Japan Is Coming to a Strategic Crossroads

With decline at home and danger abroad, Tokyo must choose between continuity and reinvention

Hello and welcome back to States of Play.

Japan has been in the news this week. First, Tokyo has struck a trade deal with the United States that will help smooth the way to lower tariffs for Japanese exports to America. Second, the Japanese Prime Minister, Shigeru Ishiba, has refused to quit despite his coalition government losing the majority in the upper house, in part because of a swing to the hard right.

Both events are linked to the tough questions being asked in the country right now. Indeed, few countries face the future with as much unease, or as much at stake, as Japan.

Once one of the world’s industrial powerhouses, lying only behind the U.S., and a postwar paragon of peace and stability, it now finds itself caught in the crosshairs of domestic decline and rising geopolitical tension. A nation that has long favoured quiet consensus over strategic disruption is being forced to confront a cascade of difficult questions. How should it respond to the pressures of demographic collapse, economic stagnation, and a darkening security environment? Japan is approaching a decisive inflection point. And time may no longer be on its side.

Japan’s Domestic Woes - Industrial and Demographic Decline

At home, the country’s longstanding demographic crisis is moving from a slow-burn issue to a national emergency. Japan’s population shrank by 595,000 in 2023, the fifteenth consecutive annual decline, with more deaths than births in every prefecture for the first time in history. One in ten Japanese is now over 80 years old. The social and fiscal consequences are profound: a creaking welfare system, an anaemic labour force, and soaring healthcare and pension obligations that the world’s most indebted government can barely fund. Prime Minister Fumio Kishida has called it Japan’s “greatest challenge,” warning that the country is “on the verge of not being able to function as a society.”

The traditional reluctance to allow immigration as a counterweight is beginning to fracture, but not without political cost. Though still small by Western standards, Japan’s foreign-born population has grown to 3.2 million, with record numbers of overseas workers now filling essential roles in care homes, farms, and construction sites. This influx, however modest, has been enough to spark backlash. The populist Sanseito party - an anti-immigration, anti-globalist movement espousing a blend of nationalism and conspiracism that essentially started as an anti-vax party during COVID - won over 1.5 million votes in the last upper house elections, drawing particular support from younger men disillusioned with mainstream politics. Immigration, once a bureaucratic domain, is now an electoral fault line.

China as a Great Power is displacing Japan industrially, and threatening them strategically.

Meanwhile, Japan’s economic prestige continues to erode. Long celebrated as the world’s second-largest economy, Japan has now slipped to fourth, overtaken by Germany in 2024. The yen’s collapse, falling real wages, and stagnant productivity are symptoms of a deeper malaise: a failure to renew the economic dynamism that defined Japan’s postwar miracle. Even its vaunted technological edge is under threat. China, once the imitator, now leads in many of the emerging technologies of the Fourth Industrial Revolution - from AI to quantum computing to advanced manufacturing. According to the Australian Strategic Policy Institute, China leads in 37 out of 44 critical technology sectors; Japan leads none.

For a country that once set global standards for industrial excellence, this shift is deeply disorienting. Japan’s flagship firms, from Sony to Panasonic, have lost ground in consumer electronics and chipmaking. It is Taiwan’s TSMC, not Tokyo’s Toshiba, that now supplies the world’s most advanced semiconductors. (Indeed, Toshiba, once the poster-boy of Japan’s tech dominance, was forced to delist from the stock exchange after years of financial mismanagement and decline.)

Even Japan’s car industry, once its industrial flagship, is being outcompeted by Chinese competitors, especially in the electric vehicle (EV) sector. China has now overtaken Japan as the world’s top car exporter and is rapidly capturing market share in Southeast Asia, long a stronghold for Japanese brands. This shift is driven by China’s swift progress in EV innovation, control over critical mineral supply chains, and highly competitive pricing, which together are reshaping the global automotive landscape and eroding Japan’s decades-long dominance.

How to Survive in a Dangerous Neighbourhood

Abroad, the strategic picture is no less troubling. Japan remains formally committed to pacifism under its postwar constitution, but in practice it is embarking on the most dramatic military transformation since 1945. In 2022, the Kishida government announced a plan to double defence spending by 2027, bringing it to roughly 2% of GDP, on par with NATO guidelines. It is acquiring Tomahawk missiles from the United States, building new warships and fighter jets, and developing “counterstrike capabilities” that mark a quiet revolution in military doctrine.

This rearmament is driven not by abstract theory, but by the spectre of conflict in Japan’s neighbourhood. In the so-called Counter Alignment – countries that stand against the West and their allies, including Russia, China, and North Korea - Tokyo sees a triad of nuclear-armed states increasingly aligned and increasingly hostile. All