『Looking to Japan…』


Ado A. Machida

"With great interest," was the response I received recently from a Senior Administration official when I asked him if the Administration was focused on Japan. As the former Acting Director of Vice President Cheney's Domestic Policy operations, this response did not surprise me. Yes, Japan is still the second largest economy in the world, yes, Japan is one of the strongest allies the U.S. has in our fight against terrorism, and yes, Prime Minister Koizumi has a personal relationship with President Bush that rivals, if not surpassing, the "Ron-Yasu" relationship of the 1980's…and, these distinctions alone should separate the way we look at Japan…and, it is, when you are particularly focused on trade or foreign policy issues. But the Administration official I had the discussion with is not a foreign policy expert, but a domestic policy staffer. Indeed, there are many in the Administration, and on the Domestic Policy side, as opposed to the National Security or the diplomatic corps, who watch Japan with increasing interest.

The reason for this is that there are many who view Japan as tackling many of the issues that the U.S. will have to deal with in the not-so-distant future. In addition, many issues under consideration in the Japanese political arena, some within the Administration believe, will have a tremendous impact on U.S. domestic entities in a variety of industries. As a result, the lens through which many aides and policy decision makers view Japan are varied.

For the people who watch Japan for potential answers and, possibly more importantly, the political path for possible answers, they see a Japan whose rapidly aging population will lead to a much needed serious national and political debate on pension reform, worker and immigration reform, and healthcare reform. They see a Japan where the number of elderly (65 years and over) is 20% of Japan's population. This percentage is estimated to grow to 33% by 2025. As a result, retired households will outnumber households that are contributing to the national pension or healthcare systems. In addition, according to a recent McKinsey Global Institute study, families in their "prime saving years" (those between 30 and 50 years), are saving less and spending more than their retired counterparts in their "prime saving years", thereby accelerating and exacerbating the impending problem of adequate funding for the national healthcare and pension systems. Contrast that to the situation in the U.S., where in just 10 years, spending on the elderly (government provided healthcare and Social Security) will total nearly $1.8 trillion ? almost half the federal budget. Exacerbating the problem, much like in Japan, is the number of workers contributing to the system ? in the1960s, there were five workers for every retiree, and in recent years this ratio has remained around 3.3. But, according to the Social Security actuaries, this ratio will begin to decline around 2007, reaching 2.9 in 2015 and 2.2 in 2030. The change is especially rapid during the years when the large baby boom generation born between 1946 and 1964 reaches retirement age; but even after the post baby boom generation begins to retire, the ratio will continue to fall, reaching 1.8 in 2080. By 2017, more money will be paid out of the system, than are coming in via worker contributions. So, for many in the White House, staffers watch how Japan will react to fostering a national debate, and what options (such as raising the retirement age; privatizing portions of the national healthcare system; etc.), Japan as a nation, will embrace.

For the people who watch Japan for potential adverse impact to domestic industries due to policy changes in Japan, they watch the process of Japan's Postal Privatization closely. Why? Because if the privatization plans are successful, it would create the world's largest financial institution with over $3.5 trillion in assets and deposits; and the Japan Post Holding Co. will remain 1/3 owned by the Japanese Government. This has an impact not only in the global financial institutions arena (both in the banking and insurance arenas), but also in the postal/package delivery industry around the world. Already many U.S. financial institutions are trying to come to grips with what such a behemoth in the industry would mean ? at nearly 0% interest rate on deposits, where would all this money go? Japanese deposit holders are extremely conservative ? how will they react to equity investments and other financial instruments (already Nomura Securities are tackling the problem by increasing the number of branches to assist the elderly with an education on financial instruments)? Who would make the decisions? What interim/transition measures would there be? What safeguards would be in place for these deposits, both domestically, as well as internationally? For the package delivery industry, is this another Deutsche Post/DHL model? Will the Japanese Government subsidize Japan Post to move into international package or cargo delivery? (Will they open Haneda to international travel or international cargo?) Will it influence the Japanese Government's attitude on U.S. ?Japan air route negotiations? Trade negotiations? How will U.S. companies react in these industries? How will they lobby their constituent members of Congress and the Administration? What will they ask them to do? All questions that have an enormous impact on U.S. domestic companies in these industries.

And many of these questions have nothing to do with trade or foreign policy ? arenas in which most Japan watchers have focused in the past. Instead, I would argue that more Japan watchers and U.S. watchers in Japan should be looking towards domestic policy issues to understand how these two government will interact.