Asia Foreign Policy Update Forum Address - John McCarthy

H. E. Mr. John McCarthy, Australian Ambassador to Japan

Sydney, Australia
April 30, 2003

MR JOHN McCARTHY: Well, thank you very much, Philip, and thank you, ladies and gentlemen, for doing me the honour to come along to this luncheon today. I should also like to acknowledge the presence of the Japanese Consul-General in Sydney, Mr Kato here today, as well as the representatives of several Japanese companies. I’m delighted to see them here, although I have to say I am somewhat daunted always by telling people about their own country. I always find that a little bit difficult to do, but I am going to do my best.

What I would like to do is talk to you today - and I emphasise that really I am giving my personal views - I am not representing in a formal sense what the Australian Government’s attitude is to Japan. But I would just like to, I think, give you some impressions that I have after a little bit more than 18 months in Tokyo. You would find, were you to go to Tokyo, there would be plenty of people who disagree with what I have to say, because it is a place now where there are a lot of very well informed views on what is going to happen to Japan and they very often differ considerably from each other. It’s that sort of place and that’s what makes it, I think, very interesting.

Now, if you were to be reading the international press about Japan, the Australian press, but particularly newspapers such as the Asian Wall Street Journal, Financial Times, the international press generally, I think you would be forgiven for having a less than sanguine view about the future of that country. And I don’t want to deny that there are enormous problems in Japan, nor would I wish to deny that the Japanese still have a very long way to go and have, in some respects, moved too slowly on reform. But what I would like to say, I think, essentially, is that perhaps a little bit more progress is being made than the Japanese and this particular Government in Japan, are generally given credit for. I don’t wish to appear as an apologist. It’s merely my impression, but sometimes it is the wrong impression that people have overseas.

But the problems are considerable, and I think a lot of you would be well aware of that. For the last 10 years Japan has been in and out of recession. It has had four recessions. From a country which was booming in the 80s, it has spluttered along during the 90s. It has amassed a very considerable public debt; something like 140 per cent of GDP. It has a very serious non-performing loan problem in the banking sector, which is in clear need of restructuring. Deflation is almost universally acknowledged as a problem which has to be attacked if the Japanese economy is to emerge reasonably successfully from the present doldrums in which it finds itself. The stock market is in very bad shape. It is at its lowest point for some 18 years. To some degree that can be attributed to the worldwide slump in stocks, but by the same token, there are clearly reasons behind this which are peculiarly to do with the state of the Japanese economy.

The Japanese Government has a problem in that there is an enormous amount of pressure on it to put through a successful program of reform. But to put through a successful program of reform a lot of the existing economic structure, quite clearly, has to be damaged; has to be broken before you can rebuild again. You come against the immediate problem when talking to Japanese about what do you do with the people when the structure is broken? There isn’t the safety net in Japan which is sufficient to withstand this sort of damage to the economy that people envisage will occur during the restructuring process. And so the argument that you constantly hear in Japan is whether you should apply the anaesthetic first in sufficient quantities, which means spending and stimulating demand, in order to withstand the pain of restructuring. And there is an argument that the LDP stalwarts will constantly put up that the economy needs restructuring, but not just yet, because it’s going to be a little bit too painful if it’s done right now. But that’s a constant dilemma and a constant debate.

You also have a problem when you’re talking about dealing with deflation, that most of the tools available to deal with deflation are exhausted. Monetary policy has a limited effect when interest rates are already close to zero, and it is difficult to use fiscal policy (a) when you’ve promised that you’re not going to do it, and (b) given the size of the national debt and the risks of further inflating that national debt.

Now, what sort of guy is Koizumi, because you would have read a lot about him. You would have read about his reformist aspirations, his very unusual style for a Japanese politician and, you know, he is unusual for a Japanese politician, particularly a Japanese LDP politician. This is my impression of him.

I don’t think he is somebody who has just come to power because he has got flair and because he has a good unusual political style. He has that. He is very good with the media. He is unusually good with the media by the standards of almost, I think, any politician, but particularly in Japan where politicians tend to be rather po faced, unresponsive, very much prepared, very staged. He is very good, and the public respond to that.

