in2017 is a sign of democratic powers stepping up in defense of thecurrent rules-based order. Albeit it is only an informal consultation
mechanism, it further added to the growing divide and tensions
between the status quo powers and Beijing.

Theatre of Power Politics
Discussions about the regional strategic dynamic quickly shift to abroader debate on the emergence of a new world order, dominatedby a new type of great power relations. In a recent opinion piece
published in the New York Times, a group of distinguished former
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Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 1

world leaders warn of the grave impact of a US–China trade war on
the global economy and stability, and the risk of recession it posesfor developed countries (https://www.nytimes.com/2019/10/11/
opinion/china-trade.html). Using the example of the Cold War, theyraised concerns about the divisive character of the dispute, forcing
many nations to choose between the two powers. While the current
trade tensions have indeed accelerated this trend, polarization of the
Indo-Pacific started even before, dividing countries along thecompeting spheres of influence through investments, historicallinkages and ideological proximities. Many small and middle-sizedcountries in Southeast and South Asia feel the growing pressure tochoose their strategic camps.
The impact of the current tensions is not limited to trade andsecurity. The competition takes place on all fronts – including inresearch and technology – with implications for the broad spectrumof human and economic activities. It shifts attention away fromeveryday functional security issues, such as transnational crime,
environmental or human security issues, which need to beaddressed through cooperative efforts. Finally, it undermines theachievements and the potential of existing multilateral structures in
the region – whether the ASEAN Regional Forum (ARF) or the Indian
Ocean Rim Association – to provide some form of regional
governance.

Time for “Middle-Power Diplomacy”
The US-China rivalry tends to define the Indo-Pacific in binary
terms and limits the field of possibilities for other important regional
actors – Japan, India, ASEAN, South Korea or even the EU. All theseplayers maintain strong economic ties with China and close security
relationships with the US, and all try to navigate the growing tide ofpower politics to protect their interests. But they also need to step up
their efforts collectively to contain the risks stemming from theescalating competition. Importantly, some key global issues, such as
climate change, technological progress, or much needed institutional
reforms (such as the WTO) can only be addressed through effective
international cooperation, with the participation of both the US andChina.
This is where the concept of “middle-power diplomacy” offerssome useful guidance. The term “middle powers” was widely used in
the Cold War context to refer to countries that are neither great
powers nor small powers that would simply suffer the hegemony
imposed by others. They are usually stable, prosperous democracies
that do not have substantial military capabilities to be strategic gamechangers on their own, but can still exert influence on theinternational scene through economic and diplomatic means.
“Middle-power diplomacy” describes a specific form of foreign
policy: one that seeks multilateral solutions, peaceful settlement ofdisputes, adherence to international norms and preservation of arules-based global order as an essential prerequisite for global
stability. In other terms, it is the “good citizen” behavior that could
stabilize the global order through influence in international
institutions and promote principles of preventive diplomacy andcrisis management, but also human security and environmental
issues.
At times when many countries find themselves caught “in the
middle” of the US–China great power rivalry, joining forces inaddressing these challenges and bearing a collective responsibility toprotect the global order may be a way forward.

What Role for the EU?
The EU has been most overlooked in the Indo-Pacific debate. In
Asia, Europe has traditionally been viewed as a distant player withlittle influence over regional security. This was partly due to its
geographical distance, but mostly to its limited security toolbox anda profile of a solely economic power.
The EU decided not to adopt its own “Indo-Pacific” strategy for theregion and keeps referring to the Indian Ocean, Asia and the Pacificseparately. This is partly due to the EU’s heavy strategic baggage
implicitly contained in the term. In the minds of many diplomats inBrussels, the Indo-Pacific remains connected to the US strategy forthe region, which openly points fingers at China and Russia as main
enemies. Although the EU may share most concerns vis-à-vis theregional threat environment, it does not share the same strategic
culture. Its “strategies”, often criticized for being too vague and too
weak, do not refer to specific actors. Rather, they refer to the type of
behaviors and values it opposes and the kind of norms it wants topromote.
That does not mean it has not followed regional developments
closely. As a global trading power, it has legitimate interests insecurity and stability in Asia. Also, the EU has legal responsibilities
vis-à-vis its Asian partners stemming from its membership of the
ARF and its accession to the Treaty of Amity and Cooperation in
2012. Finally, as a normative superpower, the EU has a strategicinterest in promoting norms and principles that underpin the current
rules-based order, including respect for international law and its
institutions.
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Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 1

Over the past years, especially since its accession to the Treaty ofAmity and Cooperation, the EU has been most vocal about its
interest in playing a more proactive role in regional security.
Although it may not be considered a “middle power” as such, its
policy has always been to support the cooperative multilateral
security architecture and preventive diplomatic measures to easeregional conflicts. Finally, it has been using its technical expertiseand experience to build the capacity of regional countries inaddressing various non-traditional, functional security issues – fromtransnational crime to border management and environmental
issues.

EU–Japan Cooperation:
From Connectivity to Security
The current strengthening of EU–Japan ties beyond economic
cooperation is most timely. Both Japan and the EU are atypicalsecurity actors, with political constraints limiting their capacity to
project power through military means. However, together they
represent a third of the global market and weigh significantly inworld affairs through their economic and diplomatic leverage. They
share the same vision of building a stable and prosperous IndoPacific based on multilateral cooperation and the rule of law. Finally,
they possess significant human and technological resources andexpertise to address the many outlying non-traditional security
issues, as well as global challenges related to climate change,
research and innovation, and environmental governance.
Among the functional areas ripe for closer EU–Japan cooperation,connectivity has been the most logical starting point. Promoting
physical, people-to-people and institutional connectivity is the
backbone of the FOIP’s economic agenda, linking up to Tokyo’s
tradition of infrastructure investments in Southeast and South Asia.
The EU published its “Connectivity strategy” (“Connecting Europe
and Asia - Building Blocks for an EU Strategy”, Sept. 19, 2018,
accessible at https://eeas.europa.eu/sites/eeas/files/joint_
communication_-_connecting_europe_and_asia_-_building_blocks_
for_an_eu_strategy_2018-09-19.pdf) partly as a response to China’s
BRI, to underscore the rules and principles that should govern all
connectivity projects in the region – namely, economic, social andenvironmental sustainability, transparency and the rule of law. The
recent conclusion of the EU–Japan Partnership for Sustainable
Connectivity, promoting high-quality infrastructure and free, fair,
open and rules-based trade and investments is a logical step in acommon direction and certainly most welcome. That said,
64 Japan SPOTLIGHT • January / February 2020

connectivity can only flourish in a safe and stable environment. Even
the most environmentally friendly and efficient seaport, built
according to the highest quality standards, will not prosper if it islocated in a country torn by domestic conflicts or in waters affectedby geopolitical tensions. Joining forces to address the various
sources of instability across the Indo-Pacific is therefore essential toensure sustainable growth and prosperity in the region.

Maritime Security
Maritime security presents a vast array of opportunities forcooperation for both partners. The outbreak of piracy (whether inSoutheast Asia at the end of 1990s or in the Western Indian Ocean
since 2008) is one issue that has managed to bring the international
community together and steer an unprecedented level ofcooperation.
However, there are many other issues that need to be addressed
through concerted efforts. Unsustainable exploitation of marine
natural resources, environmental destruction and proliferation of
seaborne criminal activities (illegal fishing, drug smuggling andpeople trafficking) are lasting security challenges that keep
undermining the economy and stability in Southeast and South Asia
and Africa. Moreover, the region crucially lacks effective cooperative
institutional frameworks for multilateral governance.
While Japan has contributed most to enhancing maritime safety
and security in Southeast Asia, providing navigation systems,
countering piracy, building law enforcement capacity and enhancing
port security, the EU has been most active in similar activities inAfrica. Building capacity for maritime law enforcement has been a
key component of its comprehensive approach to countering piracy
in the Horn of Africa as well as in the Gulf of Guinea. Projects suchas E€OFISH have been targeting illegal, unreported and unregulated(IUU) fishing, and developing sustainable fisheries and viable blue
economies in East Africa and the Indian Ocean (bilaterally andthrough the Indian Ocean Commission), crucial for sustainablegrowth and stability in the region. (In 2018, the EU provided 28
million euros to promote sustainable fisheries in the region under the
E€OFISH program.) Finally, the EU has been investing most inenhancing shipping safety in the Indian Ocean and Africa through its
Critical Maritime Routes programs, providing technological tools forbetter Maritime Domain Awareness, capacity-building and training
for regional law enforcement agencies and setting up regional
information-fusion and information-sharing centers (https://www.
crimario.eu/en/the-project/rationale-objectives/). If the EU and Japan
aim to improve connectivity at sea, they also need to promote

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 1

multilateral cooperation and institutional mechanisms in the Indian
Ocean region. The Indian Ocean Rim Association is one such
structure, dealing with maritime safety and the development of blue
economies in the region. Although neither Japan nor the EU aremembers, they could consider gaining observer status to support
their activities. However, much can be done through bilateralchannels as well, in cooperation with individual regional countries.

Security in Africa
Another immediate concern for the EU and Japan to consider withregard to connectivity is security in Africa. East African countries
border the Indian Ocean and are implicitly concerned by the IndoPacific concept and its future connectivity architecture. Yet many ofthem still struggle with economic, social and environmental
challenges, organized crime, weak domestic institutions andsustainable governance.
East Africa has become known as the “Heroin Coast”, with up to
40 tons of the drug smuggled a year due to ineffective bordercontrols (https://www.unodc.org/easternafrica/en/illicit-drugs/drugtrafficking-patterns.html). Wildlife trafficking, fueled by theincreasing demand from Asia, has become one of the world’s mostprofitable organized crimes (https://www.unodc.org/documents/
data-and-analysis/Studies/TOC_East_Africa_2013.pdf). Finally, illegal
charcoal trade from Somalia to the UAE and Oman is anotherimportant destabilizing factor in the region, generating revenue forthe local terrorist group Al-Shabaab, with links across the East
African coast. (According to the UN Monitoring Group on Somalia
report, illegal charcoal tax generates revenue of $7.5 million per year:
https://undocs.org/S/2018/1002). Due to its historical presence,
European nations maintain active diplomatic and economic relations
with countries across the African continent. The EU also deploys vast
resources to provide development, security and stability in theregion, as it is the first to be concerned by potential economic,
climate or conflict-driven emigration. At present, the EU maintains
eight civilian and military Common Security and Defence Policy(CSDP) missions and operations in Africa, including its counterpiracy naval operation ATALANTA off the Horn of Africa, militarytraining missions in Somalia and Mali, civilian capacity building
missions in Somalia, Mali and Niger, and a border assistancemission in Libya (https://eeas.europa.eu/headquarters/headquartershomepage/430/military-and-civilian-missions-and-operations).
The newly established bilateral Strategic Partnership Agreement(SPA) between the EU and Japan is a promising framework forenhancing political and security relations. However, it still needs tobe completed with concrete initiatives of a practical nature. One
useful tool for deepening security cooperation with the EU is theso-called Framework Participation Agreement (FPA), which allows
third parties to take part in the EU’s CSDP missions for crisis
prevention and management. Two Asian countries – South Korea andVietnam – have signed the FPA so far. If Japan could consider suchan agreement with the EU, it would gain not only a foothold in
African security but also a closer operational experience with the EU
as a security partner, which could be of use in other parts of the
Indo-Pacific.

Conclusion
The EU and Japan have come a long way in fostering theireconomic and political ties. The emergence of the “Indo-Pacific” as a
newly defined geostrategic space constitutes a common playing field
and opens a vast array of opportunities also for closer security
cooperation.
For the longest time, the EU was not considered by Japan as a
useful security partner because of its low military profile,
geographical distance and seemingly little to offer in dealing with
Tokyo’s immediate security concerns, such as the military rise of
China or the North Korean threat. But times have changed, the EU
has become a more proactive security player, China’s strategic
influence has become a matter of global concern, and Japan has
stepped up its foreign and security policy beyond East Asia.
Both partners have much to offer to make the Indo-Pacific free,open, inclusive and prosperous. What the region needs today is notnecessarily more military power, but more common sense,
cooperation, development and sustainable management of
resources. It needs more responsible and resourceful “good citizens”
to take care of the global commons and to act in concert to containthe dangerous game of power politics currently at play – a role thatJapan and the EU could well exert together.

Eva Pejsova is a research associate at the French Foundation for Strategic
Research (FRS), specializing in security in East Asia, maritime security and
EU-Asia relations.

Japan SPOTLIGHT • January / February 202065

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 2

By Mark Fitzpatrick

Introduction
My career has focused on the North Korea nuclear issue for 30
years, and on Iran’s for two decades. With regard to North Korea, I,
like everyone else, failed. After six nuclear tests, North Korea can
produce thermonuclear bombs. It can probably miniaturize thewarheads and attach them to missiles that can reach as far as
Florida. With regard to Iran, we have not failed – not yet anyway,
although with the 2015 nuclear deal in shatters, Iran is beginning
slowly to resume its march to a nuclear weapons capability.
Both North Korea and Iran can be called “outlaw states” in thateach violates many international norms. They are notorious for their
nuclear programs, ballistic missiles, human rights abuses,
aggressive actions and detention of foreign citizens. They are thus
often cast in the same category. And why not, since they havecooperated in developing ballistic missiles and possibly in sharing
some nuclear data, though the evidence for this is far lessconclusive.
But Iranians, seeing themselves as culturally and economicallysuperior, dislike being grouped with the backward hermit state. And
to be fair, North Korea is a far worse actor. Unlike Iran, it hasdeveloped and tested nuclear weapons and intercontinental ballistic
missiles; it has stockpiled and used chemical weapons, and it
employs cybercrime as a regular tool of statecraft. While Iran has
elections, however circumscribed, gender equality in many respects
and religious principles, North Korea’s dynastic system lacks civilrights and principles of any kind.
And yet, today, North Korea is treated far better. While both states
are subject to extensive economic sanctions, North Korea has strong
partners who provide a diplomatic shield and acquiesce in its
sanctions-evasion techniques. Its alliances with China and Russia areless dependable than in the past, but having them on its side gives
North Korea diplomatic options. Russia and China have friendly
relations with Iran, and cooperate tactically, but they protect Iran to a
far lesser degree.
Meanwhile, North Korea is courted by every major player with thesole exception of Japan. In the past two years, Chairman Kim Jong
Un has met with the leaders of China, Russia, South Korea and theUnited States – three times in both of the latter two cases. I expect
there will be yet another with President Donald Trump before long.
The US president excused North Korea’s mid-2019 series of
missile tests on grounds that they were only short-range and thus
66 Japan SPOTLIGHT • January / February 2020

Author Mark Fitzpatrick

not contradictory to Kim’s moratorium on intercontinental ballistic
missile launches. The rest of the US government knows that thosetests were a violation of UN Security Council sanctions. They also
know the missiles pose a threat to US military personnel and othercitizens working and living in Northeast Asia, not to mention the
combined 180 million citizens of Japan and South Korea. But Trumpis trying to achieve a diplomatic breakthrough with North Korea thatwould redound to his glory, and thus he is willing to overlook
evidence which strongly suggests that Kim has no intention of giving
up his nuclear arsenal.
In Singapore last year, Trump agreed to suspend large-scale
US-South Korea joint military exercises, and he excused North
Korea’s human rights violations, among other concessions. In a
post-summit press conference, he even declared his willingness tounilaterally withdraw US forces. Trump stopped describing US policy
toward North Korea as one of “maximum pressure” and he treats
Kim with fawning affection, even going so far as saying that they “fellin love”. He was speaking metaphorically, of course, but what an odd
metaphor to describe partnership with a despot.

Comparison to Recent Past
This coddling of North Korea is a new phenomenon – at least in
the case of the US and South Korea. China and Russia were always
willing to look the other way when North Korea broke the rules. Up
until 2018, China did go along with tougher UN measures. WhenSouth Korean President Moon Jae-In and Donald Trump pursued astrategy of engagement, however, China relaxed its sanctions
implementation. Japan, by contrast, has been consistently tough. But
it can do little on its own. Hence, Prime Minister Shinzo Abe’s
persistent courtship of Trump, encouraging him to remain firm.
Unfortunately, this courtship has gone largely unrequited. Trump
pays lip service when he meets with Abe, then often does the
opposite in his interactions with Kim.
Only in Hanoi in February 2019 did Trump refuse to give in to Kim.
There, both sides overplayed their hands. Kim insisted on an end to
all UN sanctions, in exchange for an ambiguous offer to close down
the Yongbyon nuclear center while leaving other undeclared facilities
producing enriched uranium. Trump demanded complete
denuclearization before the US would offer sanctions relief. He does
not understand that North Korea will not unilaterally disarm. Nuclear
weapons are vital to the regime’s sense of self-preservation. It would
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Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 2

be better to pursue more limited objectives, such as verified
dismantlement of all fissile material production and an end to missile
tests, while maintaining the goal of denuclearization.

Tough on Iran
Meanwhile, Trump has been exceedingly tough on Iran. Calling the2015 Iran nuclear agreement the “worst deal ever”, he walked out on
it in May 2018 even though Iran had been faithfully abiding by its
conditions. Trump then imposed the harshest ever sanctions, which
he has continued to tighten, even putting Iran’s Foreign Minister
Javad Zarif on the US Treasury’s black list in August 2019. Trump’s
claim to want negotiations with Iran is incompatible with blackballing
Iran’s top negotiator. I believe the real purpose of the “maximum
pressure” campaign is to weaken Iran and to encourage regimechange.
America’s best friends are nevertheless still trying to mediate
between Washington and Tehran. Abe offered to carry a message
from Trump when he traveled to Iran in June. Unfortunately, theeffort came to naught. Although Iran made a gesture by releasing an
American resident whom it had detained, Supreme Leader Ayatollah
Ali Khamenei rebuffed Abe’s effort, saying: “I do not see Trump as
worthy of any message exchange, and I do not have any reply forhim, now or in the future.”French President Emmanuel Macron then tried. He twice sent his
top adviser to Tehran and he invited Zarif to the G-7 Summit in
Biarritz, in hopes of arranging a meeting at the UN between Trumpand Iranian President Hassan Rouhani. But Iranians are notinterested in such “photo-ops”. Unlike Kim, who derives international
legitimacy by sitting at the table as an equal of the US president, it
would be politically dangerous for Rouhani to appear friendly to a US
leader who is trying to kill the 2015 nuclear deal. Rouhani was evenunable for political reasons to shake President Barack Obama’s handat the UN in 2013. After the G-7 meeting, Rouhani insisted that
before there can be any positive diplomatic development, the US
must first abandon its sanctions. Trump is highly unlikely to do this.

Why the Different Approaches?
There are several reasons why the US treats Iran more harshly
than North Korea. One factor is psychological. Americans have notgotten over the anger and humiliation we felt when Iran seized ourembassy in 1979 and held 52 US diplomats hostage for 444 days.
We often forget that North Korea did something similar a decade
earlier, when it seized the USS Pueblo spy ship, keeping its 83 crew
members hostage for 11 months, even torturing them. North Korea
still holds on to the Pueblo, using it as a propaganda museum. Yet
Iran’s hostage taking is more seared into our memory because thedrama of it was aired daily on television news. By contrast, there
were no foreign TV crews in Pyongyang to witness the humiliation of
the Pueblo.
America’s history with North Korea suggests a second reason fordifferent treatment. Having fought an inconclusive costly war in the
Korea Peninsula, the US is not inclined to do so again. Hence, it ismore willing to seek diplomatic solutions. America does not wantanother war in the Middle East either. Yet its main partners in theregion – Israel and Saudi Arabia – often appear eager for the US todeal Iran a military blow. Leaked US diplomatic cables from 2008
recounted Saudi King Abdullah’s repeated call for the US to attack
Iran to put an end to its nuclear weapons program. He urged
Washington to “cut off the head of the snake” – meaning tooverthrow the Islamic republic. In Northeast Asia, America’s allies
are not similarly calling for the US to attack North Korea or to
remove its regime. To the contrary, they advocate peaceful
diplomacy.
Actually, of late, Saudi Arabia has not been calling for the US to
attack Iran, even after Trump asked what they wanted him to do,after the Sept. 14, 2019 attack on the Saudi pipeline and oil refinery.
The Saudis are wary about direct military engagement with Iran. As
former US Secretary of Defense Robert Gates said, the Saudis
always want to “fight the Iranians to the last American”.
Interestingly, Japan distanced itself from the US on this matter.
While US Secretary of State Mike Pompeo expressed confidence Iranwas responsible, Defense Minister Taro Kono expressedagnosticism. I have not seen the evidence, but I believe Iran had amotive: it made clear for months that if it cannot export oil, thenneither should its Arab rivals. Iran does not want the Saudis to plug
the oil supply gap caused by the sanctions on Iran. The US says it
has high confidence about Iran’s culpability. If so, the evidence
should be shared with Japan and other key allies.
Thirdly, Iran’s antagonism toward Israel adds to Americans’ senseof grievance. Iran’s call to “wipe the Zionist state off the map” should
not be taken literally. It means if all Palestinians are allowed to vote,
Israel could not remain Zionist. Yet such apparent calls forannihilation, sometimes expressed more luridly, evoke memories ofthe Holocaust and make Americans determined to protect Israel by
any means. Most fervent in their protectiveness, America’s large
community of evangelical Christians finds common cause with
Americans of Jewish faith. Combined with the 1 million-strong
Iranian diaspora in the US, many of whom came when the Shah was
overthrown in 1979, the anti-Islamic Republic of Iran political lobby
is formidable. Neither Iran nor North Korea has any friends in the US,
but Iran has more avowed enemies, many of whom are well-placed
to promote policies of antipathy.
Fourthly, there are factors involving geography. The most obvious
is oil; over half of the world’s oil reserves are in the Middle East, andJapan SPOTLIGHT • January / February 202067

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 2

Iran ranks fourth in the world in this regard. That makes it
intrinsically more important than oil-deprived North Korea.
The other geographic factor is that South Korea’s capital and one
quarter of its population are within range of enemy artillery. Even
before North Korea’s nuclear tests, its conventional weapons held
Seoul hostage. Despite repeated North Korean provocations over theyears, South Korea and the US avoided a kinetic response that could
have rekindled the Korean War. Now that Pyongyang has nuclear
weapons, it has an even stronger means of deterring attack. In the
Middle East, Iran troubles its neighbors in many ways, but it does
not pose a similar existential threat. So that it can never pose such a
threat, Washington is determined by any means to prevent Tehran
from acquiring a nuclear weapons capability.
Defense thinkers in Japan and South Korea once thought that the
US would similarly do everything necessary to block North Korea
from getting nuclear weapons. Americans failed in this regard,
because we and South Korea were not willing to go to war to stop
the nuclear program. The cost seemed to be too high. In the Middle
East, the cost of war appears to be lower.
A fifth reason for treating Iran more firmly is the nature of thethreat it poses. Although North Korea is a worse actor, its bad
actions are limited geographically. Iran’s regional activities, including
its patronage of non-state militias and promotion of a so-called“Shiite crescent”, collide with US interests from Lebanon to Yemen.
Because of its support for groups like Hezbollah that conduct
terrorist acts, Iran is judged by the US to be the world’s greatest
sponsor of terrorism. By contrast, North Korea’s juche ideology has
no appeal beyond its immediate borders – and even many of thecitizens within those borders surely see through the falsehood of theself-reliance slogan.
North Korea’s bombing of Korean Air Flight 858 in 1987 landed thecountry on Washington’s list of state sponsors of terrorism, but it
was removed in 2008 to promote a diplomatic breakthrough andbecause it had not conducted more recent acts of terrorism.
There were legitimate grounds for restoring the state sponsor of
terrorism designation in 2017. North Korea’s use of chemical
weapons to assassinate the leader’s half-brother Kim Jong Nam at
Kuala Lumpur airport that year was an act of terrorism by almost any
definition. Why else use such a gruesome means of murder unlessthe purpose was to evoke terror? North Korea’s cyber hack of Sony
Pictures in 2014 and its cyber thefts from banks and cryptocurrency
exchanges to the amount of $2 billion, according to a new UN report,
also qualify as terrorism by some definitions. Failure to fully accountand make amends for its abduction of citizens from Japan and othercountries add to the list of grievances among concerned states. Yet,
to Washington at least, North Korea is seen as a less formidable foe,a more contained threat, in comparison with Iran.
A final reason for treating the two states differently is personal.
68 Japan SPOTLIGHT • January / February 2020

Trump is determined to outshine his predecessor Obama and to
undo the latter’s accomplishments. In Trump’s mind, the Iran deal isbad because it was Obama’s deal. And since Obama was unable to
make any progress with North Korea, Trump wants to show theworld that he is the one who can.

