Japan needs to think big on Asian strategy

Volume 3, no. 6, June 2015

Authors: Yoichi Funabashi and Andrea Ryoko Ninomiya, RJIF

Japanese policymakers received a shock when they heard in late March that 57 countries, including some of the United States’ closest allies, had applied to join the China-led Asian Infrastructure Investment Bank (AIIB). While China has steadily been on the rise, since the 2008 global financial crisis, the United States has found itself less able to engage with Asia as it once did. The resulting power vacuum has left the region more vulnerable to destabilisation. It is here that Japan has the opportunity to become a stabilising force for regional order, based on its long and diversified experience with the US and ASEAN countries. One channel through which it could opt into a significant role in rulemaking would be joining the AIIB.

But Japan will miss this opportunity if it does not learn from the mistakes it made with its foreign policy towards Asia during the so-called lost decades. The fundamental problem with Japan’s foreign policy was its failure to ‘think big’ and establish a strategic vision for shaping the Asian regional order. In contrast, China developed and implemented a focused strategy, which paved the path to its dominance of the region today.

The fundamental problem with Japan’s foreign policy was its failure to ‘think big’ and establish a strategic vision for shaping the Asian regional order.

Over the past 20 years, Japan could have played a larger role in regional governance in Asia. During the 1980s and early 1990s, Japan actively pursued regional multilateralism, such as in the establishment of APEC with Australia, but it withdrew into bilateral preferentialism following the 1997 Asian financial crisis. Why was Japan unable to achieve what China now has within its reach, namely, establishing a large-scale regional architecture that has attracted so many countries across the world?

One answer lies in China’s comprehensive strategy towards Asia. Crucial to China’s strength in pursuing the leadership role in Asia has been its two-pronged strategy directed at establishing a multilateral economic institution and internationalising its currency, or spreading the use of the renminbi (RMB) in international transactions. To kill two birds with one stone, China is likely to set up the AIIB and utilise it to increase transactions conducted in RMB in Asia.

China has not only aimed for the internationalisation of the RMB but tactfully portrayed its design as part of a gradual reform of the international system into one based on a multi-reserve currency. China’s central bank governor Zhou Xiaochuan argued in an essay in 2009 that this would lessen the world’s dependence on the US dollar, which was responsible for the 2008 global financial crisis. So far, this has proven a shrewd approach. Britain’s decision to join the AIIB also provided both symbolic and substantial support, bolstering the credibility of the AIIB and the RMB and allowing access to the financial capital and expertise of the city. David Lipton, the First Deputy Managing Director of the IMF, stated in late May that the inclusion of the RMB in the Special Drawing Rights basket ‘is not a matter of if but when’.

By contrast, policymaking in Japan has lacked such a big-picture, strategic perspective and has become more inward-looking in the years since the Asian financial crisis. Japan was once in a position similar to China today, as a leading economic power in Asia. After the crisis, Japan attempted to create an Asian Monetary Fund, a multilateral regional mechanism designed to provide liquidity to countries in the event of a currency crisis. But the proposal failed, partly due to Japan’s lack of a convincing strategy for setting up a regional architecture in the face of strong US opposition and China’s uncooperative stance.

Britain’s decision to join the AIIB also provided both symbolic and substantial support, bolstering the credibility of the AIIB and the RMB and allowing access to the financial capital and expertise of the city.

In addition to falling short of setting up a multilateral mechanism at the height of its economic power in the 1980s and 1990s, Japan refrained from undertaking the financial market reforms necessary for the Japanese yen to be more widely used in global transactions. Policymakers’ fear of losing control of the yen due to further liberalisation of Japanese markets inhibited them from pursuing greater global use of the yen.

Based on the lessons of the lost decades, Japan must now step up to the role of shaping the future of Asian governance. The AIIB is just one arena in which Japan can provide leadership. Some Asian leaders have shown concern about Chinese governance standards, such as Philippine President Benigno Aquino, who stated during his visit to Tokyo this June: ‘It behoves us to be very, very cautious whether or not to join the AIIB’. In these circumstances, Japan is in a strong position: many Asian countries wish for it to join the AIIB in order to participate in shaping standards. The Ambassador of Thailand to Japan, Sihasak Phuangketkeow, recently expressed this wish in May: ‘ASEAN as a whole support this bank… Japan and the United States, I hope, will follow suit’.

Asian countries seek Japan’s regional presence as a rule-maker and pillar of the liberal international order. Rather than jumping on the bandwagon, joining the AIIB should be viewed as one element of Japan’s broader foreign policy strategy. In this critical period of rapid change, Japan along with the rest of Asia, must seize the opportunity to join in shaping the future of the regional architecture. During the lost decades, the country’s Achilles heel was its inability to see the bigger picture – Japan must now ‘think big’ and act multilaterally for the Asian regional order.

About the authors

_Dr Yoichi Funabashi is Chairman of the Rebuild Japan Initiative Foundation, and a former Editor-in-Chief for the Asahi Shimbun. He writes widely in both Japanese and English. Dr Funabashi has won several prestigious awards including the Vaughan-Ueda Prize (1985), Japan Press Award (1994) and Ishibashi Tanzan Prize (1992). He earned his BA from the University of Tokyo and PhD from Keio University. In the past he has held academic posts at Harvard University, Columbia University, and the University of Tokyo.

Dr. Funabashi’s book, Examining Japan’s Lost Decades, will be launched in Australia this week.

Ms Andrea Ryoko Ninomiya is a research assistant at the Rebuild Japan Initiative Foundation._

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