Kevin Rudd on Prime Minister Shinzo Abe and Japan’s Economic and Security Policies
NEW YORK – Asia Society
23 July 2015
TOM NAGORSKI: Good morning everyone and thanks for joining us, I should say good afternoon or good evening to those in other parts of the world. We are in New York, my name is Tom Nagorski and I’m the Executive Vice President of the Asia Society and we welcome our all to this ‘Asia Connect’ briefing call. Yesterday here at our New York headquarters Mr Rudd led and held a major forum and launched an initiative on India and its potential inclusion in APEC. Tomorrow night we’ll have a major event here – a special program looking at the US and Iran in the aftermath of the landmark deal. And on this, the ‘Asia Connect’ series we offer, as many of you know, insights on current policy developments in Asia and in US-Asia relations. The teleconference takes place thanks to the support of Asia Society Trustee Mitch Julis. Last month on this call we looked at India, China and potential collaboration between those countries in the area of climate change. And our subject today, broadly, is Japan. Specifically, the economic and foreign policies of Prime Minister Shinzo Abe one year into his second term. We are taking advantage of the recent visit to Japan of our speaker this morning, our President of the Asia Society Policy Institute, former Prime Minister of Australia Kevin Rudd. Now a few words of introduction, in the international arena Prime Minister Abe has pushed Japan to assume a stronger leadership role in global affairs generally and strengthen its commitment as an ally of the United States. Last year Mr Abe allowed for a reinterpretation of the country’s pacifist post-World War Two Constitution and much more recently, very recently, Japan’s lower house has approved two controversial security bills that would allow Japanese troops to fight overseas for the first time since World War Two. The US has welcomed that push towards a more assertive military but Mr Abe faces strong opposition at home from the Japanese public and also concern from key neighbours China and South Korea. On the domestic front questions remain about whether Mr Abe’s aggressive economic reforms, dubbed ‘Abenomics’, have been successful or will be successful. Particularly, if his three pronged approach, often dubbed the ‘Three Arrows’ – structural reform, fiscal expansion and easing monetary policies – all aimed at revitalizing the Japanese economy. As I said, today we’ll hear from Mr Rudd on his recent trip to Japan, his perspectives on Prime Minister Abe and his policy aims and achievements thus far. Mr Rudd will offer remarks for twenty minutes or so, we will then leave about 15 or 20 minutes for questions and answers from all of you. With that I’m pleased to introduce Kevin Rudd. KEVIN RUDD: Thank you very much Tom and greeting to all those who are listening in this morning. I look forward to an active discussion about this important topic. Often there is a huge amount of emphasis in our pan-Asian discussion of the role of China. Often there is a discussion about the role of rising India. But often neglected is the central and critical continuing role of Japan. People should not forget the fact that this is the third largest economy in the world. It is the second largest economy in Asia, after China. Where the Japanese economy goes so too does so much of the economic vitality of the Asia-Pacific region. It is not exclusively a Chinese economic phenomenon. The other point in terms of pan-regional interest is that the dynamics of Japan’s unfolding foreign and security policy under Prime Minister Abe also has wider regional implications – it is not simply a matter for US-Japan relation, it is also directly a matter for Japan-China relations, US-China relations and, of course, their respective relations with the Republic of Korea. It also dovetails into the wider security policy deliberations in South East Asia, and in fact South Asia given the particular nature of the evolving India-Japan relationship. So for those various reasons the strength of Japan’s economy, the regional and global significance of that economy still, as well as what is a dynamic and unfolding set of new arrangements in Japan’s foreign and security policy that I believe this is an important continuing matter for our policy discussion here through the Asia Society Policy Institute. As Tom mentioned just before, I’ve just returned from a period of time in both China and in Japan. In China I was able to meet with a range of government leaders as well as foreign policy leaders and foreign policy analysts and experts, as well as those from the Chinese military. In Japan I was able to meet with representatives of Prime Minister Abe’s office as well as those responsible for national security policy in Japan. These discussions have occurred within the course of the last few weeks. I hasten to add that my own conclusions should not be treated as gospel – they are simply the analysis of an interested, and I hope occasionally intelligent, observer. Let’s start by talking about Japanese national security policy, then let’s talk about Japan’s economy, then let’s move onto the thorny question of the future dynamics of Japan-China relations. First, on Japanese security policy. It is difficult to overemphasise the significance of the Japanese Government’s current exercise in the reinterpretation of Japan’s post-War constitution. The relevant provision of Article 9 of Japan’s post-War constitution reads, “That the