GREAT POWER SHIFT in JAPAN

Presentation by Kiyohiko Nanao, former Japanese Consul General, San Francisco(retired) at Rampart Range Campus, Pikes Peak Community College, Colorado Springs, USA

January 13, 2000

Introduction

by Jim Hurley, Director, Office of International Education, Pikes Peak Community College

It is a genuine privilege to introduce the honorable Kiyohiko Nanao to you. To us as a term of respect we say Mr. or Ms. or Mrs. In Japan and in Japanese we say at the end of the name of the person "San" and so that's the way I will address Mr. Nanao as I make these introductions.
    Nanao-san has devoted his entire professional career to the Diplomatic Service. From his first assignment as a Diplomatic Officer at the Treaty Bureau in Tokyo, he has crossed the globe over 32 years promoting understanding and cooperation for the people of Japan. Nanao-san's final two posts best illustrate the high esteem and respect his country placed upon him. In 1994 he was named Minister of Economic Affairs at the Embassy of Japan in Washington DC, and in 1995 until his retirement in 1998, Consulate General in San Francisco.

Nanao-san and his wife have spent the last year on sabbatical here in Colorado Springs, getting better acquainted with our community.
    The reason for his visit with us today fits perfectly with the efforts of the Business Division and the mission of Pikes Peak Community College. One of the goals of our Title VIB grant speaks directly to his work in the Diplomatic Service--cross cultural communication skills training in the business and college community. This is especially noteworthy since we are using this model in the Asian Pacific area. We are fortunate to have expert perspectives and viewpoints from someone who knows so well that geography. It is therefore, with gratitude, that I present you Kiyohiko Nanao-san.

-------------Applause-------------

Presentation

by Kiyohiko Nanao

Well, thank you very much Jim-san. I am very much honored and a little bit tense in facing the teaching staff of Pikes Peak Community College. I almost feel like this is a graduation test. I think Jim-san is limiting the time of my presentation to 30 minutes.

My ideas were originally stated in this book [gesturing to his book, "Great Power Shift in Japan"] which a Japanese newspaper company kindly published the year before last in Japan. The book was written in Japanese but the publisher wanted a title in English, so I casually called it "The Great Power Shift in Japan." So today, based on suggestion from Rieko-san [Rieko McAdams, Program Manager of international Education and Japanese Language/Culture Instructor of PPCC] and others, I'll try to do a quick overview of what's contained in this book, with some adding or updating of what has happened over the past year.

The main theme I'd like to project to you today, distinguished listeners, is that current great Japanese power shift can be defined as the process of regaining power by the original power holders, namely individual citizens and corporate citizens , being either taxpayers, voters, consumers, producers or whatever others , from those what we call in Japan, the "iron triangle." The iron triangle being defined in Japan as an integrated leadership triangle composed of bureaucrats, LDP [Liberal Democratic Party], and major corporations. This iron triangle is in the process of disintegration. And this I call the "great power shift in Japan." A primary thesis that I want to pass on to you is that this power shift is both inevitable and already, in fact, is going on. The other side of the coin is that this shift is taking place only gradually and in the Japanese way -- the Japanese fashion. So I repeat, the key words are "inevitable power shift", "already going on, probably to about one-third way up the mountain", "the shift is gradual " and "in the Japanese fashion".

Why inevitable? I perceive that there are a couple of reasons. The reason number one is the Gulf War. Japan, under the US provided constitution underwent 30 or 40 years of a totally pacifist approach. No arms, at all, in any event. The Cold War was gone, but the Gulf War started. Iraq invaded, in an overt way, Kuwait. All leading countries took arms, but the Japanese tried to hide behind this pacifism, just piling up dollars in support of others. Even the medical supply ship service well behind the front line was rejected by the Japanese opposition parties. When the war was over and the turmoil settled, the Japanese reassessed how they behaved. And Japanese realized that world opinion has changed. Japanese, taking up arms under qualified situations, is now required. That was quite a shock to the average Japanese--dimensional shock. We all felt we need to change, we can not stick to what we were taught over the past three or four decades as sacrosanct.

Second, the economic bubble burst and the ensuing seven or eight years of struggle proved amply that the system which we once believed in--this iron triangle--doesn't work. It couldn't address burning issues in a timely and effective way. Tremendous degree of distrust was generated. This is probably the second reason.

