Stratfor October 2015 1

JAPAN
A 25-YEAR
FORECAST

INTRODUCTION

CRISIS OF THE POST-WAR ORDER

Quiet Containment

Stifled Reforms

BATTERED, NOT BROKEN

External Threats

10

Shifting U.S. Strategies

13

The Changing Economics of Military Power

15

Meeting Japans Military Needs

15

The Limits of Abenomics

17

FORECASTING JAPAN

20

Forecast to 2020

21

A Quiet Revolution

23

Chinas Continued Rise

23

Forecast After 2020

24

Stratfor October 2015 2

INTRODUCTION
Japan is waking up. For two decades the island nation
has pulled back from both regional and global affairs.
Now it is in the earliest stages of a push to re-establish
itself as a leading power. No single force will drive this
process. Instead it will be spurred by shifts in Japans
internal structures and in the external geopolitical environment. This paper will examine the nature of these
emerging compulsions and constraints and analyze
how they will interact to change Japans behavior over
the next two decades.
A forecast of Japans future trajectory must first be
grounded in the nations geopolitics and the changes
that internal and external factors have wrought over
the past 150 years. During this time, the islands political order has undergone three major overhauls. Each
came as a reaction to profound shifts in the international system: the entrance of European powers into
East Asia, the rise of fascism in Europe and the beginning of the Cold War.
The first of these upheavals began with the 1868 Meiji
Restoration, which ended Japans centuries of feudal
rule. During the Meiji period, the government centralized administration and industrialized the economy
to transform Japan into a modern nation-state. With
these reforms, Japans leaders aimed to stave off Western control or incursion by affirming Japans commitment to the contemporary emerging international
order. After World War I, Japan pursued a similar
strategy by turning briefly toward constitutional democracy to conform to the then-dominant Washington Treaty system.
By the end of the 1920s, the global liberal order put
in place by the Washington Treaty was breaking down.
The world was entering economic depression and the
rise of fascist regimes in Italy and Germany all seemed
to indicate a new and radically different international
system. Japan, too, transitioned to a fascist regime at

The 1872 opening ceremony of Japans first railway, which

connected Edo, now Tokyo, with the seaport of Yokohama.
(HENRY GUTTMAN/Getty Images)

home and adopted expansionist military tactics abroad

-- its second major shift.
With the defeat of the Axis powers and the occupation
of Japan in 1945, the world system took another turn.
The United States became the premier power in the
Pacific Rim, and under Washingtons guidance and
protection Japan became a liberal democracy within
the framework of a U.S.-led capitalist international
economic system. In the Pacific, Japan was one of the
pillars of the U.S. strategy to counter the spread of
communism from Russia and China. Tokyo adopted
a pacifist constitution -- it did not need a military
because the United States guaranteed its defense.
At the end of the Cold War, however, the political
order that had sustained Japan since World War II
began to collapse. With the fall of the Soviet Union,
Japan was no longer of key strategic significance to

Stratfor October 2015 3

the United States. Washington turned its focus toward

maintaining stability and the balance of power along
the borderlands of the former Soviet Union, first in
Eastern Europe and then in the Middle East and South
Asia. Japan, meanwhile, began to slide into economic
stagnation, domestic political disarray and withdrawal.
With the United States less concerned with East Asia,
the resulting gap left room for China to first develop
its economy and then expand its military and diplomatic power without fear of sustained interference
from the worlds only superpower.
Whereas the previous three changes in the international system had ushered in coherent strategic orders in
East Asia, the post-Cold War shift did not. Without a
clear role in the U.S. strategic architecture and no new
system to fit itself into, Japan foundered -- especially
when compared with its robust economic performance
in the 1970s and 1980s. Since that time, institutional
rigidity has constrained the efforts of Japanese leaders
to respond to emerging internal social and economic
shifts. Chief among these are Japans aging, declining
population and the offshoring of domestic industries,
spurred on by the fact that businesses have had to contend with sclerotic labor policies. Hamstrung by strict
labor regulations and hobbled by high costs, many Japanese companies have lost out to rivals in South Korea,
China, Taiwan and other nations.

A succession of asset bubbles and financial crises in the

1990s and 2000s further undermined growth. Leaders
had little incentive to make the necessary reforms to
political institutions or foreign policy: Although the
economy was stagnant, quality of life for voters was
high and substantial external threats were few. For the
first time in its modern history, Japan did not know
what to do, did not need to do much and therefore did
nothing. The political and economic order designed
for an earlier era persisted and became Japans new
status quo: gradually fraying at the edges, but stable
enough to persist.
Now this order is breaking down. As with the three
previous shifts, the latest overhaul comes in the context
of a new East Asian regional environment -- one in
which China is pushing to become a regional power
and the United States is placing more responsibility
in the hands of its partners, including Japan. The new
Japan that is born from this shift will break in fundamental ways from the Japan of the post-World War II
and post-Cold War eras. It will normalize its military,
attempt structural reform to revive the economy and
reshape its society and economy to support a new
stance. The next revolution in Japans historical cycle is
the subject of this paper.

Stratfor October 2015 4

CRISIS OF THE
POST-WAR ORDER
Since the end of the Cold War, Japan has maintained
the configuration that has been in place since the Allies
defeated and chastened the Japanese Empire in 1945.
Maladapted to the new East Asia, Japan has been in a
20-year, slow-burning crisis known as the Lost Decades. Japans post-World War II configuration rested
on two pillars: integrated business groups known as
keiretsu and an autonomous, effective and powerful
bureaucracy. Both have maintained strong ties with
the Liberal Democratic Party, which has controlled the
government for all but six of the past 60 years.
The keiretsu are informal groupings of
horizontally and vertically integrated businesses that give one another preference and
maintain close ties to government agencies
and the Liberal Democratic Party. The
party in turn benefited from connections
within the bureaucracy and the ability to
mobilize keiretsu employees as voters. For
four decades, this configuration provided
Japan with high economic growth, consistently rising living standards and domestic
cohesion. The country became a global
economic powerhouse, second only to the
United States by 1978. In many sectors,
in fact, Japanese industrial conglomerates
were more innovative and cost-competitive
than their Western counterparts.

Quiet Containment

controls that limited foreign access to Japans own

markets. This buoyed the Japanese economy. Washington also supported Tokyos policies of maintaining
artificially low-cost exports by controlling its currency,
and through bilateral economic, technological and
educational cooperation. Washington readily granted
Japanese companies access to U.S. defense and computing technologies, helping fuel Japans electronics
and high-tech booms in the 1970s and 1980s.
With the waning of the Cold War, unqualified U.S.
support for Japanese growth faltered. Washington
began to fear that Japan could become the worlds
leading economy and translate its economic heft into
regional power at the expense of the United States. By
the late 1980s, the U.S. approach shifted from support
to quiet containment.