Japanese people forever renounce war, use of force as a means of settling international disputes.” This has not been set in absolute stone since it has in fact been subject to a set of four reinterpretations since then: in 1950, on the establishment of the National Police Reserve; in 1954, on the legality of the Japanese Self-Defence Force (the SDF); in 1972, the reconfiguration of individual self-defence which had previously been addressed; and in 2014, on limitations on collective self-defence. So exercises in formal Japanese constitutional reinterpretation, as opposed to explicit revisions of the Constitution, are not unique in post-’45 period. However, it is quite plain that this reinterpretation is the most significant of all. Specifically, what this reinterpretation does is to bring about a couple of changes under Article 9 concerning the definition of collective self-defence. Firstly, under this proposed reinterpretation, if a country’s ship – for example a United States ship – attacks in Japanese waters, Japan would, under this interpretation, would now come to the aid of that United States vessel although under the new security policy it would still not be empowered to attack that third countries attacking vessel. The second and perhaps more significant reinterpretation of the Japanese Constitution and Article 9 is as follows: the new defence agreement will allow the Self-Defence Force of Japan with parliamentary support to respond to attacks on third countries (not just the United States) and thereby aid any allies, American allies, that are in close association with Japan provided that those attacks directly affect Japanese security and that the country or countries in question specifically request Japanese assistance. Of course, there are qualifying clauses in there, specifically three of them or perhaps four: one is the need to obtain parliamentary support and those of us who observe Japanese Diet politics over the decades understand that it is often more complex than the current majority currently held by the LDP in both the upper and lower houses; second, going into the future also, there is a qualification that if Japan was to exercise collective self-defence policies in relation to an ally of the United States and one in close association with Japan, it would require a determination of the Government of Japan as to the closeness of that association; thirdly, it also says that where that attack on an ally of the United States directly affects the security of Japan; and fourthly, the qualification of course is that that country in question makes a specific request of Japan for assistance. Notwithstanding these qualifying clauses, these do represent a very significant change on the historical posture of Japanese security policy. I think importantly, it is also necessary to emphasize what is occurring within the framework of these constitutional revisions as well – or constitutional reinterpretations to correct my own language. The first is this, in April 2015 the US and Japan agreed to new defence guidelines which enable Japan to participate in broader humanitarian and peacekeeping operations and, furthermore, it enables Japan to cooperate with the United States in cyberspace for the first time. It will also address the nature of US-Japan cooperation in war and peace, intelligence, surveillance, reconnaissance, air and missile defence, maritime security, asset protection, training exercises, logistics support and the use of facilities. These again are important, shall I say, sub-agreements which occur within the framework of the reinterpretation of the Japanese peacetime Constitution. For example, one of the practical manifestations of that is occurring this very month in July of 2015. In Australia every two years there is a major war-game with the United States called Operation Talisman Sabre. For the first time in its history, and this goes back many decades, the Japanese will be participating. Furthermore, consistent with these broad changes in Japan’s national security posture we also note that a couple of years ago, the State Secrets Law was amended in 2013 to enable the State or Government of Japan to block the public’s right to know. This of course is an important provision in terms of Japan’s ability to cooperate in sensitive military intelligence sharing arrangements with allied countries, given that prior to that 2013 amendment most public documents concerning Japan’s national security were liable to one form of discovery or disclosure or another on the part of the Japanese public. Putting all of these things together therefore, we are noticing decisive shift in the way in which Japan under Prime Minister Abe sees its future national security posture, its future national security flexibility in terms of its operations not just with the United States but with other allies of the United States in the Asia-Pacific region, and associated changes too in the way in which Japan acts to protect its own and allied national security information. Of course, these changes, these reinterpretations of the Japanese peacetime Constitution as they have worked their way through the Japanese Diet in recent days have not occurred without controversy. This has been a highly controversial debate and not just on the part of the Democratic Party of Japan (the DPJ) but various other political parties within Japan as well. There has also been active discussion within the ruling party as well. Importantly, we have seen a significant downward trend in opinion poll