The third reason, why I think the power shift is inevitable, lies in the changes of the individuals. Economically self-reliant, not dependent on something big, nor hiding under the big umbrella, and politically conscious individuals are emerging. Can the Great Shift transforms the average Japanese into this economically self-reliant and politically conscious mode? That is with a big question mark, but I am counting on it. I am not a pure academic analyst, half politician, so I am counting on the Japanese to change.
    Look at the case like newly created corporation called Hikari Tsushin in Japan. It was just put to public offer(IPO) June last year. The corporate president or CEO is Mr. Shigemitsu who is only 34 years old. He launched the company for IPO and his assets are now valued at 34 billion dollars. The fifth richest man in the world after Bill Gates, or Warren Buffet. This is a concrete case that, if one takes entrepreneurial risks, works hard and fights against the existing establishment, one can cultivate a new field. This is quite a model generating a most inspirational impact on Japanese youngsters who are now studying at elementary, secondary, high schools, and so on. I am hoping these role-models will show up, one after another.
    Already cream of Japanese bests and brightests are dispersing to localities, and not sticking to Tokyo. There is not much opportunity in Tokyo. They find it more attractive to become mayor, prefectural governor, local community volunteer workers and so on. New venture companies are often located not in Tokyo anymore where structural barriers and operating costs are too high. They now locate their headquarters in the remote countryside where you can also enjoy green.

Of course, at the same time, I need to be careful not to give you an entirely rosy picture. For instance, the other day I was talking to a Chinese guy who spent two or three years in Japan. We use, in the Oriental world, what we call a "seal," for signatures. Whatever you sign, unless you stamp a seal on it, is not regarded as authentic or legal. The Chinese abolished this practice bit by bit, except on i.e. paintings--they still use a seal as an artistic signature. However, the Japanese still stick to this seal practice, and Chinese laugh at the Japanese. " You Japanese imported this Chinese seal culture may be 1,500 years ago. Chinese now getting out of it and entering the cyber-world. On a computer screen you cannot use seal. But the Japanese still stick to it."
    For instance, I am now going back to Japan and I am anxious to find some old, traditional, Japanese house. A farmhouse, or maybe a local winery ("Sake" brewery) master's house. Some are well preserved and some are decayed. The population in those agrarian societies has dwindled radically, because of Japanese farming has almost disappeared with Japan now dependant on California agricultural imports, mostly. So the rural population is quite small, but there are still some farmers out there. And some of the houses that are available and vacant are beautifully maintained. So I propose to the owner-- won't you let me buy or lease your farmhouse? He is willing. At least one generation, his generation, and his father's generation, for example, have lived in urban area such as Osaka. They never go back to countryside, or maybe only occasionally go back to pray at their ancestors' tombs, as a societal obligation. Why can't he sell or lease? Because a small number of people are still staying in those villages where his ancestors used to live. If he sells the house or leases it to me, the villagers will say, "Oh, he sold it because he lost his fortune in the township and it's a disgrace." For whatever the reason, the villagers may start rumors if the owner leases a farmhouse to someone like me who is a stranger to the traditional residents. "Oh, that guy brought in an unknown stranger who doesn't speak the local dialect."

That's why I am saying this shift is going only slowly. But still the trend is clear. So please try to have that balanced view when you see any reporting from Japan .

Now let me touch on major areas which are to be reformed. There are a couple of things, but the first and most important issue is "tax". Japanese tax structure is 70% direct tax and 30% indirect tax such as consumption tax. We need to shift it back in a reverse way, instead of 7 to 3 ratio we need to reverse it to 3 to 7. Japanese corporate tax, which is direct tax, has an effective rate of 40 - 50% but it just started to be reduced over several years to the 30% level, comparable to U.S. or European corporate tax. Income can be taxed up to 70%, aggregate of national income tax plus local resident tax. This is all income tax. Altogether amounting to 65% or sometimes 70% of income. The government is trying to reduce this to 50%, maximum. Temporarily there are an increased number of people who are exempted from taxation because of this economic difficulty. The government has introduced some special temporary relief measures. But still, the system as a whole can tax to such an extent that over three to four generations, family fortune can be lost.
    There is grumbling and resistance--"Why must we pay so much money to an inefficient government?" Like you did in California with Proposition 13 and other legislation. This direct/indirect tax ratio and resultant heavy direct taxation needs to be reversed.