Workers at the Printing Bureau of the Ministry of Finance in Takinogawa,

Japan, check sheets of 10,000 yen notes for flaws prior to being cut and
counted in 1980. (KEYSTONE/Getty Images)

Japans Cold War order, now on its last legs, was

rooted in U.S. support and the United States need to
bolster Japan as a counterweight to Soviet and Communist Chinese influence in East Asia. The United
States granted Japanese companies open access to U.S.
consumer markets while allowing Tokyo to impose

The 1985 Plaza Accord embodied this shift. The landmark agreement between the United States, France,
West Germany and Japan allowed the dollar to depreciate relative to the yen and deutsche mark. This
was meant to bring the United States out of recession
Stratfor October 2015 5

by curbing inflation and making exports more cost

competitive. The deal, however, had negative ramifications for Japan. The rapid rise in the yens value against
the dollar between 1985 and 1987 undermined the
low-cost export sector and sparked an enormous asset
price bubble in Japan. When that bubble finally burst
in 1990, it triggered a banking sector crisis that sent
Japans GDP growth tumbling from an average of 5-7
percent annually in the mid-1980s to near-zero percent
by 1993, initiating the first of Japans Lost Decades.
With the yens appreciation in the late 1980s, Japanese
investment began to move overseas. Much of this went
to real estate in the United States and other developed
markets, where the yen enjoyed newfound purchasing power. A growing number of investors, however,
sought to capitalize on low-cost labor pools in countries such as Thailand and China, which was then
entering the second phase of its post-1978 economic

reform and opening following the 1989 Tiananmen

crackdown. This offshoring of Japanese industrial
activity would continue in the coming decades, having
profound implications for the domestic labor force.

Stifled Reforms
Tokyo made several attempts after its 1990 banking
crisis to revive economic growth through fiscal stimulus and structural reforms. The measures failed, however, because they did not address Japans major constraints. Measures to stimulate growth with expanded
government investment were hamstrung by mounting
budgetary constraints such as rising healthcare and
debt servicing costs. Japans status as an investment-intensive economy also meant that restarting economic
growth required a much higher level of additional
investment than leaders were willing to deploy.
Successive administrations have attempted to make the

JAPANESE YEN TO U.S. DOLLAR, 1975-2014

The 1985 Plaza Accord led to a rapid rise in the yens value against the U.S. dollar
and triggered a series of events that culminated in the rst of Japans Lost Decades.
YEN TO USD
0.014
0.012

1997 Asian
Financial Crisis

0.010
0.008
Plaza
Accord

0.006

2008 Financial
Crisis

Asset
Collapse

0.004
0.002
0.000
1975
Source: Currency Converter

1980

1985

1990

1995

2000

2005

2010

2014

Copyright Stratfor 2015 www.stratfor.com

Stratfor October 2015 6

deep structural reforms needed to revive Japans economy. Former Prime Minister Junichiro Koizumi pushed
most strongly from 2003 to 2006. These ongoing
efforts, however, have been hampered by the strength
of the alliance between the keiretsu, bureaucracy and
Liberal Democratic Party -- the very institutional
framework that served Japan so well between World
War II and the end of the
Cold War.

Japan in continued stagnation. The lack of external

competition for basic goods like agriculture, energy
and electricity has worsened the effects of a strong yen.
As a result, Japanese manufacturers have continued to
expand overseas operations. Companies remaining in
Japan have been limited by regulations on firing fulltime workers, leading to declining productivity over

SPENDING AND DEMOGRAPHICS

Koizumi worked to break

As Japans population has aged, spending on social security has
this alliance to clear the
increased.
way for reforms, hoping
to expose keiretsu-domPERCENTAGE
inated sectors to greater
Populatio
60%
n 20-59
competition to stimulate
efficiency, productivity and
50%
innovation gains. He was
only partially successful.
The prime minister was
40%
Popul
ation
able to privatize Japans
under
er 60
v
o
2
n
0
o
postal service, then the
ti
30%
opula
P
nations largest employer and a key pillar of the
20%
Liberal Democratic Partys
organized vote. Koizumi,
however, was unable to
10%
break up organized voting
blocs in agriculture, power
0%
generation and electricity
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
transmission. Koizumi also
failed to deregulate labor
Social Security*
Debt Service*
*As a percent of total spending
markets or alter cultural
norms on lifetime employSources: U.N. Population Division,
Japanese Ministry of Finance
Copyright Stratfor 2015 www.stratfor.com
ment and seniority pay.
Still, his reforms managed
to tear a hole in the post-World War II political order
the past two decades. This productivity decline coin-- namely, the Liberal Democratic Partys unchallenged
cided with the exhaustion of Japans post-World War II
control over Japans legislative process -- culminating
demographic dividend and the stagnation of workforce
in the 2009 victory of the main opposition Democratgrowth.
ic Party of Japan. Current Prime Minister Shinzo Abe
now seeks to expand on Koizumis earlier success.
Because the country has failed to alter its fundamental
But the failure of Koizumi and other reformers has left
order, Japan effectively has not grown since 1994. The
Stratfor October 2015 7

country has managed to maintain high levels of overall

employment, but a growing share of these jobs are part
time. In the 1990s, under 20 percent of the workforce
was part-time, but this number rose to 29 percent by
2002 and nearly 38 percent by 2014. Meanwhile, Japans sovereign debt has grown substantially since 1994
as Tokyo borrows to maintain the bureaucracy, sustain

JAPANESE DEBT TO GDP

Despite attempts at reform, the ratio of Japans debt
to GDP has continued to rise.
PERCENT OF DEBT TO GDP
250%

200%

150%

100%

50%

0%
1980 1985 1990 1995 2000 2005 2010 2014
Source: IMF

infrastructure investment, cover social services and

healthcare costs as well as to service past debts.
In spite of all of these negative indicators, the crisis
of Japans post-World War II model is relatively mild,
especially from the perspective of ordinary Japanese
citizens. Despite two decades without growth, Japan
is still the worlds third-largest economy and maintains one of the highest GDPs per capita for a major
economy, along with correspondingly high standards
of living. Quality of life for the Japanese public has
actually improved because of steadily rising purchasing
power from a consistently strong yen. Japan has one of
the worlds highest research and development expenditure-to-GDP ratios and remains by most measures one
of the worlds most innovative high-tech economies.
And while some Japanese brands have lost market
share to Korean, Chinese and other foreign competitors in recent years, many are still global leaders in
their respective industries.
Recognizing that Japans Lost Decades have not led
to an earthshaking national crisis is key to forecasting
the next step for Japan. The country will only shift if
there are significant compelling factors that force it to
do so. If not, the status quo will persist more or less
intact, albeit fraying at the edges, for the foreseeable
future.

Copyright Stratfor 2015 www.stratfor.com

Stratfor October 2015 8

BATTERED, NOT
BROKEN
One of the primary reasons that Japans status quo has
persisted long after the end of the Cold War is that for
ordinary Japanese, the countrys crisis has been relatively mild. This means that even as the current order has
frayed, the situation has not provoked epochal change.
For the government, it is simply difficult to implement
the necessary reforms in a country that, in spite of

stagnation, is by most measures a highly prosperous

society with an advanced and innovative economy as
well as a stable body politic. The current situation,
however, is predicated on two factors: high living standards and a stable regional position. These have held
steady since the end of the Cold War, meaning that
Japans current order has entered a slow-burning, but
not disastrous, crisis.