support both for the government and for Prime Minister Abe. I think it is fair to say that so soon after Prime Minister Abe’s re-election less than twelve months ago that his political judgement is that it is necessary to bring about these changes in the reinterpretation of Japan’s wartime Constitution to enable this new security posture to take effect, for these changes to occur very early in the Japanese Government’s political term so that there is sufficient time and space for these to be accepted as ‘normal’ over the coming years before Prime Minister Abe and his party, the LDP, have to face the Japanese electors once again. Let me turn to the Japanese economy before I conclude the third section of my remarks on US, China and China-Japan in particular and the upcoming 70th anniversary of World War Two on 15th August. Prime Minister Abe’s reform program from Japan does not simply extend to foreign policy and national security policy where his long term strategic concerns about China are paramount. They also go to the reform of the Japanese economy. Much has been written and much has been said about Prime Minister Abe’s ‘Three Arrows’ policy – what is described more broadly as ‘Abenomics’. What are the ‘Three Arrows’? Firstly, a decisive policy of fiscal expansion involving $210 billion plus, in fact, if you add the figure together probably something of $240 billion plus in two instalments since the early part of 2013. Secondly and most significantly, the Japanese Government’s decision under the new Governor of the Central Bank of Japan and supported by Prime Minister to engage in a US-style policy of quantitative easing, up to in fact 57% of GDP. The direct of QE in Japan has had the effect of lowering the value of the Japanese Yen on currency markets and the indirect effect of that, in turn, has been to provide a boon to Japanese exports. This is the second arrow of ‘Abenomics’. The third arrow and what is often described, perhaps unfairly, as the missing arrow is a deep program of structural reform to the Japanese domestic economy. In fact, it is argued that the first and second arrows – fiscal expansion, which as we know Japanese Governments have tried many times before and quantitative easing which is new in terms of the policy armoury being deployed by the Japanese Government – has been to provide an economic cushion for the much more difficult third arrow to be deployed. That is, far-reaching structural reform into the baseline of the Japanese economy’s structure and associated efficiency, effectiveness and ability to lift productivity over time. Of course, the heartland of this particular set of structural reforms lies in taxation, lies in the much troubled agricultural sector, in trade liberalization, but also in the role of women in the workplace as well. On taxation reform, the introduction of an increase in the consumption tax from 5% to 8% has had a demonstrable effect in terms of consumer confidence – namely, it has knocked consumer confidence around. Prime Minister Abe’s calculus is that he needs to bolster the fiscal capacity of the Japanese Government in order to discharge its range of responsibilities, not only longer term retiring levels of Japanese public debt but also dealing with the impending future calls on the Japanese budget both in terms of defence but also, much more significantly in fiscal terms, Japan’s ballooning social security and health expenditures with an aging population. Another element of this third arrow is agricultural reform. If ever there was an effective trade union anywhere in the world you could call it Japanese farmers. Japanese farmers have defied most previous Japanese Governments to change in any way the way in which Japanese agriculture has been organized, effectively, for centuries. However, this is where we have an intersection between Prime Minister Abe’s gradual implementation of agricultural reforms through formal policy change in Tokyo with Japan’s external trade agenda as well. For example, the recent bilateral free trade agreement between Japan and Australia contained provisions for the long-term agricultural access of Australian agricultural exporters to the Japanese market, with a very long phase-in clause. However, this will be compounded in terms of its intensity if an when we see the conclusion of the Trans-Pacific Partnership which of course itself will be embracing of agriculture. The reason why this is significant in terms of the prosecution of an agricultural reform agenda is that Prime Minister Abe’s strategy, I believe, is to use these external economic instruments in terms of trade policy agreements to affect added policy changes domestically in order to bring about greater productivity from Japan’s declining agricultural sector and also to release capital into other more productive areas of the Japanese economy for investment purposes and long term economic growth. There is a third part of Prime Minister Abe’s reform program which is highly complex indeed and that is to see a greater inclusion of women into the Japanese workforce. I’ve seen many figure produced to the effect of all of Japan’s growth problems would be resolved overnight if it was to obtain comparable levels of female participation in the Japanese workforce as we see in most other OECD economies. However, on this question Japan is rowing against centuries of tradition and as a consequence Prime Minister Abe is well familiar with the challenges that he faces. Nonetheless, he has a high level of political resolve on