Second, there is irregularity in central government/local government tax revenue and expenditure. It's something like this. In total nation-wide tax revenue, national tax authorities collect two-thirds and local government collects one-third. But actual expenditures are two-thirds local and one-third national. So this portion [the remaining one-third] needs to be transferred back to local authorities. Here lies the classic secret of Japanese post- war economic recovery with central control systems and reason why almost everything was managed by Tokyo. Under this mechanism, the Finance Ministry has to transfer money back to local authorities. Local authorities had to cling to the central government officials or members of parliament to get more money in the form of subsidies and transfers. Local road works and social infrastructure building was dependent on this mechanism. "I'll give you this money and you must obey.". " You must consume your appropriation in this fiscal year otherwise you will not get it next year." and so on.
    This was a necessary evil, in a way, for wartime economy. All resources had to be concentrated and this system stayed on in the post-war days. The American occupation authorities also found it convenient to use this mechanism. So it existed overly long. It was originally a temporary measure or emergency measure for Japanese imperial war efforts or post-war economic reconstruction efforts. When the situation got back to normal, these measures should have been normalized in 70s and 80s. But this control or "obedience mechanism" stayed on. That is why we took eight years groping for the way following the bursting of the economic bubble. And change is still on the way.

The third element regarding local tax relates to --"central control". The local tax code clearly stipulates that local parliament or local voters have no right or say as far as local tax is concerned. You may not believe it but this is stipulated in the law. The local people vote for the election of members of local parliament who have no voice in matters of local taxation. They must go to Tokyo to appeal for money. This law needs to be changed.

There are issues other than taxation that are important but I will just name them due to lack of time. We need more of a direct democracy. In the post-war days, Japanese were taught that indirect democracy was the best. So-called "representational democracy". So we only had the right of recalling mayors or members of parliament who did something wrong, politically or ethically, but no right of referendum, no right for people to draft a law and present it to the local assembly for approval. There has been no effective direct democracy. The failure of Greeks was often cited. The notorious Ostracism. I think there should be a good combination of direct and indirect democracy.
    There is a famous book, California's "Paradise Lost" (written by editor of Sacrament Bee). Some of you may know of it. In it, the author talks about Proposition 13, property tax, and so on. There were good achievements but at the same time many excesses and failures. You cannot depend on either one of them exclusively. At any rate, this revival of direct democracy in California revealed the value of direct democracy where it is appropriate. This is also an important reform area that the Japanese need to go through.

The third, of course, is education. Too much of central control of education produces uniform quality or standard quality of pupils and even university students; it happened to have been the requirement of Japanese society. It has been the case in wartime efforts or post-war reconstruction efforts, but not anymore. Tokyo or Kyoto University graduates can go to the Ministry of Finance or the Mitsubishi Heavy Industries. But now this elite-course doesn't guarantee lifetime security and happiness anymore. Even giant companies can go bankrupt. That is the reality that mothers and children are witnessing .

The aging of the society is another big issue. We have now more than 2.5 million senior citizens who need home care, home medical care, and nursing. A government scheme to address this begins this April. By 2025, these 2.5 million senior citizens rapidly increases to 5.3 million. Japanese couples produce on average only 1.37 children, so the younger generation's population goes down, tax bearing capacity of the society goes down, while demandeurs of tax based service (including myself probably) go up.

There have been some lines of thinking which are prevalent, not only in Japan, but also internationally, with the interesting perception that Japan will never change. These thinkers believe that Japan has long been a regulated society since the time of the 6th to 7th century when the Shotoku Prince and the Tenchi Emperor ruled the nation. These rulers started a regulated society ("Ritsu-ryo" society) by imitating Chinese method of governance by rigorous codes. I don't think so.
It is still my hypothetical proposition and I need to rely on academics to prove. However, I think Japan has been going through the cycles of stabilization by codification and regulations, then breaking out in turmoil, introducing new order and creativeness.
    The era of the Shotoku Prince is the case in point. Buddhism came in, and introduced the high technology of those days--- rice cultivation, irrigation, all were brought in by the peoples fleeing from the Korean Peninsula. The Tenchi, still he was Prince, converted all Japanese into subjects of the emperor. Before, the people had been the property of several famous clans, like the Soga or the Mononobe. People had been private property of influential clans. They were made farmers whom the emperor gave units of land to cultivate in exchange for tax. These land was not the property of the clan anymore, it belonged to the emperor. It should have involved quite a turmoil and revolutionary changes in thoughts. I think this as a period of radical change --- 6th Century Shotoku Prince up to may be Nara Dynasty. Then the culture prospered but at the same time started decaying. It is a human world. Then soldiers class rose to power. The "soldiers age" came in the 13th century with the Kamakura Shogunate. It was a fresh revolt, the nobility lost their power to soldiers.
    Another round of new soldiers upsurge came in 16th century. Nobunaga Oda who utilized very wisely variety of imported ideas and things : Portuguese guns, gun powder--everything--even Christianity, to suffocate the Japanese Buddhist influence--his was a "hidden Roman Empire" in those days. Nobunaga crushed the Buddhist empire which prevailed in an indirect, informal way all over Japan. He utilized the imported things like Christianity effectively. Then Japan was stabilized during the Tokugawa Period . It prospered at first, but then decayed with the rise of the Meiji Restoration movements, which does not require explanation to you.
    Another change of similar magnitude came after our defeat in the last war. American culture flew in. Sony, Matshushita, all mushroomed up --all these were just like bicycle motor manufacturers. They were not the giants like the traditional Mitsubishi Heavy Industries.
    Current power shift now taking place in Japan is another round of change of similar magnitude. It started when Japanese Economic bubble burst took place in December 1991. It has been almost 8 or 9 years and the process is still togo.