But because of a lot of the public hoopla about Koizumi, I think people fail to see that, in fact, he is quite a careful conservative politician in what he actually does. What he says he will do maybe inflates expectations, but in terms of the risks he actually takes at the end of the day he is quite careful. He is also quite conservative in other respects. Right from the word go he has been very pro-American. He belongs to the conservative side of the spectrum in the sense also that he sees advantage in Japan taking a more outward looking role in terms of external policy and defence policy.

He is also on the conservative side in terms of his view of Japanese nationalism. I am not suggesting for a moment he is on the far rights of the Japanese political spectrum, not at all, but his visit to Yasakune Shrine for example, is evidence, I think, of a deeply felt belief that this is the right thing to do for a Japanese Prime Minister. Now, he is not the sort of politician who spends ages on the telephone talking to Parliamentary colleagues, bringing the LDP along with him. He is not that sort of person. Nor is he a person that gets deeply into the substance of policy. What he is, however, is very good at assessing political risk, judging timing and when there is advantage, making quite bold political moves, which he did, for example, when he visited Pyongyang in the autumn of last year, the northern autumn of last year.

How does this translate to his political style and his progress on reforms? You will hear a lot of views that really reform has got nowhere, that Koizumi says he is going to do something and nothing gets done. I don’t actually think that’s quite right. On, for example, this issue of non-performing loans, quite a lot is actually coming into play and has come into play in the last two or three months. The proof of the pudding, I think, will be in the eating. We will have to see what is going to happen over the next six to nine months, but thus far, things are happening - tougher inspections of banks are actually taking place. The methodology to assess bad loans - what is a bad loan, and what isn’t a bad loan - is much tougher with more rigorous accounting systems being used. A few weeks ago an Industrial Revitalisation Corporation was created which is intended to assist companies that are viable although in bad shape in return for some fairly strict restructuring undertakings. There is, of course, some cynicism about this in Tokyo, but in the last couple of months I have also picked up a certain sense that perhaps a few things are beginning to happen after all. And if you look at also what has happened in other areas of restructuring, attempts, for example, to restructure the post office, or to restructure the system of funding highways which has got a huge amount of money in it in Japan because it funds a construction industry, whereas Koizumi has not been able to get 100 per cent of what he has aimed for, I think a good argument can be made that he has thus far perhaps attained 20, 25 per cent of what he has aimed for. Two years later he may be able to get another 20, 25 per cent. So it is not really a negative balance sheet. There are quite a lot of achievements.

I think also if you look across what is happening in Japan you do see changes happening in business. The examples are the management of Nissan and Mitsubishi Motors which, under foreign management, have actually made some quite considerable changes, but it is not only that. The successful Japanese companies are still, you know, being highly successful, like Toyota. But other companies are taking very hard decisions on letting people go and on restructuring operations more generally. Still, nothing like enough, but it is happening gradually over a period.

I could give other examples, eg. some changes in taxation which will be beneficial. But the main point I want to make, I think, is this; that Koizumi perhaps in concrete terms has not achieved what he said he hoped to achieve, but he has achieved part of it, and two things are clearly coming through.

One, reform is on the agenda, firmly in the mind of every Japanese in a way that it wasn’t a couple of years ago. And secondly, in all the various areas where he has sought to achieve some reform, at least beach heads have been established which will subsequently, it is hoped, allow further reform to take place.

Where is all this going to leave Japan? I think you might talk of three broad scenarios which you hear discussed quite frequently in Tokyo and outside. The first is what you might call genteel decline, and that is the view that essentially Japan is not going to recover but is it not going to collapse. It simply has too much money in the economy for it to collapse and its foreign exchange reserves are too extensive to allow it to collapse. There is no question of it being an Argentina. But, because the tough decisions aren’t going to be taken, over a couple of generations it is going to fall into irretrievable but gradual decline. And you hear that view and it’s a view that you can legitimately hold. I don’t hold it. I think it ignores the Japanese capacity for ingenuity, organisation, their technological advantages and, at the end of the day, the determination of the people not to let that happen. Also I think it ignores the changes that are beginning to take place.

