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Hitachi Research Institute

Interview

Interviews with experts and opinion leaders from our research network

Revitalizing the Japanese Economy through the U.S.-Japan Relationship:
― Cooperation on TPP and Resource Measures are Key ―

The Abe administration is promoting the participation of women and young people in the labor force, revitalization of corporations and agriculture, electricity system reform, and promotion of social infrastructure development in its “growth strategy.” This is the third arrow of the “Abenomics” measures for economic revitalization, after a “flexible fiscal policy,” and “aggressive monetary easing.” On the other hand, in diplomacy, amid the rising influence of emerging countries including China in global society, the importance of the U.S.-Japan relationship is increasing more than ever. Therefore, in this issue, we ask Dr. Michael Green, an East Asia security policy specialist renowned for his vast knowledge on Japan, about a broad range of topics, ranging from economics and diplomacy to energy policies, from the perspective of the U.S.-Japan relationship.

Dr. Michael Green

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Dr. Green graduated with a Ph.D. from the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University in the U.S. Previously, he was Assistant Professor at SAIS, a Researcher at the Institute for Defense Analyses (IDA) and Senior Adviser on Asia in the Office of the Secretary of Defense. In 2001, he was appointed as Director for Asian affairs, with responsibility for Japan, Korea, Australia, and New Zealand in the National Security Council (NSC). From 2004 through 2005, he served as Special Assistant to the President for National Security Affairs and Senior Director for Asia, with responsibility for East Asia and South Asia in the NSC. Dr. Green also worked on the staff of a member of the National Diet during a five-year stay in Japan and is fluent in Japanese. He is currently working on security issues in the Asia-Pacific region as Senior Vice President for Asia and Japan Chair at the Center for Strategic and International Studies (CSIS) and as Associate Professor at Georgetown University, in the U.S. Dr. Green is also the author of books such as “The U.S.-Japan Alliance: Past, Present and Future” (published by the Council on Foreign Relations and, in Japanese, by Keiso Shobo) and “If Japan and China Were to go to War [Nitchu Moshi Tatakawaba],” (in Japanese, published by Bungeishunju Ltd.). Currently, he is working on a book project on the history of the U.S. diplomatic strategy in Asia.

Reasons Why CSIS is Highly Influential

Mr. Kawamura:The Center for Strategic and International Studies (CSIS) is an influential think-tank that conducts research on important policies and makes recommendations for the U.S. government, mainly related to diplomacy and national security. Could you briefly introduce overall activities of CSIS?

Dr. Green:There are approximately 1,500 active think-tanks in the U.S. In the University of Pennsylvania’ s annual “Global ‘Go To’ Think Tanks Report,” for the past two consecutive years, CSIS was named the No. 1 security and international affairs think-tank. In addition, CSIS received a special award as the most influential think-tank in the world. The reason why CSIS is so influential is that its specialists work there irrespective of political lines or affiliations. Therefore, even when the administration changes from either Republican to Democratic Party or vice versa, research produced by CSIS continues to receive attention. There are only a few non-ideological think-tanks that conduct analysis from a neutral perspective like CSIS. The only others of comparable size are the Brookings Institution and the Council on Foreign Relations. CSIS is based in Washington D.C. in the U.S., and we have specialists from wide-ranging backgrounds in government service, the financial world, and the academic sector. We are able to conduct practical research and make concrete policy recommendations through the collaboration of these diverse specialists. One of our strengths is that the content of our recommendations stress what can easily be put into practice by governments and private corporations. We have been conducting these activities for 40 years now, and we have built up a strong reputation.

Mr. Kawamura:Dr. Green, you are a specialist in East Asian politics and diplomacy, in particular, Japan’ s security policy. What made you decide to place the security of Japan at the center of your research?