Prospective Deal with North Korea
Looking ahead, I see grounds for both optimism and cynicism.
Given Trump’s egocentricity and his need for a diplomaticachievement before the 2020 presidential election, I believe he will be
inclined to try to strike a limited deal with North Korea. The
prospects for this have improved now that John Bolton is no longer
in the White House. He opposed engagement with North Korea andinsisted on an all-or-nothing deal, surely knowing that North Korea
will not give up its nuclear weapons entirely. The Hanoi summit thus
failed.
The deal that might be possible with Pyongyang would not
eliminate its nuclear weapons program, nor its missiles. And theverification measures would be limited. The deal would not address
the other problems North Korea presents, including its chemical
weapons, its human rights violations, its cybercrimes, its
counterfeiting and its smuggling. The agreement I foresee would
contain and reduce the nuclear threat to some degree. In many
respects, it would resemble the 2015 nuclear deal with Iran, althoughwith fewer constraints and less detail. It would be worse than what
Trump repeatedly calls “the worst deal ever”.
He is wrong to say so. In light of the alternatives, and the state of
the Iran nuclear program before it was stopped, the 2015 agreement
was good. It blocked any potential for an Iranian nuclear weapon fora number of years and thus also obviated the likelihood of war. So, I
will not prematurely cast judgement on an imperfect deal with North
Korea. To quote Voltaire, we should not let the perfect be the enemyof the good.
This essay is drawn from the author’s presentation at the Third
International Symposium on Global Risks, on Sept. 19, 2019 held by
the Japan Economic Foundation in coordination with Komatsu
Research and Advisory.

Mark Fitzpatrick is an associate fellow at the International Institute forStrategic Studies (IISS). He headed the IISS non-proliferation and nuclear
policy program for 10 years at the London headquarters and then ran theinstitute’s Washington office from 2015-2018. He is the author or editor of 10
books about proliferation issues concerning Iran, North Korea and othercountries and regions of concern.

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

Author Yong Sueng Dong

By Yong Sueng Dong

Introduction
Recently, global economic uncertainty has been growing due tothe US-China trade war and Japan-South Korea dispute. Such
clashes can develop into the form of economic sanctions. Economic
sanctions are a step that the party imposing the sanctions takes
against the receiving party in order to push through their demands.
The US trade tariffs imposed on China are a measure to achieve
policy change in China. The country imposing sanctions imposes themost effective ones by taking into considering the economic
interdependence between the two countries. In the country on thereceiving end of the sanctions, the inconvenience and disadvantages
to the general public arising from the sanctions function as politicalpressure. Policy-makers calculate the cost benefit of maintaining
power and decide whether to change policies or not. This is thegeneral theory on economic sanctions.
Powerful economic sanctions are also being imposed on North
Korea. However, rather than changing policies, North Korea is further
strengthening its opposition. While we can interpret this reaction tomean it will take more time until its policies change, considering
North Korea’s past pattern of behavior, it is highly likely that
opposition will escalate rather than its policies changing. The reason
for this assumption can also be drawn from the general theory of
economic sanctions. In the following paragraphs, I would like to lookat the impact that the economic sanctions have had on the North
Korean economy. After considering the general theory of economic
sanctions, I will begin with a discussion on whether the sanctions
imposed on North Korea by the international community are actuallyfunctioning and the changes that have emerged in the North Korean
economy and society through analysis focusing on recent events.
Then I will consider why a phenomenon that does not match theprimary goal of economic sanctions is being observed in North
Korea.

General Theory of Economic Sanctions
Academically, it is difficult to find an analysis that shows thegeneral theory that economic sanctions are effective. This is because
the effect of sanctions may differ according to the situation of thecountry in question. The results may also differ depending on theeconomic interdependence of the imposing party and receiving party,
and the level of political stability within the country in question. I
have summarized the general theory in the flow chart below (Chart
1).
Economic sanctions are used by the imposing party against thereceiving party to push through the imposing party’s demands.
Therefore, whether to impose sanctions or not is determined by the
degree of the relevant parties’ benefits and disadvantages rather thanby the legitimacy of the action. Thus it can be said that the imposing
party is not always righteous, as well as the receiving party did notnecessarily do something wrong. We must consider sanctions on thepremise that we cannot apply right-or-evil values.
The form of sanctions can be largely classified into multilateralsanctions and bilateral sanctions. Multilateral sanctions are mainly
measures taken by a resolution of an international organ such as theUnited Nations (UN). When a country in question takes action that
goes against international standards, the international community
decides to impose sanctions on that country in order to control orcorrect it. However, because the UN does not have the power to force
implementation, individual member countries choose to orchestratebilateral sanctions against the target country. Member countries
report their degree of implementation of UN resolutions to the UN

CHART 1

Flow chart of economic sanctions
Economic Sanctions- Multilateral sanctions- Bilateral sanctions

Effect of Sanctions

Changes in Political Actions- Types of sanctions- Degree of participation in sanctions- Economic scale and degree of external
dependence of the sanctioned
countries- Political pressure from the public- Policy-makers consider social costs andbenefits to make decisions

Policy changes in the
sanctioned countries

Source: Compilied by the author

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

Japan SPOTLIGHT • January / February 202069

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

and it then evaluates them. The disadvantages faced by a member
country that does not implement sanctions by a resolution of the UN
can also be regarded as sanctions in a broader sense. Representative
examples of such sanctions in modern society are the UN
resolutions for sanctions against North Korea and Iran and theimplementation thereof by respective countries.
Economic sanctions can be categorized into trade sanctions,financial sanctions, and sanctions against individuals. Trade
sanctions are cases in which trade with the receiving country is
prohibited or restricted. In modern society, in which economic
exchange in the international community is active, not being able toconduct trade is an extremely large disadvantage. The higher an
economy’s external dependence, the higher the degree of
disadvantage is due to sanctions. Financial sanctions are a method torestrict financial transactions with the receiving country. When
comparing it to the human body, finances in modern society are likeblood. The main function of blood is to carry various substances
throughout the body. Finances also have the function to make thetransportation of goods possible in the international community. To
restrict financial transactions is to naturally restrict thetransportation of goods. Therefore, it is recognized as a powerful
sanction.
Financial sanctions also include investment restrictions. Sanctions
against individuals are cases that restrict the travel and residency ofpeople. They limit the dispatch of workers from abroad as well as
restrict the overseas visits and stays of people from sanctionreceiving countries. Conversely, they include cases in which visits tothe sanction-receiving country by citizens of the sanction-imposing
country are restricted as well. In this way, the types of sanctions can
be classified by targets: people, goods, and the currencies that linkthem.
The effects of sanctions manifest in different ways depending on
the economic scale and dependence of the sanction-receiving
country. With regard to economic scale, the economic sanctions
between the United States and China are a representative example.
The US and China boast the first and second most powerful
economies in the world respectively. If the US imposes trade
sanctions on China, the economy of China – called the world’s
factory – may face atrophy. However, we cannot underestimate thedisadvantages the sanctions may cause to the US as well as to theinternational community. Because the US-China trade war would
cause turmoil in the global economy, the two countries as well as theinternational community are concerned about the US-China tradewar. That is the reason the two countries cannot head in a drastic
direction. Iran and North Korea can be mentioned as representative
examples of the degree of economic dependence. Iran’s economic
structure depends on exporting oil and importing industrial goods.
Its external dependence is extremely high. On the other hand, North
70 Japan SPOTLIGHT • January / February 2020

Korea’s economic structure depends on exporting goods in order toimport goods that are not produced or are lacking in North Korea.
Thus its external dependence is extremely low. Therefore, while Iranis highly susceptible to economic sanctions, North Korea’s
susceptibility is relatively low.
Susceptibility to sanctions is influenced in general by the politicalenvironment within the country in question. If the political voice ofthe people of the country in question rises as their inconveniencegrows due to sanctions, and if the government can overcome thissituation, it will not accept the demands of the other party regardlessof sanctions. On the other hand, the weaker the political structure to
the demands of the people, the less susceptible it is to sanctions.
However, because sanctions have a relative effect, the sanctionreceiving country is not the sole affected body. The citizens of the
sanction-imposing country may also face disadvantages due to the
sanctions, which may stumble as they continue. In such cases as
well, the situation is swayed by the political voice of the citizens.
Overall, the reason we still cannot consistently organize the effects ofeconomic sanctions is that it is difficult to maintain sanctions
continuously because of numerous variables existing due to theinterconnection of the sanction-imposing and sanction-receiving
parties, internal political environments, and so on.

Powerful Economic Sanctions Against North Korea& Their Impact
The economic sanctions imposed on North Korea span all areas:
trade, finance, and people. It is no exaggeration to say that the mostpowerful methods that the international community as a whole andrespective countries can mobilize are being employed. North Korea
cannot export its biggest export goods such as coal, iron, textiles,
and fisheries products. These account for over 70% of North Korea’s
exports. Because of the export bans, naturally, imports also become
difficult. The import of crude oil is restricted to 2 million tons per
year. Because China, which accounts for about 90% of North Korean
trade, is also participating in these economic sanctions against North
Korea, difficulties in trade are on the rise.
Financial sanctions are even more powerful. Foreign financial
institutions conducting financial transactions with North Korea aresubject to a secondary boycott by the US. Because of this, foreign
financial institutions have revoked agreements with North Korean
financial institutions and North Korea cannot conduct internationalbank transactions. Furthermore, North Korean corporations as wellas individuals of North Korean nationality cannot open accounts at
foreign banks. Therefore, most transactions in North Korea must be
conducted in cash, more or less making transactions impossible.
North Koreans residing overseas cannot conduct financialtransactions either, making trilateral transactions difficult as well.

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

Expat North Koreans whose primary business is intermediary trade
have lost their source of income. Most North Koreans working
abroad have been sent back to North Korea. Even China and Russia
plan to stop reissuing most of the work visas to North Koreans after
their current employment term expires by the end of 2019. Of
course, new applications for work visas for North Koreans foroverseas stays will not be issued either. Because of this, the numberof North Korean workers returning to North Korea through China isincreasing. Maritime transactions are also difficult due to elaborate
monitoring. In this way, North Korea is facing international sanctions
in all areas.
Due to such circumstances, North Korea’s foreign trade, which
had been on a steep rise since 2010, has fallen by nearly 50%.
Immediately after the collapse of the Eastern Bloc in the early 1990s,
the scale of North Korea’s foreign trade fell drastically from about $4
billion to under $2 billion. The current situation is reminiscent ofNorth Korea’s serious economic difficulties following this fall.
Looking at the situation in terms of numbers or chronologically, it isclearly a similar situation to that of the early to mid-1990s.
Therefore, if a little more pressure is applied, there should bechanges in North Korea’s policies. This is the view of the US and theinternational community.
While we cannot conclude that it is due to the impact of the
sanctions, North Korea has set out to improve its relationship with
the US. Taking the opportunity of the Pyeongchang Winter Olympic
Games held in South Korea in February 2018, North Korea has also
started to improve inter-Korean relations. In order to impress upon

the international community the suspension of nuclear experiments,
North Korea closed the Punggye-ri Nuclear Test Site and suspended
the testing of long-range missiles. In June 2018, a US-North Korea
summit was held in Singapore. The US and North Korea agreed tomake efforts towards establishing a new relationship between thetwo countries. Based on this agreement, North Korea returned theremains of US soldiers. With such shifts by North Korea, an
optimistic view became dominant that maximum pressure had
started to influence North Korea and that its denuclearization would
be achieved as long as US-North Korea relations normalized.
However, negotiations broke down at the US-North Korea summit
held in Hanoi in February 2019 and the situation started to change.
While North Korean leader Kim Jong Un professed that he was nolonger fixated on ending the sanctions, he also resumed the testingof missiles (Chart 2).

The Dilemma of Economic Sanctions Against
North Korea
The international community has not eased up on economic
sanctions against North Korea. Around the time of the US-North
Korea summit, North Korea explored changes in its policies
internally. However, an inexplicable phenomenon has emerged within
North Korea. That is to say that no major fluctuation in market prices
has been seen and an emphasis on self-rehabilitation has emerged
once again recently.
It is widely known that in North Korea, the market became

CHART 2

Economic sanctions & changes in North Korea
Trade Sanctions- Trade embargo on major exports from North Korea(Coal, textile products, fisheries products, etc.)- Restriction on the export of petroleum to North Korea (2 million
tons annually)- Export embargo on luxury goods, metals, etc., to North Korea

Impact on the North Korean Economy- Shrinking the scale of trade- Return of workers employed overseas- Restrictions on trilateral trade

Financial Sanctions- Embargo on international financial trading (secondary boycott)- Freeze of overseas assets (US, Japan, etc.)- Embargo on direct and indirect investment to North Korea

Sanctions Against Individuals

Changes in North Korean Policies- Halt on nuclear experiments and launch of long-range
missiles- Negotiations aimed at improving its relationship with theUS- Embargo on overseas employment- Restriction on overseas travel
Source: Compilied by the author

Japan SPOTLIGHT • January / February 202071

Perspectives on Global Risks: the 3rd JEF Global Risk Symposium 3

TABLE

Price trends in the Pyongsong Market in Jan.–Aug. 2019 (North Korean Won/kg)
Jan.

Feb.

Rice

4,794

4,875

Corn

2,091

Soy

March

April

May

June

July

Aug.

5,250

4,780

4,600

5,000

4,850

4,800

4,920

2,237

1,950

2,120

2,200

2,350

2,400

2,470

2,300

3,986

3,625

3,580

3,500

3,520

3,430

3,500

3,500

3,250

Cooking oil

12,150

9,387

9,765

11,00013,50013,10012,80012,600

11,100Wheat flour

3,550

4,662

5,500

4,300

4,300

4,000

4,100

4,250

3,750

Gasoline

14,76014,65013,125

13,20015,00016,70016,70016,20015,100

Diesel

8,610

8,692

8,725

8,800

9,700

9,400

9,100

8,900

8,700

Sugar

4,180

4,687

4,654

4,700

4,610

4,350

4,150

4,200

4,100

Chinese cabbage

985

965

898

1,200

1,200

1,350

850

920

950

Coal

150

175

165

170

230

190

180

180

210

Pork

14,70015,10018,75017,90017,000

8,500

9,500

14,00016,000Exchange rate
(North Korean
Won/US$)

8,075

8,100

8,125

8,250

8,400

8,300

8,310

8,350

8,330

Sept.

Source: Compilied by the author

widespread and established. Due to the amendment to its
constitution, North Korea put into statutory form a socialist
corporate responsible management system that in essence permits amarket. This indicates just how much of an absolute position themarket has in the lives of North Koreans. However, the market isstarting to fall into dysfunction. According to North Koreans, they
can no longer even think about new enterprises. It has come to thepoint that there are more people who want to sell things than people
who want to buy things. The supply of goods, which provides thebasis for market dispersion, was being fulfilled by Chinese-madegoods. Additionally, even as many goods supplied on the market inrecent years were replaced with North Korean goods as domestic
production advanced – mainly food and clothing – from the supply of
raw materials to final goods, Chinese goods still play an importantrole. However, the economic sanctions caused the inflow of goods tomarkedly decline. With the inflow of goods decreasing, the people
who had been making money in the intermediary distribution stage
fell into a difficult situation, and finally the diversity of products on
the market fell. The market scale could not help but shrink.
However, market prices, which should naturally rise withdecreased supply, did not show any major changes. Excludingchanges in pork prices due to African swine fever (ASF) which brokeout in China, changes in the price of other goods remained mostly atemporary phenomenon. This was due to withering demand, but thecharacteristics of North Korea’s distribution structure also played a
72 Japan SPOTLIGHT • January / February 2020

part. For example, when importing Chinese products, the money forthe products is paid after delivery. First, the products are sent to andsold in North Korea. The money is then paid to China from the salesof the products. The import price is decided before importing goods.
North Korean merchants add their profit margin on to that price andsell the goods. This is why they cannot lower prices even if thegoods do not sell. In the end, all they can do is return the goods toChina or keep them in inventory until they sell. Most of the importers
who paid in advance went bankrupt (Table).
On the other hand, the North Korean authorities are still holding
up. While implementing the socialist corporate-responsible
management system and field-responsibility system, the authorities
have made an agreement with cooperating organizations to pay 30%of their production. However, this means 30% of the planned volume
rather than 30% of the final products. So even if production
decreases, the reality is that 30% of the planned volume must be
paid to the authorities. Therefore, if corporations pay the government
according to the planned volume, the amount they keep to eat
decreases. This is the reason for the shortage of food – because
currently, corporations are made responsible for the living of theirworkers. Additionally, in order to move forward with the large-scale
projects directed by Kim, the government has implemented a quota
system for each organization. Due to this, the North Koreanauthorities have yet to recognize the need to consider policy change.
Furthermore, during the time when North Korea maintained aPerspectives on Global Risks: the 3rd JEF Global Risk Symposium 3planned economy, its external dependence remained around 6–7%.
In recent years, its external dependence has risen to around 30%,
but that is not relatively high. It means that North Korea is able toproduce that much goods internally, and because the payment ofplanned volume is fixed there is relatively little difficulty. Looking at
the situation comprehensively, the supply of goods that the North
Korean authorities require is being secured by squeezing it out oforganizations and citizens under the pretext of self-rehabilitation.
Next, let us look at smuggling. North Korea has been facing
sanctions since the Korean War. Economic sanctions target normaltransactions rather than illegal and abnormal transactions.
Paradoxically, North Korea has been very familiar for a long time withinternational methods and routes to circumvent sanctions. A balloon
effect is emerging in illegal external transactions. Because the scaleof illegal transactions is expanding, North Korea has begun to receive
VIP treatment in the global black market. Representative
commodities are gold and human activity.
While it is difficult to estimate the scale of the black market forgold in the world, it is common knowledge that it is considerable. It
is difficult to look for a breakdown of gold transactions even looking
at North Korean trade statistics. North Korean gold mines are mostly
controlled by the Workers’ Party of Korea and the military (inprinciple, the Party, military, and government own a third each).
North Korean bullion has long maintained transactions on theinternational black market, but recently it has come to the point thatthey have been forced to increase volume. The more the economic
war between the US and China intensifies, the higher theinternational gold price will rise. Gold is the biggest source of foreign
currency for North Korea.
As for human activity, computer hacking and arms dealing are
typical examples. The US Treasury placed major North Korean hacker
groups on the sanctions list, but the viability of the sanctions is
unknown. While North Korea’s cyberattack capabilities grow stronger
on a daily basis, defensive abilities have not yet caught up. Most
financial transactions including virtual currencies take place incyberspace. North Korean hackers are the cream of the crop selected
at a national level and are already recognized internationally as
having considerable skills. As for arms dealing, we should consider
that what is being traded is instruction on techniques provided byexperts, rather than actual weapons. These are mainly related tomissile technology. It is an open secret that North Korean missile
experts are being dispatched to countries such as Iran and Syria.
Such transactions are not conducted as normal financialtransactions, but rather as various methods of money laundering.
Therefore, they can circumvent the economic sanctions imposed on
normal transactions.
In this way, the North Korean authorities are capable of securing
the foreign currency they need through various routes. Internally as

well, they are securing goods by exploiting the people. While there
are inconveniences due to the sanctions, it is not to the extent that
North Korea would abandon its policies. Furthermore, it is not an
exaggeration to say that there are no movements in the market tooverthrow the government, which maintains a powerful centralized
rule. So the sanctions do not function as pressure on thegovernment. Rather, North Korea emphasizes self-rehabilitation andencourages the people to endure pressure from foreign powers. In
fact, Kim says while giving onsite guidance that he often felt that theeconomy would make a turnaround as soon as North Korea’s
relationship with the US improved. The second US-North Korea
summit held in Hanoi at the beginning of 2019 ended unsuccessfully
and Kim blames the US for this. Because the market is in such asituation, the North Korean government can take an even more
hardline stance against external pressure.
Additionally, the outside world has been paying close attention to
the North Korean market, considering it is the driving force to change
North Korea. However, a dilemma has emerged with the power of themarket weakening due to the sanctions instead and the central
government becoming comparatively stronger. Amidst this situation,
the cost to the North Korean people and difficulties are increasing.
This is the dilemma of sanctions. The aim of the economic sanctions
against North Korea is its denuclearization. The choice ofdenuclearization is up to the North Korean authorities. However,while the power of the North Korean authorities is becomingstronger following the sanctions, the force of the North Koreanmarket to raise a voice against the government is becoming weaker.
The complete opposite of the general theory on economic sanctions– that the power of the market would grow and the North Koreanauthorities would face political pressure and change their policies –is occurring in North Korea. This might suggest that the strength of
the sanctions imposed on North Korea should be adjusted
accordingly. Perhaps we are still not at the stage to discuss the effectof the sanctions. However, in order to solve the dilemma of
weakening the power of the market which should change North
Korea from the inside with hardline economic sanctions, a more
effective application of economic sanctions against North Korea isnecessary.

Yong Sueng Dong is director of Good Farmers Inc. Association (Good
Farmers Research Institute). He is former leader of the economic security teamat Samsung Economic Research Institute and former advisory committee
member of the Blue House.

Japan SPOTLIGHT • January / February 202073

COVER STORY • Can Economics Save the World from Rising Geopolitical Incertitude? • 3Interview with Dr. Heather Boushey, President & CEO of the Washington Center for Equitable
GrowthI

nstitutionalized Income
Inequality Hampers Social
Mobility

By Japan SPOTLIGHT
If income inequality remains fixed due to established conventions such as inheritance or genderinequality, it would result in further diminishing equality of opportunity, such as access to good educationor good health care. This would act to depress the economy structurally, as it would seriously hamper
upward mobility in society. Income inequality is a hugely important issue, and economists are expected tofind good methods of quantifying it.
Dr. Heather Boushey, the author of a new book, Unbound: How Inequality Constricts Our Economy andWhat We Can Do About It (Harvard University Press, 2019), president and CEO of the Washington Center
for Equitable Growth, kindly responded to our questions in the following interview.
(Interviewed on Sept. 4, 2019)

Introduction
JS: Please could you start by telling us

a little bit about your Center – its
mission and its main activities?

think economists have been working
on this issue since economics wasborn. Why do you think economists
have traditionally concentrated mainly
on market functions rather thanincome distribution?

Boushey: Thank you so much for reaching out toBoushey: I think that there are a number of
us and I am very glad to talk to you. The
reasons. First, what Piketty and Emmanuel Saez
Washington Center for Equitable Growth was
did in 2003 (in a Quarterly Journal of Economics
founded in November 2013, and I am one of thepaper) was to re-introduce to economists dataco-founders. It was founded to advance evidencethat they had not used for many generations. Thatbacked ideas and policies in pursuit of growthis the data from tax records. In the US and otherthat is strong, stable and broadly shared. We havecountries, starting in the 1960s and 1970s,
a unique institutional strategy: we work witheconomists have been increasingly reliant on
academics in the United States with a large
Dr. Heather Boushey
survey data. When you look at how they had beenacademic program that includes a call forthinking about understanding the economy, it was models. Not
proposals and an open and competitive grant program. We work
empirical theoretical work, but theory. The extent to which it waswith scholars to investigate whether and how inequality affects ourempirical work was often using large national or sub-national
economy and to explore all the different avenues. My team in
surveys to get experiences. Starting in the 1990s, the profession
Washington – which is about 40 people now – then takes thatstarted to undergo a significant shift where scholars began to gather
research and helps make sense of it so that it can be acceptable andtheir own data. They began to do natural or controlled experiments
useful to people who are in the policy-making community.
using new sources of data and information, and developing new
We have a blog, we use social media, and we do events with policy
methods that allowed them to show causality. When Piketty and Saez
makers for them to understand what this research means for theirlooked back at what Simon Kuznets had done in the mid-part of thework.
20th century using tax-return data, they found that inequality at thevery top of the income ladder was growing much faster than that
Income Inequality an Old Issue
survey data had shown. That opened up expanded computing
JS: The issue of income inequality has drawn lots ofcapacity and the ability to use new methods and computers toattention since Thomas Piketty’s book Capital in theevaluate all this data. This ushered in a new way of thinking about
Twenty-First Century was published in 2013. Yet I
the fact that economists can study inequality, and to see how
12 Japan SPOTLIGHT • November / December 2019https://www.jef.or.jp/journal/

COVER STORY 3

important this economic trend is.

