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Japan as number 3 – does it matter?

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American intellectual Ezra Vogel once wrote a book entitled "Japan as number one".  In reality, it never really was.  But now it’s official, Japan is number 3.  The total size of its economy has just been overtaken by China.

The question is: does it matter?  Is China now more powerful and important than Japan?  According to a Financial Times headline, "China's jump signals shift in global power".  This may be somewhat simplistic.

The first thing to note is that Japan’s standard of living (GDP per capita) is ten times higher than China’s, while China’s population is ten times higher than Japan’s.  So, despite its turbo-charged economic growth, China remains overall a relatively poor country with a big population.  Japan is still a very rich country with a medium size population, despite a long period of economic stagnation.  In fact, it is estimated that China is some 40 years behind Japan in terms of economic and social development.  It is not surprising that Bejing's Olympic Games took place about 40 years after Tokyo's Games, and Shanghai's World Exposition is also happening about 40 years after Osaka's.  

How to interpret all of this?  Some geopolitical analysts would argue that the total size of GDP is some indicator of a country’s economic power and therefore political power.  History shows however that there is no close connection between a country’s economic and political power. 

Countries like the United Kingdom and France, which are now on mid-level powers in economic terms, still wield important political power by virtue of their nuclear status and their permanent seats on the United Nations Security Council.  By contrast, Germany which is now an economic superpower, is only slowly and reluctantly reassuming political power.  While its World War 2 crimes are now a thing of the past, pacifism is so strong in Germany, that it holds it back from exercizing more political power. 

Since World War 2, Japan, which is still very much an economic powerhouse, has always been a political pygmy, partly by choice and partly as a result of the post-War peace imposed on it by the United States.  Japan’s capacity to become a political power is also constrained by post-War pacifism and its Constitution.  But it is also constrained by its relations with its neighbors which still have bitter memories of the War time.

On this score, China seems like a global political power.  It has a permanent seat on the UN Security Council and nuclear weapons.  It has no great commitment to pacifism, although it does not want to upset too much its export markets.

Some military analysts would argue that military power (one aspect of political power) is more closely related to GDP per capita.  The reason is that military power depends in large part on technological sophistication and the human resources necessary to operate high tech defense systems.  On this score, Japan is arguably very much more powerful than China which has a much lower level of technological and human resources development.

Another aspect of military power to look at is its main objective.  In Japan’s case (like all democracies), the purpose of military power is to defend the nation and its interests against other countries.  In most non-democratic nations like China the role of military power is in part to defend the non-democratic regime from its own people and to stay in power.  Events in Tibet and the Western provinces of China demonstrate quite clearly this function of China’s military power.  So the question is how powerful is a country militarily when its firepower is mainly aimed at its own people?

Perhaps the main concern in the case of a country like China with a rapidly growing military is the risk of military accidents.  When a government depends on the military for its own survival, the military can have its own agenda, and is less controllable by the government.  In this case, accidents can happen.  The present fisticuffs between the Chinese and Japanese navies in the East China Sea are a strong reminder.

When an economist or business man looks at China versus Japan, he or she would be most interested in the larger size of the Chinese market, plus the fact that the market is growing more quickly.  This gives the impression of an economic powerhouse, which to some extent is true.  Again, we have to be careful. 

China is now the world's largest exporter, but more than half of those exports are by foreign enterprises invested in China, not by Chinese enterprises.  And much of those exports are merely products assembled out of imported components, with very low Chinese value added.  When it comes to technological development, Japan is much more of a powerhouse than China.  China is still at the stage of absorbing and copying Western and Japanese knowledge and technology, and could not keep developing without that.

Another issue that is on the headlines is China’s and Japan’s holdings of US Treasury Bonds.  Now, China is the world’s biggest holder, as it holds more than Japan.  It really is not clear that this is a sign of strength or not.  As Keynes reportedly once said, "If you owe your bank manager a thousand pounds, you are at his mercy.  If you owe him a million pounds, he is at your mercy".  In other words, the Chinese government should be worried about its holdings of US Treasury bonds -- not so much worried about default, but about exchange rate movements.

The total size of an economy is only one aspect of power and importance.  We should not get too carried away by the rise of China as the world's second biggest economy.  Its development path has many economic challenges.  It is also politically unsustainable -- the Chinese Communist Party cannot maintain its monopoly on political power forever. 

Perhaps the real problem is that many Japanese really think that they are being overtaken by China, when Japan is still much more powerful and important than they realize.  After two lost decades, the Japanese seemed sadly resigned to their fate and destiny.  The country does not know how to get out of its hole, and has become very risk averse.    

What Japan needs is not more GDP, but more self confidence and optimism.  Regrettably, senior politicians only care about (in)fighting for the leadership, not about policy. 

For its part, China is not getting carried away with its new number 2 status.  The Chinese know they have a challenging path ahead, and are following the wisdom of Deng Xiaoping -- "Keep a cool head and maintain a low profile. Never take the lead - but aim to do something big."

A recent article in the China Daily signalled great caution -- "When we talk about China's economic power, we should be careful not to overestimate our strength. We are still an underdeveloped country and many problems need to be addressed. Only by constantly reviewing our progress and identifying successes and shortcomings, can we move forward. Otherwise, if the country encounters a real financial crisis it may regress to what it was like years ago."


China’s jump signals shift in global power


Deng Xiaoping quotes


“Don't overestimate China's economy”, China Daily