But bear in the mind the population factor which is a big issue in Japan, because the population is beginning to decline, or it will from next year - from a population of 127 million it will fall to about 100 million by the middle of the century, and there will be corresponding significant changes in the age structure of the population - which has enormous implications for the economy and for supporting that group of older people. And that is something that has to be overcome and it’s very difficult.

The second, I think, view you hear is what I call the turn on the sixpence theory, and that is that the Japanese are beginning to arrive at a stage where there will be shortly consensus throughout society that drastic and radical change will have to take place and it will take place, but probably Japan has to fall lower towards the bottom before it can do that. The view is that Japan has done it before, it turned on a sixpence in the Meiji Restoration, it turned on a sixpence very, very quickly after the Second World War. I don’t see that pressure there yet, and I’m not sure that it can happen like that. It doesn’t seem to me somehow realistic. These situations take really a lot of time.

Now, the third view, and this is one which I think I subscribe to, is that Japan will continue to change and continue to reform gradually. Not as quickly as we would like it, not as quickly as many Japanese would like it, but that change will take place. And at the end of that process, maybe another 15 years, you will see as having emerged a leaner and fitter economy. That is something that I think is feasible.

Another view is that Japan won’t move sufficiently fast, some five or six years down the line, far more radical measures will have to come into effect and that the Japanese people will take those more radical measures. It might involve, for example, the collapse of the LDP and new political reconfigurations emerging which will take the necessary steps. It could happen. I don’t rule it out. But somehow it seems less likely, and it is less talked about now than it was perhaps 18 months ago.

So, summing up, what I want to say is essentially this: reform is very tough anyway. There are people in this room who know that much, much better than I do. It usually takes a long time. You could argue that Australia has been under a reform process for 20 years. Japan has been seeking to reform seriously maybe four, and only just beginning to seriously get going in a tough, hard, rigorous way. Bear in mind that this is a harder society and a harder economy to restructure than most other economies in the West. It is effectively a one-party state. You look at the problems of changing one party states. Look at the problems of changing the Soviet Union, look at the problems of changing China, where at least you had the top strata of policy makers broadly in agreement in the way to go.

Look at the changes in another way, another sort of one party state totally different, Indonesia - very, very much harder than undergoing change, making change take place, for example, here, United States, Britain, New Zealand. And the reason is that all the main sectors of society are integrated and most of them have a considerable stake in the status quo. Very, very hard to shift. So they’ve got to overcome that. But, by the same token, in my view there is movement taking place in Japan slowly - not as quickly as we would like but it is still taking place.

Now, what about the immediate environment, the international environment in which Japan operates. You can’t really look at what is happening in Japan and the potential relative decline of Japan without looking at what is happening on the other side of that mirror, and that is the rise of China, because I think most people who spend time thinking about these issues in Tokyo would see the rise of China as being the overwhelming development for the East Asian region for the next two decades. To some degree, I think we have had our eyes taken off that particular ball by what has been happening in the Middle East since 11 September, and also what is happening in the Korean Peninsula more immediately.

But the overwhelming external policy preoccupation of the Japanese is how to manage the rise of China. I’m not talking here about containing China, I’m not talking here just about rivalry with China, but how to deal with this new phenomenon. Now, in one sense the Japanese are dealing with it by going with it, by investing very heavily in China, by working with the Chinese. Their trade relations are there, their investment relations are growing and increasingly the major Japanese corporations are going offshore to China.

So they are dealing with China in one respect by going with it, by joining with it to their own advantage. Even though there are problems created in Japan by moving offshore, there are still enormous economic advantages in so doing. But also of course what they are looking to is to see how they can deal with the rise of China to avoid being disadvantaged in their dealings with East Asia, and that is behind both what Japan is doing in terms of its policy of a series of FTAs - free trade agreements - with East Asian countries, and what China is doing with its policy of one great big free trade agreement between China and the ASEAN countries. It is a jostling for position as China increases in size and in power and, in a relative sense, Japan diminishes in economic influence.

