Hello, Stephanomics. Here the podcast that brings you the global economy, and this week we're joining world leaders in Japan, virtually at least as they head to the G seven Heads of Government summit in Hiroshima. It wasn't so long ago that people spoke wistfully about getting rid of the G seven altogether. Having just the US, Canada, Japan and a bunch of European countries sitting around the table just didn't feel like a representative sample of the global economy. But
today a lot of extra countries get invited. Plus everything going on in the world has left the G seven needing a safe space. The change in geopolitics and economics is particularly evident in Asia, and perhaps nowhere is it more challenging to policymakers than in Japan. I'm getting into all of that in a few minutes with distinguished thinkers and authors Richard McGregor and Rory metcalf. But first, here's our economy and Government reporter Yoshiaki Nohara in Hiroshima, Mokdo.
It's August sixth, twenty twenty two. The clock hits eight fifteen in the morning, precisely seventy seven years ago. This time the Wall's first nuclear bomb exploded. Here in Hiroshima, Japan, I'm standing among hundreds of people observing a moment of silence for the victims. Japanese Prime Minister Formio Shida steps forward and dedicates a wreath.
We must not repeat the calamity on that day seventy seven years ago. This is our nation's responsibility as the only even hit by an atomic bomb, and it's my preach as Prime Minister hum Hiroshima.
This coming weekend, Hiroshima will be hosting a G seven summit, and Chida will reigrate his pledge for peace. But in the background stakes are higher than ever. Russia is escalating nuclear threats in Ukraine, North Korea keeps firing missiles, and China is putting greater pressure on Taiwan. They are all Japan's neighbors.
Japanese Prime Minister Kishida FuMO ordered the Defense finance ministers on December fifth to secure forty three trillion yen for defense spending from fest of All twenty twenty three.
Ironically, peace is often preserved through the supply of heavy weapons. Kishida's ordered a historic increase in defense spending. Japan's military budget is now said to be two percent of its economic output. That would rank third largest in the world, only after the US and China.
Japan had said multiple times this year that it will drastically strengthen defense capable.
NOWA is counting on private companies to make sophisticated weapons to arm Japan's self defense poces, and the key weapons factory is located in, of all places, Hiroshima. The Japan Still Works Hiroshima plant sprawls over a flat plain on eastern edge of the city. The company let me enter the factory and watch them making artilleries and canons, but they wouldn't let me use any sound or take any photos. It's a secret operation here and even locals are dimly
aware of what happens inside. So I would just describe what I saw. Jebre factory specializes in making activities. I saw bunch of cannons and guns. They would be loaded on warships and tanks. I looked into the barrel of a cannon. I saw spiral groups inside that will allow shells to spiral through the air in a stable trajectory and hit targets during the tour. The smell of machine oil hang in the air. There was a constant bus
from cutting steel. Some beams supporting the ceiling were rusty, which wasn't surprising given the factory was built before World War Two. The local managers who gave me the tour said they never let a journalist in before. They all declined to be quoted. They said their families might be harassed with the nature of their work was publicized. After all, this is Hiroshima, the Wall's mecca for past fismen. But
then I met Kato arigatomas the Chio. Kato was fifteen years old when she began working at the j stew factory in nineteen forty four. At her old girls school, students were forced to skip classes and work at factories while their fathers, brothers and uncles was sent to fight. Kato and her classmates pulled twelve hour shifts making bullets around the clock.
That Couninotoman, it's a good letter.
We were told all the Wifelome Elementary School that we shouldn't spare our lives in order to stop donation. We thought we must work hard for Japan. That was all we care about.
Demo On August sixth, nineteen forty five, Kato took Adeo. Because the factory was closed for a routine power saving day, Kato and some friends planned to go swimming outside town. She was waiting for a train when the bomb hit up. She doesn't remember the blinding flash or deafening sound that other survivors would later recall. She just woke up on the ground, perhaps ten meters away from where she was standing,
and found her two friends. One's face turned brown like a samber, the other's right arm was studied with shells of glass. They staggered toward a shelter where other survivors flooded in.
The skin was killed off, all the while hanging from their fingernails. The three of us held all together and cry it were Chellish even in hell. I don't think it would be the horrible.
Good Man and.