Photo: Harvard University Press

Income Inequality & Politics
JS: Talking about politics, we are witnessing a rise inpopulism all over the world. Would you concur with
the idea that increasing income gaps could be driving
this populism?

Boushey: I think that the answer is “yes and”… Part of the reason
that people are frustrated with politicians is that the way that we havethought about the economy and the way that we have talked about
how to measure economic success has obscured the reality of risinginequality. This new movement of Piketty scholars and scholars that
we fund who understand this – this is on the cutting edge. Whatmost people hear about when they look at policymakers or when
they watch the news is data about the economy that doesn’t reflect
what is happening in their own lives. For example, on many news
stations they talk about the changes in the stock market; that does
not have anything to do with whether there are good jobs in yourcommunity. Or they will talk about indicators like changes in national
economic growth or output, and indicators like GDP. Over the periodof the 60s and 70s, GDP really was a great shorthand indicator for
how the economy was growing that was reflected in people’s lives.
When GDP went up by 2%, most Americans were seeing theirincomes rise by 2% because we had less inequality. Since the 1980s– and especially since the rise of these new populist movements –the macro-economic indicators like GDP don’t mean anything formost of us. GDP rises by 2% but the vast majority of Americans do
not see their economies rise that much. So when policy makers tout
a new policy for growth or the economy, there isn’t a connection
between what they are measuring and what is happening in family
lives. It is not just that inequality has risen; it is that the politicalclasses have not honored or recognized this significant change.

important. His argument that so long as the rate of return on capitalis higher than a sense of the rate of return on wages – even in an eraof high income equality – you see the income gap between thewealthy and the poor is to be further expanded by a high wealthinequality. Once you have wealth inequality, that creates obstruction
and distortions in our whole economy; that wealth means that there
are people holding onto that wealth rather than a society where
people can get access to capital and start their own businesses orwhere children who did not grow up rich can go to the best colleges.
I do think that this is a deep and important insight that he has
regarding economics, politics and social sciences more generally.

JS: Would you agree with Piketty’s analysis of

JS: In light of today’s economic situation and rising

economic inequality regarding the difference
between interest rates and wage increases?

Boushey: I edited a book looking at his work, and certainly the data
he has complied is amazing and I do think it is relevant and very

Publisher: Harvard University Press
Available at: https://www.hup.harvard.edu/catalog.
php?isbn=9780674919310

populism, do you think that economists’ main
responsibility for achieving sustainable growth
should be focused on mitigating income inequality?
Higher income inequality would not only lead toresolving social issues but also re-stabilizing market
Japan SPOTLIGHT • November / December 201913

COVER STORY 3

economies.
Boushey: I have a book coming out next month that argues that
inequality constricts our economy. I argue that high income andwealth inequality creates obstruction for people who aren’t alreadyrich to engage in the economy and move up the ladder. It particularly
creates obstruction in the areas of health and education. In the US
we have just had a scandal whereby parents are buying theirchildren’s acceptance into elite colleges when these entrances aresupposed to be based on merit and getting high scores on exams.
These rich parents were basically buying seats for their children eventhough they didn’t qualify, which means that the children who
weren’t wealthy and might have been highly skilled don’t have theaccess to opportunity. That means that the economy does not benefit
from their skills and talent, so that is the way that it obstructs
growth. You also see evidence of inequality in market powers acrossfirms, and in the way that wealth inequality and income inequality
affect political influence.
Both of these are subversions of how the market is functioning.
We are in an era of rising economic concentration and in a way thatis not for the public good but which allows some firms at the top to
obliterate their competitors because they have all the market power
and are able to charge higher prices, pay lower wages, and don’t
have to worry about providing high-quality goods and services. Thatis a subversion of our market economy, and at the same time you
see the role of money in politics where our politics in the US has
been focused on tax benefits for the very wealthy, while starving the
public services that would create widespread opportunity.
Finally, we see economic inequality distort investment andconsumption. There are a lot of scholars who trace the financial
crisis back to the growth of inequality through the mechanism of therising supply of credit. You have so much wealth circling around theeconomy looking for something to do, and what it ended up doing
was to transform into increased credit supplies and too manyfamilies had credit pushed on them, which did not end well. So I do
think that there are these destructive aspects of inequality that are
dragging our economy down generally, and this is the theme of thebook that I have coming out next month.

Institutional Drivers of Inequality
JS: You mentioned in your paper included in the book

After Piketty, The Agenda for Economics andInequality published in May 2017 that equality ofopportunity should be assured by institutions but is
not. Inheritance could affect the wealth gap between
the rich and the poor, and you argue that women in
the US are institutionally disadvantaged in theinheritance of wealth. Could you elaborate on thisplease?

Boushey: One of the things we know is that what constrain economic
inequality are institutions, like governments through progressive
taxation and progressive spending. Or institutions like unions thatprovide some boundaries on economic inequality, or institutions likea legal infrastructure that focuses on anti-trust. Those institutions
have become much weaker in the US or in fact non-existent. So as
the inequality rises, one thing that we learn from Piketty is that if
income inequality translates into wealth inequality, then the way thatpeople will become wealthy in our society may not be through being
smart and innovative or coming up with a great idea or doing a good
job at work, but rather through inheriting their fortune. I argue in mychapter in After Piketty that we have to think about what this means
for gender equity. At least in the US, traditionally, parents give moreof their wealth to sons than daughters, and marriage among wealthyelites becomes much more important. The trend now for marriage
among the elites is often between two individuals who are highly
skilled and earn a lot in the labor market – two lawyers or two
doctors, for example. But if you have a world where wealth istransferred through inheritance, it creates an incentive for families tofocus on preserving and growing their wealth through marriage,
which has traditionally not been something that has led toemancipation for women. In a world where value in the economy isbased on what you contribute, that creates a lot of incentive to value
women and men much more equally, but in a society where wealth iscreated by handing down money from generation to generation, thatcreates a lot less incentive for gender equity.
JS: How do you think we can mitigate income

inequality effectively? You highlight some

14 Japan SPOTLIGHT • November / December 2019

COVER STORY 3

institutional drivers of income inequality and also
cultural issues. How can we correct these
institutional issues or cultural issues in favor ofincome equality?
Boushey: This is a great question. First, I think that we need to give
people access to the information to understand the problem. We
want policymakers to show the public what economic growth looks
like across the income distribution. The first is changing theconversation from the metric of success being just GDP to sayingthat we need to look across the income spectrum in order tounderstand economic success.
Then, I think we need to craft a policy agenda that addresses theconcentration of resources and addresses creating more economic
opportunity. To address the concentration, a wealth tax or other waysof taxing income at the top. Addressing market concentration andensuring that we have more competitive markets are very important.
Then we need to create a counter balance in giving workers thecapacity to be a counterweight to businesses in a way that unions
traditionally were. I don’t think this involves just going back to what
unions used to do, but rather finding ways for civil society to create
those counterbalances through either unions or government orcommunity groups. It is also important to invest in universal
opportunity and childcare and early childhood education in the US, toensure that inequality is not creating obstruction to upward mobility.

What inequality means is that there is a difference in income
across people; but that does not tell you whether or not all the
income is with people in the top 1% or if there is a huge middle classand a significant chunk of poor people. Looking at the percentiles
across the distribution, it is very important that you understand whatform inequality is taking because that is important for policy andpolitics.

Mitigating Inequality
JS: Is a wealth tax a good idea for mitigating wealthinequality?

Better Indicator to Measure Income Equality

Boushey: In a world where the vast majority of wealth is owned by asmall few and where income gains are transferring into wealthconcentration, a wealth tax becomes much more important than aworld where you have a large middle class with a few rich people but
are not that rich, and a large number of poor people. In such asociety, a wealth tax might not be so important, but in the kind of
inequality that we are seeing today which is growing so fast in termsof wealth distribution, that makes the case for why a wealth tax is so
important because you want to open up that economy. Otherwise, wewill become an aristocracy again! If you have this concentration of
wealth among a small group of people, you will be soon dominatedby that small group, so wealth taxes open that up, and if you use
those resources to increase opportunity then you are creating a morecompetitive economy overall, a much more vital economy.

JS: Finally, you mentioned that GDP might not be a

JS: The causes of rising inequality seem to be quite

good indicator to show economic performance;
perhaps the indicator for income equality could bediversified? The Gini coefficient is to my knowledge
the only indicator to show income inequality.

Boushey: We have done work building on research by Piketty andSaez and Gabriel Zucman, and their World Income Database where
they are creating what they call distributional national accounts.
These take GDP and look at what it looks like across the income
distribution. Instead of just having one single data point – i.e. “GDPwas 3%” – you have how much income growth occurred across theincome spectrum that aggregates up to that 3%.

diversified among nations and so it would seem
important for each country to share information
regarding income inequality and how to deal with it.

Boushey: There are a lot of scholars working on this idea. The world
income database is tracking inequality across countries and many of
those scholars are working on understanding the differences. I
couldn’t agree more that this is an important goal.

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

Japan SPOTLIGHT • November / December 201915

COVER STORY • Can Economics Save the World from Rising Geopolitical Incertitude? • 4

IInterview with Dr. Mark Zandi, Chief Economist, Moody’s Analytics

ncome Inequality Destabilizes
Business Cycle & Lowers
GrowthBy Japan SPOTLIGHT
What are the implications of income inequality for macroeconomic prospects? Dr. Mark Zandi, chief
economist of Moody’s Analytics and a distinguished macroeconomist working on economic forecasts,
talks about the connections between income inequality, growth and business cycles in the followinginterview.
(Interviewed on Sept. 3, 2019)

Assessment of the Current
Global Economy
JS: There is a lot of talk about thegrowing risk of a recession. How
do you assess the possibility of arecession in the current global
economy?

on global oil prices also poses a threat. But
while there are many things to worry about,
the trade war poses the greatest concern.

Income Inequality &Economic Growth
JS: Income inequality would seemto be one of the main drivers of

Zandi: The global economy is struggling, andrising populism around the world.
How do you think income
global recession risks are rising and are
inequality affects your assessment
uncomfortably high. Parts of the globalof economic growth globally?
economy are already close to recession. In
Europe, Germany, Italy and the United
Zandi: The growing wealth and income
Kingdom are near recession. In Latin
inequality across many parts of the world is a
America, Brazil and Mexico are barely
corrosive on global economic growth. I do
growing. And in Asia, Hong Kong, Singapore
Dr. Mark Zandi
not think it is a reason for a recession thisand South Korea have weak economies. The
year, the next year or the year after, but I think it weighs on theescalating trade war between the United States and China and othereconomy’s long-term growth, particularly in places in the world
trading partners is having a negative impact on global trade, andwhere the income and wealth distribution is very significantly
making the global economy vulnerable to a downturn.
skewed. Wealthy and high-income households are able to capture
the political regulatory process and change rules in their favor, and
JS: Do you think a trade war between the US andChina is the principal reason why you consider thethis exacerbates the existing income inequality, and such anrisk of a recession to be so high?
inequality is of a structural nature.
Given the fact that the global economy is already growing very
Zandi: Yes, I think that the trade war is doing significant damage toslowly and long-term prospects are for continued slow growth given
the global economy; not only weighing on global trade but alsodemographic trends and other factors, the skewing in the income
affecting business investment. Global businesses are very uncertain
and wealth distribution means that we are more likely to suffer
and do not know how this is going to play out, and as such they haveeconomic downturns and recessions. That is a real problem because
pulled back on their investment and are turning more cautious in
there aren’t effective policy tools to navigate and manage throughtheir hiring. There are other reasons to be nervous, such as Brexit,
those downturns. Japan is a very good example of this. Monetary
which could contribute significantly to the risk. Even in Japan there
policy is now much less effective than it was in the past, and given
is a VAT increase coming that will have some negative
the heavy fiscal debt burden, there is much less capacity for fiscal
consequences. Growing tensions in the Middle East and the impact
stimulus, so this makes the economy much more vulnerable and
16 Japan SPOTLIGHT • November / December 2019https://www.jef.or.jp/journal/

COVER STORY 4

more likely to suffer periods of secular stagnation because there isno good policy response to it.
The skewing of the wealth distribution in itself is not a catalyst foran economic downturn but it certainly makes it a lot more difficult to
avoid one and to navigate around a recession if it does actually hit. It
is a very pernicious corrosive on long-term growth.
JS: You mentioned that in the short term, income

inequality could have a limited impact, but could
have a significant impact in the long term. Whatwould the “channels” of such an impact beprecisely?

Zandi: The first one is that high net worth households have theability to capture the political and regulatory process where they dobusiness. They can bend the rules in their favor and garner more of
the benefits of government policy. So, it is more likely that they cancollect the rents of protection that they receive, and these rents could
increase.
This means that economic activity is not being allocated efficiently
and that will weigh on long-term productivity growth and therefore
long-term economic growth. This varies – in some parts of the world
it is a significant problem, others less so – but as the income andwealth distribution becomes more skewed, it becomes more andmore of an issue. It is very difficult to measure and quantify but is avery pernicious problem. You can see this in the industries oftechnology, media, telecommunications, and pharmaceuticals; theseindustries are dominated by very large companies that are owned bya very small number of people who do have a lot of politicalinfluence and are able to influence the government to create rulesthat work in their favor.
The second channel goes to the fact that the long-run potential
growth of the global economy is much lower today and will be forthe foreseeable future than has been the case since World War II.
This is linked to demographic trends including aging populations.
This affects not only the growth of the labor force but also
productivity growth. So you have slower underlying growth, and theskewing in income and wealth distribution creates incentives forlower income households to take on debt leverage and greater
financial vulnerabilities that make them exposed, and then when theeconomy goes into recession it is very difficult to get out of it
because there is no effective policy response. So it is much more
likely that we will see economies that are struggling to grow and to
break free from these broader forces at work such as income
inequality.
One final point is that it is difficult to explicitly connect the dots
between income and wealth distribution and economic growth; thechannels are more indirect and not as obvious as one might think.

Income Inequality & Business Cycle
JS: You also mentioned in your essay in After Piketty:

The Agenda for Economics and Inequality publishedin 2017 that income inequality could destabilize thebusiness cycle and that the debt problem in poor
households would create this instability. Is that right?

Zandi: Exactly right. The crisis 10 years ago that emanated from the
US was caused largely by the leveraging of lower- and middleincome households motivated in significant part by the skew in
wealth and income distribution. These households had notexperienced any significant increase in real incomes or wages or
wealth for several decades and in the period prior to the financial
crisis they had access to significant amounts of credit – mortgage
debt, credit card debt, auto debt, and so forth. They took on a lot of
debt and this was the main culprit for the downturn that followed.
This kind of massive leveraging by households seems much lesslikely to happen today in the US given that in response to thefinancial crisis there were a lot of regulatory changes. It is now a lot
more difficult for those households to take on that debt. But the risk
exists in many other parts of the world – the economies whereleverage has increased significantly and continues to increasesignificantly and in part probably due to the skewing in income andwealth distribution. Places like Australia and Canada, theNetherlands, the UK have all seen significant increases in leverage ofdebt and there are lots of reasons for that, but the fact that low- andmiddle-income households have not seen any increases in theirwealth for decades may be one of the reasons.
JS: Not only poorer households, but also wealthypeople seem to be depending significantly on asset
prices. Would you agree?

Zandi: This is an excellent point. Wealthy households havesignificant assets and their spending and investment behavior is verymuch tied to the ups and downs in asset prices, much more so thanin the past. Asset prices are highly volatile and in recent decades wehave experienced significant bubbles in asset prices.
Something that also might be related to the skewing in income andwealth is that wealthier households have invested very aggressively
in these assets that have appreciated significantly in value and attimes into bubbles. This results in a more cyclical economy throughso-called wealth effects in which high income and wealthy
households change their spending behavior very sharply anddramatically in response to shifts in asset prices, including stock
prices, housing values, commercial real estate values, bond prices,and so on. This makes the global economy much more cyclical andvulnerable. If interest rates are already low or negative, then theJapan SPOTLIGHT • November / December 201917

COVER STORY 4

heightened volatility in the economy is much more dangerous as it
makes it much more likely to fall into a recession and harder to get
out of one.
JS: With regard to the impact of income inequality on

the business cycle and long-term economic growth,
could there be some differentiation among developed
economies?

Zandi: The skewing of the income distribution varies substantiallyacross the globe, and indeed has become less skewed amongdeveloping economies in recent decades. Globalization has lifted
hundreds of millions of people out of poverty; China is the best
example as the wealth and income distribution has become muchless skewed. In the developed world, and in particular in countries
like the US and European economies, income and wealth distribution
has become much more skewed as a result to the globalization
process. The US is probably the best example of the skewing inincome and wealth as it is much more unlikely to use government
policy to redistribute income and wealth. In many European
countries, there are very progressive tax codes – wealth and estatetaxes that work to mitigate the skewing of income and wealth, butmuch less so in the US. That may change; a lot of the presidential
candidates on the Democratic side are focused on this issue andwant to increase wealth taxes and mitigate the distribution in income
and wealth, but as of now this is not the case, at least not as muchas in Europe, Canada and other developed economies.

Differentiation of Income Inequality
Among Nations
JS: Do you think that income inequality in the US has

been expanding and diminishing in Europe?

Zandi: It has been widening – the skewing has becoming moresignificant in the US and to a lesser degree in the rest of the world. If
you consider government policy, taxes, benefits and other forms of
public support, the skewing of the distribution is less pronounced
everywhere, but much less so in Europe and Canada compared to
the US. But even in Europe you can see there is a lot of tension
among lower-income households, and a lot of this has fueled the
populist movements there.
JS: Income inequality is different between developed

and developing nations. In the case of developing
nations, income inequality is emerging as a “middleincome” trap; the shrinking middle class indeveloping countries could hamper long- or mid-term
economic growth. How do you evaluate the different

18 Japan SPOTLIGHT • November / December 2019consequences of income inequality upon developing
and developed economies?
Zandi: In general, in developing economies the distribution of wealthand income has become less skewed over the last quarter of acentury, but that goes to the benefits of globalization on thoseeconomies. They have been able to reap the benefits of that
globalization and have helped to lift everybody in their economy but
in particular low-income households in the last few decades. At thesame time, that is why lower- and middle-income households in thedeveloped world have struggled, because they lost incomes, wages,
and wealth to the developing world due to the globalization process,among other factors. Technology has also played a role in enabling
globalization, but also the adoption of new technologies has been
most pronounced in the developed world and that has significantly
impacted lower- and middle-income households. This has beenongoing for much of the past half century.
Having said this, the impact of globalization on income and wealthdistribution is about ready to turn, especially if the world doesn’t pullaway from globalization. Because of globalization, many developing
economies now have large and quickly growing middle classes whoare beginning to buy many of the high valued-added goods andservices produced in the developed world. The developed world is on
the cusp of selling much more to the developing world, which will
create many jobs and ultimately work to reduce the skewing inincome and wealth. It would be a dark irony if the developed world
turned away from globalization now, just when globalization was set
to benefit everyone, including lower income and less wealthy
households.
JS: If China is suffering from the middle-income trap,

its consumption would not grow so significantly andthis would impede its economic growth, wouldn’t it?

Zandi: Yes, it would and I think they realize that and are trying toaddress it. One potential solution to that problem is to strengthen
their social safety net. Unlike many developed economies, they havevery little in the way of retirement benefits or healthcare benefits orunemployment benefits, and therefore the population has to save a
lot and does not spend very much; consumers and households bear
all the risk. I think the Chinese understand that they need to harden
their social safety net to address the problem and I believe they havebeen moving in that direction for the last decade. China is
symptomatic of this problem in many developing economies.

Income Inequality & Policies
JS: Do you think this income inequality is the main

driver of increasing populism today?

COVER STORY 4

Zandi: It is a very significant factor, as lower- and middle-income
households have not seen their wages or wealth increase for many
decades. They now feel helpless and are worried that their children
are going to do worse than they are financially and they are very
upset by that. On top of that, massive global migration flows makethem very nervous because they worry that immigrants will taketheir jobs and their incomes. So the combination of the skewing ofincome and wealth distribution and the very significant flows ofpeople across borders has fuelled the populism that is evident
across the globe, particularly in developed economies.

educational opportunities. There are many open questions regarding
the efficacy of wealth taxes, as these households have significant
means to avoid paying them, but increasing thought is being put into
how to design these taxes to address these issues. Other types oftaxes being debated to address income and wealth inequality include
carried interest taxes on private equity firms and financial transaction
taxes. Finally, increasing the income threshold for the payroll tax thatfunds the nation’s retirement system is also a possibility. The
effective tax rate on high income and wealthy households isgenerally much lower than in other parts of the developed world.

JS: Do you think that the capacity of the current fiscal

JS: In the future, do you think it would be necessary to

Zandi: I worry about it; I am not sure that policymakers are up to thetask. I might have had a different view several years ago, but now I
worry that populism is overtaking the political process and theresulting policy response is wrong-headed. Anti-globalization
sentiment is not to anyone’s benefit and will hurt everybody from the
top to the bottom of the income and wealth distribution. We are also
underinvesting in educating, training and re-training the workforce
and we are not building the public infrastructure that is needed for
economic development, especially in poor areas. I worry that policy
is not moving in the right direction. On top of that, the fiscal health ofmany countries is deteriorating, reducing the resources available toaddress the skewing of income and wealth.
The political capacity for governments to address the income andwealth distribution is also eroding. Populist sentiment is overtaking
the political process and we are unable to collectively deal with these
serious problems and as such they are becoming self-reinforcing. I
am as pessimistic about this as I have ever been, and I’m not at all
sure we are going to be up to the task globally to address thisproblem. Something has to shift fundamentally before we canaddress these problems in a meaningful way.

Zandi: Yes, macroeconomic models need to catch up to the growing
chasm between the wealthy and the poor in many parts of the world.
Until recently, most macroeconomists, at least those focused on theeconomy’s prospects, have all but ignored inequality in theirthinking. Their implicit, if not explicit, assumption is that inequality
doesn’t matter much when gauging the macroeconomic outlook.
This is a mistake, as inequality makes the financial system lessstable, as credit-constrained low-income households are potentiallysignificant risks, and the economy more cyclical, as wealthierhouseholds that account for the bulk of the spending are sensitive toswings in increasingly volatile asset markets. This may not be a big
deal if financial markets and the economy move in a more-or-lessstraight line, but it could be a huge deal if they don’t.
This is especially true given that the economy’s potential growth
will be much slower going forward than in the past, suggesting that
recessions will be more likely. With monetary and fiscal policy
almost certainly rendered more impotent by the zero lower boundand tighter political fetters, future recessions could be more severe.
A critical lesson of the Great Recession is that recessions dopermanent damage to the economy, diminishing its potential. Few, ifany, macroeconomists have models that account for this in theirlong-term projections. Macroeconomists should thus not be
comfortable that they have a good grip on what inequality means forour economic prospects.

and monetary authorities is good enough to stabilize
the economy and business cycle by mitigating
income inequality?

JS: You mentioned tax policy and regulations in orderto mitigate income inequality. Assuming that ourgovernment has serious constraints on fiscal andmonetary policies, what kind of tax policies would benecessary to mitigate income inequality?

Zandi: In the US, there is increasing attention to the possibility ofincreasing existing estate taxes and implementing new wealth taxes
on those at the very top of the wealth distribution. The tax revenues
that would be generated would be used to finance policies that
support lower- and middle-income households, including more
affordable housing, increased childcare and health care, and greater

create a macroeconomic model taking income
inequality’s long-run impact on the economy into
consideration?

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

Japan SPOTLIGHT • November / December 201919

COVER STORY • Role of Business in New Global Governance • 3

Companies Have a
Crucial Role to Playin National Security

By Elisabeth Braw

How Companies Are Targeted in a Cyberattack
Immediately after the United States killed Iranian general Qasim
Soleimani on Jan. 3 this year, the warnings began arriving: Iranwould retaliate by attacking US companies. It would not be the firsttime Iran has attacked a US business: today the private sector isincreasingly a target as countries compete for geopolitical power
without having to go to war against one another. But companies
shouldn’t simply consider themselves victims. On the contrary, they
have a crucial role to play in national security.
Six years ago, unknown hackers inserted malware into thecomputer networks of Las Vegas Sands Corp., the world’s largest
gambling company. It was a sophisticated attack that brought down
three quarters of the casino’s servers; restoring them cost more than
$40 million. US authorities subsequently established that hackers
working for the Iranian government had perpetrated the attack. Las
Vegas Sands Corp. belongs to Sheldon Adelson, a controversial
businessman and ardent supporter of Israel (and subsequently alsoof President Donald Trump). Four months before the cyberattack,
Adelson had publicly proposed that the US should detonate a nuclear
bomb on Iran.

