Initially Abe’s strategy seemed to work, at least to some extent. The yen fell by 25 percent and exports surged, along with export-related employment and corporate profits. The Nikkei stock average rose higher than it had been in many years. What looked like the beginnings of a construction boom seemed to be underway, and a wave of hope coursed through the Japanese public. But problems arose as time passed. In order to reduce the huge government fiscal deficit that was threatening to undermine the health-care and retirement systems, consumption tax was increased, which had the unfortunate effect of undercutting the growth dynamic. In addition, the weak yen gave rise to retaliatory action. The South Korean government intervened frequently and massively in the global currency markets to offset the impact of a weaker yen on Korean exports. To a lesser extent, Taiwan, Singapore, Malaysia, and China did the same, while the US Congress threatened to pass legislation aimed at providing offsets to currency-related import surges. Suffering from a continuing euro crisis that saw unemployment in countries like Italy and France rise above 15 percent, the EU also undertook a series of tough actions against import surges related to currency movements.
More fundamental were two additional problems. Government spending on public construction in Japan no longer provided significant stimulus to growth or a very good return on investment. So much of such construction had been done over the years that, with a few exceptions, essentially only low-payoff projects were left. Even more important, however, was the increasingly apparent failure of the “third arrow” of structural reform. While the Abe proposals had been bolder than anything put forward in Japan in the preceding forty years, they were not bold enough, or at least not implemented in a bold enough way. Reducing corporate taxes, eliminating corporate cross-shareholdings, rationalizing the electricity production and distribution system, deregulating much agricultural production, reducing agricultural and a wide variety of other subsidies, increasing after-school activities for children so that mothers could work full-time, and trying to establish wages based on output rather than hours worked were all groundbreaking and necessary measures. Yet they proved difficult or impossible to achieve, and it was increasingly apparent that they would be insufficient to meet the goal of revitalizing the nation. Inflation had indeed risen, but there was little increase in real GDP growth, household incomes, or standards of living. New investment, production increases, and job growth remained sluggish. Citizens faced with rising costs and stagnant incomes were not happy. They began to fear that the aim of the government was to use inflation to reduce the cost of national debt. Because a large portion of citizens’ wealth was invested in government bonds, this would threaten the real value of their savings and their retirement.
Fear caused pension funds, mutual funds, and other investors to sell off their holdings of Japanese government bonds and other yen-denominated assets. The government was reluctant to raise interest rates to stem the outflow, because with interest payments on public debt already eating up roughly 30 percent of government revenue, higher interest rates could threaten the government itself with bankruptcy. Instead, introduction of capital controls became a topic of discussion. Unfortunately, this had the effect of spurring further capital flight. The unthinkable possibility was becoming a reality: Japan would have to rely on borrowing from the International Monetary Fund (IMF) and put its economy effectively under IMF control.
UNADVENTUROUS YOUTH
Because it was a country with few natural resources and relatively little cultivatable land, modern Japan had been forced to fully exploit its human resources in order to achieve its position as one of the world’s most advanced economies. Thus heavy emphasis had always been placed on education and maximum development of human capacity. As a result, Japanese students had always tended to do well on the standardized tests that are often used to make international educational comparisons. The best known of these tests was the Program for International Student Assessment, or PISA, which was taken every three years by fifteen-year-old students in many countries starting in 2000. In 2012, Japan placed seventh out of the seventy-eight entities where the PISA was administered. These included city-states or micro-states with very small populations such as Shanghai, Singapore, Hong Kong, and New Zealand; however, if these were discounted, Japan placed third. This was far better than, for example, the United States at number seventeen. Moreover, the United States had seen its position decline over the years, while Japan’s had remained steadily near the top.
Yet, in 2015, as Japan approached a quarter century of economic stagnation, and the iconic Japanese companies and industries of long standing disappeared or paled into shadows of their former selves, many Japanese began to wonder whether the schools were teaching and measuring the right things. In short, was the education system preparing young people to deal successfully with the world they would face? Some astounding surveys and statistics suggested that the answer might well be no. For instance, in early 2015, the Institute of International Education found that the trend toward fewer and fewer Japanese going abroad to study was continuing. In 2008, the number of Japanese studying in America (30,000) was only about 60 percent of the number that had been there ten years previously. In 2015, this number fell by 50 percent. In other words, compared to the 50,000 Japanese students who had been studying in America in 1998, there were now only 15,000. This was not because more Japanese students were going to places like Australia or China; those countries also reported declining numbers of Japanese exchange students. The fact was that in an age of increasing internationalization and globalization, the young generation had less and less interest in learning about the outside world, and was not as well-equipped to deal with it.
Research between 2000 and 2010 by university analysts for publishers like Benesse indicated that Japan’s young people were now less adventurous and less willing to take risks than their elders. There seemed to be fear that with widening gaps in society between rich and poor, making a mistake at a young age could prevent one from moving up or could even push one disastrously down. Thus ambition was muted.
Furthermore, as media strategist Mariko Sanchanta wrote in 2013, quoting a top executive of a Japanese bank, “It is impossible to persuade young bank executives to study abroad even if they are fully funded by the bank. They’re concerned about falling behind their peers if they go overseas.” Young people also seemed to think of Japan as safe and of other countries as dangerous. Books like Mitsuko Takahashi’s Don’t Let Your Daughter Study Abroad, published in 2007, fanned this fear. In a survey completed in 2012, the Ministry of Education, Culture, Sports, Science, and Technology had found that fully 60 percent of Japanese students were not interested in studying abroad. The main reason, cited by 52 percent of the students surveyed, was insufficient foreign language capability. This was closely related to the second reason, cited by 31 percent of students—inability to make friends and concern for the safety of the environment in which they might have to live. Thus, despite their high PISA scores, it seemed that a generation of Japanese students was being educated in such a way as to make them less capable of dealing with the outside world on which Japan’s future depended.
This contrasted dramatically to the trends in most other countries, where the number of students studying abroad was multiplying rapidly. Thus, in 2011, even as the number of Japanese students in America was declining, the number of Chinese students there rose by more than 40 percent to 156,000. The total number of international students in the United States in that year was 723,000, an increase of about 5 percent from the previous year. Japan seemed to be going against the flow. Significantly, the decline was more pronounced among male than female students, reflecting the fact that corporate sponsorship of overseas study had declined sharply. Men were led to view overseas study as a greater risk to their careers than did women, perhaps because the women knew that the big corporations were not going to hire them in any case.
SONY MERGES WITH SAMSUNG
Throughout the 1990s and the first decade of the twenty-first century, the once-fabled companies of Japan, Inc. had steadily lost ground to competitors in Asia, the United States, and Europe. Number two Japanese automaker Nissan had to be rescued by bringing in a foreign CEO and forging a close joint venture and partnership with France’s Renault. In 2012, once-mighty Panasonic recorded the biggest losses of all time for any Japanese