The war ended soon afterwards, and Kato never returned to the factory, which stopped making weapons. In nineteen forty seven, Japan adapted a new constitution that the renownced war for good and pledged its armed forces wouldn't be maintained. Then the Korean and Cold Wars came about, threatening peace in the area. Jess w started making weapons again. The constitution remains the same even today. But in reality, Japan has built self defense forces, which is military, and companies have
long made weapons for them. Now it's going to take a lot of work to get to parent's defense industry ready to meet Seer's goals. Many contractors have shattered defense operations in recent years. They can barely make ends meet with low profit margins in government contracts. They cannot export their products easily either, due to tight regulations. Defense ministry manager costchemets Motto told me he cannot keep track of how many are gone.
There is not much profitability or possibility for expansion. That's why new players, investments, or resources aren't coming in. As a result, our technical strengths has weakened in our advantage is being threatened. That's the state of the defense industry.
Shots were fired at Camp Kaitechi for self defense poces. The camp is just next to the js W factory. Soldiers who are training and preparing for the camp's seventy second anniversary. I struck a conversation with Koki Hiroka, a twenty one year old medic. Hiroka told me that people may be rullying for peace, but the officers still have to be ready for enemy attacks.
I'd be lying if I say I'm not scared. But if we quit one after another, nobody will be left to protect Japan. I try to gether my courage. It's my duty to serve.
On August sixth, last year, peace activists rallied along the main street in Hiroshma. They chanted against the Kishida's moves, which they considered as weakening the constitution and arming Japan. But Paul's are showing more people are favoring a booster to defense spending and gaining more military capability. Even Kato, who worked for js W as a girl, is becoming
less idealistic. She is now ninety four. Every year on August sixth, she cries at the ceremony to commemorate the nearly seven hundred students and teachers from her school killed by the Bond. The idea of a rearmed Japan breaks her heart, but she also has no illusions about peace keeping.
Has renounced to war. But if others are chance, Japan will have to protect.
For now that place. Bell continues to talk in for Boomberg News, Am Yosha.
Well, that was such a thoughtful and evocative piece there from Hiroshima by Yoshi Hara, and there's there's a lot of strands there that would be worth following up. And I'm going to talk to two experts now who could run away with any one of them. Richard McGregor is
an Australian journalist, writer and author. He is currently working as a Senior Fellow at the Loewi Institute based in Sydney, Australia, and has written numerous extremely influential books on China, including The Party, Asia's Reckoning and more recently Sijinpink The Backlash. We also have Rory Metcalf, who has been head of the National Security College at the Australian's National University for
a long time. He's also written a lot of influential books, including most recently Indo Pacific Empire, China America and The Contest for the World Pivotal Region. Well. One reason obviously we wanted to go to Hiroshima is that Prime Minister Kishida has himself chosen that as the location for this weekend's G seven Leader's Summit. Rory, there's clearly a message there.
The symbolism is about the dangers of unrestrained geopolitical conflict, but the military build up in Hiroshima itself, which she talks about in that piece, you know, underscores that to a you've pieced, Japan now thinks you have to increase preparations for war. So, just stepping back a little, you know, how much of a change does this represent in Japan's strategy.
So, Stephanie, it does seem to point to a dissonance in the way that Japan thinks and acts strategically in the world. But in fact this isn't so new, you know. For the past fifteen years, almost twenty years now, I think Japan has begun to emerge as a strategic actor
in the Indo Pacific region. Indeed, the very idea of a connected Indo Pacific region which kind of enables countries like India and Japan to work together, or India in Australia or the Quad to work together, was driven in significant part by Japan, by Japanese leadership, by Prime Minister, the late Prime Minister Abe. I think it's really important to bear in mind that this is not the kind of militarization of Japan that the Chinese like to warn
us all about. It's still relatively restrained, and it's really about Japan trying to adopt a defense posture that most countries, the most powerful countries in the world, would recognize as as being a pretty normal thing to do. But it is a big change for Japan, and it points to a Japan that's more sober and realistic about the realities
of armed force in the world. So the lesson I draw is how well is Japan go to strike the new balance of diplomacy, deterrence and a I guess, more realistic effort at economic prosperity that reduces the risks that come with globalization and connectiveness.
Richard, I guess I should We could go straight on from there. I mean, how realistic is that effort by Japan.