The second external preoccupation is the more immediate one of the Korean Peninsula - what is happening in North Korea. Let me just say right now that in policy circles in Japan, some would argue that this is the most important security issue facing Japan since the Second World War. And you can see that if you look at the proximity of North Korea. There are other issues which colour Japanese perceptions of North Korea, particularly the abductee issue which has been running - the domestic issue involving what to do in relation to Japanese who were kidnapped by the North Koreans in the ‘80s and who’ve since come back to Japan and what more the North Koreans need to do - it’s a very, very big issue at a popular level. But amongst the policy makers, the real concern is the possibility that North Korea may become a nuclear weapons state and all the unpredictability that that involves. And there is currently enormous focus in Japan going on to that issue.

I shall also mention, in relation to the Iraq war, the stance they’ve taken has been much more forward looking and much more supportive of the United States than most of the forecasts would have been had we foreseen this scenario two or three years ago. There’s several reasons for this. One is Koizumi’s own view and the view of his government that this is the way to go, this is the correct thing to do, and this is in Japan’s overall strategic interests. No question about that. The second factor, which is just as important, is that the Japanese were seeing Iraq through the prism of North Korea, that it is crucial at this particular period in time that like minded countries - which means essentially the United States, Japan, South Korea as well as other countries such as Australia or members of the P5, Britain and France - approach the North Korean problem with as much unity as possible, that it was to the disadvantage of all of us if splits were to appear. Equally, of course, in a narrower way the Japanese saw it as absolutely crucial that they could work in tandem with the United States - and that very much remains their policy and it is, let me say, a crucial issue.

The other point I’d just make, relations with the United States, I think I have probably covered. It remains very important to them, it remains important because that’s the way the government thinks. It also remains important because most Japanese policy makers would see advantage in retention of a considerable American strategic interest in East Asia at the time of the rise of China. This is not because of a particular threat from China, it is merely because of the natural need to see balance when one part of East Asia is growing at the speed which China is.

The only other point I’d make is Russia and the Japanese have shown some interest in improving their relationship over the past 18 months or so. This is partly because of the possibilities of getting oil supplies from Central Siberia to Japan. No decisions have yet been made on that by the Russians, but they are likely to be made shortly. But also I think it’s legitimate to see it in terms of balance of power politics, as relevant to the rise of China. Countries just - that’s the way they do things.

I think probably that’s all I want to say on Japan. I just want to make a couple of points about the relationship with Australia.

Japan does remain very important to us. I think people in this room wouldn’t disagree with that, because I don’t know that you’d be here if you did. But a lot of people have kind of got disillusioned. You know, what is this country doing? It’s not doing real well. Is it as important as it should be? Perhaps we should be going off to China. My response to this would be yes, you really should go to China, there’s a lot happening, but don’t ignore what is happening in Japan. It is still a country which is one and a half times the size in economic terms of the rest of East Asia put together. You would think it has sunk over the last 10 or 15 years. In fact it has grown. There have been four periods of recession but it has had occasional periods of respectable growth. And it is still a country which in ways is enormously innovative and where there is enormous talent and considerable capital. All the estimates suggest that demand for our resources will continue to increase in coming years, in the next five or six years into Japan and there are numerous opportunities for Australians to do business in Japan. But it is very, very important that the Australian business community maintain that in their minds.

And I would also say that there is something of a tendency, I think, in Japan not fully to appreciate what has happened in this country over the last 15 years or so in terms of our own economic restructuring, the sort of economy we now have, and perhaps a little bit more attention could be paid on the part of Japanese business to aspirations in Australia to do more with Japan. There are some people in Japanese business, some people in Japanese government who fully appreciate it, but I certainly would like to endeavour in the time left to me in Japan to try and do more because it could be a bit of a deficiency and it’s something I think both Australia and Japan need to work to make up - because opportunities are being missed and there is a little bit of a tendency in each country not fully to see what the other can do for it.

And I know that on your tables - I’m doing a commercial here for Hugh Morgan - there is an advertisement for the meeting in Kyoto in October of the Australian/Japan Business Consultative Council. It needs support. It does some very, very valuable work for Australian business. The more Australian business can do to contribute to it the better.

Finally, we’re working on a trade and economic agreement with Japan. An FTA is not yet in sight. It won’t be obtained with Japan any time soon. The reasons why you can’t have an FTA - free trade agreement - are simply that agriculture is too much of an issue between our two countries, at least at this time. But there is a fair amount else that can be done to facilitate trade and investment between Australia and Japan and at least we can keep in place a process of looking at what might be done down the line on trade liberalisation - potentially at the end of the day an FTA. Not any time soon, but potentially at the end of the day. But this is going to be hard, and in the next two or three months a lot of work has to be done with the government of Japan on this. Again I thank the Japanese business representatives here.

