The theory goes that Japan's national power fluctuates in 40-year cycles.
In 1905, Japan won the war against Russia, defeating an opponent much more powerful than itself. Then, 40 years later in 1945, Japan lost to the United States. If the Russo-Japanese war is a high point, then Japan hit rock bottom in World War II.
Japan again experienced a peak 40 years later, after undergoing a remarkable postwar recovery to become an economic superpower in around 1985. Economic strength took the place of military might in postwar Japan to boost its national power.
If the 40-year theory is correct, Japan's next low will come in 2025, which the government must do everything in its power to avoid. Unfortunately, the Fumio Kishida administration is likely to go ahead with tax hikes and monetary tightening that will damage the economy. If the government wants to avoid ushering in an era of burden on its people, it must change its course.
Another year considered to be rock-bottom for Japan is 1867. The threat of Western powers led to great upheaval during Bakumatsu, the final years of the Edo period. Consequently, the Edo shogunate relinquished power, ending its rule of more than 250 years.
The Emergence of Japan as a Modern Nation
However, the following year marked a new beginning — the start of the Meiji era. Japan began to take shape as a modern nation. The Sino-Japanese War ended, and 38 years after the fall of the Tokugawa shogunate, Japan won the Russo-Japanese War in 1905.
In just under four decades, Japan's quest to become a modern nation brought a superpower to its knees. Japan reached its zenith, becoming a nation worthy of respect throughout the world.
But Japan's subsequent expansion into mainland China led to its isolation from the international community. Its war against the United States ended in defeat in 1945. Exactly 40 years after its victory over Russia, Japan was scorched to the ground, hitting rock bottom again.
After WWII, Japan joined the Western Bloc and bolstered its economy, entering a period of rapid growth in the 1950s. By the late 1960s, its gross national product (GNP) was only second to that of the US. In 1986, 41 years after its WWII defeat, Japan experienced an unprecedented economic bubble, and the nation seemed to have achieved its height as a major economic power.
But in 1991, the economic bubble burst, and the Japanese economy entered into a long period of stagnation. In 2010, Japan's gross domestic product (GDP) fell to third place after being overtaken by China. According to the 40-year cycle theory, Japan is now on its way to hitting another low in 2025.
What Leaders in Their 60s Experienced in Their 20s
There is a reason why the theory is based on a 40-year cycle. At any given time, the core of the political leadership of Japan is generally formed by people in their 60s. What they experienced 40 years ago in their 20s influences their policy decisions.
The leaders at the time of the Russo-Japanese War were in their twenties during the Bakumatsu. The Shimonoseki campaign and the British Bombardment of Kagoshima had infused the fear of foreign nations to their very core. Because of that, they won the war by negotiating a peace treaty without fearing public outcry, instead of recklessly continuing the war.
On the other hand, the leaders who led Japan to ruin in WWII were in their 20s when the nation was celebrating its victory over Russia. Instilled with an image of an invincible Japan, their overconfidence is likely to have contributed to their willingness to plunge headlong into war with the United States.
Furthermore, the leaders of Japan at the height of its economic power were in their 20s when Japan was defeated in WWII. That generation knew first-hand the might of the United States.
As for today's leaders, they were in their 20s or 30s during Japan's transformation into an economic giant. They must be careful to pursue well-balanced policies and exercise prudence.
Will Japan Hit Rock Bottom in 2025?
The 40-year cycle theorizes that Japan will experience another low in 2025, just two years away from now. At the moment, Japan's economic strength, which forms the core of its national power, shows no clear signs of improvement.
According to the Cabinet Office, Japan's potential growth rate — a key indicator of an economy's strength — remains low at 0.5%. Greater productivity is necessary to compensate for Japan's shrinking population and workforce, and the key to greater productivity is technological innovation. But failures and drawbacks, like the launch of the Epsilon-6 rocket, have become prominent in the news.
Growth strategies, such as those centered on decarbonization, will need time to take effect. Japan's top priority should be to restore the economy from the ravages of the COVID-19 pandemic. To accomplish this, the government must boost consumer spending and capital investment, which together account for about 70% of Japan's GDP.
Instead, the policies pursued by the Kishida administration will become headwinds, not tailwinds, for Japan's economic growth.
First, the proposed tax hike. The government has recently decided to finance part of the defense buildup by raising corporate, income, and cigarette taxes "at an appropriate time in 2024" or onwards, according to Kishida.
But a corporate tax hike by 4-4.5% runs the risk of stifling corporate capital investment and wage increases. A higher income tax will discourage consumer spending.
In light of the situation in East Asia, Japan will have to build its defense capability. But if this is attempted at the expense of the citizens' livelihoods, Japan's overall national strength will decline.
Furthermore, some within the Liberal Democratic Party (LDP) are proposing a consumption tax hike to finance countermeasures against the declining birthrate.
The Double Punch of Higher Taxes and Interest Rates
Although the independence of the Bank of Japan is stipulated by law, it is "in effect, a subsidiary of the government" as one government official put it. It is only natural that the Kishida administration, eager to move away from the Abenomics policies of the late Prime Minister Shinzo Abe, would also have the BOJ turn from the massive monetary easing that formed the pillar of Abenomics.
In fact, the BOJ's decision, led by Governor Haruhiko Kuroda, to raise the cap on long-term interest rates on December 20 was "effectively a rate hike" according to a market participant. The move came as a surprise given Kuroda's previous statements.
One theory is that he intends to prepare an environment that would enable the next governor, who will take office by the spring of 2023, to proceed with monetary tightening in compliance with Kishida's policies.
The government might consider lifting the cap on long-term interest rates and raising short-term interest rates in the near future. But this will lead to higher interest rates on housing loans and corporate lending, which could dampen housing demand and business activity.
The double punch of higher taxes and interest rates will deal a heavy blow to the Japanese economy. Before Japan reaches rock bottom in 2025, the Kishida administration needs to urgently reconsider its policies.
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(Read the article in Japanese.)
Author: Nobuhiko Yamaguchi