If the Japanese government hopes to maintain the status quo, it must first be able to guarantee living standards comparable to those
the majority of Japanese
citizens now enjoy. This will
GDP AND HOUSEHOLDS
require meeting several conEven though GDP has declined, household expenditures
have remained relatively stable.
ditions. Tokyo will need to
GDP per Capita
keep Japans GDP constant
Nominal GDP
Average Annual Household Expenditures
or declining slowly enough
USD
TRILLION USD
to dovetail with the drop6
60,000
ping population over the
5
50,000
next several decades. Tokyo
will also need to reconfigure
4
40,000
the countrys fiscal system to
3
30,000
pay the costs associated with
the countrys growing elderly
2
20,000
population. These would
1
10,000
both require improvements
in worker productivity to
0
0
1999
2004
2009
2014
1994
offset the effects of deSource: World Bank, Statistics Japan
Copyright Stratfor 2015 www.stratfor.com
mographic decline on the
workforce. On top of this,
GDP PER CAPITA PPP VS. NOMINAL GDP
Tokyo would need to help
GDP, Current Prices
GDP Based on Purchasing Power Parity (PPP) per Capita GDP
Japanese industries remain
BILLION USD
CURRENT INTERNATIONAL DOLLAR UNITS
globally competitive and
8
40,000
find new ways to effectively
tax overseas Japanese eco6
30,000
nomic activity.
4

20,000

10,000

0
1994
Source: IMF WEO

1999

2004

2009

2014

Copyright Stratfor 2015 www.stratfor.com

Although it will take some

political wrangling, Tokyo
will likely be able to maintain stable living standards
for the population. OverStratfor October 2015 9

seas expansion has helped Japanese companies

ensure their continued global competitiveness,
especially in sectors such as advanced manufacturing where they began with an edge. Building
on this, Tokyo will need to figure out how to
extract more income from Japanese overseas
activity to fund domestic spending. This will be
critical. Social security and healthcare spending
now account for over 35 percent of government
expenditures, a figure that will only rise in the
coming decades. At the moment, 26 percent of
the population is over 65. By 2040, the elderly
will make up 36 percent of population. The
graying of Japan makes implementing new taxes
or other measures on overseas business activity critical. While technically and politically
challenging, this reform will not be impossible
-- the Japanese government has close ties with
the leading industrial keiretsu at the forefront
of offshoring.

GOVERNMENT EXPENDITURES BY CATEGORY

Since 1994 social security spending has signicantly
increased.
EXPENDITURE AS A PERCENT OF TOTAL
100%
80%
60%

Social Security

40%
20%

Debt Service

0%
1994

1999

2004

2009

2014

Source: Japanese Ministry of Finance Copyright Stratfor 2015 www.stratfor.com

It would also be feasible that incremental labor reforms, technological advancement and the integration of robotics could improve productivity enough
at home to maintain GDP per capita for decades to
come. For such reforms to be politically viable, they
would only need to be gradual enough not to substantially increase unemployment (currently just 3.4 percent) or radically exacerbate Japans underemployment
problem in the near term. For the next 5-10 years,
Japan will see population aging and workforce shrinkage slow. Between 2015 and 2025, Japans workforce
will shrink by 5.5 million-5.6 million, down from 7.7
million-8.3 million between 2005 and 2015. This will
increase the likelihood of political challenges to labor
reforms: A steadier population level means pressure
to maintain employment will be greater. Reforms,
however, would not undermine the status quo because
they could be offset by other efforts to boost economic growth and corporate investment as well as Japans
already high quality of life.
After 2025, and especially after 2045, however, ex-

Public Works
National Defense
Education

treme working-age and overall population declines

could force more fundamental changes to the structure
of Japans economy. By 2060 (barring a major resurgence in fertility rates) Japans total population will fall
by around 25 percent, while the working-age population will fall by around 50 percent. This will almost
certainly have profound implications for the economy.
The population shifts, however, will be gradual and
it will take some time before their full effects are felt.
This makes it impossible to pinpoint a specific moment when demographic factors alone would cause
a fundamental rupture in Japans structure. Without
shifts in Japans external environment, the Japanese
government could make incremental policy adjustments that address the impact of population decline
on quality of life over the next three to five decades, at
least enough to stave off a catastrophic change in the
foundations of the current order.

External Threats
Although Tokyo has the ability to manage the domestic pressures of demographic and workforce decline,
Stratfor still expects the country to begin breaking
Stratfor October 2015 10

substantially with the

current order over the
next 5-10 years. While
internal pressures will
lead to reforms in the
coming decades, they
are not strong enough
to cause a decisive shift.
Instead, the proximate
trigger and driving motivation behind Japans
domestic and foreign
policy reorientation
will come from beyond
Japans borders. But in
the coming years, the
nations mild internal
crisis will interact with
regional shifts -- most
importantly the ongoing transformation of
China.

THE RISE OF CHINAS GDP AND MILITARY EXPENDITURES

TRILLION USD

BILLION USD

11.00
8.25
5.50

200
150
100

GDP

2.75
0

E
ary

lit

Mi

it

nd

e
xp

250

s
ure

50

2000

2002

2004

2006

2008

Source: IMF WEO, SIPRI

2010

2012

2014

Copyright Stratfor 2015 www.stratfor.com

CHINAS NET IMPORTS

Chinas new reliance on imports increases its exposure
to international developments and crises.
MILLION TONNES
1,000

*Million tonnes oil equivalent

800

To maintain its Cold

600
War-style order, Japan
must be able to remain
400
secure from regional and
200
international threats.
Both during and after
0
the Cold War, Japan was
-200
able to pursue a mer2000
2002
cantilist foreign policy
centered on economic
Source: IMF WEO, SIPRI
competition and cooperation rather than defense
and security. This rested on the security of the home
islands and the protection of Japanese economic interests from external threats. Both of these rested in the
hands of external allies such as the United States. To
stay the course, Japan would need to be able to guarantee its ability to maintain its economy. Japan would
also need to believe that its mercantilist foreign policy
is sufficient to meet its strategic imperatives.

Iron

Ore

Petroleum

Liquids

2010

2012

Natural Gas*
2004

2006

2008

2014

Copyright Stratfor 2015 www.stratfor.com

Since the end of the Cold War, China has transformed

from an isolated and impoverished pariah state into
the worlds second-largest economy. China has been
the demographic center of East Asia for millennia
and, for most of its history, it was also the regional
hegemon. In the middle of the 19th century, however,
internal and external pressures drove China into one of
its periodic cycles of political fragmentation, social up-

Stratfor October 2015 11

heaval and introversion. Although China reunified in

1949, the preceding century of chaos had left its economy in tatters. This prevented China from translating
its demographic heft into regional economic, political
or military dominance throughout the 20th century.
After three decades of rapid economic growth, China
has become Asias largest economy. Now Beijing is
building on its economic strength to accrue diplomatic
influence and military power. While China is not yet
capable of seriously challenging the U.S.-led Cold War
alliance structure in the Pacific, it is on the path to
doing so. To understand the future of Japan, one needs
to first understand the future of China.
Chinas power rests on a shaky foundation. Although
it has achieved a high degree of economic development, Beijing now faces mounting social, economic

and political strain at home. A number of factors have

contributed to the current crisis. Internally, profound
economic imbalances and intense regional tensions
threaten to undermine Communist Party stability.
China is also uniquely dependent on overseas supplies
of energy and raw materials to sustain its industrial
plant and, for the next decade, it will also remain heavily reliant on foreign consumption of Chinese-manufactured goods. Historically, China enjoyed a surplus
of domestic natural resources relative to its economic
needs. This allowed generations of Chinese leaders,
most notably Mao Zedong, to close the country off in
times of internal turmoil. Because China is now reliant
on imported inputs, the country has little option but
to press outward to protect overseas assets, interests
and personnel and to ensure the security of crucial sea
lines of communication.

Stratfor October 2015 12

Chinas current externally dependent position will

condition the countrys behavior over the next 5-10
years. This period will be one of extraordinary strain.
The Communist Party will continue its push to move
the country toward a new economic model grounded
in robust domestic consumption, high value-added
manufacturing and services industries. The process will
require Beijing to substantially change core aspects of
its existing political and economic model. It will need
to alter the relationship between central and local governments and loosen government control of key parts
of the economy. Tens of millions of rural Chinese will
have to move into the cities and a hundred million migrant laborers will need to shift from coastal to inland
regions. The government will have to loosen controls
on credit to consumers and small private businesses.
It will also need to devolve key fiscal powers to local
governments.

however, it is by no means clear that the Communist

Party can survive the decade.