History of Private Sector Being Targeted
The attack against Adelson’s gambling empire was an earlyexample of how companies are targeted as countries compete for
global power. For centuries, civilians and subsequently also
businesses have been targeted as tribes, principalities and countries
went to war against one another. Such attacks were simply part of
the warfare. The Geneva Conventions, passed between 1864 and1949, subsequently introduced rules protecting civilians. Companies,
however, remained targets in armed conflicts. During World War I,
for example, Britain’s Royal Navy – aided by France and Italy –blockaded all vessels bearing commodities for Germany and its
allies. During World War II, “more than 12,000 mines were laid [bythe US] in Japan’s shipping routes, territorial waters, and ports aspart of Operation Starvation. These mines sank or severely damaged
670 Japanese ships and strangled maritime commerce,” asCommander Timothy McGeehan and Commander Douglas Wahl
(Retired) of the US Navy note in the January 2016 Proceedings of
the US Naval Institute. And during World War II, Britain and the US
controversially firebombed Dresden, a city with minimal military
https://www.jef.or.jp/journal/

Author Elisabeth Braw

value, reducing its companies along with its buildings to rubble. Nazi
Germany, for its part, forcibly expropriated companies from owners(often Jews) in countries it had occupied.
What is different today is that companies are being attacked eventhough no war has been declared. Consider the findings in the 2019
Cyber Readiness Report by insurer Hiscox. Last year 61% ofbusinesses in Belgium, France, Germany, the Netherlands, Spain, theUnited Kingdom and the US reported having been subjected to acyberattack in the preceding 12 months, up from 45% in theprevious year. Troublingly, an even higher percentage (65%) reported
having experienced one or more cyberattacks as a result of a weaklink in their supply chains. (This is the first time Hiscox included
supply chains in its Cyber Readiness Report.) In addition, businesses
are increasingly subjected to repeated cyberattacks. “In every one of
the 15 sectors tracked in this report, the proportion of firms
reporting one or more attacks has risen sharply. Across all sevencountries, the most heavily targeted sector was TMT [technology,
media and telecom], where 72% of respondents reported one ormore attacks, up from 53% a year ago. Government entities came
second (71% reporting an attack, up from 55%), followed byfinancial services (67%, up from 57%),” Hiscox reports.
Britain’s 2019 Cyber Security Breaches Survey, in turn, says that
32% of businesses and 22% of charities report having experienced
cyber security breaches or attacks in the previous 12 months.
Medium-sized and large businesses are the most affected at 60%
and 61% respectively. While the number of attacks has decreased,that does not mean that aggression is abating. The UK Department
for Digital, Culture, Media and Sport, the publisher of the Cyber
Security Breaches Survey, suggests that one possibility “is a change
in attacker behaviour, with more attacks being focused on a narrower(though still numerous) range of businesses”.
Not all of these cyberattacks are, of course, linked to governments– but many are. The Council on Foreign Relations, a New York thinktank, maintains a database of state-linked cyberattacks (including
cyberattacks linked to Western governments). In April last year, forexample, German pharmaceutical giant Bayer reported having been
attacked by Wicked Panda, a Chinese hacker group linked to theChinese government. According to cybersecurity firm Crowdstrike,the group’s tools have been traced to “contractors who countmultiple Chinese government agencies as clients, including the
Ministry of Public Security. Observed targeting by the Wicked Panda
adversary has focused on high-value entities in the engineering,
Japan SPOTLIGHT • March / April 202011

COVER STORY 3

manufacturing and technology sectors, aligning with the PRC’s
strategic economic plans.” A plant chlorinating Ukraine’s water – acritical function – has been targeted by hackers working for Russia.
An Iranian hacker group referred to as APT33, Refined Kitten or
Holmium has managed to interfere with the operations of target
companies such as power plants rather than simply disrupting themas most hackers do.

Other Forms of Aggression Against Businesses
Businesses are subjected to other forms of aggression as well.
Last July, the UK-flagged, Swedish-owned freighter Stena Impero
was seized in the Strait of Hormuz by commandos from Iran’s
Revolutionary Guard; initially Iran maintained that the freighter had
violated international rules but later stated that the seizure was a
response to Britain’s seizure of an Iranian oil tanker suspected ofcarrying oil to Syria earlier that month. Following the Stena Impero’s
seizure, insurance costs spiked.
Executives worry, too, that disinformation campaigns bygovernments hostile to countries where they are based or havesignificant operations could harm them. Imagine, for example, a
successful disinformation campaign by Country A against Country B,
where Company X is based. By spreading false information about thestability of Country B’s government, Country A can – for example –fuel a run on Country A’s currency, thereby causing significant harm
to business including Company X.
Businesses are, in other words, being targeted and harmed byother countries and their proxies not because any country is
pursuing vendettas against them specifically. Instead, they are being
attacked as a way of weakening the country or countries they
represent. The Stena Impero was seized not because the governmentof Iran wished to harm it or its Swedish owner Stena Bulk, but toprotest at the seizure of the Iranian freighter by the UK. In addition,
the seizure can be seen as a protest against the Trumpadministration’s campaign against Iran and the Joint Comprehensive
Plan of Action (JCPOA), better known as the Iran nuclear deal. By
seizing the Stena Impero, Iran indicated that it could make the Straitof Hormuz unsafe for international commerce if it wished to do so.
That would constitute a severe blow against companies dependent
on the shipping route, and against a number of countries likewise
dependent on the route.

Challenges for Companies Targetedby Foreign Governments
The reality that companies can be – and are being – targeted as
12 Japan SPOTLIGHT • March / April 2020

proxies poses a challenge, because virtually no business can defend
itself against a nation-state. Even though rare ones might
conceivably do so, the law bans private actors from engaging in
offensive action against another country, a necessary requirement
for credible defence. In the area of cyber, for example, a business isallowed to defend itself but is not allowed to strike back against its
attacker through cyberattacks of its own. Nor are businesses
permitted to conduct preventive attacks against individuals or groups
it suspects of planning a cyberattack. Offensive cyber action is thedomain of governments, and with good reason: through offensive
attacks, businesses could escalate conflicts with a foreign
government to the point where their home government would haveto step in with military means.
Nevertheless, it is clear that the current arrangement, where
governments are solely responsible for national security, is not
appropriate for an era in which aggression is not only of a militarynature. It is also in everybody’s interest that a country – especially aliberal democracy, which is by definition vulnerable to aggression
due to the open nature of its society – is able to minimize disruptions
to its society. If hostile attacks result in repeated and extensive
disruption, it will not only harm current business activities in thatcountry, and the public along with it. It will also harm the country’s
standing as a safe place to conduct business. Businesses, in otherwords, have a role to play in national security.

Expected Role of Business in National Security
It may seem like a novel concept. Indeed, it is. Businesses played
a role in national security in previous wars, including World War II,
and defence contractors by definition still do so. Today, however,companies of all kinds can play a role in national security. Indeed,
Western governments are too small to span a protective umbrella
over the entirety of their civil societies – and their doing so would beneither affordable nor desirable for their societies.
But which role should businesses play? During the Cold War, theNordic countries developed so-called “Total Defence” models thatcan provide lessons today, even though the threats during the Cold
War were rather different from those affecting liberal democracies
today. Total Defence was created by Sweden during World War II,
when it was neutral and was faced with the overwhelming force ofNazi Germany. Sweden further developed its Total Defence during theCold War, and Denmark, Norway and Finland too developed Total
Defence.
As part of Total Defence, the Swedish government maintained
close contact with companies considered of vital importance –including the Stockholm Stock Exchange, the postal service, theCOVER STORY 3

telephone company and the railway company, but also Volvo andSaab – so that the country could keep functioning in a crisis. These
companies, known as K Companies, were obliged to keep operations
going during a crisis, and key staff were exempted from military
service to guarantee that continuity of operations. In some cases,
such as with Volvo, Saab and arms manufacturer Bofors, thegovernment subsidized the construction of manufacturing facilities
inside mountains, which would protect the companies’ production
against enemy attacks. Sweden largely dismantled Total Defence
during the early 2000s, but is now rebuilding the system, albeit not
to its Cold War size.
As part of its Total Defence model Finland has, in turn, perfected
the National Defence Course introduced by Sweden in the 1950s. The
course, an invitation-only three-week residential course (withsubsequent refresher courses) in national security for emerging
leaders in politics, business, civil society and the armed forces, ishighly sought-after. One of its outcomes is that the Finnish businesselite are well-informed about national security and take it into
account in their activities.
During the Cold War it was, of course, helpful that many of thecompanies were government monopolies and thus at liberty to adjust
their operations to the government’s needs. As the involvement of
Volvo, Saab and Bofors show, however, it was possible to get
privately owned businesses competing on the global market to play arole in the country’s security. To be sure, the Swedish government
was able to appeal to the executives’ sense of patriotism; at thattime, all major Swedish companies were led by Swedish citizens, justas most major companies in other countries were led by nationals of
the respective country, and the companies were not owned by aneven larger foreign entity.
That is different today. In many countries, leading companies may
be ultimately owned by a foreign entity; Volvo is, for example, ownedby the Chinese automotive giant Geely. Indeed, even if a CEO feelsthat he or she has a responsibility to contribute to the security of thecountry in which his or her company is headquartered, such steps
may not sit well with the foreign-based owner of the company.
Furthermore, businesses worldwide are now led by the MBA
generation, which excels at management and financial matters but
has little understanding of national security. Some new market giants
even take apparent delight in being as remote as possible from thegovernments of their home countries: consider Facebook’s refusal toprovide the US Congress and government with anything more thanminimal information about the company’s contacts with Russia
during the 2016 election campaign.
At the same time, it is in businesses’ interest to help keep thecountries in which they operate as free as possible from disruptions

to everyday life, and free from disinformation that can harm investor
confidence in the country and thus the country’s economic
performance. Finland’s National Defence Course would be a goodstarting point for other liberal democracies. The course provides anideal vehicle for the government to teach emerging leaders(including, crucially, business leaders) about the foundations of thecountry’s national security and the threats facing it, and the refresher
courses allow the government to provide information about new andemerging national security challenges. Furthermore, the course
builds a network of rising leaders, who are likely to interact andconsult with one another throughout their careers.

Government & Private Sector Collaboration
for National Security
Governments of liberal democracies would also do well toregularly invite chief executives, especially of companies in strategic
sectors such as telecoms, transportation, electricity, food and waste,
to regular consultations, providing them with updates on emerging
threats and the national security situation more generally. If thoseinvited were given security clearance, such briefings could include
classified information. The provision of regular national security
updates by the government would allow business leaders to consider
their operating environment in a more comprehensive context thanwhat they are able to read in newspapers and reports from risk
consultancies.
That does, of course, not automatically mean that they will alter
their decision-making in a way that benefits national security. It does,
however, mean that they have a better understanding of national
security when making corporate decisions. One should bear in mind
that in most liberal democracies, businesses today are not just led by
the MBA generation but by a generation that has for the most part
had minimal interaction with national security. By contrast, major
American firms in the 1960s and 1970s were, for example, often led
by men who had served in World War II, and almost all Nordic
business leaders had performed military service.
Another step that ought to be considered is incentivizing
companies in strategic sectors to play specific roles in support ofnational security, for example to develop comprehensive contingency
plans. Today services that were mostly government-owned until theend of the Cold War (primarily telecoms, airlines, water, electricity
and railways) have for the most part been privatised. In most
sectors, a number of smaller companies now operate side by side,often as competitors. Companies agreeing to take on a role similar to
Sweden’s Cold War K Companies could receive government
subsidies covering the additional expenditures. Alternatively, orJapan SPOTLIGHT • March / April 2020

13

COVER STORY 3

additionally, they could be awarded special government recognitionakin to the Royal Warrant label used in monarchies, which would
identify them as “best in class”.
A chief executive may, of course, still decide that involvement withnational security is not a net benefit to the company. Indeed, withlarge companies operating globally he or she might decide that
contributing to the national security of the large Western country
where the company has its headquarters could harm its access toother markets. This freedom of business leaders to make decisions
based solely on how they will benefit their company, not the country
in question, is one of the weaknesses of liberal democracies. By
contrast, in authoritarian countries such as China the government
can command even officially private companies to perform specificactivities or work in close collaboration with the government.
Legislation could solve this problem. It is, however, a blunt tool,and once a new law is in place, those affected by it tend to respondby only meeting the minimum requirements. A mix of limited
legislation and engagement with business leaders, by means ofconsultation and national-security training, could therefore be themost productive way forward. It would build on business leaders’desire for their companies to operate in stable environments andinclude government consultations to help inform their decisionmaking in a way that would benefit the country and by extension
their companies. Because government should not favor one
company over another, it would be important for the consultations tobe open to chief executives of all major players within each strategic
sector, the only requirement being that they should have security
clearance.

Corporate Ownership Laws Could Play
Significant Role
One additional aspect is of great significance: corporate ownershiplaws. Because even major companies are today not often
independent but owned by even larger foreign entities, and becausethat restricts their executives’ freedom of action in the area ofnational security, liberal democracies should consider their rules forforeign ownership. Although most liberal democracies havelegislation restricting foreign ownership of strategic companies,
those rules are mostly limited to defence contractors and are
remarkably permissive. In the UK, for example, between 2002 and2018, the government only intervened in eight business transactions
on national security grounds. There is, however, movement towards
more restriction. In 2018 the US imposed stricter rules through theForeign Investment Risk Review Modernization Act (FIRRMA). The
same year, Germany lowered the ownership stake at which foreign
14 Japan SPOTLIGHT • March / April 2020

investments in strategic companies require government approval,
from 25% to 10%. Also in 2018, the UK government presented awhite paper which proposes government approval for acquisitions ofover 25% in business selling “strategic goods”. The UK government
estimates that such rules would lead to some 200 applications forapproval each year.
Although similar developments are underway in other liberal
democracies, the question is whether such tighter rules go far
enough. Should there be an outright ban on foreign ownership ofcompanies in strategic sectors, or would that harm the vibrancy of
the global market on which companies in Western countries depend?
It is worth remembering that China imposes severe restrictions on
any kind of foreign companies operating in the country.

Conclusion
The prosperity of liberal democracies from Japan to Canada
depends on the success of the market. Despite the messiness of afree and open society, during the Cold War the US outshone its rival,
the Soviet Union, measured by standard of living. In 1989, the GDP
per capita in the Russian republic within the Soviet Union was$3,428 (measured in current US dollars), compared to $22,857 in
the US. Japan, no stranger to geopolitical aggression, performed
better still, with a GPD per capita of $24,813.
The challenge, as has been outlined in this article, is that today’s
national security threats can – and do – directly harm companies.
Not every proposal put forward in this article can be adopted byevery liberal democracy. Each government can and should, however,urgently consider how it can involve its private sector in national
security – whether simply by information-sharing or by also
incentivizing companies to play an active role in minimizing
disruptions to the country in case of a cyberattack or indeed anothertype of attack.
The former, of course, informs the latter: business leaders ofcompanies in strategic sectors who properly understand national
security challenges are more likely to be willing to commit theircompany to national security-related moves that an executive
focusing solely on the next quarterly report would dismiss as a
distraction. The equation boils down to one fundamental reality:
because businesses today are targets of geopolitical aggression in a
way they have not been in the past, it is unquestionably in theirinterest to do their part. They just have to be given the opportunity to
do so, and the framework for collaboration with the government.
Elisabeth Braw is a senior research fellow at the Royal United Services
Institute in London, where she leads the Modern Deterrence Project.

COVER STORY • Role of Business in New Global Governance • 5

JInterview with Teruo Asada, former Chairman & Executive Advisor of Marubeni Corporation

apanese Business Leader Is
Cautiously Optimistic About
the Global Economy

By Japan SPOTLIGHT
Think tank people are concerned about the possible harmful impact of the US-China tech cold war if it isprolonged on the world economy and trade. How does the business world view this? While think tankviews are theoretical and have a macroscopic perspective, businesses tend to be more practical and focus
on tangible effects.
Teruo Asada, former chairman and executive advisor of Marubeni Corporation, one of the largest
Japanese trading companies, kindly spared time to respond to our questions on this issue. The views of a
big trading company’s representative are of great interest given the current turmoil in global trade and thepossible impact upon global supply chains.
(Interviewed on Dec. 13, 2019)

Current State of the Global
Economyof the chairman of the British Market Council, a
private organization aimed at promoting
Japanese imports from the UK and supporting
Japanese companies interested in setting up
JS: I suspect that a prolonged
offices or factories in the UK. I talked with
US-China tech cold war will have aopinion leaders there and I was impressed by thestrong negative impact on the world
robustness of the UK economy. It will not be ineconomy. Many economists think the
any serious difficulty due to whatever may
US economy is still in an
happen after Brexit.
expansionary stage at this moment,
What I am most worried about is the Japanese
but I think a prolonged trade war
economy. Japanese interest rates have already
would seriously harm the US
reached below zero and there will be little room
economy, the Chinese economy andto lift the economy by monetary policy. Oureventually the global economy. Whatpublic finances are in the worst condition, withdo you think about the outlook for thetremendous accumulated debt. There is also very
world economy if this trade war
Teruo Asada
little room for stimulating the economy by fiscal
continues?
policy. It is certainly true that the Japanese economy has been
enjoying its longest expansion in the postwar period, lasting many
Asada: In the light of the current business situation, I do not thinkmonths. But this can be considered as a consequence of thethe global economy will fall into a recession, as it did after thecontinued monetary easing policy so far and not of a consolidated
Lehman Shock in 2008, though it may slow down to a certain extent.
growth strategy. I am particularly concerned about the delayed
I believe in the strength of the US economy. The US-China trade war
implementation of a growth strategy for raising industrial or national
would strengthen the need for restructuring global supply chains,competitiveness by structural reform, compared with the rest of thewhich could lead to rising production costs. Tariffs are also rising,world.
and developed nations are suffering from a labor shortage. Under
Overall, I think the world economy, including emerging economies
such circumstances, in 2020 world economic growth will be slightly
and those of ASEAN nations, will not get into a serious recession,
lower than in 2018 or 2019.
although there could be a tentative slowdown in 2020.
The US economy and Chinese economy will be negatively affectedby the trade war. In particular, the Chinese economy would fall into
difficulty due to a continuous decline in exports for the past two
Japanese Business Suffering from Poweryears. However, both the United States and China can still afford to
Based International Politics
implement active monetary and fiscal policy to stimulate theireconomies. I visited the United Kingdom last December just before
JS: I guess there might be cases where Japanesethe general election that determined the direction of Brexit on behalfbusiness interests would be seriously harmed in
24 Japan SPOTLIGHT • March / April 2020

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

COVER STORY 5

power-based global politics without rules. What do
you think about this possibility?
Asada: I am not worried much about it. I participated in the Annual
Joint Meeting held by the Japan-US Southeast Association andSoutheast US-Japan Association as a chairman of the Japan side in
October 2019 in the state of Georgia. This meeting regularly attracts
the attendance of state governors and business leaders from theseven southeastern states in the US (Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Tennessee) andJapanese business leaders. At the meeting I raised with the sevenstate governors the possibility of Japanese business being negatively
affected by the decision of the Committee on Foreign Investment in
the US (CFIUS) to reject foreign direct investment (FDI) due tonational security concerns.
Many Chinese companies today are finding their FDI in the US
rejected. Our concern is that Japanese business could be involved insuch US-China friction in the future. For example, if a Japanesecompany, in partnering with high-tech Chinese companies, is trying
to invest either in the US or other countries, there would be apossibility of the US opposing it. Particularly in the case of largescale investment either in the US or other nations, I thought there
could be great concern about its being refused by the CFIUS. But,
after having talked with the governors, I found it is quite unlikely thatJapanese companies would be involved in any such trouble and theywould neither suffer any serious loss nor would any new business bedifficult to start.
I was also surprised to see in this meeting that the tradeimbalance between the US and Japan was not an issue fordiscussion anymore. The largest bilateral trade deficit of the US is
now with China, followed by Germany and Mexico. Japan comesnext. The US-Japan trade imbalance or trade issues do not mattermuch anymore for the people in the US. There is also the fact thatJapanese FDI in the US has worked well in convincing US states of
its utility and this has lessened trade friction between the two.
Some 1,500 Japanese companies have invested in the sevensoutheastern states and created around 200,000 new jobs there. The
investment balance in those states amounts to more than $40 billion,
while the investment balance overall in the US is around $400 billion.
This is greatly appreciated by local communities and I believe this isthe best example of the win-win relations achieved by the US-Japan
partnership since the 1970s.
As a business person who has worked for a trading company formany years, I believe that business is based upon human relations.
That is an important lesson for us. Having seen such good humanrelations built up between the US and Japan, I think there will be little
risk of Japanese business being hampered by the CFIUS decision,
though the risk is not zero.

Rules-Based Trade Regime
JS: Even with little possibility of Japanese businessbeing affected negatively by power-based
international politics, would it not be better to have arules-based trade regime that ensures free trade andinvestment?
Asada: Yes, but it is difficult. The WTO’s rule-making function has
stopped working and even its dispute settlement mechanism has
been seriously hampered by the lack of a majority among the sevenmembers of its Appellate Body tasked with making a final decisionon the relevancy of the dispute panel report. Can Japan take theinitiative in reconstructing trade and investment rules? I think there
will be a greater role expected of Japan in rule making for IPRs andnational security-related issues. However, I am skeptical about
Japanese leadership in WTO reform or in founding a new trade
regime to replace the WTO. The US is a self-sufficient nation, as it
can provide energy and food necessary for domestic use and survive
even with its markets closed, though that could negatively affect theeconomy in the long run. How can Japan lead the US to a rulesbased global regime?
President Donald Trump is doing well in having China accept atentative agreement to modify its aggressive foreign economic policyby his tough countervailing policy. No other person could haveearned such a gain from China. The US economy is still in good
shape. The trade war is not significantly harming its economy at thismoment.
Meanwhile, Japan is certainly doing well in having concluded therecent trade agreement with the US. I believe these provide goodbilateral rules. But as for global rules, I think it will be questionable
for Japan solely to create them on its own initiative or leadership.
JS: It may be difficult for Japan to create a global trade

regime, but it would be possible to make regional
trade rules like the TPP among Asia-Pacific nations.
Asada: Yes, that is true. Japan’s contribution to mega-regional FTAs
is significant, as shown in the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP) which should havebeen even better with the US joining it, the EU-Japan EPA, and thetrade agreement between Japan and the US, as mentioned, whichstays largely within the framework of the CPTPP. Another megaregional FTA, the Regional and Comprehensive Economic
Partnership (RCEP), will be concluded with India’s agreement soon. I
think such regional FTAs can be achieved by Japanese leadership,
and taking the initiative in concluding such regional trade rules will
be a crucial role in the future for Japan, but the WTO or otherworldwide trade regimes possibly replacing the WTO will be difficult
to achieve only by a Japanese initiative.
JS: In such rule-making, economics and national

security are increasingly discussed simultaneously.
METI has recently set up an office focusing on theinterrelations between the economy and national
security. The recent revision of the Foreign Exchange
and Foreign Trade Act in Japan, imposing
restrictions on FDI over possible harm to Japanesenational security, is one example of how economics
and national security are closely related.

Japan SPOTLIGHT • March / April 2020

25

COVER STORY 5

Asada: If national security concerns become too great they would
push Japan into a contradictory stance on free trade, which it has
been advocating until now. This could lead to many sanctions and wecannot deny any possibility of the global trade regime moving
towards anti-liberalization. The revision of the Foreign Exchange andForeign Trade Act could also provoke friction between Japan and theinvesting countries, even with a very small amount of FDI. Of course,
Japan should respond to concerns about national security in balancewith economics, as is the trend today. But it is necessary to bear inmind that excessive policy intervention based on concerns overnational security could be disastrous.
JS: Australia and Japan seem to share the concern

about the balance between economics and national
security and agree that they should be discussed
simultaneously. I think they can be good partners inthis regard. Both nations play a key role in APEC.
APEC could be a good venue for discussing
economics and national security, assuming that the
WTO does not work well. It would not enforce any
obligation upon member countries but there would
be peer review pressure on them. This would make iteasy to achieve a consensus among member
nations.
Asada: Unfortunately, the US is not paying much attention to APEC.
Trump is not interested in attending multilateral forums, as heprefers bilateral discussions and negotiations. It is certainly a goodvenue for discussion, but I doubt if APEC would be the venue where
new international rules are adopted.

