Mr. Kan's Third Way

The Third Way has, belatedly, arrived in Japan.

The style of politics popular in advanced industrial democracies during the 1990s among center-left leaders keen to reconcile their left-wing parties to the rise of neo-liberalism and the onset of austerity after the 1970s had heretofore failed to surface in Tokyo. But with the ascendancy of Kan Naoto, Third Way politics may get another lease on life in Japan.

In his maiden policy speech as prime minister on 11 June, Kan explicitly spoke of a "third way" to the reconstruction of the Japanese economy. Rejecting the first way, what he identifies as the ideology of the construction state (shared prosperity through public works), and the second way, "extreme market fundamentalism" focused on supply side reform at the expense of public welfare, Kan proposed a third way that would target the budget deficits that he says have produced ongoing stagnation and eroded confidence in the social security system. In short, he is trying to break what I've described elsewhere as an impossible trinity of deficit reduction, renewed, balanced, and low-carbon-emitting growth, and robust welfare provision.

What follows is a set of policies intended to create a "Strong Economy," "Strong Government Finances," and "Strong Social Security." 

His proposals on the first point are a reiteration of the DPJ's prevailing position on the economy: the need to balance external and domestic demand, to be realized through a combination of intra-Asian trade, tourism, Green technology, and support for families and the elderly.

On the second point, Kan alluded to the specter of Greece — an allusion that will be repeated in other times and places in the coming years — to make the case for aggressively attacking Japan's bloated national debt with efforts to cut wasteful spending and fundamental tax reform, which would undoubtedly include a consumption tax increase. Naturally he appealed to the LDP to cooperate with the government on this issue.

Finally he turned to social security, identifying a secure social security system as critical for economic growth. Effectively he argued that a shaky social security system in an aging society triggers hoarding on the part of middle-aged and senior citizens concerned about their well-being in retirement.

The similarities with the Third Way politics of Blair and Clinton are not accidental. Kan, a veteran of Japan's reformist, pragmatic left, is at once trying to unleash and humanize Japanese capitalism. He praises Koizumi's supply-side reforms for promoting the restructuring of Japanese businesses, but despairs of their impact upon Japanese society in the form of unemployment and persistent deflation.

While Kan arguably speaks more fluently about economic policy than any prime minister since Koizumi — his speech was largely free of the airy fairy rhetoric that characterized Hatoyama's pronouncements — it is difficult to see Kan's Third Way having any more success than the Anglo-American Third Way, which in retrospect seemed to do little more than promote the Casino Capitalism that produced the financial crisis that has arguably wiped out whatever gains were made to the state's role in welfare provision and plunged both countries ever deeper into debt. The point is not that Kan is foolish for trying to reconcile what appear to me at least as irreconcilable political goals: the political environment demands that the government addresses all three, not least the problems in the social security system. Instead, it seems likely that over time Kan will be forced to focus on one goal at the expense of the others — and that the privileged goal will be deficit reduction.

Even without Kan's embrace, it is likely that deficit reduction would become the government's primary goal with Greece serving as "focusing event," with Kan's government full of deficit hawks, and with the finance ministry still a potent force in policymaking. But with Kan himself having embraced the issue in strong terms, there appears to be little doubt that his government will prioritize deficit reduction above all else, to the point of the DPJ's including a pledge to increase the consumption tax in its manifesto for next month's upper house election (perhaps not a bad move politically with a Yomiuri poll showing sixty-six percent support for a consumption tax increase). Kan has also stated that within the month his government will establish 2020 as a goal for restoring the government's primary balance to surplus.

The question, however, is whether deficit reduction will lead to sustainable growth and secure social security spending. For example, I find it difficult to believe that the government will able to promote greater domestic demand, let alone sustain existing domestic demand while taxing consumption at higher levels. Deficit reduction is undoubtedly valuable in its own right, it's just difficult to see how the Kan government will be able to make good on the totality of its economic program. Can the government really cut enough waste and raise enough tax revenue to shrink its deficits while expanding programs to promote economic growth?

I think that the pursuit of deficit reduction will have implications for Japan's foreign and security policies. The first challenge, however, is figuring out exactly what has changed: Yomuiri sees a new realism in the DPJ's latest manifesto (discussed here at Twisting Flowers), but the reality is that apart from the new government's emphasis on rebuilding relations with the US and the call for defense transparency in China, the DPJ is putting in words what it has already been doing since taking power, especially in its focus on stronger bilateral ties with South Korea, Australia, and India. And really, the Hatoyama government was not nearly as soft on China — or as opposed to the US-Japan alliance — as the contemporary wisdom in Washington held.

Moreover, the Kan government's overtures to the US can be overstated: even the formulation of support for the alliance voiced in Kan's address last week was more like former LDP Prime Minister Fukuda Yasuo's, in which the alliance is viewed largely in terms of its role in providing stability in Asia, than the vision of the alliance as resting on a foundation of shared values and dedicated to the promotion of democracy in the region. Like Fukuda, Kan recognizes that stable, constructive relations with Japan's neighbors, China most of all, are essential, and that the US-Japan alliance is valuable insofar as it contributes to Japan's Asia policy aims.

But in the Kan government's unflinching support for last month's agreement on Futenma, the new government is clearly interested in bolstering the US pillar of Japan's foreign policy. What I wonder is whether the DPJ's renewed interest in the security relationship is a function of its focus on deficit reduction. As the government looks to reduce spending, DPJ officials may increasingly be coming to the realization that austerity combined with regional uncertainty means that for the foreseeable future Japan will be dependent on US deterrent power. While the new government is quietly hedging against the possibility that the US commitment to Asia might weaken through its focus on bilateral cooperation with regional powers and its growing acceptance of the need to loosen restrictions on arms exports (which would lower the cost of bolstering Japanese's own conventional capabilities), the DPJ clearly accepts that for the foreseeable future it will be necessary to maintain a constructive security partnership with the US, even if the party continues to hope for an "equal" partnership.

It is open to debate whether austerity is leading the Kan government into a more enthusiastic embrace of the US (or even whether the embrace is more or less enthusiastic than the Hatoyama government's or any LDP government's for that matter). The DPJ may simply be free or cheap riding irrespective of concerns about austerity in the future. Or it may sincerely believe that the status quo is more or less the best option for Japan when it comes to coping with the rise of China.

However, I think the proposal to relax the three arms-exporting principles is a sign that the DPJ is sensitive to the costs of defending Japan and, therefore, that while the alliance may provide the most cost-effective means of national defense (provided measures are introduced to lessen the domestic political costs of US bases on Japanese soil), the government should look for ways to reduce the costs of Japan's providing its own defense in due time.

In short, at home and abroad the DPJ is performing balancing acts, pursuing multiple and at times conflicting goals that require flexibility on the part of the government — precisely the reason why Ozawa and other politicians have called for a stronger Westminster-style executive over the past two decades. Whether the government will be up to these challenges even with reform remains to be seen.