Okay, Philip, I’ve done my bit. Thank you very much.

CHAIR: Ladies and gentlemen, it is my privilege and John has very kindly agreed to take some questions. John and I have both worked in the media in Canberra and, as we used to say, there were no embarrassing questions, only embarrassing answers. Please feel free to ask John whatever questions you might like to ask and then if you wouldn't mind and then if you wouldn't mind identifying yourself or your organisation as you do that. We have a question?

QUESTION: John, you went a certain distance with North Korea and the problems that poses, especially with the deconstruction of Kedo and the agreed framework. Several Japanese politicians, including Prime Ministers Nakasone, Kishi, and his brother Sako Sato have said at various times that Japan reserves the right to go nuclear. One of the trip wires would be if North Korea developed nuclear weapons. Can you give us any steer on that subject? I know it's very sensitive, but is there anything you can tell us, reassuring or otherwise?

AMBASSADOR: Sure, well, first off it is worth perhaps mentioning that the Japanese have the capacity to put a nuclear weapon together very very quickly. They have got extremely capable technicians, top class scientists -- that's not a problem; that's not the issue at all. The issue is whether they intend to as a matter of policy.

The answer is: I don't think so. But, like anything, in the final analysis way down the track you can't rule it out. Japanese Ministers have alluded to the possibility in hypothetical terms. But, I think there are several things that have to happen first. I think a couple are already happening.

As I said, policy makers in Japan are acutely concerned about this North Korean issue. You can understand why. If the North Koreans were to use a nuclear weapon it wouldn't be on China; it wouldn't be on Russia. It is most unlikely it would be on their compatriots in South Korea. The most obvious target is Japan where, of course, there are American military bases as well, which make it perhaps more inviting as a target.

So, you can understand this concern. What is happening right now is there is a greater interest in Japan on missile defence than there was even four or five months ago. Now, Japan was already going in the direction of missile defence -- the speed with which it is going in the direction of missile defence is much much greater. Missile defence is a system which would give them basically an anti-ballistic capacity to hit whatever is incoming from the Korean Peninsula - a significant anti-ballistic missile defence capability.

I think the second thing that is being talked about is Japan getting offensive capability which they currently don't have under their Constitution. That may well develop. I simply don't know. I think you are looking a very long way down the track before they decide to develop a nuclear capability and when I raised this question with a group of Japanese experts on these issues the general answer that came back was that it was really very unlikely for a whole host of political reasons. Bear in mind this is the country that was bombed -- Hiroshima and Nagasaki were bombed. It is very unlikely for political reasons unless the whole international structure to maintain the cause of non-proliferation, the NPT -- Non-Proliferation Treaty -- were to break down in which case you could see a totally different international situation, part of which might involve Japan going nuclear.

But, there are many stages to go through before we get to that and it is certainly not an item on the agenda right now.

QUESTION: Ambassador, I would like to ask you another difficult question, which I am provoked to do because you are indeed a real diplomat, and it concerns the Kurile Islands and it is a question not so much with the political issue of the Kurile Islands, but concerning Japan's energy situation. There has been a lot of talk over the last 10 years, and it is increasing in intensity, about the possibility of Japan importing from Russia over Sakhalin oil and gas by pipeline but the Kurile Islands issue is still the stumbling block. Would you care to comment on this?

AMBASSADOR: It is still a stumbling block but there are two aspects: in terms of what the Japanese are seeking from Russia there are two areas of real interest I think. First of all, what might be done to bring oil from Central Siberia which would reduce Japanese dependence for oil from the Middle East from 85 per cent to 65 per cent dependence. So, that is quite important and the Japanese are very interested in that.

In relation to Sakhalin, which is the area in the Far East of Russia, there is interest in what might be done by way of ongoing efforts in terms of importing oil and natural gas, but also what more might be done in the future, particularly in relation to natural gas from Sakhalin. The question of the Northern Territories - the Kurile Islands, as you rightly point out, has not yet been resolved and it has been an issue which has been a stumbling block.