Well, in some respects, you know, most of the attention on the you know, the Japanese efforts to rebuild its military focused on money. So in some ways raising the money is easy. Spending it is difficult for multiple reasons. You know, in post war Japan, the Ministry of the military, you know, self defense forces they're called, by the way,
which tells you something. As the military in Japan has been a very low prestige and low profile institution, You rarely see Japanese military officers on the street in their uniform in Tokyo or elsewhere, and that's been quite deliberate because they didn't want to attract attention to themselves. The military inside Japan has really been seen more as a disaster relief organization rather than an organization which can really
fight and win wars. So for all those reasons, the government might have lots of money to spend, but they're going to struggle to recruit people and train people and keep them. With a declining population and a still slightly growing economy, there's many more jobs on offer than people
there are people to fill them. They're going to really struggle to actually fulfill the task that mister Kishiderra set for them, that is to build a much more modern military, a much more mobile military, and a military which is much more suited to the perilous strategic circumstances that Japan now finds itself in.
Rory Richard's talked about sort of the very practical problems involved in this. I guess, as an economist, I look at a much more basic issue that even though the political approach, that geopolitical stance with respect to China may have changed significantly over the last ten to twenty years, if you by any measure, that economic connectedness of Japan and China, and indeed probably every country in the world's
connectedness to China has increased. So how is it going to be possible to keep on to keep those two things operating on separate tracks.
I think in the medium to long term it's probably not realistic to keep those on separate tracks, or to do both. Unless China changes, you know, unless China becomes a less risky or reckless or coercive force on the international stage, then something's going to have to give at some point. I'm not the economists in the room. It's important to distinguish trading relations and relationships and investment relationships for example, you know, going to the Australian experience with China.
For example, of course, even during the ear of Chinese economic coercion or the phase of Chinese economic coersion against Australia over the past five years, you know, the trade relationship effectively grew, you know, signifally because of the price of iron ore and China's dependence on Australian iron or but the investment relationship was already going downhill and effectively went over a cliff and will be hard to rebuild. So I think we do need to look below the
surface of the numbers. I think it would be interesting to understand in Japan, particularly how the business business community is thinking about investment in China, is thinking about the risks that come with becoming to entangle even things like the consular safety and welfare of their own staff and executives. And I think that's not only a Japan China story. That's a story for Australia, it's a story for Europe, of course, it's a story for the United States as well.
I think the hardening of Japan's fence posture that we've seen, while that might be the pointy end of a more robust national security response to a dark strategic environment, it's not the only response. And I'd be surprised if there isn't thinking in the Japanese system about, you know, what does the future of the supply chains look like, what
does the future of critical technologies look like? And a lot of that will be I think informed by the kind of de risking approach that we've at least heard Europeans speak about at a at a leadership level, although we may not be seeing it happening across the board among corporates yet.
Well, actually, Richard, I was going to ask you, I mean, you do hear this language now of de risking the relationship with China around the world rather than decoupling, which sounds marvelous and I think, especially if you're a businessman who doesn't want to really completely untangle the supply chain with China, it sounds much better. But does it actually mean anything? Is it possible?
Well, it's not quite pigh in the sky, but it's almost impossible for global economies to disentangle themselves from China. The good news, though, is that the same applies to China itself, because China can't disentangle itself either. Now, obviously China has been trying to do that for many years. They've got their own sort of policies, so called dual circulation, in other words, that they can de risk their own economy against the kinds of sanctions that America is pursuing
against it right now. But I feel that the amount of decoupling or de risking that has taken place is pretty superficial compared to the depth of it. At the moment, it's the word buzzword on everybody's lips, but if you talk to business people in any detail, then it's just about impossible. And that this is in fact quite a positive thing, I would say in many respects, it can be. It's a negative thing to or rely on China, of course, but it's positive in as much as it restrains Chinese behavior.
Because the entire global economy really goes through China, Japan, Taiwan, South Korea, to a lesser extent Southeast Asia. Any interruption to that has an immediate and dramatic effect on the global economy and on each economy individually. So I'm not quite sure how anybody can get out of China, and I hope that ultimately is a stabilizing factor in geopolitics because it affects China as well.
For many of people listening who are sitting in the US, they do only see this, or we often will only see it through the US lens. So I think highlighting that there are now these other relationships and other strategic partnerships rising up is a good one. But Richard, I did notice twenty sixteen was also the last time that you had the G seven meetings, including the I think
there was a foreign minister meeting in Hiroshima. Since then, you've had the Trump administration, You've had now the Biden administration. Out of the Biden administration, how has the US changed the games? How has the US's emerging attitude to the region affecting the way countries think about it?