Coping with Other Rising Geopolitical Risks
JS: Besides the US-China tech cold war, there areother geopolitical risks, such as Iran or North Korea.
How does a trading company in Japan like Marubeni
prepare for them?
Asada: Japanese trading companies have been pursuing business
opportunities despite the wide range of geopolitical risks. We havebeen doing business with our partners and clients in close
relationships for a long time under such risks. We would also pursue
business opportunities in other countries and communities with
Chinese companies even with the risks that may entail, if suchbusiness could bring those nations or communities invaluable
benefits.
I believe that trading companies must continue their win-win
business with their partners, while bearing in mind existinggeopolitical risks. Of course, it would be thoughtless to continue
business without any risk management policy. We trading companies
have developed good risk management strategies for each country
based on our knowledge and wisdom acquired from long worldwide
business experience.
When there is any large-scale conflict in the world or a need tothink about specific emerging risks, we rethink and revise such risk
26 Japan SPOTLIGHT • March / April 2020

management strategies on our own. Our company, through such a
process, has developed our own ranking of country risks andcountry ratings and we define the limits of exposure to transactions
with a specific country based on that ranking. We must also think
about the means of hedging those risks while developing risk
management.
We have been working with Japanese public agencies, such as theJapan Bank for International Cooperation (JBIC), Nippon Export andInvestment Insurance (NEXI) and the Japan International
Cooperation Agency (JICA), in financing our projects for hedging
risk. Also I believe that working with international organizations suchas the Multilateral Investment Guarantee Agency under the World
Bank, which has long experience in Africa, or the IMF in terms of
co-financing would be important in avoiding political and/or credit
risk. Such a risk hedging strategy would be a product of our trading
companies’ wisdom born of our business experience.

Private Business Involvement in RuleMaking on Economics & National Security
JS: In rule-making on economics and national

security, would we need to involve more private
business people’s views in policy discussions andformulation? For example, it is often said that there
are some sensitive technologies which could harm
national security. It might be only private businesses
that could identify exactly what these technologies
are.
Asada: Yes. Having participated in various meetings of advisoryboards to Japanese government ministries, I found there were very
few business people among the members, while there were many
academics and economists. The arguments of the academics andeconomists were too theoretical and conceptual because most ofthem do not have actual business experience so that they are notfully aware of the real problems which businesses face.
I think the Japanese government should create more venues forpolicy discussion with private business people who are engaged in
actual business and knowledgeable about business realities. They
should take full account of those business people’s views in policy
formulation. Not only trading companies but also manufacturing
companies or IT business should be more involved in exchanges ofviews on the economy and business with the policy makers in thegovernment.
I think such dialogue between the government and private sector
in Japan would strengthen the capacity of Japanese policy decision
making and thus encourage Japanese leadership in global
governance. I sincerely hope that such strengthened Japaneseleadership can lead the world economy to better globalization.

Written with the assistance of TapeRewrite Corporation.

COVER STORY • Role of Business in New Global Governance • 6

OInterview with Phillip O’Reilly, Chairman of BIAC

ECD’s Business & Industry Advisory
Committee Could Contribute to
Achieving Rules-Based Global Economy

By Japan SPOTLIGHT
Multinational companies, which are great beneficiaries of globalization, must have a strong incentive tostop any moves toward deglobalization and restore global governance for rules-based trade and security
to prevent the US-China tech cold war from causing damage to the global economy. How can businesslead this process in public policy decision-making? The Business and Industry Advisory Committee(BIAC) has long experience of playing an advisory role to the OECD in public policy and international rulemaking discussions. We interviewed BIAC Chairman Phillip O’Reilly to discuss this issue.
(Interviewed on Jan. 10, 2020)

Introduction

JS: Could you outline your recent
activities at BIAC?

JS: Could you give us a brief selfO’Reilly: BIAC is a formal part of the OECDframework. The core of the organization isabout 33 committees that are made up of andO’Reilly: My name is Phillip O’Reilly, I am achaired by members and align with the
New Zealand national. My role is chairing
various committees within the OECD, such as
BIAC, which is based in Paris. I have a staff oftrade, investment, and tax. There are
10-12 people, and I have chaired it for the last
hundreds of members engaged in advising
six and a half years now, and have been on
the OECD process, and we also assist thethe board for a bit longer. BIAC is the formal
OECD in terms of its outreach. We assist thebusiness partner of the OECD, set up a year
outreach process in ASEAN, and also throughafter a trade union advisory committee was
the G20 and G7 processes, including the B20
set up, so it’s a tripartite structure. While weand B7 processes. It’s a busy job, and myare technically part of the OECD, we are veryrole is really to make sure that theindependent and offer an independent
organization itself works. The policy work is
Phillip O’Reilly
advisory source. We have a number ofdone elsewhere, and my role is to make sureobservers from countries that maybe will join the OECD on thethat the organization is being run effectively. It is quite a complex
accession pathway, and have a number of other technical/
organization but what it brings to the table is high-quality advice
international organizations – for example, on chemicals and banking
because it has these very big and well-resourced business– that also join BIAC because of the particular work that the OECD
organizations behind it. When we give advice to the OECD we candoes. The core members are the business confederations, and inreach back to those federations and ask their opinion, so we canJapan of course that is the Japan Business Federation (Keidanren).
offer powerful and insightful advice. I will be travelling to ParisMy company in New Zealand is called Iron Duke, based in
tomorrow for the Liaison Committee Meeting which happens every
Wellington. I used to run Business New Zealand, which is theJanuary and is our big set-piece meeting with the OECD to express
equivalent of Keidanren in New Zealand. After 11 years of being CEO
what business wants, and how we respond to the OECD’s work
there, I left and formed this organization which is a public policy
program. This meeting will be held by the most ambassadors andadvisory firm. It’s a commercial firm, and we have clients in central
business people we have ever had. I am the chair of the process andgovernment, local government and in the private sector both in New
have a board that I work with.
Zealand and overseas. We are attempting to get to good public policy
outcomes, and we do this by giving strategic advice to clients both in
BIAC & Trade Policies
the public and private sectors.
JS: You mentioned that BIAC is trying to influence

introduction and tell us a bit about
your company?

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

Japan SPOTLIGHT • March / April 202027

COVER STORY 6

OECD programs. I am curious about programs on
trade policies as today the international trade regime
is facing a crisis.
O’Reilly: We work very closely with the Trade and Agriculture
Directorate at the OECD. The head of that is a Canadian national, Ken
Ash. We think that the OECD’s trade work is second to none; I would
rank it as the best trade work in the world. The reason it is importantin the current times is that it brings evidence to the debate. The tradedebate right now is often not one based on evidence but on slogans,on both sides. One of the reasons that the WTO is under such threat
at the moment is that the trade debate has become rather isolated
from the public. I make the joke that far too often in the past, tradenegotiators said to the business end of the public, “This is our job,
we will tell you when we are done,” and they excluded people fromtheir work because of secrecy and so on in the negotiations. That has
got to stop. The work that Ken Ash and his team at OECD do is very
important because it makes the benefits of trade much more real tothe public and to the business community and that is a very
important part of what the OECD does. We support that process; forexample, the Services Trade Restrictiveness Index is a product that
the OECD has put out, which measures trade restrictiveness andservices. They have done a lot of work on trade and digital, aroundthe costs of protectionism, and also about how to build advice
around trade policy that makes it more inclusive. This is missioncritical work that they are doing.

The other challenge is that oftentimes when politicians are facedwith tough decisions internally – for example, reform of pension laws
or taxation laws – they will often blame trade. How do we resolve
that? I think that we need to make clearer to more people the valueof trade. It is actually the job of our leaders and politicians to do that,and Prime Minister Shinzo Abe is doing an outstanding job of that inJapan, with the third arrow reforms and the Comprehensive andProgressive Agreement for Trans-Pacific Partnership (CPTPP). It is
actually the job of politicians to communicate to the public the valueof trade; it is the job of businesses to explain to their stakeholders
the value of trade, including their employees. It is also their job toengage in trade in a responsible fashion, making sure that they truly
are competitive.
There is no one simple answer to this, but we certainly need toengage more people in the clear and evident benefits of trade, andthen hold politicians to account for what they need to do to makesure that trade is good for all. We all knew when free trade deals andthe Doha Round happened that one of the things that was going tohappen was micro-economic, internal economic reform in countries
to make them more efficient and more open, as it has implications
for social welfare, education and infrastructure. Far too few countries
have taken that process and done it well; they have not done some of
the things that needed to be done internally very well, and I think thatthey need to be held to account to do that.

“Decoupling” of the Global Economy

JS: It seems to be very difficult for the trade policy

JS: Technology has an impact on jobs, but also on

people to convince the masses of the benefits oftrade liberalization, in particular against the risingtide of populism.

national security as evident in the latest argument
between the US and China. Journalists are sayingthat this could lead to the “decoupling” of the global
economy. How would you assess this?

O’Reilly: First of all, it is important to say that not everybody thinks
in that way. We were recently in China, and they understand. In
Japan, I don’t think that people misunderstand the benefits of trade –I think they are generally on board with that. Indeed in the UnitedStates, citizens are more pro-trade than anti-trade. Two things have
happened to the trade debate over the years.
One is that is has become isolated. It has become people of the
WTO sitting behind their iron gates in Geneva and deciding things
and then telling the world, rather than engaging with the world. That
is not just the WTO, but other organizations too. Second, trade has
become the thing to blame when people lose their jobs. If a country
is struggling with welfare, trade is blamed. Yet it is often not to dowith trade – for example, the US manufacturing job loss is largely the
result of digitalization and is not much to do with China, but trade isblamed.
28 Japan SPOTLIGHT • March / April 2020

O’Reilly: I am personally quite optimistic. (This is my personal viewand not from BIAC.) My sense is that both the Chinese and theAmericans will have to react to that because the Chinese
undoubtedly have some technological leadership, and the US has agreat deal more technological leadership than the Chinese do. Whenit comes down to it, they both need each other which is why we areseeing a softening of the trade tensions of the last couple of years.
My sense is that this will resolve itself without some kind oftechnological cold war, but we need it to resolve itself because theworld will be a poorer place if we do not. If the rest of the world isforced to choose between US and Chinese technology just becauseof the flag on the box, it will make us a very poor world and increaseother tensions as well. So it is incumbent on all of us to make surethat we don’t go down that track.

COVER STORY 6

Japan is right on the edge of this. You have a long-standing
relationship with the US and you also have an increasingly close
relationship with China, neither of which is without its tensions, ofcourse. Japan will need the best technology it can get from whereverit can get it, so we need to make sure we resolve this and I do think it
will be resolvable over time, but it will require a change in behavior
from both the US and China.

impeding that, then it needs to be resolved. I don’t think it meansthat we don’t buy each other’s stuff. We need to resolve issues
around security knowing that actually trade will be the biggest driverof security in the long run, as it has been since World War II.
Multilateral trade is the biggest driver of national security and peace
and prosperity that we have ever seen in the world’s history. We need
to be clear about that, and not to stop trade.

JS: Decoupling of the world economy would

JS: There seem to be lots of issues intertwined. In thepotentially be disastrous for it. Should we assume
that business circles, such as BIAC or multinational
companies, would have an incentive to intervene?

case of trade policy and structural policy, thoseissues should be discussed together, otherwise wecannot reap the benefits of trade liberalization. Also,
security and trade should be discussed
simultaneously as otherwise we cannot achieve arule-making process for them.

O’Reilly: Exactly right. Businesses will make their own decisions –businesses in Japan, businesses in New Zealand, businesses in the
United Kingdom. They will decide which technology to use
independent of governments and we will be safer because
businesses will use the best technology for their needs. It’s fair tosay that in the OECD we don’t get engaged in that debate, but what isclear is that the OECD is for trade and for globalization. There are
obviously some implications to that in the way that we think about
US-China relations more generally, and technology wars generally as
well. We don’t get engaged in the Huawei versus US thing as muchas others; we are much more about trade.
JS: On the question of national security, there aresome sensitive technologies. Without businessknowledge it would be very difficult to make rules on
sensitive technologies as government people do notknow exactly what sensitive technologies are withregard to national security. So business involvement
is inevitable to achieve rules-based governance.
O’Reilly: You are seeing those debates playing out in the B20 and
G20 process, of course, as well as the B7 and G7 process. They arealso playing out at the OECD but not so much because it has neverbeen an organization about, for example, military security. I would
make the point that there has always been a situation whereparticular technologies have been held secret for the national
interest: technologies around canons, and around maps back in the
18th century were kept secret. The same applies today. Some of thechallenges are where telecom companies are private but have amassive role to play in the national situation, such as broadband
technology.
I think we must be driven primarily by the need for efficient,competitive markets and if there is fear or a logical view or a view
upheld by evidence that something the US or China is doing is

O’Reilly: Precisely. There are times when other things trump trade –security will occasionally beat trade. In the trade debate, we haveseparated these two issues and the OECD has worked hard to put
these two things together. You can’t have a conversation about
welfare reform or about national security without thinking about
trade and vice versa. It does not surprise me that trade has become avictim of debate when that has not been occuring, and it has notbeen occuring.

Some Good Venues to Restore Global
Governance
JS: What kind of venues would be appropriate fordiscussing these issues simultaneously? The OECDis an interdisciplinary organization with a wide rangeof experts able to work together on various issues.
But what about other organizations when global
governance is in crisis. How do you see the future of
the WTO for example?
O’Reilly: My ambassador David Walker is trying to achieve someoutcomes with the US and others regarding the re-instigation of
dispute-settlement procedures. I am an optimist and I think we will
get to some kind of outcome in time. One thing I know we need to do
more of is to get the business community to step up moreaggressively and to say that the WTO matters to us. This is anotherone of these institutions that sits between the big steel gates in
Geneva and hasn’t been particularly open to the business community
and to others over the years, and it just needs to change. The WTO
senior people recognize the need to reach out to business. Businesscan bring home the importance of the multilateral rules-based
Japan SPOTLIGHT • March / April 2020

29

COVER STORY 6

system on trade much more powerfully than others, and to give an
example of that, I was told by one of my chief trade negotiators in
New Zealand that before the WTO’s rule-making processes came in,when a ship of lamb meat left New Zealand for Hamburg in Germany
we did not know what the tariff rate would be when the ship arrived.
That’s ridiculous, and now we do because of the rules-based systemof the WTO.
I often tell people these illustrative stories to try and get them tounderstand the importance of a rules-based system – not just forsmall countries, but for big countries as well. So the WTO is
definitely part of global governance, and other parts of the WTO
move along. A piece of it has stopped, but there are lots of massively
important issues that they are trying to resolve such as fishingsubsidies, environmentally harmful subsidies. The point about global
governance is that there is no one place – that is part of thechallenge. Global governance is in the G20 this year in Saudi Arabia,
through the WTO and the OECD, and also through the International
Labour Organization and the UN agencies that are relevant to it. Partsof it aren’t going too badly, but there is a lot of tension and it is not
as powerful as it once was.
This is where the role of Japan in particular becomes important. It
is the third-biggest economy in the world, and Abe is pro-trade,admirably pledging to lead the process through the CPTPP when the
US left. So effective global governance requires leadership fromleaders, and we need more leaders prepared to stand up and declarewhat they stand for. Global governance has some challenges; it is not
all wrong though, and parts of it are going OK. We also need torecognize that global governance happens in lots of places and will
only work effectively where leaders are prepared to step up andsupport it. Business leadership in the WTO is very important andpeople need to understand how important the WTO is so that it
doesn’t wither on the vine.
JS: Looking at other venues where issues can bedeliberated simultaneously, APEC might be a goodvenue, but Americans have very little interest in
APEC. Would the CPTPP be a better venue for
initiating global governance?
O’Reilly: We need to be cautious and make sure that organizations
stay within their mandate. I used to be a member of the APEC
Business Advisory Council until very recently, and was asked aquestion in New York about whether or not APEC would be involvedin the tensions in the South China Sea. The answer is no – APEC issuccessful because it sticks to its mandate of economic growth andintegration and it does that well. If you start to give it rules-based or
security roles it will immediately fail because that is not its mandate.
30 Japan SPOTLIGHT • March / April 2020

I would argue that the US has an interest in APEC that waxes andwanes, but it is actually pretty involved in APEC. The US has always
had more of a suspicious view of multilateralism, even before
President Donald Trump. If we get APEC right, then APEC can be apathfinder for much else. If we get some rules around digital right at
APEC through a voluntary approach, we can present them to theworld and say look at those. In much of the work that APEC has
done, there have been examples where because it was voluntary anddone with many of the key countries of the world around the PacificRim, APEC work has become much more common elsewhere.
Likewise with the CPTPP, it is just a trade deal and is nottechnically part of global governance, but the fact that it exists andnow countries like the UK want to join, implies that the UK may be
prepared to comply with the rules and processes within the CPTPP. I
have always been interested in the idea of taking a successfulprocess or forum and running hard with it, making it successful.
Others will want to join it, and by doing that you will reduce tension,
get more economic integration, and get better things happening.
APEC is a great example of that. The fact that the OECD has anumber of countries that want to join suggests that it is successful,and once you join the OECD you have to sign up to all the investment
criteria and anti-bribery legislation, so that is why business wants
the OECD to expand these principles. For global governance, weneed to show what is successful and what forms we can use to pusha message of growth and integration and social success, and hopethat others will join that process as a way of securing goodoutcomes.
JS: How about the Regional Comprehensive

Economic Partnership (RCEP)? It is a bit generous tosome protectionists and is not so ambitious, which
could be a good thing as countries would find it
easier to join. Structural reform would take time, so
generous free trade agreements might work better.

O’Reilly: I would argue that you want the reduction of all tariffs tozero. You want free movement of investment and people over time,
so for me the outcome of trade deals like the CPTPP or RCEP need
to be tight and ambitious. The timeline for countries to get there is
the issue. In New Zealand, we know that dairy subsidies around theworld are massive, including in Japan, and so we want to get rid ofthem. But how long will it take to get rid of them? The point about
RCEP is that if we can get countries like India to sign up eventuallyon the basis that it gets quite a long pathway to reform, then that is
OK with me so long as it reforms and does not sign up to a free tradedeal that is not very free at all. That would be where the business
community would insist on ambitious outcomes. The way in which

COVER STORY 6

people can link into those and move along at their own pace to someextent is very sensible and is common. The CPTPP does that, andthe Doha Round did too.
JS: How about the idea of trying to have sectoral

agreements, for example on digital products.
Countries can get together on a voluntary basis tohold negotiations or discuss initiatives and perhaps
this could be a good alternative to global
governance?
O’Reilly: Global governance is a lot of things all at once, but as you
know, these sorts of voluntary discussions go on all the time and arequite powerful. New Zealand and a number of other countries havestarted one on digital. P4 – the origins of the TPP – was a voluntary
thing between these countries and done explicitly to say to AsiaPacific and the rest of the world that they can play into it, and it leads
to the CPTPP and more. I agree that if you can get countries todemonstrate to others and be open to others joining, it is a goodthing that should be encouraged.

Role of Business in Rule-Making in the
Global Community
JS: On the subject of discussions for rule-making, can

BIAC play an important role ?
O’Reilly: It does. Through the mandate of the OECD, there are anumber of rules on investment, chemicals, trade, anti-corruption,
Corporate Social Responsibility and so on. There are a number ofrules or quasi-rule processes that the OECD has through its
mandate, and BIAC already plays a crucial role and will continue todo so. If you think about the other roles of the OECD, BIAC effectively
follows the OECD around. So in terms of making those much more
effective and a part of global governance, for example, OECDmembership in ASEAN is poor. If the OECD can be assisted to
improve membership among ASEAN nations, it would be good forbusiness and a level playing field. We would encourage and support
the OECD in doing that, and on a whole raft of issues. As well as
rules on multinational tax, we support more countries becoming
members, we support its role in the G7 and G20, and particularly for
global governance. BIAC is one of the biggest repositories ofbusiness knowledge, information and research in the world, and is amassive engine of knowledge to assist governments in playing thatrole.
JS: In Japan, we are initiating discussions about how

to get businesses involved in policy decision-making,and how to play a key role in global governance in
the international community. To be honest, businessmight be a little shy of doing so, and government
people do not know how to attract business people
to the policy discussions. Do you have anysuggestions to ameliorate this situation?
O’Reilly: You would always start with the business associations. It istheir role to bring business views together and put them in alanguage that policy officials and politicians can use. One of thechallenges is that when you talk to business people about public
policy, they think about it and describe it in a business way. Public
policy officials and politicians are often unfamiliar with business, andso often we are talking in different languages to each other. Thus, it
is a key role of business associations including BIAC and Keidanren
to translate between the two, and to turn it both ways into advice thatboth sides can use. When business thinks something needs tochange, government needs to listen to that and vice versa.
Also, we need to be clear about our respective roles. It is not therole of business to engage in global governance, as this is thedomain of elected officials. It is, however, their role to try and ensurethat the decisions made by public policy officials and politicians will
make citizens better off, and from an economic development
perspective business knows a lot about this. It is their role to advise
the political process and then explain to their stakeholders what they
have said and why, including their employees, the communities they
serve, and their customers. Not the citizens – that is the job ofgovernment to explain to.
JS: The OECD is a global think tank. You mentioned

some kind of mediating role between business andpublic policy. Could think tanks play this key role?
O’Reilly: Indeed they do, and there are many in Japan, the US andthe UK. I always see business organizations as big think tanks too. A
massive amount of thinking takes place within the OECD – theevidence is brought to bear, and the experiences of the companies
around the table are massively important. So I would argue thatbusiness organizations are think tanks too, as they bring together theevidence, they distill it, and they represent it. Think tanks areimportant but it is about getting the right brains around the table.

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

Japan SPOTLIGHT • March / April 2020

31

COVER STORY • Exploring for the Best Models of an Aging Society – Lessons from Japanese Experience • 5Interview with Dr. Atsushi Seike, President of the Promotion and Mutual Aid Corporation forPrivate Schools of Japan (PMAC)

E

lderly Workers – Key toAchieving a Sustainable
Super-Aging Society in JapanBy Japan SPOTLIGHT
What will Japan’s super-aging society look like in the future? This will depend on the policies adopted
from now on and the private sector’s adjustability to the aging and depopulation of Japan. As aging inJapan continues in parallel with a declining birth rate, depopulation will be the eventual outcome, resulting
in a labor shortage that could hamper economic growth. To avoid this, Japan will need to try to increase
its labor supply. Among the ways of achieving this, encouraging elderly people to continue to work longer,even after their retirement at 60 or 65, would be at least a partial solution. As we are now the beneficiaries
of longer lifespans with better health thanks to advances in medical science, why should we not take fulladvantage of these aging but still healthy workers today?
Dr. Atsushi Seike, a distinguished labor economist and former president of Keio University, kindly
responded to our questions in the following Interview.
(Interviewed on March 27, 2019)

Introduction – Overall
Picture of the Issue

When a college student today becomes about
65 years old, namely in the 2060s, the ratio
will be rising to around 40%. This
JS: The aging of societies is one ofphenomenon also means that the ratio of thethe key issues today in global
much older people among the population
public policy discussions, and willaged over 65 is also rapidly increasing. The
be at the center of G20 discussions
proportion of the 65-74 age group to the age
in 2019 in Osaka. To achievegroup of those over 75 is now around 1:1,
sustainability in Japan’s aging
but by 2025 this proportion will be 2:3. This
society, we will need to ensure thewill be due to the fact that people in the babysustainability of our social welfare
boom generation born from 1947 to 1949 will
system. But on the other hand, we
have turned over 75 years old.
should discuss the possibility of
Looking into the future further, aroundenhancing the employability of2060 when 40% of the total Japaneseelderly people, given that our
population will be over 65, that same ratio
enormous public debt will not allow
will be 1:2. Thus, we will see a significant rise
us to increase social welfareof the super-aged population. In such a
Dr. Atsushi Seike
expenditure very significantly.
super-aging society we will have two issues.
Would you agree with this policy direction?
The first is rising social security costs. In order to reduce suchcosts per capita, it will be crucial to encourage anybody willing and
Seike: Yes. I think that is exactly what we will need in terms of social
able to work to continue to work regardless of age and support thesustainability as well as personal happiness. We will need to build asocial security system. The second is the decline in the size of thesociety in which anybody willing to work and competent could fully
workforce. Assuming that we will need to shorten working hours andutilize his or her capacity. That would lead not only to thethat raising value-added productivity at very high speed will not besustainability of society but also to personal content. Japan is now
easy to achieve, a significant decline in the labor force would end in a
becoming a super-aging society that no other nation has evershrinking economy. So the aging population would be a serious
experienced. The percentage of the population over 65 years old hasconstraint on economic growth on the supply side. It also leads to a
already exceeded 28% of the total. This is higher than in any otherlarge decrease in consumption in the economy. Since retired people
country. This ratio will reach one-third in the middle of the 2030s.
would consume from their pensions, which will be half of thehttps://www.jef.or.jp/journal/

Japan SPOTLIGHT • July / August 201921

COVER STORY 5

average earnings of workers who are paying premiums, theirconsumption will significantly decline. This will be another constraint
on economic growth on the demand side. Enhancing theemployability of elderly people would therefore be a good solution to
mitigate these two constraints.
Another key issue from an individual’s perspective on aging isabout how to maintain a sustainable life in a super-aging society. At
this moment, statistically the expected remaining life span for a
Japanese at the age of 65 would be about 20 years for men and 24
years for women. This means at the retirement age of 65, in general,
you had around 40 years of working life and will have 20-24 years oflife in retirement. With this balance, it would be difficult to have afinancially comfortable life after retirement. You would need tocontinue to work a little further, such as until the age of 70.
Thus, in the light of social needs and an individual’s needs, we willneed many more elderly people to work longer and enhancing theiremployability will be a key to achieving the success of an aging
society. One advantage for Japan in this regard would be the strong
willingness to work of many aging people. A large portion of older
people in Japan would prefer to work as long as they are in good
health and connected with society. Realizing a life-long active society
in which the willingness and ability of older people can be fully
realized would be a relevant policy goal for Japan in this regard.