The Chinese government will need to implement all

of these disruptive changes amid a sustained slowdown
in low-end manufacturing and housing construction.
The government has long relied on these two sectors
to maintain economic growth and employment. At
the same time, the country will need to metabolize the
staggering levels of local government and corporate
debt accrued over decades of rapid investment-led
growth and extensive capital misallocation.

As China transforms to adapt to internal pressures and

mitigate external threats, the United States will also
begin a significant shift in its East Asia strategy. Washington is in the midst of adjusting its stance to prevent
the emergence of a rival regional hegemon anywhere in
the world. Since it became the leading superpower at
the end of World War II, the United States has enforced this power by securing global sea-lanes, maintaining a permanent U.S. military presence along key
regional fault lines and on occasion directly intervening to maintain the balance of power.

Beijings task is not impossible. Achieving success without triggering a political crisis, however, will require
perfectly coordinating an array of complex maneuvers.
Failure to properly choreograph these moves could
undermine the Communist Party government and lead
to another cycle of political fragmentation. Stratfor
believes that to manage these shifts, the Communist
Party government will need to dramatically centralize
power beyond the current configuration, becoming
what amounts to a dictatorship and security state.
This process is already well underway. In time, this
new order could turn increasingly to nationalism as a
means of maintaining social cohesion, likely at Japans
expense. Even if it transforms itself along these lines,

From Japans perspective, Chinas current trajectory

presents a fearsome prospect. China shares its sea lines
of communication with Japan. As Beijing tries to reorient itself, it will need to maintain access to raw materials for imports and markets for exports. The Chinese
military has become increasingly sophisticated and
proactive in defending its territorial claims in the seas
over which these imports and exports transit. It is this
shift in Japans external environment over the next five
years that will provide the decisive, direct impetus for
the normalization of Japans military, the expansion of
Tokyos diplomatic footprint and the rebuilding of its
domestic economy to support Tokyos strategic goals.

Shifting U.S. Strategies

The strategic imperatives underlying these methods

will not change, but Washington will gradually shift
over the coming years toward indirect and less costly
ways of ensuring security and regional balance under
the norms of a U.S.-led international system. Central
to this will be devolving more of the responsibility for
enforcement of U.S. strategic interests and international norms to regional partners. In East Asia, this
process will focus on China, which is the only country
with even the remote potential to upset the status quo.
Washington will rely on historical allies and partners,
including the Philippines, Australia, Taiwan, South
Stratfor October 2015 13

coming decade, East Asia

will be a proving ground
for the worldwide deployment of this new strategy
and China will be the
test case. While the pivot
to the Asia-Pacific will
certainly involve boosting
direct U.S. military presence in certain parts of the
region, by and large the
process will involve indirect support for increased
direct action by partners.

Korea (although to a more limited extent) and most of

all, Japan.
The drivers of evolving U.S. strategy are manifold.
Technological advances in hypersonic precision-guided
munitions in the coming decades will begin to alter
the way nations protect global sea-lanes. So will less
tangible factors such as the U.S. conception of itself as
a superpower, global economic shifts and the evolution
of domestic politics.

This process is already beginning to compel Japan,

South Korea and other
U.S. allies in East Asia
to become much more
proactive in defending
their regional security interests. The coinciding rise
of China has given these
allies a clear focal point for
their energies. (A partial
exception to this is South
Korea, whose location
between Japan, China and North Korea makes its own
strategic calculations more complex.) Japan is at the
forefront of this process. This change in Japans regional role in U.S. defense architecture alone, however,
does not solely explain the coming shift in the nations
future bid to normalize its military and play a regional
role. Instead, it must be taken in conjunction with the
rise of China and Japans impending demographic decline. Other external pressures will affect the contours
of that transformation, but they will not be its center
of gravity.

From Japans perspective the causes are immaterial.

What matters to Tokyo is that the United States will
move toward greater reliance on regional partners to
maintain the balance of power on its behalf. Over the
Stratfor October 2015 14

The Changing Economics of

Military Power
Tokyo is already aware of the ongoing shifts in the
Pacific and is attempting to adapt to the new situation.
In late 2012, Prime Minister Shinzo Abe launched an
initiative to revive Japans regional economic, diplomatic and military standing. Since that time, Japan has
made strides in regional diplomacy and military expansion and normalization. But to be successful, Japan
will need to not only maintain its progress but expand
it dramatically. This will require Tokyo to make more
dramatic changes to the economy than the pressures of
the mild Lost Decade crisis alone would call for.
Throughout history, economic power and military
power have been intertwined. In the 20th century,
industrialization, combined with the technological
limitations of ballistics, placed a premium on volume.
Victory was as much a function of scale -- the sheer
number of bombs and bullets produced, fired and
dropped -- as it was of strategy. The overwhelming size
of the U.S. and Soviet war machines did not guarantee
them victory in World War II, but it certainly stacked
the deck in their favor once the two countries entered
the war effort full steam.
Since the final years of the 20th century, there have
already been substantial changes in the relationship
between production and combat capabilities. These
have made the quality of weaponry more important
than the quantity. From the earliest origins of warfare,
innovations in tactics and technology have disrupted
the old models and allowed certain militaries to punch
above their weight. The progress that will be seen in
the 21st century is only the latest manifestation of this
trend. Chief among the recent shifts has been the rise
of precision-guided munitions. In the coming decades,
quality rather than quantity will be the key to military power as mass production of imprecise ballistics
is replaced by more tailored production of precise,
devastating and expensive smart weapons. An econo-

mys size will still be a factor, especially in competition

between major powers, but countries such as Japan,
China and the United States will approach maritime
security differently. Vast fleets of large military vessels
traveling long distances will continue to decline in
significance, while precision-guided weapons platforms
supported by space-based guidance systems will become increasingly important. In the coming decades,
the computer will continue the process of replacing
the assembly line as the organizing principle of warfare and maritime security. Industrial size will still be
important to a degree, but with less emphasis on sheer
numbers and more on quality and innovation.

Meeting Japans Military

Needs
To play a role in 21st-century Pacific regional security,
Japan will need to cultivate and sustain a cutting-edge
domestic computing industry. Without this economic foundation, Japan will not be able to support an
effective, modern defensive and offensive capability.
The government has several tools at its disposal. Tokyo
could start by increasing spending and public-private
partnerships in defense research and development. It
could also increase cooperation, intelligence sharing
and technological connections with the United States.
These measures will go a long way. But Japan will
also need to form a broader fabric of innovation and
experimentation in computing technologies on which
the state can draw in times of need. This will require
homespun equivalents to companies like Google, Samsung and Apple, not to mention countless smaller tech
start-ups.
In the latter half of the 20th century, Japan excelled
at building advanced manufacturing and electronics
hardware companies and is still at the forefront of robotics research and development. But the country has
struggled to gain a comparable footing in newer Internet-based computing industries. Japans enduring Cold
War order is part of the problem -- an order defined

Stratfor October 2015 15

by the close relationship between the government and

major business groups, the keiretsu. These keiretsu,
along with entities like the agriculture monopoly, have
hampered the efforts of successive Japanese leaders to
open Japan to greater outside competition and investment. These tough changes, however, will be necessary
to compete with neighboring China and South Korea.
Policies will also be needed that give pride of place to
the kind of small-scale startups that have fueled the
rise of Silicon Valley in the United States. An innovative tech sector will also require a workforce educated
in the relevant disciplines and a culture of entrepreneurship.