But what our sense is, certainly since Koizumi's visit to Russia quite recently - a few weeks ago - but even before then, is that while there is no question of the Northern Territories issue being shelved by the Japanese there is some disposition to talk about the question of further energy supplies from Russia without automatic reference to the Northern Territories issue and that seems to be also the disposition of the Russians.

CHAIR: If we try to end promptly at 2 o'clock we will have time I think for one more question.

QUESTION: I ask you for your comments in regard to the foreign policy that concerns the Japanese, you indicated that the Japanese Government was very forward looking in relation to the US initiatives and I understood you to say in relation to the Middle East and the military action there, have they given any indication, can you tell us, of support for Australian action in relation to Iraq, the military action there?

AMBASSADOR: I think I can give you an unequivocal answer to that, firstly just to confirm, they were fully supported to an unusual degree, more than people would have expected, of United States action towards Iraq. They were one of the few countries that spoke up very very clearly in the Security Council in support of United States action. They have also expressed privately through me to the Government a view which suggested that they thought very positively about Australian policy both in terms of general political stance and the contribution of troops. I think the reasons for that are that there is a lot in common between what we were saying and doing and what the Japanese were saying and doing, but of course for constitutional reasons they were precluded from committing troops to that theatre.

But, their whole attitude, what they said, was clearly very very supportive of the role that Australia took.

QUESTION: I was wondering if you would, Mr McCarthy, give us your impressions of the very latest developments in the North Korean affair or crises and what is being revealed in the last couple of days of the substance of the talks in Beijing and what happens next or where they go to from here as we wait for the US response to what has been put on the table.

If I could have a second part to that question, what role directly will Japan play in subsequent negotiations and what will it have to offer to those negotiations or what can you tell us about what might be on offer to help resolve the crisis with North Korea?

AMBASSADOR: Much as I am tempted to I am actually not trying to duck the first question. I am a little bit out of touch because I have been travelling and I just haven't seen messages coming in. I am only really talking on the basis of press reports, but this is how I would see it. Obviously what happened in Beijing was a very interesting development but you could say that there are two broad views, and this isn't just in Tokyo, this is globally. The first broad view is that the North Koreans are essentially trying to negotiate for a number of things, including security guarantees, economic aid, with the capital which they have acquired through their interest in nuclear affairs, let me put it that way. They are trying to get the best out of it and then they are happy to go down to zero – total de-nuclearisation – that's one view.

The second view is that really they are playing for time; they have decided to go nuclear. We just don't know. Anybody who can be certain on this – they are a lot better informed than I am. That's all I can say. But those are broadly the two views. I think the point I have to make here though – I don't think there is any real doubt – certainly there isn't any doubt in Tokyo and I don't think there's any doubt in Australia – is that the negotiations track is the crucial one to explore. Then we will see what the North Koreans are really about.

What you will hear in Japan constantly is that although they are worried, they have doubts – all these different views about what North Koreans are up to – there is absolutely no question about the importance of a negotiations process.

Now, what will Japan have to offer? As you know the three main parties in talks so far, in this recent set of talks – are China, US and North Korea. The other two crucial parties that really have to come into the game are South Korea and Japan. Japan clearly has huge security interests and those interests have to be taken into account and their views have to be registered. Their view is they want – very similar to Americans – they want total de-nuclearisation of the Korean Peninsula and you can understand why.

What will they have to offer? At the end of the day they will have a lot to offer. They have, like the United States, a major economy which can assist North Korea, but they are not opening up the gates of aid just yet because there are two issues that have to be sorted out. One is the security issue, which is crucial to them, but secondly there is this very very difficult domestic issue of the abductees, which is very important in Japan. I guess there is a way to go yet, but clearly the Japanese have got a role, see themselves as having a role, and also have a great deal to contribute both in terms of ideas and at the end of the day ballast to hold the agreement together, if one emerges.

THE CHAIR: Once again, our warm thanks to John for a very frank and informative address and also for handling questions in the same way. I am sure we could go on for much longer but we do try and finish sharply at 2 o'clock. So, I have to draw a line there. Thank you for coming and thanks to you once again, John.