Possible Employment System Reform
JS: To enhance the employability of older people,

what do you think would be the necessary reforms to
the employment system in Japan?

Seike: First of all, it will be important to raise the mandatory
retirement age to 65. The lower limit for mandatory retirement has
been lifted gradually under the Japanese Law Concerning
Stabilization of Employment of Older Persons and 60 is now thelowest retirement age defined by law. This law also makes it
obligatory for an employer to keep anybody employed in some form,
such as by raising the mandatory retirement age to 65 orreemploying those who retire at 60 until they are 65, if they want tocontinue to work after age 60.
The majority of the large Japanese enterprises still keep the
mandatory retirement age at 60, but I believe they must raise it to
65. From 2025, the provision of public pensions for employees will
begin at the age of 65. Unless the mandatory retirement age and theage for pension eligibility are connected, consistency between theemployment system and public pension system will not be achieved.
22 Japan SPOTLIGHT • July / August 2019

So raising the lower limit of the mandatory retirement age to 65 is aminimum requirement. With this, you would have to continue towork until 65 and after that we should have as many alternatives as
possible, such as continuing to work part-time in the same company
or working as a freelance with more flexibility. There could be many
people who, having worked hard until the age of 65, will feel likedoing whatever they would like to do. In meeting their desires, wewill need an employment system fixing the retirement age at 65 andproviding more flexibility in continuing to work beyond that age.
JS: What do you think about total abolition of theretirement age, as in the United States?

Seike: It is true that in the United States the Age Discrimination in
Employment Act (ADEA) prohibits a mandatory retirement age in
employment, but employers there are not suffering any
disadvantages from this law. There are mainly two reasons for that.
The first is that in the US an “employment at will” principle
prevails. An employer is allowed to fire any employee it finds
redundant under this principle. In Japan, we have the principle ofprohibiting abusive use of dismissal rights. Apart from dismissal as apenalty, you need authentic and convincing reasons for dismissal,
and even if you have those reasons you need to prove that all means
and efforts to avoid dismissal, such as working hours, have been
exhausted. You also need to demonstrate that there is a rational andobjective reason for selecting the employees to be dismissed. Your
personal opinion about those employees is not to be taken accountof. Lastly, you need to get an agreement on the dismissal between
management and labor unions or representatives of the employees.
So in Japan, dismissal is considerably difficult. Therefore, mandatory
retirement practice at a certain age is a useful means for a Japanesecompany to adjust employment to economic and businesssituations. If business slows down, a company would need to reduce
employment. In this situation, a company would not replace retiring
employees. This works very well as an adjustment process, and for
employees as well ensures job security until the mandatory
retirement age. In this light, it would be difficult in Japan to eliminate
a mandatory retirement practice.
The second reason is that in the US most people retire at the ageof 62 without being asked to do so. This is made possible because
the public reduced early benefit provision begins around that age andalso corporate pension systems are devised to maximize theamounts due to be paid on retirement at that same age. Hereemployees expect a retirement allowance by working until the age ofretirement. This practice creates a mindset for workers to retire atCOVER STORY 5

such an age. It is true that there are certain merits of the ADEA, but
its introduction into Japan would damage the stability of
employment.
JS: If elderly people’s working styles were diversified

as they choose to continue to work after theretirement age, would mid-career recruitment or
reemployment increase, and Japanese management
styles change accordingly? For example, would theseniority-based salary system be replaced by aperformance- or expertise-based salary system?

Seike: The seniority-based salary system is already changing.
Looking at the wage curve profiles of average workers since the1980s in Japanese government statistics, it has been continuing to
flatten. This is encouraging for promoting the employment of older
people, as a company’s personnel costs for salaries would risesignificantly if the retirement age is prolonged under the senioritybased salary system.
However, in the current situation, if an employee reaches the
mandatory retirement age of 60 and reemployed until 65, his or her
salary would be 30-40% less than the one at retirement. This would
be a disincentive to work. Therefore, I would suggest curbing a risein wages starting while employees are in their 40s, making thecurrent wage curve profile even flatter.
It is true that the seniority-based wage system works well during
the first 10 years of working life, as before becoming a full-fledged
employee, young and inexperienced workers in general need to catch
up with their seniors by receiving on-the-job training that theirseniors usually provide them with and a salary raise by seniority canbe justified by their progress in job performance year after year at a
relatively high speed. But after being a full-fledged employee,seniority-based salary raises would need to be more moderate.
It is generally considerably difficult to evaluate your working
performance objectively, apart from jobs linked directly to sales. For
example, it would be not fair to compare the job performance orcompetency of an employee assigned to a job that happens to behighly profitable and that of another assigned to a difficult job torestore a structurally less competitive business activity. So I do notthink the seniority-based salary system will cease to exist
completely. But the steepness of the seniority wage profile would beflatter starting from one’s late 30s or 40s than now.
We have an employment system in Japan of which we should be
proud. I think the Japanese method of simultaneously recruiting new
graduates is an excellent system that could be promoted worldwide.

Thanks to this system, Japan enjoys low youth unemployment. In
parts of the world where youth unemployment is high, it is
economically and socially a big issue. In Europe, for example, young
people start looking for jobs after leaving school or university, andthey are statistically defined as unemployed. Companies also recruit
those with experience for vacant posts that occur spontaneously. So
the recruitment of youth is less prioritized and that also prolongs
their periods of unemployment. But in Japan, young people are able
to find jobs while they are still at school, and the new graduate
recruits in Japan will undergo on-the-job training in a company andbe trained under human resources development programs. They canmaster basic working skills at the initial stage of their professional
life in their company. I think this is an excellent system that should
be preserved in Japan.

Social Security Policies Consistent
with Elderly Labor Force
JS: What would be the crucial social security policies

to encourage elderly people to work longer?

Seike: Poor health would be the most important factor preventing
older people from working longer and prompting early retirement. So
the most important social security policy concerning the publichealth insurance system to encourage people to work longer would
be to promote good health by preventing lifestyle-related diseases
through precautionary care or promoting vaccinations and providing
regular consultations on meals and physical exercise.
Another factor affecting the incentive to work would be a public
pension system that could discourage them from working longer. A
typical example in Japan is the public pension for employees todiscourage those still working. The amount of pension benefits is cut
in accordance with the earnings received by those who continue towork over 65, and thus it penalizes them for doing so. In cases
where their earnings exceed a certain amount, the total amount ofbenefits has to be cut.
At this moment, the Japanese government is trying to encourageolder people to work longer by committing to paying more inpension benefits to those who postpone receiving pension benefits
than the amount paid at age 65. But with the public pension scheme
for those still working which I described above, if you work hard
after 65 and the pension due to you is cut in accordance with yourearnings, you have less extra increase in pension or even cannot
expect any extra increase in pension at all at the age of 70 even withthis policy to encourage the aged to work longer. Thus, the old age
Japan SPOTLIGHT • July / August 201923

COVER STORY 5

pension for those still working would nullify the effect of the good
government policy to encourage postponing receipt of pension
benefits and it needs reconsideration.

Capacity Building for Elderly People
JS: In order to avoid a possible productivity decline by

the elderly labor force then, will we need better
development of human resources or lifelong
education?

Seike: There are two issues here. One is to take advantage of aged
workers’ capacities. There are many top SMEs in Japan with highcompetitiveness in niche sectors. They rely on skills, knowledge,
long experience and sophisticated services to take care of theircustomers’ needs, all of which could be provided by elderly workers.
High value-added, order-made products or services would be what
older workers excel in producing. Given that industries in Japan are
pursuing higher added value, I think the key to raising our laborproductivity is utilizing these older people’s capabilities.
The other is to invest in older people’s health to keep them fit andprolong their lifespan. We will also need technology to play a
supporting role for the elderly when their physical functions decline.
A robot suit enabling an elderly person to carry a heavy item would
be a good example. The deteriorating eyesight of the elderly could be
supplemented by mechanical support. One interesting example isthat brain surgeons would be able to continue to work on operations
even after their 50s with the help of endoscopes to supplement theirpoor eyesight or mechanical handles to correct any trembling of theirhands. This is how we could continue to benefit from the skills andknowledge of older brain surgeons. We would be able to enhance
our labor productivity overall in an aging society by fully utilizing
elderly workers’ competencies in producing higher added value withthe use of technologies.

Helping the Aged Achieve Good Financial
Management
JS: On a different note, could you talk about financial

gerontology, which is helping the aged withworsening cognitive function in their financial asset
management?

Seike: In Japan, as we have a practice of paying large lump-sum
retirement allowances, the aged often have great amounts of
24 Japan SPOTLIGHT • July / August 2019financial assets. But they are facing the risk of worsening cognitive
functions and it is necessary to protect such people’s assets. We
should not allow them to invest in high-risk assets. The Japan
Securities Dealers Association has a guideline in which sales personsof security companies should refrain from selling risky financial
assets to their clients over 75 years old. There are two ways to avoid
this guideline being an obstacle to financial investment overall for theJapanese economy as well as taking the possible earnings offinancial investment from the aged investors. One is to conclude acontract on investments between a financial institution and theelderly before they face any worsening of cognitive function, so thatthey are assured of certain financial benefits from their investments
if or when their functions worsen. Typically they are private pension
plans and mutual funds. The other is to have financial institutions
learn from a medical doctor about the cognitive functions of potential
elderly clients and then decide in accordance with medical criteria
what conditions they should stipulate in their contracts with them. In
the future, it may be possible to connect a financial institution with a
medical clinic, such as through the Internet. I hope this study ofgerontology would lead to effective use of older people’s assets inorder to realize a wealthier life for the elderly or investments that canenhance the overall economy.

Coping with the Aging Population in Asia
JS: There is a high risk of significantly large-scale

aging in Asia, in particular in China. Could thelessons of Japan be useful for these countries?

Seike: Yes. If Japan is successful in achieving a life-long active
society in which the will and ability of older people are fully realized,
it would be a good model for other Asian nations. This would be avery important Japanese contribution to Asia. The aging of societies
is a common issue, in particular for Japan, South Korea and China,
with respective birth rates of 1.45, 1.2 and 1.6. All three facedepopulation, so it would be productive for them to discuss thiscommon challenge and learn from each other’s experience. Pursuinga collaborative path to build up affluent aging societies would be agood subject for a very productive discussion among these threenations, regardless of any political confrontations among them.

Written with the assistance of TapeRewrite Corporation.

COVER STORY • Exploring for the Best Models of an Aging Society – Lessons from Japanese Experience • 8

Japan’s Long-Term Care Insurance
System & Community-Based
Integrated Care System

By the Health and Welfare Bureau for the Elderly, Ministry of Health, Labour and Welfare

Introduction
With Japan’s population aging more rapidly than that of any othernation in the world, the Long-Term Care Insurance System wasestablished in 2000 as a framework for all of society to support longterm care for older persons. This article introduces the current stateof this framework, focusing on the history of its introduction, an
overview of the system, and the Community-Based Integrated Care
System.

Background to the Introduction of the Long-TermCare Insurance System
The percentage of Japan’s population aged 65 or higher is 28.1%(as of 2018), making Japan the country with the world’s oldest
population. The percentage of people aged 65 and higher has been
rising steadily, from 5.7% in 1960 to 7.1% in 1970, to 9.1% in 1980,
to 12.0% in 1990, and to 17.3% in 2000.
Along with this rapid aging and increased longevity, the number ofpeople who are elderly and bedridden, or require assistance in their
daily lives, is growing. Traditionally, these people were mostly cared
for by their families, but in addition to the increased need for nursing
care, changes in the social and industrial structure have brought
about a shift from extended families to nuclear families, leading to asituation in which the problem of long-term care places a majorburden on families.
In Japan, a system of welfare for older persons using tax
resources has been in place since 1963, but with a shortage offacilities relative to overall needs, persons with low incomes andother special circumstances were given priority. In addition,
procedures like means tests meant that the system was notnecessarily easy for ordinary people to use.
In addition, in 1973 medical expenses for older persons weremade free, and a social problem of “social hospitalization” emergedin which older persons requiring nursing care were hospitalized forextensive stays despite the fact that they had little need for medical
care.
With these social changes, the limits of the traditional systembecame evident, and the Long-Term Care Insurance System wasintroduced as a new framework in which all of society supported thelong-term care of older persons.

34 Japan SPOTLIGHT • July / August 2019

Basic Concept of the Long-Term Care Insurance
SystemJapan’s Long-Term Care Insurance System is based on three mainconcepts.
The first is “support for independence” and this is the mostimportant principle. Long-term care in Japan means more than justdaily assistance with things like making meals, using the lavatory,
and bathing. The basic principle is that support for persons requiringlong-term care maintains the person’s dignity, and allows them tolive their daily lives as independently as possible in accordance with
their capabilities.
The second concept is that the system is “user-oriented”. Under
the old welfare system for older persons, the government conductedmeans tests and other procedures and then unilaterally determined
what service would be provided. Under the Long-Term Care
Insurance System, however, the necessity for long-term care basedon objective, impartial standards in accordance with each individual’s
nursing care needs is deemed a right, and appropriate services arechosen based on the user’s selection.
The third concept is that a “social insurance system” is employed.
The system is supported by all persons aged 40 and older, including
older generations. The person pays insurance premiums in advanceand receives services when they are needed, giving the system theunique feature of a clear relationships between benefits andcontributions.

Framework of the Long-Term Care Insurance
SystemThe basic framework of the Long-Term Care Insurance System isshown in Chart 1.
Municipalities (cities, towns, and villages) are the long-term careinsurers in Japan. There are more than 1,700 municipalities in Japan,
and each is the operator of its local long-term care insurance. The
system is managed flexibly by municipalities, which are closest to
the people, based on actual local circumstances.
Half of the system’s financial resources come from taxes, and theother half from insurance premiums. The breakdown of taxes is 25%
from the national government and 12.5% each from the prefecture
and the municipality.
Insurance premiums are paid by insured people. People arehttps://www.jef.or.jp/journal/

COVER STORY 8
CHART 1

Structure of the long-term care insurance system
Municipalities (Insurer)
Tax

50%

Premiums

50%

Municipalities

Prefectures

State

12.5%

12.5%(*)

25%(*)

23%

Pay 90% of thecosts (*)

27%

Application

Service providers○ In-home services- Home-visit care
- Outpatient Day Long-Term Care, etc.
○ Community-based services- Home-Visits at Night for Long-Term
Care- Communal Daily Long-Term Care for
Dementia Patients, etc.
○ Facility Services- Welfare facilities for the elderly- Health facilities for the elderly, etc.

Determined based on
the population ratio(FY2018-2020)

Premiums

Individualmunicipality

National pool ofmoney

Users pay 10% (*) of
long-term care services inprinciple, but must pay theactual costs for residence
and meals additionally.

Use of the services

National Health Insurance, Health
Insurance Society, etc.

Certification of NeededLong-Term Care

Insured persons

Primary Insured Persons- aged 65 or overSecondary Insured Persons- aged 40-64(34.40 million people)(42.00 million people)

Note: The figure for Primary Insured Persons is from the Report on Long-Term Care Insurance Operation (2016), Ministry of Health, Labour and Welfare and that for Secondary Insured
Persons is the monthly average for FY2016, calculated from medical insurers’ reports used by the Social Insurance Medical Fee Payment Fund in order to determine the amount oflong-term care expenses.
(*) Co-payment rate for persons with higher income than certain amount is 20% or 30%.

Source: Ministry of Health, Labour and Welfare

considered insured from the age of 40, and enrollment in the system
is mandatory rather than voluntary.
There are two categories of insured persons – Category 1 Insured
Persons (Primary Insured Persons – aged 65 or over) and Category
2 Insured Persons (Secondary Insured Persons – aged 40-64).
Category 1 Insured Persons are residents aged 65 or older.
Insurance premiums are determined by the municipality based on
the level of income, and are deducted off the top from pension
payments. Category 2 Insured Persons are residents between theages of 40 and 64. These persons do not pay premiums directly tothe municipality, but instead are charged premiums along with the
medical insurance premiums paid by all persons enrolled in theirrespective type of medical insurance.
Insured persons are able to use services according to the nursing
care they are deemed to require based on objective national
standards certified by the municipality (insurer). There are sevenlevels of required nursing care certifications: care levels 1 to 5, andsupport levels 1 to 2. Classifications are made according to carerequirements, and the type and amount of services to be received aredetermined according to the level. The two categories of insured
persons also differ in terms of benefit requirements. For Category 1

Insured Persons, certification is given if the person requires nursing
care in their daily life, regardless of the reason. For Category 2
Insured Persons, certification is given if nursing care is required
because of illnesses caused by aging like dementia or
cerebrovascular disease.
Insured persons who are certified to receive long-term carechoose the service provider and conclude a contract for the use of
the service. Long-term care service providers are primarily privatesector entities. Both nonprofit and for-profit corporations are able toenter the field, and services are provided by a diverse range ofentities. Since the launch of the Long-Term Care Insurance System,
the market for long-term care services has grown significantly.
When using services, in principle the user pays 10% of the costthemselves to the service provider, but if the user’s income is above
a certain level they are required to pay 20% or 30% themselves. The
remaining 90% (or 80% or 70%) is paid from the insurer directly tothe service provider.
Japan’s long-term care insurance covers both care provided in theusers home and at facilities. Many older persons want to live athome where they are comfortable with their surroundings, evenwhen they require long-term care. Services can be combined in a
Japan SPOTLIGHT • July / August 201935

COVER STORY 8

variety of ways. The user may have their home modified and receive
care from visiting caregivers, nurses, and rehabilitation specialists,or they may go to the provider’s facility to receive care. There areolder persons who move to group homes having persons withdementia living together or nursing homes.
Japan has the specialist occupation of care manager, which entails
putting together appropriate care plans in line with the user’s needs,
and coordinating among the various related parties.

CHART 2

Changes in the population over age 75
3,000(10,000 people)

2,500
2,180

2,000

1,872

Changes & Issues in the External Situation
Roughly 20 years have passed since the Long-Term Care
Insurance System was introduced. While the system has stabilized
and developed on the one hand, issues are also appearing for the
future.
Japan’s population has been aging since the system wasestablished in 2000. The number of persons aged 65 and older has
grown 1.6 times, from 21.65 million in 2000 to 34.92 million in
2018. At the same time, the number of service users has grown from1.49 million in 2000 to 4.74 million in 2018, an increase of 3.2 times,
showing that the number of users is growing at a faster rate than the
aging of the population. The introduction of long-term care services
has led to a wide spread in the number of people who require care
and are using services as latent needs materialize, so it can be said
that the people of Japan have embraced the system. Of particularnote, while the number of users of facility services has grown 1.8
times, the number of users of home-care services has shown asignificant increase of 3.8 times.
Naturally, as the population ages and the number of users
increases, the total cost of long-term care insurance is proportionally
increasing each year. From ¥3.6 trillion in fiscal 2000, costs havegrown to ¥11.1 trillion in fiscal 2018 (budget basis). In addition,
along with the growth in total costs, the amount of insurance
premiums paid by each individual is also increasing. The amount of
insurance premiums is recalculated every three years, and taking as
an example the monthly premium paid by a Category 1 insured
person aged 65 or over, the nationwide average during the first
period (fiscal 2000-2002) was ¥2,911, and by the current seventh
period (fiscal 2018-2020) this had roughly doubled to ¥5,869.
Furthermore, looking at population trends, demand for long-termcare is expected to grow for some time. Looking ahead to 2025, a
sharp increase in the number of persons aged 75 and higher isforecast (Chart 2). This is because in Japan by 2025, the large baby
boomer generation born between 1947 and 1949 will all havereached the age of 75. Beyond that, the rapid growth in the
population aged 75 and above will dissipate, but the number ofpeople aged 85 and over will continue to grow. The percentage of
people who require long-term care increases proportionally with age.
Looking at the percentage of people certified to receive long-termcare by age group, the percentage for people aged 65-69 is 2.9%,
but this increases to 13.2% for persons aged 75-79 and to 50.7% for
persons aged 85-89. Therefore, an increase in the number of older
persons aged 75 and above, and 85 and higher, will lead to an
36 Japan SPOTLIGHT • July / August 2019

720

1,632

1,164

383

831

620

1,419

1,500

2,288 2,260 2,239 2,277

224

678

0

870

1,037

1,002

1,024

964 1,029

970

1,152

494

1,000 901 294

500

Age 85 &older

2,417 2,446 2,387

1,138

1,252

1,460

Age 75-84
1,458

1,258

1,216

1,307

1,453

1,418

1,235

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Sources: Future population estimates were taken from the National Institute of Population andSocial Security Research’s “Population Projections for Japan (April 2017): MediumFertility (Medium-Mortality) Assumption”
Actual past figures were taken from the Population Census by the Statistics Bureau of
the Ministry of Internal Affairs and Communications (population with proportionalcorrections for those of unknown nationality/age)increase in the number of people who require long-term care.
At the same time, the number of people aged 40 and over paying
Long-Term Care Insurance premiums is expected to peak in 2021
and then decline. In addition, the number of working-age people, i.e.
those who provide nursing care, will also decline. If the Long-TermCare Insurance System is to operate continuously in the future, wewill need to make serious efforts to create a better system while
conducting regular reviews.

Structure of the Community-Based Integrated
Care System
Given these changing circumstances and looking ahead to 2025,
the most pressing issue now is the creation of a Community-Based
Integrated Care System.
The trend in the number of older persons outlined above shows
the figures on a nationwide basis, but in fact the situation differs
significantly by region. Many urban areas have baby boomer
residents, and face the issue of a rapid increase in the number ofpeople aged 75 and higher. In rural areas, there are regions where
the overall population is contracting and the number of older
persons is decreasing as well. It will therefore be more important
than ever to implement measures that are consistent with the actual
situation in each area.
The Community-Based Integrated Care System is based on theprinciple that even if someone requires intensive long-term care,they should be able to live out their lives as they are used to living
where they are used to living. To achieve this, the system aims toCOVER STORY 8

provide comprehensive support with five components – health(medical) care, nursing care, preventive care, residential care, andsupport for daily living (Chart 3). Municipalities are working to put
this system in place by establishing community general support
centers for each sphere of daily life, and handling consultations fromresidents and coordinating with related parties.
Next, we will introduce some of the key points for building a
Community-Based Integrated Care System.

forums to report on sample cases and how to allocate roles properly
among related professions, and creating face-to-face relationships.