of Japanese employed in part-time jobs rose from 29

percent to nearly 38 percent between 2002 and 2014.
Underemployment is highest among older workers
and women, but it is notably high and rising among
young men. In general, part-time employment is
extremely high (in the 35-60 percent range) for female
workers of all age groups. At the moment 25 percent
of employed men ages 15-24 work in part-time jobs,
up slightly from 24 percent in 2002. Meanwhile, 17
percent of male workers ages 25-34 work part-time
jobs, up from 9.4 percent in 2002. Part-time employment is lower among men ages 35-44 (9.7 percent),
but still much higher than the 5.6 percent of a decade
ago. No good data exists
for employment type by
EMPLOYMENT COMPARISON: 2002 VS. 2014
sector and company size,
Since 2002, total regular employment has decreased and non-regular
but the rise in part-time
employment has increased.
employment coincides with
PERCENTAGE
an increase in medium and
100%
large-scale firms share of
total employment and a fall
80%
Regular employment 2002
in small firms share. This
would seem to corroborate
Regular employment 2014
the idea that larger compa60%
nies have turned to hiring
more temporary workers as
40%
a means to avoid strict laNon-regular employment 2014
bor regulations and norms
20%
Non-regular employment 2002
regarding full-time and
lifetime employment.
0%

A related problem is the

offshoring of Japanese
Source: Statistics Japan
Copyright Stratfor 2015 www.stratfor.com
manufacturing activity
over the past two decades.
Anecdotal evidence indicates that over the past 20
Maintaining and widening its technological edge
years, many major Japanese electronics and advanced
against regional rivals will require Japan to make signifmanufacturing companies that once dominated Japans
icant changes to its domestic job market. These are
economy (and accounted for a sizeable chunk of
precisely the reforms that the country has been able to
domestic employment) have downsized their domestic
avoid because of the mildness of its current economic
workforces, at least in manufacturing, while expanding
stagnation. Tokyo will need to address the stark rise in
their share of overseas employees.
underemployment in recent years. The total portion
15-24

(Excluding School
Attendees)

25-34

35-44

45-54

55-64

65+

AGE

Stratfor October 2015 16

The Japanese economy will not necessarily have to

grow for Japan to buffer against China and play a
leading regional role, but it will need to become much
more dynamic. This will mean channeling the nations
dwindling working-age population into cutting-edge
industries. This will also be critical to maintaining
domestic political order because the increasingly small
workforce will bear the burden of caring for an aging
population. While the demographic factor would not
under static circumstances be enough to cause Japan
to dramatically shift, when combined with external
challenges it becomes significant. How Japan responds
to external pressures, and whether its response is adequate, will be determined largely on the basis of what
happens to its economy over the next 5-10 years -- the
period in which Japanese Prime Minister Shinzo Abes
reforms will play out.

The Limits of Abenomics

Prime Minister Shinzo Abes economic program,
known as Abenomics, aims to revive Japans economy
through three measures: monetary easing to devalue
the yen, fiscal stimulus and structural reforms. By
devaluing the yen, the prime minister hopes to reverse
consumer expectations of continually falling prices
after years of stagnant-to-negative inflation to incentivize consumer spending. A weaker yen would also
make Japanese exports more globally competitive and
increase the value of overseas corporate earnings repatriated to Japan. Fiscal stimulus will include direct government investment into infrastructure development,
defense and other sectors. The measures would also
include corporate tax cuts and reforms aimed at stemming the flow of investment overseas while attracting
greater foreign investment. The last set of initiatives,
structural reforms, aim to improve worker productivity
by loosening regulation of full-time workers, deregulating protected sectors such as agriculture and power
to increase competition domestically as well as expanding international free trade agreements, including the
Trans-Pacific Partnership. In addition to the three
arrows, the Abe administration is trying to encourage

the autonomy and competitiveness of Japans different

regions and cultivate a startup culture.
Abenomics is still in its early stages. Monetary easing
has only been in place for two years. Fiscal stimulus
will only filter in gradually and it will take time to tell
whether corporate tax cuts will succeed in drawing
corporate investment back to Japan. Structural reform
has hardly begun. The next two years will be critical in
determining whether Abes plan will succeed. However,
moving away from tactical details, we can identify a
number of crucial and intersecting problems that will
constrain Abenomics and could derail the program
completely.
The Japanese economys most serious problem for the
next decade will be high and rising underemployment.
For 20 years, this has been the key driver behind
declining average household consumption and a drag
on consumer spending. Weak consumer spending, in
turn, limits the Japanese governments ability to boost
corporate investment at home. Negative consumption trends combined with steady population decline
further explains why Japanese companies with the
resources to expand overseas would hesitate to invest in
the domestic market.
Central to Abenomics are measures to address the
root causes of underemployment. These, Abe hopes,
will create a virtuous economic circle driven by strong
domestic consumption. Each of the arrows has aspects
meant to raise employment. Monetary easing seeks to
boost the value of Japanese corporate earnings overseas to raise earnings for major conglomerates and free
up bandwidth for them to invest domestically if they
choose to do so. As part of fiscal stimulus, Abe aims
for corporate tax cuts to create stronger incentives
for these conglomerates to invest capital domestically
rather than put it into savings or reinvest it abroad.
Lastly, structural reforms seek to ensure that when
companies invest domestically, they are free to do so in
ways that will maximize productivity and profitability,
even if it means cutting back on long-standing workStratfor October 2015 17

force privileges. In theory, if all of these measures are

implemented, Japans economy should begin growing
more steadily, full-time employment should expand,
and consumer spending should pick up. These are the
nuts and bolts of Abenomics.
In Stratfors view, this strategy will fail for a number
of reasons. The simplest is that it will not be enough
to compel Japanese companies to expand domestic
investment to the degree necessary to address underemployment and grow consumer spending. The
companies and industries that form the backbone of
Japans economy have moved many of their operations
overseas. This includes much of the heavy industrial,
advanced industrial and electronics hardware manufacturing sectors. These operations went abroad to avoid
the extremely high cost of manufacturing in Japan,
much of it due to high labor costs. China is a key
market for the products produced by these companies
and has a strong production base with low labor costs.
If the Abe administration wants to expand domestic
investment, it will have to look to new industries for
that investment, not to the companies that sustained
Japans post-World War II economic boom. Japan cannot simply clone the economy and nation that it was
in the 1970s and 1980s.
If Abenomics cannot attract new corporate investment
to Japan of the kind that will generate more full-time
employment, then it is difficult to see how Abes other
policies will succeed in raising consumer spending. To
date, Abes policies (particularly monetary easing) have
done as much damage to ordinary Japanese consumers as they have helped because they have raised costs.
The main reason that this damage has not politically
crippled the administration is that low energy prices
have given consumers a boost. Large corporations with
overseas operations have benefited from a weak yen,
but ordinary Japanese consumers and small businesses
with domestic operations have only experienced rising
costs. Base-pay hikes at major Japanese companies will
help boost consumer spending in the second half of
2015, as will the recovery from last years consumption

