Japan’s Options

TOKYO – The current tensions between China and Japan have revived talk about how far Japan has fallen since its glory years of the 1980’s. To the extent that this sense of decline is grounded in reality, can Japan recover?

Japan’s economy has suffered two decades of slow growth because of the poor policy decisions that followed the collapse of the country’s massive asset-price bubble in the early 1990’s. In 2010, China’s economy surpassed Japan’s in total size, though it is only one-sixth the size in per capita terms. In 1988, eight of the top ten companies in the world by market capitalization were Japanese; today, none is.

But, despite its recent poor performance, Japan retains impressive power resources. It possesses the world’s third largest national economy, sophisticated industries, and the best-equipped conventional military forces among Asian countries.

Only two decades ago, many Americans feared being overtaken after Japanese per capita income surpassed that of the United States. Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war between the two countries. Futurologist Herman Kahn forecast that Japan would become a nuclear superpower, and that the transition in Japan’s role would be like “the change brought about in European and world affairs in the 1870’s by the rise of Prussia.”