this question and has sought to lead from the front by not just having a large number of women in the Japanese Cabinet but insisting that public board appointments in Japan include women representation for the first time. This is very much a reform which is pending full execution but you have to commend the Prime Minister for taking this particular challenge head-on. I think Prime Minister Abe – knowing the dimensions of Japan’s economic challenges into the future with a rapidly aging workforce, a rapidly aging population, with a ballooning age dependency ratio – must increase female participation in the workforce particular if Japan continues its historical policy of not using immigration as a source by which to rejuvenate and to add to the quantity of its workforce. They are the policy settings that the Japanese Government has deployed. In terms of the success of those policies, the jury is still very much out. Critics of ‘Abenomics’ will point to the fact that in 2014 the economy went into two quarters of recession following the introduction of the Japanese consumption tax. Those concerned about the implementation of ‘Abenomics’ will also point to the fact that Japanese consumption, which normally represents 60% plus of any advanced economy, is still lagging in terms of its growth. Not simply because of concerns about the consumption tax, which has of course added to the general cost of living in Japan, but also because of deep-rooted consumer pessimism about the future and an aging population, a pre-disposition to save rather than to rely exclusively on government services to cater for a person’s old age, retirement and future health needs. Nonetheless, we have seen after the difficult numbers generated in 2014 in economic growth, where the economy slid into two quarters of recession, a modest rebound in 2015 albeit against the very low base of 2014. The important thing to note is Prime Minister Abe has an economic strategy and against many of the predecessor Japanese Governments on that score he has significant advantages over his predecessors. The implementation however will be difficult and hard, most things in political economy are difficult and hard as someone who speaks with a modest amount of experience on these questions. Time will tell whether in fact the economy will respond to these efforts at deep structural reform. However, I would conclude this section on the economy by simply saying this is the critical factor determining, ultimately, the size and significance of Japan’s continuing role in the region and in the world, both as an economic power but critically as a foreign and security policy power as well. Prime Minister Abe is fully aware of that fact. To conclude then on the question of US-China but, most acutely in the context of this conversation, Japan-China relations. We are on the verge of looking at a very significant statement from Prime Minister Abe on the 70th anniversary of the conclusion of the Pacific War as part of the Second World War. August 15 is the critical date. The Japanese custom is that every ten years a significant statement is delivered by the then Prime Minister of Japan to the Japanese people and to the world at large on their understanding of Japan’s involvement in the Second World War. Most commentary on this most sensitive of subjects begins with the Morayama statement of 1995. Those old enough to remember Prime Minster Morayama apart from his astonishingly bushy eyebrows will remember the fact that Prime Minister Morayama was also a socialist and, as a consequence, many in Japan and many around the world have interpreted the Morayama statement of 1995 as reflecting the sentiments of that side of Japanese politics rather than the mainstream of Japanese politics. It’s worth reminding ourselves briefly of what Morayama did back in those days. Morayama said that Japan formally apologized for its mistaken national policy advancing along the road to war and for its colonial rule and aggression that it caused tremendous damage and suffering to the people of many countries. The key question which is therefore on the minds of our Chinese friends, Korean friends and frankly friends and partners of Japan across the Asia-Pacific region not least the United States – is what will Prime Minister Abe do on this 70th anniversary? This occurs at a time when China for the first time will be organizing a massive military parade in Beijing to commemorate the War and celebrate the liberation of China from what, at that stage, was a considerable period of brutal Japanese occupation beginning in Manchuria in the 1930s and continuing after the Marco Polo Bridge incident of 1937, the total invasion of China through to 1945. This is an open question. No one knows precisely what Prime Minister Abe will say but the tonality and context of what he has to say will have a significant bearing on the evolution of China-Japan relations and, as a consequence, China-US relations for the decade ahead. Of course, this doesn’t occur in a vacuum. Everyone listening to this conversation is familiar with the backstory of the longstanding dispute between China and Japan over Senkaku/Diaoyudao, the islands in the East China Sea where tension remains considerable. People often forget this incident or series of incidents because it is no longer in the newspapers but its sobering to remember that the actual quantity of Japanese and Chinese military assets both in the air and on the sea have not changed that much since this particular crisis came to the