DEBT OWNERSHIP BY TYPE

PERCENTAGE

Other
Households
Foreign
Other Pensions

100%
90%
80%

Public Pensions

70%

Insurance

60%
50%
40%

Banks

30%
20%
Bank of Japan

10%
0%

September
2010

September
2014
Source: Japanese Ministry of Finance
Copyright Stratfor 2015 www.stratfor.com

tax hike, but given Japans employment situation it is

unlikely these wage hikes will make a significant, lasting difference in consumption levels. At the same time,
demographic decline means that each year the number
of potential consumers falls more quickly. Japanese exports could perform better in the months to come, but
exports of goods and services only account for about
16 percent of Japans GDP.
Abenomics will likely fail to boost domestic investment by Japans industrial conglomerates. One solution would be to bring in investment from non-Japanese companies overseas. This would require deep
deregulation of long-protected industries, a relaxation
of labor controls and the uprooting of deep cultural
norms. It would also require Japans accession to the
Trans-Pacific Partnership and the rapid development
of a Japanese Silicon Valley. Together, such radical
moves could be enough to draw substantial investment
away from the United States, Europe, South Korea and
China in slightly over a decade. Such a scenario, however, would need measures much broader by far than
Stratfor October 2015 18

anything Abenomics has considered. It would mean a

revolutionary break with the post-World War II order
and truly profound changes. Such changes would
encounter substantial opposition from the industrial
keiretsu and key electoral constituencies. More likely,
overseas investment into Japan will remain around current negligible levels: $2.3 billion in 2013 compared
with $135 billion in outbound investment.
Laying aside the need for more ambitious measures,
several near-term factors could undermine even the
basic reforms that Abe wants to roll out. The Bank of
Japan is currently purchasing bonds at a high rate. It
is unclear how much longer this can continue before
the market tightens to the point of dysfunction. If
the Bank of Japan is forced to pull back before inflation reaches the 2 percent target, then Japan could
experience a return to deflation. If the Bank of Japans
rapid purchase of debt leads to a debt default or other
catastrophic event, it could well provide the trigger for
the fundamental break in Japans current order that

Stratfor anticipates. However, a default is unlikely.

But more pressing than these financial considerations
is the potential erosion of public support for Abenomics and for the administration itself. Without a surge in
corporate investment and a surge in full-time jobs to
counterbalance it, Abenomics will have primarily negative effects on the populations quality of life. The initiatives would reduce the value of savings, raise the cost
of living, contribute to perceptions of rising inequality
and leave the workforce vulnerable to layoffs. The last
of these will be felt most acutely by the very corporate
employees that are the backbone of the Liberal Democratic Partys organized vote. The electorate is already
uneasy about the prime ministers reforms and many
voters have continued to support the Liberal Democratic Party only because the opposition is hopelessly
fragmented. These negative perceptions will only
grow given the outlook for corporate investment and
consumer spending. Abenomics in its current form is
unlikely to last beyond 2017.

Stratfor October 2015 19

FORECASTING
JAPAN
Before proceeding with the forecasts for the period
up to 2020 and the decades beyond, it is important
to outline the demographic changes ahead. The next
phase of Japans history, 2015 to 2035, will see only a
relative demographic decline, a problem that will become more serious after 2040. The decade since 2005
saw Japans 65-and-over population grow by more
than 33 percent -- faster than any past rate or future
forecast. This corresponded with working-age popula-

tion declines, as outlined above. Over the next decade,

however, the rate of aging will slow substantially as
will the decline in working-age population. This will
continue until around 2040, when most of those born
in the 1968-1976 baby boom will have entered retirement (assuming the retirement age remains below
70). Between 2035 and 2045, the rate of working-age
population decline will pick up slightly and raise the
pressures on the system. By 2060, however, the situation will become dire -- even under constant fertility
conditions, Japans population will fall to around 86
million, dropping further still to 79 million under
declining fertility. (In 2013, Japans population was
127.3 million.)

DEMOGRAPHIC PYRAMIDS: 2015, 2025, 2035 AND 2045

By 2025, Japans workforce will shrink by around 5.5 million, and by 2040,
people over 65 will make up 36 percent of the population.
2015
JAPAN
MILLION PEOPLE

4.8

3.6

MEN

2.4

1.2

2035
JAPAN
MILLION PEOPLE

4.8

3.6

100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4

MEN

2025
JAPAN
MILLION PEOPLE

WOMEN

1.2

2.4

3.6

4.8

2.4

1.2

1.2

4.8

3.6

2.4

3.6

4.8

4.8

3.6

WOMEN
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4

2.4

1.2

2045
JAPAN
MILLION PEOPLE

WOMEN
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4

Source: U.S. Census Bureau International Programs

MEN

MEN

1.2

2.4

3.6

4.8

2.4

3.6

4.8

WOMEN
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4

2.4

1.2

1.2

Copyright Stratfor 2015 www.stratfor.com

Stratfor October 2015 20

During the period from 2015 to 2035, demographics

will remain a constant source of fiscal, financial and
social pressure but will not shift Japans behavior to
a great degree. Tokyo will not push outward to find
new sources of labor as it did in Manchuria in 1931.
Japans real problem is not extreme labor shortages but
labor surpluses: large pools of underemployed workers.
Japans core task from 2015 to 2025 will be to expand
the economy to accommodate existing labor, especially
in industries that contribute to strategic interests. The
need for new labor will not become extreme until the
period after 2040, by which point technology will have
offset those needs substantially.

Forecast to 2020
Japans next five years are challenging to forecast. The
nearness of the period can cloud analysis, and policies
enacted in 2015 will only begin to come to fruition
toward the latter half of the decade. Assumptions of
continuity and the excessive detail available to build
out a forecast can easily result in superficial precision
but fundamental errors. This is especially dangerous
in assessing Japan, a country with a modern history
punctuated by rapid and radical breaks.
The next five years will see Japan begin its break from
the post-Cold War period. The previous two Lost Decades were marked by withdrawal from regional and
global affairs, declining economic vitality, institutional
rigidity and deepening political incoherence. Japan
will begin to dismantle key elements of the post-World
War II political order and the reforms that have made
that order more democratically accountable. This will
require major changes in the relationship between the
Liberal Democratic Party, civil service and the keiretsu.
It will also mean curbing or eliminating the electoral
strength of economically non-competitive bodies such
as the postal service and agriculture lobby as well as
the growing power of the over-65 voting population.
This change will also require breaking down legal and
cultural obstacles to reforms aimed at improving the
productivity, efficiency and competitiveness of Jap-

anese businesses. It will also mean cultivating new

enterprises able to keep Japan at the leading edge of
innovation in high-tech electronics and ultra-high
precision manufacturing, as well as becoming more
competitive in emerging computer- and Internet-based
industries. Only these changes can ensure that Japan
can face the acute population aging and workforce
shrinkage in the decades after 2020 while guaranteeing
Japans national security in an increasingly competitive
strategic environment.
The break with the post-Cold War status quo will not
be a bottom-up political revolution. Quality of life in
Japan is simply too high, the economic and political
crisis too mild. Prime Minister Shinzo Abes reforms
could manage to achieve the modest near-term goal
of 2 percent inflation, putting Japan back on the path
to sustainable longer-term growth or at least sustained
improvements in quality of life and modestly improving productivity growth through labor and other
structural reforms. Tokyo will not actively seize control
of overseas assets or operations to extract greater income from them. In terms of external behavior, Japans
shift will mean the full normalization of the countrys
defense forces in increasingly overt efforts to counter
and contain Chinese maritime expansion in the South
and East China Seas. This will include an expansion
of military ties with countries in Southeast Asia and
beyond. Japan, however, will not become an expansionist military power or challenge its place within the
broader U.S.-led alliance framework -- at least not in
the next five years.
Over the next two years, Japans government will focus
on achieving the virtuous circle that improves employment numbers with economic growth and corporate
investment. This will need to be done before the Bank of
Japan pulls back on monetary easing or the central government is forced to improve its fiscal position by raising
the national sales tax or increasing corporate taxes. The
banks current rate of bond purchasing is unsustainable
and Stratfor expects that the Bank of Japan will cut back
on bond purchases, perhaps significantly, before 2017.
Stratfor October 2015 21

While Abenomics will make some progress before

2017, it will not manage to attract sufficient corporate
investment or generate enough new employment to
withstand the pressures of a substantial cut in bond
purchases or a tax hike. The administrations efforts are
not disruptive or extreme enough to put Japan back
on the course to sustainable growth within the next
two years. The weak economies of both China and
Europe key destinations for Japanese exports will
make this even more unlikely. This means that when
the Bank of Japan does inevitably pull back on bond purchases,
Japanese companies with extensive overseas operations will see
repatriated funds decline in value,
which will disincentivize them from
investing domestically. The cost of
Japanese goods will also once again
rise, eroding competitiveness with
China and South Korea.

out undermining the countrys sovereign debt markets.