Community Building
A system of medical and nursing care and the roles of specialists
are in and of themselves insufficient for building a Community-Based
Integrated Care System. Community building that includes local
residents is also an important component.
Preventive care can also be seen as one form of community
building. Currently, communities encourage resident-led initiatives
that create places for older persons to go to engage in activities like
physical exercise. There are no rules for where or how these events
are held. For example, they might provide an opportunity for people
within close walking distance to gather once a week to engage inlight calisthenics for 30 to 60 minutes and then relax over tea.
Participating in the calisthenics has the aspect of building health,while the act of gathering together has the benefit of building ties
among local residents.
Sometimes, activities can come about from local residents using
local resources to provide mutual assistance to support one anotherin their daily lives. As the number of households with an older
person living alone and with an old couple increases, there are areas
where these people require a minimum of support for things likedaily mobility, shopping, sorting and taking out the trash, andchanging light bulbs. Many of these tasks do not necessarily need tobe carried out by specialist long-term care providers, and can behandled by local volunteers. Initiatives with local characteristics are
beginning to appear in various areas, including the assignment of
coordinators for daily support who connect local resources, or giving
volunteers points that can be accumulated and exchanged for goods

Coordination Between Medical Care
& Nursing Care
One of the important points in the building of a Community-Based
Integrated Care System is to have appropriate coordination between
medical care and nursing care.
Many older persons live with multiple illnesses, and also require
one-time hospitalization when they become ill or are injured.
Enabling older persons who require both medical care and nursing
care to continue to live in the area where they are used to living, andto be able to make a smooth return to home after recovering if they
are hospitalized for medical treatment, requires a system in which
various medical and nursing care staff in the area, including doctors,
nurses, care managers, care workers, rehabilitation specialists, andpharmacists, can coordinate their work.
Under the 2014 revision to the Long-Term Care Insurance Act, thesystem is intended to promote coordination between medical careand nursing care. To build that system, municipalities identify theirlocal resources and seek to promote cooperation among various
professions. Specific initiatives vary depending on the area, but
successful examples include training sessions for persons fromvarious professions held jointly with local medical associations,
CHART 3

The Community-Based Integrated Care System
In case of illness:

Health Care

the Community-Based Integrated Care System Model

Nursing Care

Hospitals:
Acute phase, recovery phase,
chronic phase• Community General
Support Center• Care manager

When care becomes
necessary...

Outpatient / in-patient
care

Regular health care:• PCP, clinics with in-patient facilities• Regional affiliate hospitals• Dental care, pharmacies

Handles consultation andservice coordination.

Visits / Moving in• In-home services:■ Facility/Residence services:Home• One’s own residence• Senior residences offering services, etc.

■ Preventive Long-Term Care Services

Livelihood support/ preventing long-term care
So that seniors can continue active, healthy living* The Community-Based Integrated Care System isconceived in units of every-day living areas(specifically equivalent to district divisions forjunior high-schools) in which necessary services
can be provided within approximately 30 minutes.

Senior clubs, residents’ associations, volunteer groups, NPOs, etc.
Source: Ministry of Health, Labour and Welfare

Japan SPOTLIGHT • July / August 201937

COVER STORY 8

or cash.

CHART 4

Policies to Address Dementia
Building communities that are compatible for persons withdementia is also indispensable for creating a Community-Based
Integrated Care System. The number of older persons in Japan withdementia was 4.62 million as of 2012, and estimates are that this willreach 7.00 million by 2025. Seven million people correspond to one
in five people aged 65 and over. Social costs related to dementia
were roughly ¥14.5 trillion in 2014, and are estimated to reachapproximately ¥19.4 trillion by 2025. Dementia can be seen as
having a significant impact on overall daily life. Many fields inaddition to medicine and nursing care are involved, in areas likemoney management, prevention of becoming a victim to fraud, andresponses to getting lost, and therefore this issue needs to beaddressed by the entire government, not only the Ministry of Health,Labour and Welfare.
In 2015, 12 Japanese government ministries and agencies jointly
formulated a comprehensive national strategy to address dementia,
called the New Orange Plan. The New Orange Plan has seven pillars:(1) Raising awareness and promoting understanding of dementia;(2) Providing health care and long-term care services in a timely andappropriate manner as the stages of dementia progress; (3)Strengthening the measures for early onset dementia; (4) Supporting
those looking after people with dementia; (5) Creating age anddementia-friendly communities; (6) Promoting research anddevelopment and disseminating the results of prevention, diagnosis,
cure, rehabilitation models, and care models for dementia; and (7)Prioritizing the standpoint of persons with dementia and theirfamilies.
The training of dementia supporters is one example of a specificmeasure in this area. Dementia supporters possess accurate
knowledge and understand dementia, and assist persons withdementia and their families to the extent possible in the community
and the workplace. Anyone from children to adults can take thecourse to become a dementia supporter, and more than 10 million
supporters have already been trained.
New policies to address dementia are currently being studied, tomake government measures even stronger and more coordinated.
We expect this new policy to expand measures to reduce the risks
and delay the onset of dementia, while continuing to build dementiafriendly communities.

Looking Ahead to 2040
Finally, we would like to present a simple medium-term outlook
extending to roughly 2040. As noted previously, the period to 2025
will see a push to achieve a Community-Based Integrated Care
System against the backdrop of a rapid increase in the number ofolder persons. Looking beyond 2025, more than a rapid increase in
the number of older persons, the bigger issue will be to address the
rapid decrease in the working age population. The number of
38 Japan SPOTLIGHT • July / August 2019

Changes in the number or employees(10,000)

65.8 million

About 63.5 million

6,000

About 56.5 million

2,000

1,000
Medicaltreatment/
welfare0

8.23 million<12.5%>

About 9.3
million<About 15%>
[Temporary]

About 10.60
million<About 19%>
[Temporary]

2018

2025

2040

We mechanically calculate based on the sources: government's economic growth forecast by Cabinet
Office "Economic Outlook and Basic Attitudes toward the Economic and Fiscal Management" in 2018,
and in and after 2025, labor force participation rates by age and sex in the Japan Institute for Labour
Policy and Training “Estimates of Labor Supply and Demand in 2015” and National Institute ofPopulation and Social Security Research “Future Estimated Population of Japan (Estimated in 2017)”(according to Medium-Fertility and Medium-Mortality Assumption)

Source: Ministry of Health, Labour and Welfare

employed persons is seen decreasing from 65.80 million in 2018 to63.50 million in 2025, and to 56.50 million in 2040. At the sametime, the number of required workers in the area of medical care andsocial welfare, including long-term care, is expected to increase from
8.23 million in 2018 to 9.30 million in 2025, and to 10.60 million in
2040. Estimates are that by 2040, roughly 19% of the workforce will
be engaged in the fields of medical care and social welfare (Chart 4).
Based on these projections, we believe the social security sector
as a whole will need to both secure labor and raise service
productivity. With regard to securing labor, it will be important topromote diverse forms of employment and social participation,
including for older persons, and maintain the vitality of society as awhole. A goal has been set to increase healthy lifespans by three
years or more by 2040, and this will include stepped-up efforts inpreventive care. In terms of service productivity, the use oftechnologies like robotics, artificial intelligence, and information andcommunications technologies can be seen as reducing the burden
placed on workers and increasing productivity. In the long-term caresector, in addition to support by introducing nursing care robots likemonitoring sensors, we are seeing the formulation of guidelines toincrease productivity through specific operational improvements likestreamlining operational processes and the use of information andcommunications technology.
Because Japan is facing issues associated with an aging
population before the rest of the world, it has tried various responses
including the establishment of a Long-Term Care Insurance System.
Looking ahead, the populations of other countries, especially in Asia,
are set to age more rapidly that Japan’s, so we hope that this article
will be useful to those countries.

Special Topics • Partnership Between Africa & Japan • 5Interview with Nico de Wet from South Africa working at the Global Business Division of
SoftBank Corp’s Enterprise UnitB

ridging Africa & Japan –Entrepreneurial Engagement
for a Young African

By Japan SPOTLIGHT
Nico de Wet, a young South African, talks about his experience of the ABE Initiative, the “African
Business Education Initiative for Youth”, one of the most important outcomes of the TICAD process so far.
He also talks about the NGO initiative “Kakehashi Africa” (Bridge of Africa), an important offspring of the
ABE Initiative. He works for SoftBank, a major Japanese telecommunications company that started as aventure, and is learning entrepreneurship from them.
(Interviewed on July 12, 2019)

Introduction
JS: How did you become interested

in Japan, and why did you decideto stay working in Japan for
SoftBank?

The ABE Initiative &“Kakehashi Africa”
JS: What do you think about theABE Initiative? Is your assessment
mainly positive?

Nico: I am from South Africa, and before
Nico: From my perspective, it was a very
I came to Japan I studied philosophy and law
good return on my own investment because
at Stellenbosch University, which is locatedI ended up working for a very good company.
close to Cape Town, and worked for nearly
The mission of the ABE Initiative is to enable
five years for a group of companies
the creation of partnerships between
specialized in space engineering, GIS
Japanese and Africans, and in terms of thatapplications and other technologies. I worked
mission, in my personal case, I havein a team that was specifically involved inaccomplished that by being employed byusing technology to help NGOs be more
SoftBank, who have given me the mandate toeffective. Then I came to Japan under the ABE
penetrate the African market. So for me, theNico de Wet
Initiative, spending two years at Ritsumeikan
outcome was very good. In addition to
University in Kyoto, where I studied
employment by SoftBank, during the ABEinternational relations, followed by a six-month internship at
Initiative and all the events created by the Japan International
SoftBank Corp. The reason for joining the ABE Initiative was because
Cooperation Agency (JICA), I managed to meet a lot of Japanese
I felt that Africa and Asia would become very important continents incompanies and build a very good network. This helped me create athe future, due to population and economic growth. At the same timevery good foundation for my future mission of building bridges
there are not many people that can be a bridge between the two
between Africa and Japan.
markets, so I thought it would be a good opportunity for me to
specialize in that space. Two and a half years of the ABE Initiative
JS: Kakehashi Africa is one of the NGOs acting insounds like a long time but it was not enough to build a deep
making bridges between Africa and Japan, and it
understanding of how Japan works, so that’s why I decided to stayconsists of alumni of the ABE Initiative. Could you
longer in Japan. I was very fortunate to join a Japanese company
briefly explain about Kakehashi Africa?
that has a large appetite to change the world and has a lot of
resources that can be used to satisfy that appetite. It also gives me a
Nico: Obviously, during the two to three years of the ABE Initiative
good opportunity to deepen my knowledge of Japan and to continue
program, each ABE participant has a great opportunity to build abuilding my networks in Asia.
great network and gain lots of knowledge, but if this is not followed
up by a platform to make sure that the relationships that were built
actually reach some kind of concrete result, then the return on
https://www.jef.or.jp/journal/

Japan SPOTLIGHT • September / October 201943

Special Topics 5

investment will never happen for the ABE Initiative. So the mission of
Kakehashi Africa is to kind of continue the mission of the ABE
Initiative even after it finishes by creating a platform that allows ABE
participants and Japanese to continue their engagement. This is thereason why we created Kakehashi Africa: to continue the momentumof the ABE Initiative towards and beyond the point of making ameaningful impact for all stakeholders. We also felt that Japan has
already done so much – the Japanese taxpayer has paid so much bybringing us here and giving us this education, internship andnetworking opportunities. So Kakehashi Africa is an initiative by us
Africans, as it is our turn to take co-ownership and contributeproactively to this mission of the ABE Initiative.
In terms of what we do practically, currently Kakehashi Africa isfocusing on building a formal member network where ABE
participants and alumni, Japanese companies, NGOs, governments
or anyone can become a member of the network and then they canhave access to two platforms: a virtual online platform for knowledge
exchange, sharing opportunities, requesting employment, funding,teams or skills – so a kind of a business intelligence and matching
platform – and also a physical platform in the form of branch
activities. We are creating branches across African markets, but alsoin Japan, where people can attend networking events, workshops or
have business tours. So basically we want to develop Kakehashi
Africa into an enabling platform to continue the idea of bringing
Japanese and Africans together to do real business.
Currently, since we are still in the early development stages of theplatform and need to get a few more things in place, we have limited
the membership to ABE participants. We have about 500 ABE
participants who have indicated their interest to be involved; morethan 250 of them have formally registered and this number isincreasing week by week. We have a board of directors, elected byour members, who have appointed me to lead the executive
management. We have a lot of challenges, because all of us are
doing this during our spare time as we have day jobs; neverthelessslowly but steadily we are getting things in place.
JS: How about your budget?
Nico: We don’t have a budget at the moment. Recently, we legally
registered the organization in Kenya and the expenses of registering
the entity were covered out of our personal pockets. The Japan
International Cooperation Center (JICE) – which has been contracted
by JICA to help manage the ABE Initiative – has often supported ourtransportation and accommodation costs whenever we had major
events or meetings. So, our first mission is to create a basic revenue
stream. We want to do this by creating a way for people to pay a fee
when they become a member of our network.
JS: Your members have mostly been working forJapanese companies. Are they successful in building
up links between Japan and Africa?

Nico: The majority of ABE participants go back to Africa so only a
few remain in Japan working for Japanese companies. I think there
is some concern among those who return about what to do next. To
44 Japan SPOTLIGHT • September / October 2019address that concern, I think that Kakehashi Africa can really help tocontinue creating opportunities for those who have returned to dosome real business or projects with Japanese entities. It’s a big
challenge but we are committed to addressing it.

View of TICAD
JS: Moving to TICAD, the ABE Initiative must be one of

the important products of the TICAD process. How
do you assess what TICAD has achieved so far?

Nico: My only exposure to TICAD is the ABE Initiative so I can’t talkmore broadly about what has come from TICAD. I think that the ABE
Initiative is a great program for contributing to the development ofAfrica while at the same time creating opportunities for Japanesecompanies to expand their business. However, since the focus of the
ABE Initiative is human capacity development and relationshipdevelopment, the results of the program will not happen overnight,
so I think we will need to give it some more time to see the fruits of
the ABE Initiative. There have been some small successes, such as
people like me who joined Japanese companies to help them expand
into Africa or people who have created new enterprises inpartnership with Japanese, but to have the scale of successnecessary to tell the Japanese taxpayer that this program was a goodinvestment we will need to give it more time and seriously follow up
the ABE Initiative with something like Kakehashi Africa. The real
success will be determined and achieved by what we do next after
the program.
JS: How about TICAD VII in Yokohama this year? Do

you have any particular expectations?

Nico: It is now our turn as Africans to contribute to the success of
the ABE Initiative, but it would be very helpful if the Japanese
government and private sector could continue to commit theirsupport and particularly help us to follow up the program andactively participate in the projects that we may organize for that
purpose. The ABE Initiative has created all these relationshipnetworks and ideas for business partnerships, but now we needother resources, such as venture capital, to invest in these ideas andmake them happen. So if there could be some kind of investment
fund that could help lower the risk for Japanese companies to enter
into partnerships with ABE Initiative alumni, this could be very
helpful. Furthermore, another type of ABE Initiative program could
also be good, perhaps one that is focused on technical skills
development – practical skills that could make an immediate impact.
JS: How do you think Japanese businesses could

contribute to African economic development? The
bottom-up pyramid approach would be an effective
way to achieve economic development, but there
may be other ways.

Nico: The answer to this question depends on the industry. Generally
speaking, the challenge for Japanese companies is that there is a lot

Special Topics 5of competition with emerging economies and specifically other Asian
players who are offering a cheaper price on products and who thesedays are even increasingly providing high-quality products. So
Japanese companies will have to be very creative and strategic in
their thinking. One benefit they have is that because they are from alarge and highly developed economy they are very cash rich; they
could become very good investment partners. Secondly, Japanesecompanies still have a very good reputation in the world. They are
respected and trusted. Other foreign players in Africa do not havethat brand of trust, so if Japanese firms can leverage these things totheir advantage, it could help. A company like SoftBank, for example,
is very good at making investments and building partnerships, andhelping develop ecosystems around a certain industry. Instead ofcompeting, if Japanese companies could invest in the enterprises ofother players or facilitate the building of partnerships based oncommon values, it could be an interesting approach. Generally
speaking, Japanese companies are not geared towards the “bottomof the pyramid” as their products are very high quality andsomewhat pricey, and most African countries do not have enoughpeople in the higher ends of the market who could appreciate andafford those products yet. So Japanese companies are going to haveto think differently, perhaps acting as a facilitator or partner in orderto target the majority of Africans.

Digitalization in Africa
JS: I understand you are working on a digitalbusiness. Digitalization is spreading all over theworld, and in particular in Africa there is a lot ofprogress. How do you assess the future of digitalbusiness in Africa? Is it limited to startup
businesses?

Nico: No industry can escape digital business/technology thesedays, and this will increasingly become the case. If we as Africans do
not create technological or digital solutions or adopt these solutions,
we will lose out. The gap between us and the rest of the world will
simply become wider. However, Africans have a good appetite forusing tech, and mobile penetration is moving very fast, evencompared to the rest of the world. Mobile wallets such as M-Pesa inEast Africa, for example, show how eager Africans are to use digitalsolutions. There are many challenges that prevent Africans fromusing more digital solutions: tech infrastructure, especially telecoms
infrastructure, is an issue, as are the political and businessenvironments in terms of regulation and corruption. Some of thesethings could perhaps be leap-frogged or disrupted with newtechnology. However, education cannot be so easily leap-frogged.
We cannot escape the hard work over a long period necessary toensure that you have people with the right skills and mindset. Frankly
speaking, Africa has the worst education systems in the world andthis is preventing digital business from taking off properly. For acompany like SoftBank – and I think this should maybe be the casefor other Japanese companies as well – the correct approach would
be to focus on building local partnerships, investing in local capacity
development and making capital available for local people in a

supportive role. This would really help Africans to reap the benefits
from the digital economy. It is not going to be easy; there is a lot of
potential but a lot of challenges that need to be kept in mind.
JS: In the case of the digital economy, open

innovation might be very important. Do you think that
SoftBank could contribute to more innovation in yourcountry?

Nico: SoftBank wants to be the player that makes the biggest impact
in an industry. If we are talking about agriculture, they want to lookat the whole ecosystem and be the platform underpinning that
ecosystem. SoftBank can make a huge contribution to help develop
the necessary technology infrastructure and make sure that the rightplayers are in the value chain and that the right players are supported
to enable value creation. Creating an open innovation platform isdefinitely good, but Africans need to be equipped with the right skills,
knowledge and capital to really leverage this opportunity. African
governments will also have to take ownership. Once again, education
is an important key – if we don’t have education the rest will not fall
into place, or foreigners will just come to Africa, capitalize on all theopportunities and reinvest most of the profit in their own or otherregions. If we want to enable Africans to become wealthy and be able
to contribute to the world with their own solutions, we need to makesure that they have the necessary skills and mindset to do that. For
that we need solid education.
The ABE Initiative is only one part of the bigger solution to the
problem of education or human resource development, so we needto look beyond it. The ABE Initiative is the right approach however,and I really want to compliment Japan for it.
In terms of other anticipated outcomes of the upcoming TICAD
VII, in addition to human resource development programs that bringpeople to universities, there is perhaps also a need to focus ontechnical or practical skills development, like giving Africans
apprenticeships in factories, that may translate into immediate
practical benefits. A follow-up to the ABE Initiative that further
supports the skills development of alumni may also be helpful. For
example, every year or more frequently, Japanese agencies like JICA
could facilitate seminars or workshops in African countries to which
ABE Initiative alumni are invited. The Japanese government is
actually already supporting African governments through a wide
range of activities to make an impact on the systemic challenges of
education. However, Japan cannot make the necessary impact alone
and needs to collaborate with the whole global community who areinterested and involved in solving the challenges of education in
Africa.

Prospects for South Africa
JS: South Africa seems to have a lot of growthpotential. What is your view of its growth potential?
Perhaps in two or three decades its economy will bebigger than Japan’s.

Japan SPOTLIGHT • September / October 201945

Special Topics 5

Nico: I like that idea! I don’t know if it will happen though. South
Africa’s current economic growth is nearly zero, and we had somequarters recently when we were technically in a recession. However,South Africa does indeed have tremendous potential because wehave the best infrastructure on the continent. There are hugeinequalities in South Africa, but the people who have skills have very
good skills. Our large companies, like those listed on the stock
exchange, are of global standard. South Africa has so much potential
and we are geographically positioned in a region of emerging
markets full of potential, so we really have the opportunity not toonly leverage our own resources but those of the whole continentand really be a leader for Africa. We can be a regional leader that
does things differently from the heavyweights in other regions in theworld by truly creating shared value for the whole region rather than
exploiting our neighbors primarily to our own benefit.
The problem is that we are our own worst enemy. We have a lot ofinternal issues that are a result of our past. We have gone through astage over the past decade under the previous administration where
we have not made progress and in fact have gone backwards. This isvery unfortunate, but with the new current government andleadership I think there is a lot of new hope. I have a lot of faith in the
new government and we are making slow but steady progressheading in the right direction. All we need to do is to maintain thismomentum. There are still a lot of risks and challenges and it will bevery difficult, but we are moving in the right direction. In a few
decades, maybe we can be an important player even if we are not as
big as Japan!
JS: When Africa hosted the World Cup in 2010 there

were serious concerns about security. Has the
security situation improved?

Nico: I believe there have been some small improvements tosecurity, but the overall picture is still not that good. However, one
needs to maintain perspective on this. I lived for a very long time inSouth Africa and have never experienced any serious incidents –nothing more serious than what you may typically encounter in the
United States or Europe. It really depends on where inside cities yougo, and as long as you follow common sense, you should be fine. So
I don’t think it presents a serious obstacle to doing business andshould not stop us from moving forward.
JS: So mitigating the security risk might lead to more

foreign investment?

Nico: If there is more direct investment and economic opportunities,
our security situation will be alleviated, so it goes both ways. But wedo need to take the issue of security very seriously and I think South
Africans are doing their best to alleviate the security challenges.

Nico: In terms of the long working hours, I often also worked longhours in South Africa before coming to Japan. So, I think the work
hours may not be that different to many South African companies.
However, Japanese do certain things very differently. For example,
the way decisions are made and the way people act are very different
from what I am used to in South Africa. I have learned a lot about
humility, to really consider others, and about consensus in decisionmaking. Also to do things systematically by focusing on small
details. I have respect for this working culture and have developed anadmiration for it. There are challenges: for example, you don’t always
move as fast as may be necessary, but if you are open-minded about
the challenges then it does not present a problem. I am always
discovering new aspects to Japanese culture. The culture is very
deep and sophisticated. It is a very interesting experience for a
foreigner like me to be part of a journey to understanding it better.
JS: In particular, corporate culture is hierarchical andrequires a lot of consideration of others.

Nico: Maybe I am not a good example because SoftBank is not sucha traditional company, and moreover I am in the global businessdivision which perhaps has a different business culture from the restof the company. There is a lot of space there for you to take theinitiative and not follow the hierarchy. My bosses are very openminded people so I am not really experiencing hierarchy. I think wehave a very healthy culture at my company. However, because you
always have to accommodate people instead of going it alone, youhave to slow down sometimes; but this teaches you humanity and toreally consider others, which I see as a good quality. Of course,
I benefit from this practically as well, when others in the company
have to slow down to accommodate me.

Future Plans
JS: What are your future plans for continuing to be abridge between Africa and Japan?

Nico: I would like to establish an office for SoftBank in Africa, and as
its mission I would like it to become the best facilitator ofpartnerships between Japanese, other foreign companies and local
African companies – partnerships that create real solutions that willaddress the real needs of Africans. But also to enable partnerships
between African and Japanese companies or other companies thatcan be taken to the rest of the world. We need to create opportunities
for Africans to generate their own wealth, and a part of doing that is
opening up markets around the world for Africans – throughpartnerships, this can be achieved. I hope to facilitate such good
partnerships between Africans and the global community.

Views on Japanese Culture & Business Life
JS: How do you find working in a Japanese company?

The culture must be very different.

46 Japan SPOTLIGHT • September / October 2019

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

Special Topics • Partnership Between Africa & Japan • 6Interview with Juvencia Deschamps Ralay Harisoa from Madagascar working in the Public
Relations Group, Administration Department, of GPSS Holdings Inc. in JapanL

earning Management Will
Help Bridge Madagascar &Japan

By Japan SPOTLIGHT

Juvencia Deschamps Ralay Harisoa from Madagascar talked about her experience in Japan through the
ABE Initiative, the “African Business Education Initiative for Youth”, and her work with a Japaneserenewable energy company, GPSS Holdings Inc., following her studies. She also discussed her plans after
she returns to her country.
(Interviewed on July 17, 2019)

Self-Introduction

View of ABE Initiative

JS: Could you please briefly

JS: You studied under the ABE

introduce yourself and tell us why
you became interested in studying
in Japan, and why you decided tostay and work in Japan?