world’s attention twelve to eighteen months ago. What has changed are the protocols surrounding this particular set of military movements by both sides, thereby, reducing we hope the possibility of any crisis arising from accident or miscalculation. But it would be absolutely wrong the international community to conclude that the absence of newspaper coverage means a resolution of the problem or even the partial resolution of the problem. Of course, Japan also faces territorial disputes with South Korea over the Takeshima/Dokdo Island, and of course in the case of Korea the long history of Japan’s response and, from Seoul’s perspective, their inadequate response to the question of Korean ‘comfort women’ in World War Two. This brings us to the very present and news of this in the last several days when Japan has just released its annual defence report. The publication of this report, we are advised through newspaper commentary, has been delayed some ten days because of a requirement on the part of the Prime Minister’s Office for the report to be amended to include a much more forthright set of warnings to the Japanese public about the significance of China’s military threat to Japan in the future. This has led to the somewhat odd circumstance that the 429 page Japanese defence report has now had an insert made into it containing a series of statements, long in number, concerning China’s recent military posture not just in the East China Sea but more broadly across East Asia. I quote some paragraphs from the recent insert as an indication of the nature of the sentiment towards China which is alive in the heart of the Japanese Government. The report for example now says, “China, particularly over conflicting maritime issues, continues to act in an assertive manner including coercive attempts to change the status quo and is poised to fulfil its unilateral demands highhandedly without compromise. Japan is concerned about China’s actions and we need to keep watching closely.” It makes a range of other observations as well. But the overall point in this part of the presentation that I would conclude with this morning is that not just because of the historical tensions between China and Japan over Senkaku/Diaoyudao, not just because of the looming significance of the August 15th statement from Prime Minister Abe on the Second World War, but also including in the last several days this significant annual defence report to the Japanese Diet on Japan’s overall strategic posture indicates that from Tokyo’s perspective the principal strategic challenge it faces for the future is China. That is what we’ve been able to deduce in terms of a combination of direct conversation, indirect conversation with those in office and not in office in Tokyo in recent times when I have been there but also from the available public literature as well. I’ll conclude my remarks there. NAGORSKI: Thank you Kevin for a great and sweeping look at the politics, the military developments and of course the issues pertaining to the Japanese economy. As the questions come in just one quick one of my own, about the new military posture. If you look at it from the outside, the current security situation in the region it seems I think to most outsiders, abundantly sensible to make these changes for modern Japan and given what is going on. But I wonder, given your extensive experience in Japan and particularly in China, should we now – you mentioned the protocols that now exist for these kinds of things between these countries – but should we now be more worried or less worried in the outside world about the possibility of, even if it is a small-scale incident, clash, accident, given what these new directive compel the Japanese to do in the event of…? Are you more sanguine or less sanguine about this kind of incident? RUDD: Thank Tom. I think if we put the current circumstances into a broader framework and seek to project ahead for the next decade, what I identify is a continued steady deterioration in the China-Japan relationship. What we’ve seen in the last period of time since the uncomfortable meeting between Prime Minister Abe and President Xi Jinping in Beijing at the APEC Summit last November is what I would describe as a temporary – perhaps not temporary – easing of the temperature. But an easing in the temperature against an underlying proposition that the deep-seated problem has not gone away. It is possible to argue that the mutual interests which Japan and China share over their respective economies and the difficult performances of both over the last year or so that mutual self-interest would triumph and you would see a much more vigorous re-engagement between China and Japan. To some extent that is occurring and this is welcome because if you have the second and third largest economies in the world impeding their natural levels of economic activity in trade and investment then of course that is going to impact the actual growth numbers of both those countries. If it is vibrant and it is consistent and it’s of significance then it will aid both parties. But my overall point strategically for the decade ahead is that a lot of trade and a lot of investment will still be impeded by the underlying political sentiment. For example, Japanese investors will still be concerned about any future shifts in Chinese sovereign policy towards Japan and there is still some anxiety on the part of some Chinese investors as to how much they put into Japan for similar reasons. Nonetheless, the broader point