Dr. Green: I was born and raised in Washington D.C. and felt a desire to be involved in government since I was young. My mothe r worked as a diplomat in the U.S. Department of State before getting married. She was a specialist on Europe, fluent in Italian. My father was an officer in the U.S. Marine Corps and worked as an attorney at the U.S. Department of Justice. He stayed in the Marine Reserves and retired as a Colonel while still practicing law. Therefore, I always imagined my career would head in that direction, but I never thought back then that I would become a specialist in Asia or Japan. My major at university was European and U.S. history, and I passed the Foreign Service Officer exam in my senior year. Since it was the Cold War, I was going to head to Europe and fight as a “samurai” in the cold war, just like in the book “Shogun” by James Clavell, that I read when I was young (Laughs). However, I wanted to experience Asian culture and see an actual samurai before that, so I participated in the Monbusho English Fellow program(MEF, the former JET Programme) and lived in Shizuoka Prefecture for 2 years from 1983. I didn’ t know much about Japan up until then, but my experience living in Japan made me start thinking about U.S.-Japan security. In the U.S. at that time, the importance of U.S.-Japan security was not well understood, and I started to think the national interests of the U.S. would be supported not by Europe but by Asia with Japan at the center. So, I decided against becoming a diplomat and returned to the U.S. to enroll in a doctoral course. I studied at the University of Tokyo from 1987 to 1990, and my research themes were Japan’ s security and domestic politics. It is worth studying the domestic pol i t ics to under s tand the phi losophy behind U.S. -Japan secur i ty. Dur ing my s tudies at the University of Tokyo, I also worked as a secretary for a member of the National Diet, the late Motoo Shiina, who played an important role in the U.S.-Japan relationship especially in security affairs. In the past, the majority of people in the U.S. opinion polls felt that the most important region for the national interests of the U.S. was Europe. However, public opinion began to shift its focus to Asia about two years ago. It feels like public opinion is finally catching up with my opinion of 25 years ago.

Impact of the Abe Administration’s Diplomatic Policy on Japan and the U.S.

Mr. Kawamura: The second Abe administration was inaugurated in December 26, 2012. What impact do you think the diplomatic policy of the Abe Administration has had so far, on the Japan and U.S. relationship in particular?

Dr. Green: I was responsible for Asia in the National Security Council (NSC) from 2001 through 2005 under the Bush administration. At that time, Prime Minister Abe was Deputy and then Chief Cabinet Secretary under the Koizumi administration, and he was held in high regard in the U.S. administration. This was because his diplomacy placed importance on U.S.-Japan security and upheld the same values as the U.S. I think he believed that Japan and the U.S. share the same sense of democratic values, and if they cooperate in creating security rules for the Asia region, peaceful global relationships can be built in Asia, including with China. Up until the LDP win last year, most of the diplomatic experience of the Obama administration was with the Democratic Party of Japan, except for the Aso administration, so they did not have much of an impression of the Abe administration at the beginning. However, I believe the Obama administration must have been impressed by Prime Minister Abe’ s political might and ability to take action during the U.S.-Japan Summit Meeting in February 2013. The view that the Abe administration is highly likely to remain in power for some time has taken root in Washington since then.

Mr. Kawamura: The Abe administration has a slogan which goes “A single meaningful outcome is worth more than one hundred empty words.”

Dr. Green: Its approach to participation in the Trans-Pacific Partnership (TPP) will have a positive impact on U.S.-Japan security. Personally, I think the success or failure of the policies of the Abe administration will depend on the revitalization of the economy. Without economic power you cannot create diplomatic s t rategy. Finding out how the administration prioritizes its policies is very important to determine whether or not an administration will last long. The general view is that the second Abe administration will be beneficial for the U.S.-Japan relationship since the administration prioritizes its economic policy first.

Mr. Kawamura: Yes, since Japan is a country driven by the growth of economy, we cannot do anything until we revitalize the economy.

The Significance of Participating in TPP Negotiations

Mr. Kawamura:Japan’ s participation in TPP negotiations has great significance in terms of economic development, and it also is like a “Third Opening of Japan.” In addition, I al so think that Japan’ s par t i c ipat ion in TPP negotiations will be greatly beneficial from the perspective of stabilizing security in the Asia-Pacific region. In that sense, I think Japan’ s participation in TPP negotiations holds major significance. What do you think, Dr. Green?