Initiative, and you are continuing towork for a Japanese company as a
graduate from this initiative. How
do you see the outcomes of the
ABE Initiative in terms of your own
studies?

Deschamps: I was born and raised in
Madagascar where I had all my formal
Deschamps: The initiative provides moreeducation. I worked in Madagascar foropportunities not just for Japan but foraround nine years before coming to Japan,
African countries too. I think I would not havemainly in sales and marketing, and mosthad this opportunity to develop connections
recently quality management. That position
with other African countries if I was not inbrought me to Japan for two reasons – firstly,
Japan. It is amazing that outside of Africa
I was training people about the Plan-DoI can have the opportunity to meet people
Check-Act (PDCA) cycle and the Ishikawa
Juvencia Deschamps
from 40 countries at the same time. The ABE
Diagram, and also the theory of continuous
Initiative has provided me with a very valuable experience in thisimprovement, and secondly, I got a scholarship from JICA to myregard.
current company. I chose Japan because I wanted to deepen myknowledge about leadership as part of my MBA. I was looking at
JS: The Abe Initiative has produced many people who
different scholarships in various countries, but received aare now active in Japan and other countries. Humanscholarship to Japan and that is what brought me here.
JS: Could you explain a bit about the Ishikawa

Diagram?
Deschamps: This is a theory about PDCA and the 5Ms (Method,
Material, Man, Machine, Measurement) as the elements of quality
management in a factory, and this is something I trained employees
about in my previous organization mainly when it is applied in the
management field. My former CEO appreciated my work and said
that I could go further, and that is why I came to Japan.

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

resource development is a very important issue for
all nations – and particularly for Africa – in achieving
economic development. How has this initiative
contributed to your country or other Africancountries in the respect?
Deschamps: The initiative has allowed people to gain experience andtraining in Japan and then go back to Africa to address the lack ofhuman resource training there, particularly in developing countries. It
may take a little more time for change to take place, but in a few
years it will come.
Japan SPOTLIGHT • September / October 201947

Special Topics 6

View of TICAD
JS: You must be familiar with the TICAD process. How

do you assess its achievements so far, apart from the
Abe Initiative, and what do you expect from TICAD VII
in Yokohama this year?
Deschamps: TICAD has strengthened the relationship between Japanand African countries not just in terms of economic development but
also in cultural and social relations. There are a lot of improvements
in contracts between my country’s government and the Japanese
government, including the Toamasina Port Development Project.
I think this will result in a lot of commercial transactions between thetwo countries.
JS: TICAD has helped bring Japanese companies to

Africa. How do you think they can further contributeto African development?
Deschamps: In terms of know-how, and sharing best practices andexpertise, and in terms of technology and innovation, Japan canmake contributions to African countries. When it comes to PDCA,
there are things that Japan can learn from Africa, and that Africa canlearn from Japan. It would not work to just take the methods fromJapan and try to apply them to Africa, nor vice versa, so there needs
to be an element of adaptation when sharing best practices. PDCA
can work very well – when people see the results they are convinced
and want to apply them effectively to achieve their goals in many
fields, such as their businesses and their daily lives. As long as
people know where we are going and what it is about, they tend torespond favorably to it, so I think it can be applied successfully
across borders.

power. To achieve real sustainable energy we have to move awayfrom nuclear, which is not at all easy. At the least, we have to raiseawareness of this situation and bring together people who areinterested in it, including policymakers and the political sphere. We
need to promote the issue among the population.
JS: In Madagascar, what kind of renewable energy

sources offer the most potential?

Current Working Experience in Japan

Deschamps: Solar and wind energy. There is geothermal but it is still
limited – very little is used to generate electricity in Madagascar.
Solar and wind are still under-utilized in terms of their potential.
Since we have so much sunlight throughout the year, we can get
solar energy very easily. The challenge lies with batteries, as wecannot store the energy yet, so we need to protect the environment,
to use fewer batteries, and instead rely more on wind and hydroelectricity, in the appropriate combination.

JS: Your company is involved in renewable energy,

JS: As far as solar and wind power are concerned, do

which is very important for Japan especially since
the Fukushima disaster. What lessons learned inyour company in Japan could contribute to therenewable energy situation or development in Africa?

you think Japanese technology offers someadvantages?

Deschamps: Right now I am learning how to utilize sustainableenergy, and I think that Japan has achieved local community
collaboration to leverage energy use and bring it to the grid. This issomething totally new to me. We can learn from this and implement
it in Madagascar and also in other countries in Africa. Local
community collaboration is very important and is one of the mostimportant lessons to be learned from Japan when it comes toleveraging renewable energy. Another is reducing the use of nuclear
48 Japan SPOTLIGHT • September / October 2019

Deschamps: Yes, especially in terms of turbines. Japan has
somewhat similar climate conditions to Madagascar – we are bothislands and we face similar challenges. We have cyclones and this isa big challenge in terms of making turbines that can withstand theimpact of cyclones, and this is something we can learn from Japan.
I should also mention biomass. This is already ongoing and variousorganizations from Japan are in Madagascar to teach about biomass.
JS: You studied management rather than technology.

For a renewable energy resources company, what

Special Topics 6

JS: Working for a Japanese company, are you very

conscious of the existence of a hierarchy?
Deschamps: Not really. While my company has a hierarchy, it is notlike a typical Japanese company: the CEO is open-minded, and thisextends to the employees also. I can share my ideas and can takeinitiatives at any point.

Talking About the Future
JS: How do you see future relations between

Madagascar and Japan?
Deschamps: I foresee a very positive future for relations. Japan has
been very active in the economic and social development ofMadagascar over the last decade. There are projects with JICA,
including the development of the port, and these will allow a lot of
two-way traffic and transactions between the two nations. There will
also be many opportunities for sharing knowledge and know-how in
the future.

kind of management techniques would be useful?
Not in terms of leadership, but for example,
mathematics can be applied to renewable energy tohandle all the data coming from the energy sources.
Managers need to maximize the profits so I imagine
that some mathematical techniques might be usefulfor achieving efficiency.
Deschamps: I am not sure if there is one thing that we have tofollow. I would like to emphasize the point that if Japan wants to go
to Africa or another country, there is no one singular route that itneeds to follow. Management is one tool, but leadership is the key toopening it. We need to inspire people, and so I am not sure if amathematical or theoretical approach is the most relevant. Rather,people and talented management might be more important in thisrespect.

Life in Japan
JS: How many years have you been in Japan so far?

What is your perspective on living in Japan?
Deschamps: In total, two and a half years. What I love about theculture is that people are humble and polite, and very organized.
Japan has a culture of excellence, which I really like, although it canbe very difficult to achieve. Something that I do not like so much isthat sometimes Japan puts too much emphasis on perfection insteadof humanity.

JS: In the future, you may wish to go back to yourcountry to contribute to its economic prosperity. How
do you view your future at the moment?
Deschamps: My plan is ultimately to be able to have my own
company and to inspire the youth in my country using myexperience in Japan. If my company can build some links with Japan
it would be great. In the end though, I would like to run my own
company. I do hope that we can create some business opportunities
that benefit both countries.
JS: Will your company function as a bridge between

Japan and Africa?
Deschamps: Not necessarily, but I think that the future is a very longtime. It could start tomorrow or in several years. It might not belimited to Japan, but I am not yet sure exactly what kind of company
I would like to create. I will try to use my networks in Japan to build
up a company and then to facilitate some transactions between
businesses in Japan and Madagascar. I am steadily growing myhuman network in Japan which will be very important for opening
doors in future, and for uncovering new opportunities and potential
markets. People management will be key, and I think I can achieve
this through networking.

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

Japan SPOTLIGHT • September / October 201949

COVER STORY • Japanese Economy After the Olympic & Paralympic Games Tokyo 2020 • 6

TInterview with David Bickle, President, the British Chamber of Commerce in Japanhe Legacy of the Rugby World Cup 2019
in Japan Will Be Good for the Olympic& Paralympic Games Tokyo 2020

By Japan SPOTLIGHT
The Rugby World Cup 2019 in Japan turned many Japanese who had never seen the game and knew
nothing about the basic rules into rugby fans, thanks largely to the Japanese national team’s achievement
in qualifying for the quarterfinals for the first time. But will the legacy of the tournament prove to be evengreater than the national team’s performance? Could it provide some useful lessons for the coming Tokyo
Olympic and Paralympic Games in 2020?
We interviewed David Bickle, president of the British Chamber of Commerce in Japan and former
member of the Japanese national rugby team. This is his second interview with Japan SPOTLIGHT,
following his first in the September-October 2015 issue.
(Interviewed on Nov. 5, 2019)

Self-Introduction

think the record top five viewing figures for
television audiences of rugby matches are
JS: Could you briefly tell us again
now all involving the Japan team, with nearly
about your connection with Japan
55 million people in Japan tuning in to watch
and your experience as a former
them play Scotland. More than 400,000
lock with the Japanese national
foreign visitors arrived in Japan to watch therugby team?
tournament in person, and I think there weremore than 1 million visits to the official fan
Bickle: I’m currently the president of thezones. On social media, according to figures
British Chamber of Commerce in Japan
published by World Rugby, there were 1.7(BCCJ). In total, this will be my 22nd year inbillion views of videos and content, so theJapan, and I’ve been based here on twosocial media engagement was incredible – atoccasions. My first time was after graduating
unsurpassed levels. And I think the economic
from university, when I joined Kobe Steel,
impact was huge as well – World Rugby
where I had a chance to play with the Kobe
estimates it to be 437 billion yen.
Steel rugby team for six years from 1993 toImportantly, beyond the economic impact
1999. I was very fortunate that in 1996, I was
was
the engagement of people in Japan andDavid Bickle
also selected to play for the Japan national
the development of the game, and theteam, and in that year I played six times for Japan.
number of children in Japan who for the first time were introduced torugby – not just through the tournament but with the community
engagement exercises that took place around the tournament. The
Assessment of Rugby World Cup 2019
impact has been huge. That was during the tournament and before
JS: How do you assess the Rugby World Cup 2019 in
the tournament, but I think we all hope now that as a legacy of theJapan overall? Everybody speaks about it as a great
tournament we’ll see continued engagement, impact, and follow
success.
through.
Bickle: I think however you measure it, it’s been a huge success,both in terms of the experience the fans have had and the quality of
the rugby. It was historic that Japan won all of their group matches
and were able to make it through to the last eight, their first time inhistory to reach the knockout tournament. If you look at the metrics,
the television audience for all of Japan’s games was incredible. I
https://www.jef.or.jp/journal/

JS: I recently came across the term “sports

hospitality” for the first time. What are your thoughts
on sports hospitality, and about that aspect of thelegacy here?
Bickle: I think sports hospitality is clearly a new opportunity forJapan SPOTLIGHT • January / February 202027

COVER STORY 6

Japan. Particularly around the World Cup, it was the same company
which delivered hospitality at the last three or four Rugby World
Cups. They had a bespoke facility built in Yokohama, and theprofessionalism of the delivery really created a focus aroundcorporate hospitality, a chance for companies and organizations tobring guests to a quality facility and enjoy themselves and network
before and after a game. It’s another way for companies andorganizations to entertain their clients and guests in a very exclusive,
unusual, and unique networking environment. There is a huge
multiplier effect as well for the economy, so anything to do with thedelivery of services – food, drink, entertainment – has a positive
impact on the economy here.
If you look at sports hospitality in the United Kingdom, a lot of it isfocused around the stadiums. A number of those are used not juston match day, but also throughout the year for conferences andentertainment. I think that’s another angle to look at – whether sports
hospitality offers a way to get better utilization of the infrastructurethat there is already here in Japan.
JS: Travel agents and the hospitality industry in Japan

seem to be looking forward to more tourists from allover the world.
Bickle: I think so, and tourists are increasingly looking for an
experiential time, for experiences rather than just things. Certainly,
around an event like the Rugby World Cup, I think being able topackage a match ticket and travel to the game within a hospitality
package makes it a more appealing offering to tourists.

hospitality industry is rapidly scaling up and also the number ofvisitors is rapidly increasing, and the challenges of being able tocater to those visitors. Not just to cater to them, but to cater to themin a sustainable way.
JS: Do you think Japan will be successful in keeping

these great numbers of tourists, just like China was
successful in having done so after the Beijing
Olympics?
Bickle: I think so. What the Rugby World Cup has done is to open up
the whole of Japan to a new audience. Tourism from Europe and theUnited States has traditionally been focused on the large
metropolitan and cultural centers – Tokyo going down to Osaka,
Kyoto, Nara, Hiroshima, and places like that – but the Rugby WorldCup has been nationwide, from Sapporo in the north in Hokkaido
down to Kyushu in the west. That’s given overseas tourists a chance
to see what Japan has to offer. I think a number of tourists still havethe image of Japan being a highly urbanized country, and they arepleasantly surprised when they see that much of the country is
beautiful mountains and forests as well. The key will be finding ways
to enable foreign tourists to discover the rest of Japan. I think that iswhere the Rugby World Cup was so powerful, as a catalyst to getpeople to move beyond the traditional tourism centers to places
where perhaps, were it not for the rugby, they would not have seen.

The Japanese National Team
JS: As a former lock, what is your opinion of the

British Chamber of Commerce’s Involvement

Japanese national team?

JS: Would you please tell us a bit more about the

Bickle: The Japanese national team has been absolutely tremendous
in this tournament. They played a brand of rugby which has thrilled
the world. Everyone has been amazed, I think, about the way Japan
played in this tournament. What we saw was a new level of skill andaccuracy. Japan has moved on and improved to another level, andtheir skill and accuracy have enabled them to move on to play a very
attractive brand of running rugby. The statistics bear this out, with 55
million people watching them on TV against Scotland. Most of thegames were played in front of capacity crowds. We saw people whohave never had an interest in rugby as a sport being excited andenthused to follow the national team during this tournament. I thinkthat’s because Japan’s skill level has improved markedly, together
with their competitiveness in all facets of the game. At the end of acouple of their matches, after 70 or 80 minutes when the players
would have been exhausted, their forwards still had the reserves ofstrength, desire, conditioning, and also the skills, to challenge andwin crucial penalties at the scrum.

British Chamber of Commerce’s involvement insupporting the Rugby World Cup?

Bickle: Certainly. One thing we realized a couple of years ago wasthat the Rugby World Cup 2019 Organising Committee was very
keen to speak to the foreign business community with one voice, sowhat the BCCJ did was to get together with seven other foreignchambers of commerce to form the Rugby Alliance. The original
mission of the Rugby Alliance was two-fold: it was to support thedelivery of a 2019 Rugby World Cup that all stakeholders here in
Japan can be proud of, and secondly to foster a legacy that features
more inclusive communities which embrace opportunities forinternational business and exchange. Working together with theother chambers of commerce, we collaborated closely with theorganizing committee.
The BCCJ also hosted a think tank event in July on responsible
tourism, where we had representatives from some of the regional
economies in Japan, and people from the tourism, hospitality, andhotel industries. We talked about opportunities for tourism here,
including those connected with the Rugby World Cup. And aboutsome of the challenges Japan is facing. Particularly where the
28 Japan SPOTLIGHT • January / February 2020

Another Aspect of the Legacy of Rugby
JS: Going back to the question of the legacy of rugby,

the sport has become very popular in Japan now

COVER STORY 6

thanks to this World Cup. How can we maintain the
popularity of rugby?
Bickle: It’s going to be a challenge, because when you host atournament there is going to be interest before and during thetournament because of the media coverage. There have been a lot of
initiatives around the tournament, for example the Impact Beyond
initiative, where there have been outreaches to schools. Hundreds ofschools have been introduced to tag rugby, providing thousands ofschoolchildren with access to try these sports. Seven-a-side rugby isan Olympic sport, obviously a different game from the 15-a-sidecode that we saw in the World Cup, but that’s another very highprofile event and I think it’s important to try and link the two, tomaintain the momentum. Beyond the Summer Olympics, we’ve got
the Paralympics as well, where wheelchair rugby will be a very key
sport. We’re also seeing some of the regions in Japan looking topromote themselves through rugby as well. One place is Kitakyushu,
which hosted Wales during this World Cup, and is also working very
closely with Team GB, the Great Britain Paralympics team. They’ll behosting the Great Britain wheelchair rugby squad in Kitakyushu
before the Paralympics.
So first of all, I think it’s about linking rugby – in its various forms– to these mega sporting events, and secondly it’s about creating
opportunities for youngsters to continue to enjoy the game. It’sgoing to be key as well to find ways to involve the Japan nationalteam into better quality competition. It’s important to give fans theopportunity to see top-quality competition here in Japan and ensurethat they stay enthused.
JS: I’m interested in what you said about local-to-local

cooperation, such as Kitakyushu and Wales. Do you
think that kind of cooperation will grow?
Bickle: I think so. It’s a win-win process for both sides. A number ofrugby unions worked very hard in the build-up to the Rugby World
Cup, years in advance with the towns and the cities where the teams
were going to be based, and they’ve been running rugby programs topromote interest in the sport, but also interest in their own country.
We’ve seen the great work being done in Kitakyushu, and I think
there’s been tremendous work done up in Kamaishi too with the newstadium being built there. They hosted one game during thetournament but unfortunately because of the terrible Typhoon
Hagibis, the second game was cancelled. But you saw the Canadianteam working with the amazing local community afterwards in thecleanup. They were building relationships there, and hopefully these
relationships will continue to endure over the years to come.
JS: Do you think Japanese schools should haveclasses on rugby?
Bickle: I would certainly love to see Japanese schools have classes
on rugby, because the values of integrity, respect, solidarity, passion,and discipline are displayed. I think the “fun” aspect of it is alsohugely important. People ask why countries like New Zealandproduce so many fabulous players. I think it’s because kids from avery young age pick up a rugby ball and are just playing, they’rethrowing the ball around, and through doing that they are developing
the awareness of the game, spatial awareness, subconscious things
which are the key to decision-making. These are things that develop
over time and cannot necessarily be coached, so I think it’s about
giving kids in Japan the opportunity to enjoy the game.
JS: Some have said that leadership might also be agood thing to be developed through rugby. What do
you think?
Bickle: I agree, because if you look on the rugby field, there aremany leaders. Someone is obviously designated the captain, but you
see a lot of communication. There are people in a number of
positions who have senior roles, and it’s not just the captain. I thinkrugby and all team sports are a chance for an individual to develop
leadership skills. You don’t have to be labeled as the leader to show
leadership, and I think kids can learn that through sport. They don’t
have to be loud and vocal, they can learn and show leadership bydemonstrating their commitment, their drive and determination that
all of their teammates can see, so that’s leading by example.
Leadership is beyond just being the captain; actually showing
leadership is much, much broader – showing your commitment to
the team and learning how to inspire and motivate other people as
well.

What We Can Expect from the Tokyo Games
JS: OK, let’s move on to the Tokyo Olympics andParalympics. That will be another opportunity topromote sports and have people visit the hostcountry. What do you expect?
Bickle: The Summer Olympics and Paralympics is a huge
opportunity for Japan, as a catalyst and a magnet for foreign
tourists. The Olympics itself is a shorter tournament andgeographically is broadly limited to the Tokyo area, but I think it’s stilla tremendous opportunity to promote the country and to bring intourists. Hopefully, Japan and Japanese regions will build on what
they’ve done for the Rugby World Cup, and will continue to market
themselves and appeal to the tourists who come specifically to watch
the Games. I sincerely hope as well that beyond the Summer
Olympics, we’re going to see a fantastic Paralympic Games here in
Japan, certainly in terms of the legacy after London 2012. That’s oneof the things the London organizers are very proud of, the success of
the Paralympic Games. I hope that we see that here in Japan as well,with fans wanting to come to soak up the atmosphere and see thevery high quality of competition that there is around Para sports aswell.
JS: You said something interesting about the Rugby
Japan SPOTLIGHT • January / February 2020

29

COVER STORY 6

World Cup, that athletes, coaches, and tourists staylonger, because rugby is a very exhausting game, so
you need about a week between matches, and thatwill prolong your stay in the country. In the case of
the Olympics, will the time be too short to attract a lotof attention to the Games and also to the country?
Bickle: Obviously the period of the Games is much shorter, but I
think there are opportunities for Japan to market itself and appeal inadvance to foreign tourists who are coming to the Games to comeearly, in advance of the Games, or to stay on afterwards and explore
the rest of the country. Japan is blessed with a remarkably efficientand extensive transportation network. It’s safe and it’s easy to getaround to all parts of the country, and I think more and more
foreigners are waking up to that realization and understanding that
there is much, much more to see in Japan. But in order for Japan tomaximize the opportunity, and for the regions to maximize theopportunity, they will have to actively market themselves and getcreative as well.
I think tourism is a great potential source of economic benefit for
local regions, and can really be a source of economic vitality for the
residents of those areas. Once again, hopefully it’s a win-win
situation. I think that the way Japan will be able to maximize theopportunity that tourism has to offer for the Japanese economy and
the Japanese people is to ensure that it is spread throughout thecountry. In that way, hopefully, all the regions can benefit byparticipating in this tourism boom.

British Chamber of Commerce’s Involvementin the Games
JS: I’m curious about your chamber of commerce’s

involvement in promoting the legacy of the Tokyo
Olympics.
Bickle: What we will try to do in terms of the legacy is to develop
tourism and other opportunities for internationalization. There isinterest around global sporting events, but that is just one subsectorof the tourism industry, one of the offerings. In our event earlier thisyear based around sustainable tourism, we were looking at what we
can do to help the sector. We might be able to share some thingsfrom the UK experience, where the UK government has announced
comprehensive plans to promote tourism, and then hopefully Japan
will be able to refer to those in developing its own best practices. The
UK is focusing on things like accessibility, making many parts of the
UK more accessible for people with mobility issues. There iscertainly a lot for Japan to work on in that area, and hosting theParalympics is a great opportunity to shine a light on these issues, toopen up Japan to a much bigger pool of visitors.

maintaining good health among older people, which
is very important in an aging society. In terms of yourexperience or the UK experience, what do you think
about this?
Bickle: Definitely, I agree. As society ages and people’s lifespans are
getting longer, the key challenge now is to give people high-quality
lifestyles as they age. Helping to keep people healthy and active
contributes to that. There are physical health benefits from regularexercise, so sport has a role to play there. I think an important point
too is to enable people to feel fulfilled, so participating in sports
activities, going out to watch high-quality sporting events, all thesethings can help. If such activities can be offered, or made moreaccessible to the senior members of our society, I think they cancontribute to enabling a more stimulating and rewarding life forpeople in retirement. To create opportunities though, there will need
to be additional investment in infrastructure, and also inorganization.
JS: Sports hospitality, volunteer activities, and similar“software” are a key legacy of the Olympics andParalympics. How can Japan further promote those
activities?
Bickle: I think it’s about reinforcing those strengths and successes;
in sports, it would be great to see continued involvement andengagement from national team players, also continued support
from companies. I think collaboration is the key here. There are areas
where NGOs can work together in pursuit of their goals. In terms ofopportunities to create healthy lifestyles for children, hopefully
there’s a chance for NGOs to work together with schools, with local
authorities, and maybe with their local sports teams, to involve the
top-quality sports players in the community, contributing,participating, and helping out. In Japan, we’re seeing moreinvestment now in all-weather pitches, and it will be great if we cansee more of those. Obviously, the cost is an issue, but hopefully
there will be more investment in facilities which will enable children
to more actively participate in sport.
JS: Perhaps we can take advantage of information

technology and other new technologies for
networking?
Bickle: Certainly. These days, with social media and technology, it’smuch, much easier to collaborate and promote. Many of theseorganizations have a social media presence to enable them to share
their goals and their activities with other people. That’s an important
aspect of helping to create and maintain these alliances.

Expected Legacy of the Games
JS: Sports is expected to play a key role in
30 Japan SPOTLIGHT • January / February 2020

Written with the cooperation of David S. Spengler, who is a translator andconsultant specializing in corporate communications.

https://www.jef.or.jp/jspotlight/latestissue/

March/April 2020

Role of Business in
New Global Governance

January/February 2020

Japanese Economy After the Olympic &Paralympic Games Tokyo 2020

November/December 2019

Can Economics Save the World from
Rising Geopolitical Incertitude?

September/October 2019White Paper on International
Economy & Trade 2019

July/August 2019

Exploring for the Best Models of an
Aging Society – Lessons from JapaneseExperience

May/June 2019

Global Governance at a Crossroads– a Roadmap Towards the G20 Summit
in Osaka

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