Inflation may hit 2 percent, wages may rise and Japan
will likely succeed in beginning to attract foreign investment into long-protected sectors and new industries. Abenomics is fundamentally sound and economically rational, but its economic benefits in the long
term will be preceded by hardship for individuals. In
2016, as Japans growth picks up, these side effects will
become slightly less glaring, but if the Bank of Japan
pulls back on bonds and the government raises taxes,

The drawdown in bond purchases

and declining investment will lead
to fiscal deficits for the Japanese
government and put pressure on
Tokyo to raise taxes. The government has two options here: it can
either levy taxes on companies or
Pedestrians pass by the 109 department store, a fashion complex for young women
on consumers. Taxing corporations
and an icon of Tokyos Shibuya district. (KEITH TSUJI/Getty Images)
runs the risk of further curbing
domestic investment and undermining efforts to expand employment. A tax hike for
they will resurface. Life will not substantially deterioconsumers, however, would risk another contraction
rate for ordinary Japanese people, but events will hurt
of domestic consumption like that which drove Japan
the prime minister and his administration at the polls.
into recession in the second half of 2014. Whichever
Tokyo chooses, by the start of 2017, the government
While Prime Minister Shinzo Abe survived the Dewill once again find itself with a dilemma after a short
cember 2014 elections because of an incoherent
period of economic growth.
opposition, the fragmented playing field will not last
forever. The efforts of his administration to undermine
But Abenomics will not implode. The Japanese govlifetime employment and break the agricultural moernment will likely find a way to avoid defaulting on
nopoly both work against the interests of the elderly,
its sovereign debt and the Bank of Japan will be able to
a powerful electoral bloc that constitutes 26 percent
manage a modest amount of monetary stimulus withof the population. Structural reforms also threaten the
Stratfor October 2015 22

interests and future livelihood of mid-career workers, a

group that stands to lose the most in the governments
crusade against lifetime employment. Older voters in
Japan have tended to side with the conservative Liberal Democratic Party, which for decades protected
entrenched interests. However, they are unlikely to
support measures that undermine the status quo that
has been in place throughout much of their lifetimes
and will care for them in retirement. Younger voters
might. But in Japan, older voters are more numerous
and more politically active than their younger counterparts. By 2017, dissatisfaction among older voters,
especially those with ties to the agriculture lobby or to
other keiretsu, as well as middle-aged and older small
business owners, will begin to undermine Abes electoral position.

when the bureaucracy was autonomous from politics

and informally controlled the nation. This autonomous civil service itself had roots in a much longer tradition of governing through a small cadre of administrative elites that reaches back to the Meiji Restoration
and deep into Japans feudal past.

A Quiet Revolution

In the meantime, Japans leaders will begin working

to redefine the fiscal, financial and political relationship between the government and the countrys major
keiretsu. A key objective will be to increase the governments share of corporate income from overseas
operations and to compel companies to expand investment into research and development on computing,
Internet-based and defense-related technologies. This
will be done largely through informal channels, not
through legislation.

The fate of the Abe administration will have relatively

little bearing on whether the core policies of Abenomics persist. This brings us to a core assertion of the
Stratfor forecast for Japan. Over the next five years,
two trends will coincide. The first will be the rise of a
new generation of bureaucrats dedicated to the reforms
necessary to Japans long-term security. At the same
time, the electoral system will come to be dominated
by an older population averse to these reforms, especially military normalization. Because avoiding reform
is not an option, Japans government will take steps
away from a system of electoral democracy.
Tokyo will continue to hold regular elections and parties will exchange places at the head of Japans legislature. Beneath the surface, however, the ministries that
make and implement policy will begin to reassert their
autonomy from the legislature. Chief among these will
be the ministries of finance and economy, trade and
industry as well as the defense establishment. This will
reverse two decades of reforms aimed at strengthening
Japans legislative and judicial branches and increasing
the major parties power relative to key ministries,
harkening back to the early post-World War II decades

This shift will go largely unseen by international

observers and much of the Japanese electorate. The
intent is to preserve the bureaucracys autonomy from
an electoral and legislative system increasingly averse
to structural and defense reforms and the bureaucracy will strive to conceal its maneuvers. Once the new
generation of administrators has secured its position,
it will work to ensure that core elements of Abenomics
survive even if Abe himself is voted out of office.

Chinas Continued Rise

As Japan undergoes these internal political changes
over the next five years, the external environment
will also be changing. The period will be one of increased tensions with China as economic dislocation
and political turmoil within China will combine with
Chinas expanding military powers to produce a highly
volatile security situation in the region. Urged on by
the United States, Japan will become more proactive
not only in its own maritime patrolling and reconnaissance activity but also in deepening cooperation
with regional partners like the Philippines, Indonesia
and Vietnam. An actual military engagement between
China and Japan is unlikely, even as tensions mount.
Stratfor October 2015 23

shape the mindset

and actions of Japans
rulers, in turn laying
the basis for the
nations actions after
2020.
Balancing against
Chinas military
expansion will be
the key driver of
Japans foreign policy
reorientation, but it
will be one of many.
Japans military will
gain international
visibility and domestic influence through
its role in helping to
manage the humanitarian fallout
Japan Maritime Self-Defense Force escort ship Kurama (L) sails during a fleet review off Sagami Bay,
from the collapse of
Kanagawa prefecture. (KAZUHIRO NOGI/AFP/Getty Images)
President Vladimir
The sheer quantity of vessels and aircraft deployed
Putins long-standing political order in Russia over the
in the region, however, raise the risk of short, sharp
next several years. This will represent another sphere of
crises. Such incidents will ultimately serve to bolster
intense competition between Japan and China. Japan,
popular support within Japan for a defense posture
however, will hold the upper hand thanks to a growing
against Chinese aggression. Such support will increase
regional desire to balance against perceived Chinese
cooperation with the United States in defense-related
aggression. Meanwhile, Japan will seek to capitalize on
research and development and compel Japan to more
the increased integration of the Association of Southopenly explore developing its own space-based weapeast Asian Nations to expand Japanese influence in
ons system.
Southeast Asia and in nearby India. Japan will pursue
these goals with an eye toward containing China, but
The more volatile situation in the Pacific will fuel the
they will yield benefits independent of China.
rise of the new generation of activist bureaucrats and
keiretsu leaders by underscoring the need for reform.
Forecast After 2020
By 2020, these rising civil servants and business leaders
will have made significant headway in consolidating
Japan will enter the 2020s in a relatively strong positheir influence within key ministries. They will see
tion. Despite growing opposition from an electorate
themselves as acting in and carrying forward the spirit
dominated by older voters, the government will be
of the insurgent samurai elite who led the Meiji Resmore successful than previous administrations in
toration, as well as of the administrators who brought
cementing labor and other structural reforms aimed
order and growth to early post-World War II Japan.
at offsetting the impacts of demographic decline.
It is critical to understand this legacy because it will
Stratfor October 2015 24