Dr. Green:In terms of the process of decision-making regarding Japan’ s participation in TPP negotiations, I believe there was almost no pressure from the U.S. despite reports of such in the Japanese media. The Obama administration seemed to think that Japan did not have to participate if Japan did not want to. I would say that they looked a little too unenthusiastic (Laughs). As Mr. Kawamura ment ioned ear l ier, Japan’s participation in TPP negotiations is also significant from the perspective of security in the Asia-Pacific region. Of course, for Japan and the U.S., conclusion of an agreement does not mean the elimination of economic exchanges with countries which have not declared participation in the TPP such as China. The concept of forming an alliance between certain countries and excluding specific other countries, like a security treaty, does not apply in the globalized economic world. The TPP and other Free Trade Agreements (FTAs) are essentially for promoting economic competition between countries and, I believe, will lead to the further tariff reductions, rule-making and economic development for the entire region. By participating in TPP negotiations, the influence of Japan on Regional Comprehensive Economic Partnership (RCEP) negotiations will be increasing. Furthermore, Japan will be able to demonstrate its influence in FTA negotiations with the EU because of the TPP and RCEP. In other words, the more proactively Japan par t icipates in var ious FTAs, the s t ronger i t s negotiation power will become. At present, Japanese trade through FTAs only accounts for 16% of the overall trade total. Meanwhile, approximately 38% of all Korean trade occurs through FTAs. Therefore, Japan is behind in terms of economic competitiveness as seen through FTAs.

Mr. Kawamura: In the business aspect too, Korea is getting way ahead of us. Therefore, we think we must open our economy properly. I al so think the rol e of par t i c ipat ion in TPP negotiations has significant impact domestically as well, since it makes it possible for strict regulations which have shackled the country until now to be eased or removed.

Dr. Green:Yes. In fact, the U.S. already has various agreements between countries with economies of a certain size, including the North American Free Trade Agreement (NAFTA), and so the U.S. was not so interested in the TPP at first. However, U.S. congressional interest in the TPP increased as a result of the participation in negotiations by Japan, because of its large market. Of course, automobile parts manufacturers and other groups oppose it, but 80% of interest groups are taking a favorable stance. It is also strategically important for the U.S. that Japan revi talizeitse conomy by participating in the TPP, and we need Japan to help us create common rules to counter the state capitalism that can be seen in many emerging countries.

Mr. Kawamura: Japan is not a military power, and Japan is not a resource-rich country either. Therefore, the only way for Japan to compete in the world is with its economic strength. For that reason, I believe that the TPP is absolutely necessary. As Dr. Green said, we have to proceed in parallel with negotiations not only for the TPP but also for other agre ement s such as the RCEP and Economi c Partnership Agreement (EPA) with Europe.

Using Taxation Reform to Attract Investment from Overseas

Mr. Kawamura: The Abe administration is aiming for economic revitalization with its “Abenomics,” which comprises the “three ar rows” of “f lexible f i scal pol icy,” “aggressive monetary easing,” and “growth strategy.” What efforts do you think the government must take to make the growth strategy function?

Dr. Green: As you know, the third arrow is the most important for Japan in the medium- to long- term. Looking at recent market response, the time has come for the Abe administration to reveal more concrete strategies. For example, a clearer explanation is required for measures to relax regulations. In addition, what is especially important is the reduction of corporate tax. For growth of the Japanese economy, direct investment from overseas companies is indispensable. Reducing the effective tax rate will have a rapid impact. Of course, the export of infrastructure and agricultural products, health-care system reform, promotion of women’ s participation in the workforce and other elements that support the growth strategy are also important. However, these policies will require time toproduce results.

Mr. Kawamura: As you mention, in addition to regulation reform, taxation reform is a significant issue. Although the current corporate tax in Japan is the same as the U.S., we must realize a taxation system which shows that Japan is open to investment from overseas countries.

Dr. Green: There is another thing that I always hear mentioned in opinion exchanges with leaders at U.S. companies, and that is about the carry-forward of losses (carry-back). The other day, I had an article published in The Nikkei together with Dr. Kurt Campbell, former United States Assistant Secretary of State. The period for the carry-forward of losses is shorter and the collection of taxes is extremely fast in Japan compared to other member countries of the Organisation for Economic Co-operation and Development (OECD). There are no limits on the period for carry-forward in the U.K., France, Germany, Singapore, and Hong Kong, and the period is 20 years in the U.S. If the periods for return by losses carry-back are extended, the barrier to investment from overseas will be eliminated.