Well, it depends what country you're in. Certainly the US has changed its geopolitical policies towards China, defense policies, and I think that started rather abruptly under Trump, but it's you know, to give him credit, but it's been refined and kept by President Biden. I think President Biden also has also changed US economic policies. Not it's probably a bit unfair to call it along Trumpian lines, but you know,
they maintained the tariffs against China. They're accelerating a form of industry policy in the United States through the Inflation Reduction Act, through various incentives to build semiconductor plants in the United States, and of course the speech recent speech by Jake Sullivan where he laid it out as part of a core part reindustrializing the United States, as a core part of US geopolitical strategy. Now, this affects all
sorts of countries in different ways. You know, for example, South Korea and Japan, which you want close relations with the US and in fact depend on them, have had to adjust their own domestic economic policies and tech policies
to fit in with that. A country like Australia, which sees itself as a sort of renewable energy superpower, is now going to struggle to attract the investment it needs to do that because the Inflation Reduction Act is the giant sucking sound which is taking you know, attracting global capital to the United States instead of to other countries. The US thinks that it fell behind in strategic competition with China and is now rushing to catch up again.
And so it's not going to take you know, it's looking for leverage just about it at every point, and that in some respects is extremely welcome in parts of the region. But of course if the US pursues policies like that, then it's going to rebound on them as well.
And I think particularly in the economic sense in Asia, where you know, China is really i think starting to streak well ahead at the moment, and where the US, because of its suspicion of trade in the administration and in Congress, is really struggling to catch up.
I just have one one last question. There is one event which is a long way away from from Hiroshima, but seems to have changed attitude quite significantly at summits like this weekend's G seven summit, and that's of course, Russia's invasion of Ukraine. That is an ongoing story. In fact, the long awaited counter offensive by Ukraine. We're certainly anticipating
it potentially in a matter of days. So Rory, how much has Russia's invasion of Ukraine and China's response to it affected conversations like the ones the leaders are going to have at Hiroshima.
Look seriously, I think, very seriously. I think that the impact of Putin's disastrous and brutal decision to invade Ukraine here in the Indo Pacific is pretty profound. It has reinforced the national security and defensive aspect of Japan's state craft. It's done the same here Australia. It's made it difficult, however, for a number of other partners in the region to work together. I think the fear of conflict in this region has risen, I think has been heightened by Russia's
invasion of Ukraine. Now, paradoxically, you could make a case that the day when shutin Pin will decide to invade Taiwan to send the pla across the Taiwan straight, perhaps that day has been delayed because Chinese forces have seen how no battle plan survives first contact, and how the Russian military is so poorly and grotesquely performed in Ukraine.
But we can't be sure, and so I think there's now an open debate in this region about whether conflict is more or less likely as a consequence of Ukraine, Whether in fact Taiwan needs to be looking much more robustly to its own defenses, and ultimately how important military deterrence is. Now at the start of this conversation, we talked a little bit about de risking and about the economic and commercial calculations being made constantly as we study geopolitics.
And I would say that one consequence of the Ukraine conflict, the Russian invasion here in the Indo Pacific is that I encountered many more voices in business communities who are worried about the reality of war as a factive life in the twenty first century. Who know now that they need to have at the very least contingency plans for a Taiwan conflict, for their investments, for their personnel, for their staff. Those are conversations that weren't happening three or
four years ago, even two or three years ago. And ultimately, wherever the G seven lands on this issue, I mean, I'm sure the Japanese would like to use the G seven as a platque to be putting pressure both on China and Russia. No matter where the summer tree goes this week, these realities are going to remain in this region.
It's not the in that sense, you know, It's not the globalized or corn ucopean world we were looking at when we were talking Rosalie about the Asian century just a decade or two ago.
This is so fascinating. We could carry on for many, many more hours, but I know that we all have to get on with our lives, and we have already taken more time than I had suggested. So Richard McGregor, Rory Metcalf, thank you so much.
Thank you so much, thank you.
Well, that's it for this episode of Stephanomics. We'll be back next week. In the meantime, you can get a lot more economic insight and news from the Bloomberg Terminal website or app. This episode was produced by mangnus Henrickson, Yang Yang and Summer Sadi, and the sound engineer for the Hiroshima segment was Zion Lee, with special thanks to Yoshiahara, Paul Jackson, Yoshito Okubo, kiko Uji, Khani Takashi, Nakamichi Torofujioka,
Stacy Wrong, Richard McGregor, and Rory Metcalfe. The executive producer of Stephanomics is Molly Smith and the head of Bloomberg Podcast is Sage Bowman.