is that deep-seated animosities arising from the War still infect the prevailing political cultures of both countries. Therefore, dealing in a more fundamental way with Japan’s legacy from 1945 and in China’s case the 20 years prior to that is of great significance in fundamentally carving out a new path for China-Japan relations for the future. Hence the importance of August 15. Finally, on the immediacy of protocols in managing incidents in the East China Sea today, I perhaps overstated the case when I referred to ‘protocols’. These are very much in a state of evolution rather than in a state of formal negotiation but the state of evolution has been a reasonably positive state of evolution. But both sides still, for example, negotiate in a conclusion of their first arrangements to have a military hotline between the two militaries. Of course, if an incident occurs you need to have the two militaries on the phone to each other within 60 seconds to work out what the standard operating procedures are going to be for the management down or up of the incident. If it is allowed to be managed up either by a vacuum or by a trigger response, literally, then the political machinery of both then tend to click into place and you are pointing in the direction of escalation rather than the reverse. So I don’t underestimate the importance of the formalization of these protocols in terms of managing incidents. But the burden of my remarks today has been about the underlying state of the relationship and the centrality of the war question in particular. NAGORSKI: Thank you Kevin Rudd. Operator, can you direct us to a question if there are some? AUDIENCE MEMBER: Thank you Kevin for your tremendously clear presentation. The incoming Chairman of the Joint Chiefs said the other day that the greatest strategic threats to the United States appears to be Russia. I would imagine that with Ukraine in flames, the United States is probably urging Japan not to resume negotiations on the Northern Territories but before Ukraine blew up my understanding was that there was some significant progress in that area. Now that Japan has its security legislation I wonder if you could imagine in the next two or three years a resumption talks with Russia and perhaps even a settlement? I’m wondering if that topic of Russia and the threat that it is beginning to pose came up in any of your discussions or whether the Japanese are solely preoccupied with China? Thank you. RUDD: I think on the question of the Northern Territories and, for those who don’t follow the forensics of Japan-Russia relations or Japanese security policy in general, these are significant legacy items from World War Two, when Russia entered late into the Pacific Theatre campaign and as a consequence occupied I think it is four islands off the north coast of Japan – I may be wrong – these have been outstanding irritants in the Japan-Russia relationship ever since. In fact, they reached their most acute level of significance of course during the Cold War. Since the Cold War they have slowly fallen off the agenda of difficult issues to resolve with Russia. But nonetheless were not resolved. The point to make about Prime Minister Abe, of course, for domestic political reasons he would like very much to resolve this question and to obtain Japanese soveriengty over these islands. Russia of course has a different view. Prime Minister Abe is pursuing a very interesting personal diplomacy with President Putin. The assumption that no, “ally of the United States has a decent working relationship with President Putin,” I think is wrong. I think Prime Minister Abe has gone out of his way to cultivate a personal line through to President Putin. The extent to which that will yield fruit on the question of the Northern Territories is very much still an open question and certainly when I was recently in Tokyo it was not a subject of conversation. I think more broadly if I could say a positive relationship between Japan and Russia is no bad things in terms of the broad geo-politics of the future of the Asia-Pacific region. The reason being Russia is a Pacific power, there is port called Vladivostok and in the days of the Cold War it was the home of the Soviet Pacific Fleet and it was a formidable enterprise. Russia intends now to reinvest in its far east. Certainly, when I was in St Petersburg recently at the St Petersburg Forum there are now moves towards the radical reinvestment in the infrastructure of Vladivostok and perhaps using Chinese inbound investment to help with that process. A good relationship actually between Japan and Russia in my judgement looking at the long-term is no bad thing, incorporating Russia positively, productively into the emerging security discourse of East Asia and the West Pacific. This of course will be replete with its own complications but we cannot ignore the facts of geography that Russia’s far east presence represents for the future. NAGORKSI: Thank you and thank you for the question. AUDIENCE MEMBER: Thank you very much Prime Minister. I have a question about the Trans-Pacific Partnership. We know that TPP is a key part of ‘Abenomics’ but given the discussion that you had at the beginning of the call about the defence issue and some of the political capital that Prime Minister is spending on that. What is the likelihood that TPP, especially if it is concluded at the end of this month, can be politically successful given some of the controversy over the defence issue? Also, if I may ask, since Australia is