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Mr. Kawamura: The Abe administration has released a large volume of materials on the details of the “Growth Strategy,” and if you read these materials you can find specific details. However, partly because the time for examination of the policy was limited, it seems they were unable to include details for all items in the growth strategy. Even so, as you pointed out earlier, there are still areas that could use more government reform. For corporate growth, the creation of new businesses is essential, and deregulations are also vital for free corporate activities. Many regulations that are difficult to eliminate still exist in agriculture, healthcare, and labor conditions and the mass media refer to these regulations as “bedrock” regulations. If policies bold enough to break down these regulations are presented, I believe the business community will liven up more.

Dr. Green: I can not say the current market response to the policy is great, but it is from now on that the policy will yield results, and I assume the business community also has great hope for the growth strategy.

Mr. Kawamura: Of course, we do. The GDP of Japan for the January to March term was a 4.1% increase at an annualized rate, and I believe this is probably the highest among the advanced countries. Data for the April to June term has not been released yet (as of this interview), but leading indicators including the Index of Consumer Expectations also show an upward trend.

Dr. Green: My stay in Japan this time has only been 2 months, but when I walk around I see not only business circles but also ordinary people looking like they have regained some confidence. If people are not satisfied with the policies of the Abe administration, then of course the approval ratings for the Abe administration will fall, therefore, I expect more concrete plans will continue to emerge for economic growth in the future as well.

Mr. Kawamura: I think the Japanese people think so too. The Cabinet is positioning this autumn’ s extraordinary Diet session as the “Growth Strategy Implementation Diet” and has declared it will aim to enact the relevant bills for implementing the growth strategy.

Dr. Green: Needless to say, I think that a long - lasting administration is a major premise for economic growth, as well as U.S.-Japan security.

U.S. Energy Situation

Mr. Kawamura: Now, I would like to ask you about energy, as a key element supporting the economy. In the U.S., full scale production of shale gas and shale oil has begun and improvement of the energy self-sufficiency rate and decrease in dependency of Middle East oil are expected. I believe the impact may be so great that various policies such as diplomacy and economic policies will shift. Could you give us your take on this, Dr. Green? Also, could you also let us know what you think the impact will be on Japan as well?

Dr. Green: Although the U.S. government has been committed to the realization of “energy independence” since the 1970’ s, this was only an ideal. With the shale gas revolution, this ideal successfully turned into reality for the U.S. According to analysis by the International Energy Agency (IEA), the supply of energy in the U.S. will be independent of imported oil in 20 years or less, while different analysis says this will happen within 10 years. This will greatly affect the diplomacy and security strategy of the U.S. in the future without a doubt. Even so, I do not believe the U.S. will withdraw from diplomacy with the Middle East because of a decrease in the need for imported energy. As long as countries and regions closely related to the U.S. such as Japan, Korea, and Europe import energy from the Middle East , i t wi l l be neces sary to maintain forward deployment in order to maintain the stability of the global social system overall. In the U.S., to prioritize the stable domestic supply of energy, exports to the outside are strictly regulated. As you know, President Obama approved the export of natural gas produced in the U.S. to Japan in May of this year, starting with shale gas. In the business community, the export of shale gas is considered to be a generator of bus ines s oppor tuni t ies such as employment and facility investment, and the CEO of GE, Mr. Immelt, gave his approval for natural gas exports before permission was even announced. Meanwhile, petrochemical related companies opposed the export of natural gas since they do not favor an increase in natural gas costs. Thus, we could say that the significantly large influence of GE led to this eventual permission. Investment opportunities from Japan in shal e gas wi l l be gene rat ed and thi s permission will be positive in the aspect of economic cooperation between Japan and the U.S. I recommend that Japan also pays attention to liquefied natural gas from Alaska in addition to shale gas. The Prudhoe Bay oil field in Alaska is the largest oil field in the U.S. Given the backdrop of a reduction in oil production, new LNG development plans have been launched and large scale development projects are being promoted by the three main petrochemical companies including Exxon Mobil Corporation. Al though the deve lopment of pipe l ine s and liquefaction plants will take time, the state of Alaska is expecting an increase in demand for natural gas in Asia. There are export plans to Japan, Korea, Taiwan and other countries, and I think this is an opportunity to build relationships of cooperation similar to the U.S.-Japan LNG alliance.