Now on politics, let me add a few words. It is often very difficult for Americans or foreigners to comprehend what's happening politically in Japan.
    With respect to the economy, there is still some measure of understanding. But even for myself it is very difficult to comprehend Japanese politics, because it is in turmoil. This is just one attempt of analysis. Please verify it academically. [Goes to whiteboard] Let's look at this diagram. The vertical line is foreign policy. The horizontal line is domestic internal policy. If you go high up, it means politically active involvement in international security affairs, namely, "Let's use our Self Defense Forces" to help stabilization of say Cambodia. Or should there be a Taiwan Straits instability, "Let's help Americans." This would take you high up the vertical line. Contrasted position is that "we should never use arms overseas, we should only help foreign countries with economic or technical assistance". That approach is lower [down the line]. Horizontal axis represents internal policies. Think about your Republican Party --- self-help, attitude of don't expect much on the government. This is to the right of the horizontal line. This way to the left is the Democrats, perhaps. They think government should have certain legitimate areas to take care for society.

Japanese political party-map currently looks like this. At a lower point along vertical axis comes Mr. Koichi Kato who was the LDP Party Secretary General during Hashimoto Cabinet days, now relieved from Party's official duties and the central figure in the opposition circle within the LDP. Mr. Obuchi, the current Prime Minister, is located somewhere in the north-east corner of the diagram. I think he has no disciplines or consistencies. He is by now just a mouthpiece of those big guns behind the scenes, including Nakasone and Takeshita, former Prime Ministers. The most hawkish and self-help approach guy, is Mr. Ozawa, who is at the far end of north eastern corner. You might have heard a lot about Ozawa. He spanned off from LDP, but he is now in coalition with the LDP to help the LDP form a majority. The opposition party, the Democratic Party is now led by Yukio Hatoyama [Japanese only], a grandson of famous late Prime Minister, Ichiro Hatoyama. I think Y. Hatoyama, a grandson, locate himself at a upper point along the vertical line. So Hatoyama and Kato are resting on the same vertical axis, implying they have not much of difference so far as domestic policies are concerned.
The only basic difference between them is on foreign policy. Socialist Party residual, Kan [Japanese only] who is currently with Hatoyama, is at the left along horizontal axis.

Another coalition partner, the Komeito, is somewhere in south-west corner. Current coalition--Obuchi, Ozawa and Komei-Party, therefore, you could easily see, demonstrates how strange matrimonial relationship they are in terms of policy orientation . To my mind, Obuchi's coalition is a kind of crisis management cabinet to tide over the immediate crisis like the one on banking. Now that this crisis is getting over and the Japanese stock market is coming back. Suppose world economy would not crash, and if there should be no strategic crisis such as the one around the Taiwan Straits, then one could count on a grand centrist coalition or de-facto cooperation between Hatoyama and Kato.

This would amounts to an invitation to a further splitting of the remaining LDP into two : the central Kato elements and the conservatives like Nakasone in the north-east corner. This would constitutes the second stage of political reform in Japan. The first stage already took place. That was the demise of socialist camp. The Social Democrats had virtually disintegrated. Only relevant residue is Kan, who is participating in the newly created Democrats' Party. That was the first stage. That phase was over with Murayama's resignation, followed by Hashimoto's failure in trying to increase consumption tax. So the Japanese political picture is now coming into this second stage. Given the international conditions, I think there is a good chance of realignment along policy lines, otherwise political reform will take more time to muddle through.

