Disasters challenge plans to reinvent Japan Inc.

TOKYO (AP) — Before disaster struck, Japan’s leaders were vowing to counter the prospect of long-term economic decline with a new spirit of engagement with the rest of the world.

Freer trade and deeper economic ties could help re-energize an economy stifled by deflation and eclipsed in size by rising rival China and in vision by smaller, more dynamic countries such as neighboring South Korea.

Now, as Japan deals with the aftermath of triple calamities — earthquake, tsunami and nuclear reactor leaks — the considerable challenges of remaking the world’s third-largest economy have become even bigger and may take a backseat to reconstruction.

“Those who want to return to a more Keynesian, pump-priming and heavy government control of the economy will argue that this is the time to rebuild Japan and to use the government’s leadership,” said Michael Green, an analyst and Japan expert at the Center for Strategic and International Studies in Washington. “The other side of the debate will say no, now is the time to build more market fundamentals and really put some dynamism and growth” into the economy.

Japan faces a massive recovery bill, already estimated as high as 25 trillion yen ($305 billion), equivalent to the size of Greece’s entire economy and that may get bigger. The tab could strain already overloaded government finances against the backdrop of one of the world’s most rapidly aging societies.

Things weren’t looking bright for Japan even before March 11, the day its northeast coast was struck by a magnitude-9.0 earthquake and devastating tsunami, which crippled a nuclear power plant and led to the world’s worst nuclear crisis in 25 years.

Faced with a bleak future marked by slow decline as national wealth faded away with a shrinking population, the country was widely described as having fallen into a psychological funk.

China, where economic growth rates sometimes exceed 10 percent a year, overtook Japan last year as the world’s No. 2 economy, a position held for decades behind close ally, the U.S.

Beijing also appeared to be flexing its growing economic muscle at Tokyo’s expense. A tense encounter near disputed islands last year ended with Japan seen as giving in to Chinese threats and punitive action, such as halting exports of rare earth metals needed to make high-tech products.

Japan is also facing the demographic challenge of a fast aging society, with 40 percent of citizens expected to be 65 or over by 2050. The country’s population fell by a record amount last year and declined for the fourth straight year. Adding to the overall pessimism has been a public debt of more than twice its gross domestic product.

Prime Minister Naoto Kan, whose political stature was wobbly even before the disasters, has been a vocal advocate of his country looking outward for opportunity and revitalization. His government has called for slashing trade barriers, cutting red tape and encouraging investment.

Japan is studying participation in the U.S.-backed Trans-Pacific Partnership, a proposed free trade zone that would link several economies lining the Pacific Rim, but which is opposed by Japanese farmers. It has also been studying a possible three-way free trade deal with China and South Korea.

Tokyo has looked on anxiously in recent years as dynamic smaller neighbor South Korea has carried out a national strategy of forging free trade agreements with the United States, European Union and other economies including India.

Talk of the need for Japan to further open its economy has been a call heard for decades without much progress.

“Japan has been and is in many respects a fortress,” said Jean-Pierre Lehmann, professor of international political economy at the IMD business school in Lausanne, Switzerland, citing low levels of imports, inward investment and foreign workers.

And despite its economic heft in the global economy in terms of overall size, it has lagged far behind in terms of leadership and setting the global trade agenda.

“Japan’s been irrelevant, really,” Lehmann said, referring to the country’s stance in the current round of stalled World Trade Organization talks. “It’s far less important than a country like Brazil, for example, in determining trade policy.”

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said that the tragedies may have the effect of forcing Japan to move faster to confront its burdensome fiscal problems.

“Right now, there is the opportunity to plant the seeds of a better tomorrow,” he told reporters last week in Tokyo. The OECD also called for Japan to increase participation in regional free trade agreements and hike its sales tax.

To be sure, Japan has remade itself before in the wake of disasters, which have fostered national unity and given a shot in the arm to new levels of development.

The country’s previous worst natural disaster came in 1923 when a magnitude 8.3 earthquake and ensuing fires destroyed Tokyo and nearby Yokohama, killing more than 140,000 people.

Japan rebuilt and pushed on to expand its nascent empire that already included the Korean peninsula by invading China and Southeast Asia — and gambling that it could defeat the United States.

That wager ended in destruction, defeat and a temporary loss of independence under a U.S.-led occupation. But Japan remade itself, renouncing war under the sway of American Gen. Douglas MacArthur and transforming itself into an export juggernaut that turned the expression “Made in Japan” into a worldwide badge of quality and pride.

Experts say that if Japan is to truly embrace and achieve openness following the disasters, it will need bold leadership from more outward-looking politicians.

“I think this is an opportunity if the younger generation play their cards right and if they are courageous enough to stand up to the status quo,” said Noriko Hama, a professor at Doshisha University’s graduate school of business in Kyoto. “The general public are very willing to support them.”

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Associated Press writer Jacob Adelman in Tokyo contributed to this report.

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