also a TPP country what do you make of the domestic political situation in Australia over TPP and is it conducive to being able to ratify a final deal do you believe? RUDD: On the Japan question and the Trans-Pacific Partnership my judgement is that Prime Minister Abe understands entirely the domestic policy utility of signing this agreement to drive reforms domestically. I think this is acutely grasped within his office, I think it is acutely grasped within the reforming elements of the Japanese economic policy establishment and, as such, within Japanese economic and political circles generally highly controversial. Because remember the great sacred cow, otherwise called the Japanese cow, as a symbol of Japanese agriculture which has resisted every attempt at reform since the days of the Tokugawa Bakufu, is now facing a date with destiny. My judgement is that the economic utility of the deal in reforming the agricultural sector and most critically securing a reallocation of domestic capital in the direction of other forms of investment activity in a more rational allocation of investment decisions will be foremost on Prime Minister Abe’s mind. I think also if Japan is able to import high quality, much cheaper foreign sourced agricultural products you will have a demonstrable impact on Japanese cost of living. The difficult thing with protectionism around the world, whether it is protection in textiles, clothing and footwear, whether it is protection in forms of agriculture, is that where as we are often pushed sentimentally, emotionally, nationalistically in the direction of protection of our own industries we are usually doing so at the expense of our own working populations for whom things like cheaper shirts, cheaper skirts or cheaper food become the sacrifices that are paid in the absence of trade liberalization. Therefore, the cost of living for Japanese consumer, which in turn affects their predisposition to save rather than to spend, is a core factor in this as well. As for the Commonwealth of Australia and the state of current Australian politics, I will continue to take the vow of the Trappists and decline to comment. NAGORSKI: Good, it is a Japan call anyway but thank you for the question. AUDIENCE MEMBER: Good morning on the economic side, I’ve been wondering for the last two and a half years as the Yen has gone from 76 to 124 now, what will it take to get Japanese corporations and individuals to behave differently and the corporate side to spend more in terms of capital investment? I know orders have gone up recently but they haven’t – shipments and spending are not good. As you said, Japanese are still saving a very high rate even though wages went up a little bit more they just saved more. What does it take to change their behaviour? RUDD: Well you and I would make a lot of money, my friend, if we could answer that question between us and I’d suggest we set up a separate consultancy after this call to do that. There is a theory, and it is only a theory, but it is worth reflecting on for a moment. Deeply embedded within the Confucian cultures of North East Asia we have an equally deep savings culture. There is some empirical research to back this up in terms of the savings habits of the Chinese, Korean and Japanese households as well as those in Taiwan and Hong Kong and to some extent in Singapore. That is, a strong historical, cultural predisposition to save against future contingencies and future disasters. If you’ve been around as long as the Chinese have, and they’ve seen a few disasters in their extensive recorded history of 3500 years of continuing history, there are multiple cultural reinforcements of this phenomenon. I know for a fact our friends in China, and this does not directly answer your question because it is a China reference are deeply frustrated by the fact that Chinese saving rates remain so high. Similarly, in Japan. So, what policy instruments are capable of battering down two or three thousand years of accumulated history on the savings question? I’m not sure. But I know that the Japanese Government is acutely conscious of its own history and culture and will be trying to throw everything possible at this. My final point is, Japan’s economic future is also complicated on this question and more broadly by its historical aversion to any significant migration to the country. This I think, personally, is a self-defeating strategy by Japan. Population is declining relatively rapidly. As I said before, the workforce is shrinking. Female participation is low. The age dependency ratio is going through the roof. The natural birth rate is now, I think and I stand to be corrected, 0.7 possibly 0.9. For these reasons you either, therefore, simply allow this to unfold over time in the hope that there is subsequent attitudinal change within Japanese society, or you change by a more vigorous approach to immigration. This of course runs up against a lot of cultural factors in Japan as well but again in terms of providing fresh impetus into Japanese social and economic behaviour a growing population with a growing raft of consumer demands on the part of a larger number of young families would go towards bringing about the sort of change that you are discussing as well. But as I said if you have a eureka moment in the middle of the night then just send me an email and we’ll go into business tomorrow. NAGORSKI: On that happy and hopeful note we’re going to need to conclude this call. We thank you all for joining us and for your questions.