I have talked about politics, economics, and also changing individuals in Japan, namely the self-reliant individual. Main thrust of my conclusion is that for Japan to change as expeditiously as possible depends on how quickly we can awaken Japanese individuals to become economically self-reliant and politically autonomous. Up till now the majority of the people are only conscious of the need to change themselves. They have been hesitant to move. Now that they are increasingly obliged to move because their most important question, their own survival and wellbeing are at stake. Not only on the national level, but also on an individual and local community levels, burning issues come up one after another, obliging individuals to change.

My stay here in Colorado Springs has been very productive and rewarding one both for me and my wife. Community people have been very kind in meeting me, teaching me cases of success and failure in community management issues, education and so on. I was able to learn a lot and I was able to concretize the thesis I stipulated in my original book.

Let me try to conclude my presentation by noting that the U.S. West Coast trade with Pacific nations is now three times bigger than that along East Coast with Atlantic partners. 20 years ago when I was Director for North American Affairs back in Tokyo, the West coast superceded over East coast. In the coming 20 years, some academics forecast that West Coast trading with the Pacific will probably triple. Other academics say that Charleston, being a very good Atlantic port, handling cargoes, up till now, mainly in between Europe and US, will be handling bigger portions of cargoes with Pacific nations thanks to possible development of transportation technology (voyaging not through Suez nor Panama Canals but by round trips around the Cape of Good Hope and Cape Horn).
    Things are relatively clear economically, but mind you that we have a big question mark, that is the politico-social question of China. With 1.2 billion of population, China is groping. It is a serious game of cat and mouse. How to relax safely the politically very rigid indoctrination in view of the growing pressure for democratization, while at the same time how to improve the economic conditions of average Chinese . These are two wheels of a cart. And if either wheel derails, the nation will be in turmoil. Japan attempted to deal with the Chinese and Manchurian questions before and during the last war, but we failed like Germany failed to deal with Russians. This implies that China should be dealt by China's own self-help. Still, China needs conducive international environments to succeed. What we, the outsiders, can do at best is to provide a kind of environment conducive for them to keep playing golf along the fair-way, not be pushed into rough. They need follow wind. Japan alone can not sustain international environments. US/European participation and pro-active multilateral efforts in the Pacific community is essential. To keep China's behavior well checked and to provide greater chance for China's success in achieving often conflicting two targets--- economic development and political democratization. Inherent risks of China are one side of a coin. On the other side of coin, there is more promising potential. Should China succeeds in achieving the two objectives, others can prosper as well at a lower cost.
     This is why it is meaningful that Pikes Peak Community College succeeded in obtaining grants from the US Department of Education for the research to expand the consciousness of American people toward the Pacific Rim. It is a solid start. Pacific activities do not end at one time exchange of goods, but involve investments, high tech exposure and placement of brains overseas. These activities augur well for lasting relationships. The project your College is launching is a very, very -- I feel -- important movement.

Talking of Japan once more in conclusion, and please understand that I am not talking about the western part of Japan (Kansai) because I am from that region, the Osaka-Kobe-Kyoto area, I would like to throw to you another hypothetical proposition. I think Tokyo is too much entangled with the established post-war system. While being conscious of the need to get out of this straitjacketing, Tokyo find it extremely hard to get away from the established order and practices. The Kansai area instead in a wider sense possibly including Nagoya and even Kyushu, could be the most promising region to play pioneering role in national reform. Tradition of merchant culture, venture taking attitude to nurture new corporations, self-reliant culture and so on. The region is close to Korea, China, Taiwan. It has its own shortcomings of course. But recently in last December, the Kansai Economic Federation(Kankei-ren) launched a kind of new strategy for Kansai's renaissance, locomotive being the private sector, not the traditional government-led one. That is a fresh thrust.
    The strategy also talks explicitly about the need of effective citizenry participation. The Japanese reform may well adopt "participatory" approach . The people do not like confrontational approach American or European often take. The resolution at the judicial court is the last resort for Japanese. Japanese will collaborate to forge reforms in a participatory way, but probably not with established politicians or giant corporations, but more among smaller and newer "entrepreneur-type" corporations, reform-minded civilians and progressive local governments. These new triangles may mushroom up in many places in accordance with the inevitable emergence of urgent problems in each community.
    Now let me stop here to secure time for Q and A. It has been really my pleasure to share my thinking with you today.

[Followed by question and answer which was not transcribed]


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