Mr. Kawamura: In any event, for Japan, a country with scarce natural resources, it is really enviable for us that the U.S. possesses shale gas and shale oil resources equal to a 100- or 200-year supply for the country. The current balance will significantly improve only by eliminating the deficits of gas and oil, and I wonder if we will start to see a movement for a return to the U.S. in the manufacturing industry such as the expansion of facility investment within the country.

Dr. Green: I believe the shale gas revolution will contribute to the resurgence of U.S. competitiveness. However, as in Japan, unless regulations are relaxed in the U.S., the rejuvenation of the manufacturing industry will be limited. In particular, environment related regulations, heath-care system reform, and many other issues still remain.

Personnel System Reform to Enhance Corporate Power

Mr. Kawamura: And now, for a completely different topic. Currently, Hitachi has 14 members on its board of directors, 4 of whom are non-Japanese. Two of the directors worked in the U.S., one is British and the other is Singaporean. The two directors who worked in the U.S. say that Americans are aggressive at work, while the Japanese are very mild. If I could use their words, the Japanese lack entrepreneurship and Japanese companies will not become strong unless they make more aggressive proposals. They suggest that living quietly within Japan has now become a weakness for us. I was convinced by their comments, and I am working to improve various issues. Hitachi aims to participate in not only in the “Domestic Championships” within Japan but also in the “Olympics Games,” to be a corporation that can compete with strong rivals around the world. Dr. Green, you are well acquainted with the nature of Japanese people. Could you tell us what you think about the differences relating to pioneering spirit and entrepreneurship between Japanese and American?

Dr. Green:I think the method of utilizing the strengths of a country’ s culture is the best choice both for a government’ s diplomatic strategy and for the business strategy of companies. Individual Japanese employees may not be aggressive. However, Japanese companies do demonstrate stubbornness when making proposals yet they also have flexibility, which is vital for a relationship of cooperation. I think these are the strengths of Japanese companies. If individual employees of Hitachi become aggressive, adverse effects may be created in some cases. Since 40% or more of Hitachi’ s overall sales are from overseas sales, I think an internal environment where the employees can play active roles in the global market is important. I think the rate of recruitment of new graduates from foreign univer s i t ies i s high compared to other companies, but Hitachi will need to make further substantial increases in its international human resources. In order to be competitive in the global market, being able to speak English is, of course, important, and those with skills in the working world, as well as experience living overseas or experience as interns overseas will become the central workforce. Japanese companies can be proud of their high quality control and ability to work as a team. Enhancing global competitiveness while maintaining this kind of corporate culture is what I would like to see from Hitachi.

Mr. Kawamura: Just as you say, Hitachi is now working on personnel system reform in that direction. The Hitachi Group has 320 thousand employees around the world, 120 thousand of whom are non-Japanese. We plan to find non-Japanese personnel with a high level of skills, recruit new graduates from overseas universities in countries such as the U.S. and Africa, as you mention, di spatch young employees over seas, and more consciously implement other human resource related measures. For example, if important proposals from non-Japanese employees increase in the workplace, all employees in the workplace can discuss the proposals in meetings in English quite naturally. It’ s the same for female employees. If female employees play more active roles in making important proposals, discussion will proceed from a different viewpoint than in the past and include viewpoints which might be unique to women, allowing similar changes to occur. In other words, diversity will be generated in what used to be a more uniform workplace.

Dr. Green:Prime Minister Abe has also started to use the term “Womenomics.” Survey reports, including one by Goldman Sachs, are analyzing the impact of the increase in working women on the economy. According to the reports, in the case that the employment rate of women rises to the same level as men in Japan, its GDP level would increase by approximately 15%. Although there are various factors causing it, I feel the power of working women is not being fully utilized.