Breaking up the agricultural and other lobbies in the

late 2010s will expedite this process. As the generation
born before World War II leaves politics and tensions
grow with China, Japan will see a rise in nationalist
sentiment. This will allow the government to more
actively mobilize support for defense reforms.
The reform measures initiated under Abenomics will
slowly enter into force after 2020 but will fall short
of generating sustained annual GDP growth above
1-2 percent. Demographics will undergird this poor
performance: Between 2015 and 2020, Japans workforce will shrink by 3.3 million, or about 4 percent,
putting increased pressure on the economys productive capacity. Reform measures, however, will help
ensure relatively stable GDP, improved
efficiency and productivity as well as
constant quality of life. This will provide a workable basis for the governments efforts to revamp the countrys
regional and global image and extend
its political, military and economic
reach. The task of expanding upon and
deepening these reforms in preparation
for a much more substantial workforce
decline in the decades ahead will fall to
the generation of bureaucrats that will
consolidate its influence between 2015
and 2020.

at least 2 percent. Doing so will require securing labor

reforms. It will also depend on the Japanese governments ability to stimulate higher value-added services
(such as financial services) and computer technologies
industries at home.
Fixing its employment problems will be critical for
Japan to support its growing elderly population. Compared with the years 2010-2020, when the countrys
over-65 population grew by 7.5 million, the rate of
population aging will slow considerably in the 2020s.
The U.S. Census Bureau estimates that only 750,000
new retirees will be added, while Japans National
Institute of Population and Social Security Research
estimates 2.2 million. Though the rate of change in Ja-

From 2020 to 2030, Japans working-age population (ages 20-64) will

fall by around 4.8 million to 5.6 million. This will be well below the decline Two elderly people walk down the street near Koganji Temple in Tokyo. (TORU
of between 7.7 million and 8.3 million
YAMANAKA/AFP/Getty Images)
people from 2010 to 2020, but it will
be nonetheless substantial. Assuming an effective
pans elderly population will slow, the absolute burden
retirement age of 65 (currently, the official retirement
of caring for it will only grow. By 2030, people over
age is 61, with plans to raise it to 65 by 2025), the
65 will account for 32 percent of Japans population,
number of new retirees between 2020 and 2030 will
as opposed to 56 percent of the population at working
constitute 7-9 percent of Japans workforce. Against
age. Even as technological advances and incremental
this backdrop, to maintain constant GDP, Japan will
cost-cutting measures bring down per capita social
need to ensure average annual productivity growth of
security and healthcare costs, the growing elderly
Stratfor October 2015 25

population means healthcare will remain the largest

government expenditure.
Tokyo will make tangible progress throughout the
2020s in cementing the reforms and encouraging
the kinds of industries needed to improve the overall
productivity of Japans economy. But the Chinese and
European economies will remain weak through the
early 2020s and Japans internal changes are unlikely
to generate enough taxable income to reverse Tokyos
reliance on deficit spending. Japan will not likely
default on its debt given the high rate of domestic
ownership, but the amount of debt will grow as will
debt servicing costs.
Japans relations with China will be in flux between
2020 and 2030. Japans rise in the early 1990s caused
outsized speculation as to the threat it posed to U.S.
interests. In the same way, the perception of a rising
China will also outlast the reality especially in the

the perceived Chinese threat.

Beijing will continue to invest in its military and in
maritime expansion, and the world will continue to
expect an imminent Chinese economic recovery. This
will fuel integration efforts by the United States and
Japan. Before 2025, however, the limits to Chinas economic trajectory and military capabilities compared to
the U.S.- and Japan-led coalition will have become unmistakably clear. This will coincide with the unleashing
of long-repressed social and political energies within
China, a process that could reach a climax before the
scheduled 2022 generational leadership transition. The
extreme centralization of political power before 2020
will have thoroughly undermined the system of checks
and balances within the Communist Party put in place
by Deng Xiaoping in the 1980s and will make for a
tumultuous transition process.

Because of the time it will take for the world to come

to terms with the reality of Chinas internal
turmoil, up to 2025, Japans neighbors will
continue to view it as the leading counterbalance to China. Before long, however, internal
political turmoil and continued economic
dislocation within China will start to put
the brakes on this dynamic. Stratfor expects
Chinas ongoing economic slowdown to bottom out sometime around 2020. Throughout
the early 2020s, China will be engaged in a
process of restructuring and reconstructing
its economy, a process that will weigh on
annual GDP growth through the late 2020s.
It will not be until the end of this decade
that Chinas painful restructuring comes to
A P-3C Japanese Maritime Self-Defense Force patrol plane flies over the
fruition and domestic consumption by the
Senkaku/Diaoyu islands in the East China Sea disputed between Japan
and China. (JAPAN POOL/AFP/Getty Images)
urban middle class emerges as a genuine driver
of national economic growth. This means that
region. Even as Chinas economy slows between 2015
between the leadership transition of 2022 and perhaps
and 2018 and the Chinese government struggles with
as late as 2029-2030, China will exist in a state of ecorising unemployment and social dislocation domesnomic dysfunction, likely increasing regional economic
tically, the United States, Japan and their partners in
fragmentation. Such economic fragmentation will put
broader Asia will pull closer together to balance against
enormous strains on the countrys political structure
Stratfor October 2015 26

and will combine with the rising demands of Chinas

now 500 million-strong urban middle class to bring
the Communist Party regime to the brink. Whether or
not that regime survives in name, it will almost certainly be forced once again to fundamentally shift the
way it works.
The United States will then realize the state of China
and begin to slowly adjust the U.S. position in the
region. Washington will then move to prevent a complete Chinese political and economic collapse, fearing that such an outcome would cause extraordinary
disruption across East Asia and provide an ascendant
Japan a chance to move beyond the United States. To
prevent this, the United States will move to constrain
Japan while avoiding open displays of friction with
the Japanese. Nonetheless, by the middle or end of
the decade, the United States will gradually replace
rhetorical and practical efforts to constrain China with
more conciliatory measures such as promoting Chinese
accession to the Trans-Pacific Partnership.
Thus Japan will find itself in the second half of the
2020s caught between a recovering China and a
United States more amenable to assist in that recovery.

This strategic bind, combined with Japans deepening

demographic decline, could well pave the way for another period of relative introversion in the 2030s.
The rates of workforce decline and population aging will both remain moderate in the 2030s before
picking up precipitously in the 2040s. Efforts to boost
fertility rates in the late 2010s and 2020s may help
counteract the effects of working-age and outright
population decline after 2040, but their effects on
Japans workforce will by and large not be felt in the
2030s. If fertility does improve, Japans workforce (by
2040 only 52 percent of the population) could find
itself even more financially pressed than in the previous decade. By 2060, Japans workforce will have
declined by 50 percent since 2015, while its total
population could fall by as much as 25 percent. With
this in mind, the years after 2040 are likely to be increasingly dominated by internal economic and social
management-related issues. Technological advances,
somewhere between difficult and impossible to predict,
will almost certainly help mitigate the impact of demographic decline on Japans economy, quality of life, and
fiscal and financial stability.

Stratfor October 2015 27

Stratfor October 2015 28