How Japan Could Save the World

As the chaos off Somalia has forced more and more countries to address high-seas piracy, one nation stands out for its proven track record in the field. For years, the Strait of Malacca—a narrow but vital waterway between Malaysia and Indonesia—was bedeviled by buccaneers. Who came to the rescue? Japan, a nation not known for its willingness to take on international threats. Yet Tokyo quietly rose to the challenge, providing training to regional militaries, setting up an information-sharing center that allowed local security forces to respond quickly to attacks and providing Coast Guard ships to the ill-equipped Indonesian Navy. Japan's efforts were highly effective, helping reduce piracy incidents in the area from 150 in 2003 to a third of that just three years later.

After seemingly endless dithering, politicians in Tokyo also recently agreed to dispatch warships to the Gulf of Aden—but only to protect Japanese ships and cargo, which will limit any international good will the country earns in return. And the mission will be so entangled in caveats and conditions that its effectiveness will be highly questionable.

What gives? Japan, it seems, has become the Hamlet of Asia, endlessly fretting about its waning world influence while failing to do much about it. Some analysts explain the diffidence by pointing to the drawn-out recession of the 1990s, which left the country demoralized and mired in debt. Others suggest that Japan's half-century military reliance on the United States created a culture of dependency and timidity. Some even blame the lack of mojo on the country's aging population, or its strikingly mediocre politicians.

There's a core of truth to all these charges. Japan's government often seems to lack the will to assert itself. This reluctance is particularly problematic today, when the world is desperately looking for ways out of the economic crisis. But there's reason for hope. In some cases, such as Southeast Asian piracy, Japan has already made real contributions to global problems—and hinted at a way forward on other issues. And later this year, when Japanese voters go to the polls, they're expected to deal a stinging defeat to the Liberal Democratic Party (LDP), which has governed the country essentially unchallenged since World War II. If the opposition Democratic Party of Japan (DPJ) forms the next government, it will face a remarkable opportunity to launch bold new initiatives—even though its current positions are a bit of a muddle. Japanese voters are likely to support decisive moves, given their frustrations with the LDP's fecklessness.

If the DPJ does start tackling international problems, it will find it has plenty of resources at its disposal. The Japanese economy, for example, might not be quite the force it once was, but it's still the world's second largest. (Tokyo alone has a larger GDP than all of Canada.) Despite the global economic crisis, Japanese financial institutions remain strikingly sound. "The banking system is relatively intact," says former Bank of Japan official Mikio Wakatsuki. "Our international exposure is not too bad. The currency is too strong—[but that's] another sign that we're not too badly damaged." Wakatsuki is the first to acknowledge that these advantages are relative, and that Japan is in dire economic straits. Yet even in its weakened condition, the country has the capacity to assert benign economic leadership—should it choose to.

Indeed, Tokyo has already made a few moves in the right direction. Drawing on its more than $1 trillion in foreign-exchange reserves, Japan has offered a $100 billion credit line to the International Monetary Fund, and could easily offer up to $200 billion more, says Masahiro Kawai, a Japanese director of the Asian Development Bank Institute (and not affiliated with the Japanese government). Japan has also helped strengthen economic cooperation within Asia in the past. Under strong Japanese leadership, it, along with China and South Korea, has been expanding bilateral currency swaps—financial mechanisms where countries lend foreign-exchange reserves to each other to demonstrate international confidence and deter the speculative currency attacks that plagued Asia during the financial crisis in 1998.

While it once led the way on such efforts, however, Tokyo has become fairly passive. Kawai says that the region urgently needs swaps on a much larger scale; so far, the three countries have pledged a total of $80 billion, but Kawai would like to see it rise to $120 billion. Japan, he says, is ideally positioned to help expand the program because of its own massive dollar reserves. The Chinese could do the same, of course, but so far they've opted to hold back—giving Tokyo a perfect opportunity to demonstrate its commitment to shoring up Asian stability.

Japan could also do this by promoting Asia-wide bond markets and plans for an Asian Monetary Fund—all ideas Japan once promoted quite heavily, back in the days when it looked like the yen might become the region's dominant currency. More recently, Tokyo has let Beijing, which has shown more initiative in pursuing regional free-trade agreements, take the lead. Yet Japan could still resume its prominent role, primarily by helping Asia's economies provide financing to each other. As Wakatsuki, the former Bank of Japan official, argues, that would strengthen the world economy: "Instead of going first to London or New York, we can invest in Asia directly using bonds."

Of course, one of the best ways Japan could boost the world's economy would be to boost its own—by implementing long-debated structural reforms to social security and taxes in order to spur domestic demand and relieve the nation's dependence on exports. It should also deregulate the agricultural sector, which could create new jobs and businesses in hard-pressed rural Japan. And Tokyo should open the Japanese economy to greater foreign investment. At the end of 2007, foreign direct investment in Japan was a paltry 3 percent of GDP, compared with 28 percent in the United States. Righting that imbalance would spur global growth at a time when it's desperately needed.

To anyone who knows Japan, such grand plans might sound utopian. But skeptics can take heart from one area where Tokyo has demonstrated real leadership: the environment. Japan is a world leader in green technologies, and has spent millions helping China and other Asian states reduce their carbon emissions and clean up pollution. Tokyo is now offering a range of programs designed to help other countries tackle climate change—including one that will provide $10 billion over the next five years, mostly in low-interest loans to countries in need.

Environmental leadership is easy, however, since most politicians are happy to be associated with it. The real trick will be movement on economic reform or the most sensitive issue of all: contributing more to global security, whether on piracy or the war in Afghanistan. U.S. diplomats have already signaled that the Obama administration hopes to get more help from Tokyo. But there is virtually no appetite for overseas military involvements in Japan.

That doesn't mean Japan still can't contribute. As Jeff Kingston, a professor at Temple University in Tokyo, puts it, "When they say 'boots on the ground,' it doesn't have to be military boots. It can be the boots of construction workers, teachers, health officials." In the years to come, he says, "nothing is going to be more important than contributing nation-building capabilities and humanitarian aid" in Afghanistan and Pakistan. That's an area where the Japanese have already shown that they know what they're doing, in projects ranging from irrigation to health. And the payoff for doing more, in Washington and around the world, could be huge. So the only trick now is to persuade Tokyo—under its current leaders or its next ones—to take the plunge.