Mr. Kawamura: In Japan, many working women leave their jobs because of childbirth, and the government is trying to improve the decreasing employment rate of women in their 20’s and 30’s by developing child-care facilities.

Dr. Green:Many companies in Silicon Valley in the U.S. have child-care facilities for their employees and some companies have facilities to care for pets, such as dogs, too. For companies, human resources are the mos t important consideration, and long-term investment is required to nurture human resources. However, U.S. companies do not feel they have to nurture employees from the moment they join the company in the long term like Japanese companies do. Workers in Japanese company plants in the U.S. know that Japanese companies care about their employees. In fact, some of my friends have said they would like to work for a Japanese company since they have that kind of image. Japan’ s soft power in this sort of area is extremely important. For example, according to a survey in the U.S. about trustworthy countries, Japan trails only the U.K. and Canada. Excluding countries with the same ethics and that speak English, Japan is positioned as number one or two, which tells us about Japan’s strength in terms of soft power. In addition, according to a world survey on the subject by the British Broadcasting Corporation (BBC), I got astrong impression that Japan is greatly contributing to global society. I think this is the result of the great success of private corporations rather than the success of Japan’s Ministry of Foreign Affairs.

Mr. Kawamura: It is t rue that companies that care about their employees are strong. Originally, companies are comprised of “human resources” and the long-term growth strategy of a company is equivalent to a human resource strategy. The hiring of new employees and spending a long time nurturing the employees properly is a basic tenet of Japanese companies. However, caring about employees can spoil them conversely. As for the current system in Japanese companies, many different problems remain. For example, the seniority system does not relate to the abilities of employees and lifelong employment may cause employees to feel too secure. Hitachi also thinks we mus t chang e our pe r sonne l s y s t em to an ability-based type and build a system to enable those who work hard to be rewarded properly. Seen in this light, Japanese companies are becoming more like U.S. companies, while U.S. companies are becoming more like Japanese companies. For example, Japanese companies have for a long time not regarded making enormous profits as necessarily being a good thing. That’ s the reason behind the low profit rates of Japanese companies. The profit rate of Hitachi is only half that of leading companies in the same industry in the U.S. However, we have begun to really think about more earnings, paying a large amount of tax, and raising the salaries of our employees. I believe that giving back to society in that format is also a suitable objective for corporations.

Dr. Green:I agree with you. Creating profit and giving back to society are essential aspects of being a global company.

About Dreams

Mr. Kawamura: Dr. Green, you have had a great influence on U.S. policy towards Asia. Could you let us know about what dreams you would like to see fulfilled in the future?

Dr. Green:At present, the greatest concern in the world is whether or not the U.S. economy can recover. I think we can. We must revitalize the economy quickly, and we must prevent a decrease in the deterrence ability of the U.S. resulting from reductions in defense spending. In addition, the resurgence of the Japanese economy and strengthening of the U.S.-Japan alliance is a current dream of mine as well. In global society, given the increasing influence of emerging countries, such as China, more than ever this is an important time for strengthening the relationship between Japan and the U.S. as developed countries and allies. My dream is that the social system in China will change stably and a cooperative global relationship will be built in Asia. I have many personal dreams too. For example, I hope that my son will become a football star (Laughs).

Mr. Kawamura: Thank you very much for your time today.

Final Note

Dr. Green is a specialist in the politics and diplomacy of East Asia. In particular, he special izes in Japan’s security policy, and he has been working to strengthen the U.S.-Japan alliance for many years . Dr. Green agreed to this interview on the occasion of his participation in the “U.S.-Japan Strategic Vision Program” in Japan, which aims to make political recommendations to strengthen the U.S.-Japan alliance. We discussed a wide variety of topics from the growth strategy of Japan, shale revolution in the U.S., and potential for U.S. economic rejuvenation to respective personnel systems in Japanese and U.S. companies. Dr. Green pointed out that proactively working on important policy issues for Japan such as economic revitalization and participation in the TPP is important for strengthening the future relationship between Japan and the U.S., which was reassuring even for us, a Japanese company. In addition, I felt that in accordance with the strengthening of the U.S.-Japan relationship and rejuvenation of the U.S. economy, Hitachi needs to review its business with the U.S. and with the Americas as a whole.