Steve Blitz Morning Notes

A interesting article in today's FT written by David Pilling lays out the generational shift in Japanese leadership towards a group that feels no real moral ties to the U.S. and its defense umbrella. This generation feels the gravitational pull of China's economy -- the big offshore factory for many of Japan's manufacturers. Japan may not have the GDP growth but it has a sustained current account surplus and an aging population looking to invest its savings someplace -- someplace with a young and growing dynamic economy that generates an excess return on capital. East Asia has collected and controls the capital necessary to finance its growth. At the same time East Asia's growth is less and less dependent on growth from sales to Europe and the U.S.

This shift in the center of the world's economic gravity is not trivial -- and Russia is very likely looking to align itself with China, Japan, and India rather than the traditional West that answers Russia's new found capitalism with NATO membership for its former SSRs.

For U.S. economic policy the importance of no longer allowing the Asian trading nations to sustain cheap currencies is critical. Failure to let currencies hit market-determined levels will continue to transfer wealth from West to East. It is a huge mistake to allow a strong dollar policy to again underpin the U.S. recovery by sustaining foreign capital inflows. The cost of credit would stay too low for too long and fail to allow domestic saving to balance with domestic investment. The "opportunity" to address these problems in this recession will have been lost and the next downturn will be worse.

In the article, Mr. Pilling writes:

The centre-left Democratic party of Japan, a loose alliance of LDP defectors, technocrats and former socialists now almost certain to win power next month, has explicitly questioned some of the alliance’s sacred cows. In its 2007 manifesto, its latest word on the subject, it said it would “re-examine the role of the US military in the security of the Asia Pacific region and the significance of US bases in Japan”. The manifesto also stressed the importance of building trust with Asian neighbours, particularly China. . . . .

. . . . When push comes to shove, the DPJ is likely to walk away from many of these positions. There are already signs of realism flooding the Good Ship Rhetoric. Yukio Hatoyama, the party’s leader, recently stressed the need to preserve “continuity in diplomacy”.

Yet the DPJ’s suggestion that it wants to forge a new, more equal US alliance has unnerved Washington. Even under the alliance-friendly LDP, Japan’s US friends have struggled to keep Japan in the frame. Hillary Clinton, now secretary of state, deeply offended Tokyo when, in a 2007 article in Foreign Affairs, she stated baldly that the Sino-US relationship was the world’s single most important. The remarks evoked painful memories of her husband’s notorious “Japan passing”, symbolised by his diplomatic no-no of skipping Tokyo on his way to Beijing. Washington has also rattled Japan by allowing North Korea to tiptoe to nuclear status.. . . . .

. . . . Japan’s supporters struggle against those, sometimes called the “continentalists”, who favour a “go to China” policy on issues from global warming to North Korea. So seductive is the argument that the US should cut out the middle-man, that Mike Green, a top adviser on east Asia under President George W. Bush and a paid-up member of the Popeye Club, felt obliged to spell out the counter-argument in recent congressional testimony. “Rather than decreasing the strategic significance of Japan to the United States, China’s growing power has made the US-Japan alliance even more important,” he said. . .. .

. . . . Yet the imminent victory of the DPJ is more than a political realignment. It also marks a generational shift. For virtually the first time, Japan will be run by leaders with no strong memory of the war. They will seek to recalibrate an alliance with the US shorn of wartime guilt and postwar dependence. As hard as it will be, they will also strive to construct a security alliance that acknowledges Japan’s ties with Asia and China’s growing regional clout. As one US commentator says of the DPJ’s likely posture towards Washington: “Sit, stand, bark! They’re just not going to do that any more.”