TOKYO – The current tensions between China and Japan have revived talk about how far Japan has fallen since its glory years of the 1980’s. To the extent that this sense of decline is grounded in reality, can Japan recover?

Japan’s economy has suffered two decades of slow growth because of the poor policy decisions that followed the collapse of the country’s massive asset-price bubble in the early 1990’s. In 2010, China’s economy surpassed Japan’s in total size, though it is only one-sixth the size in per capita terms. In 1988, eight of the top ten companies in the world by market capitalization were Japanese; today, none is.

But, despite its recent poor performance, Japan retains impressive power resources. It possesses the world’s third largest national economy, sophisticated industries, and the best-equipped conventional military forces among Asian countries.

Only two decades ago, many Americans feared being overtaken after Japanese per capita income surpassed that of the United States. Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war between the two countries. Futurologist Herman Kahn forecast that Japan would become a nuclear superpower, and that the transition in Japan’s role would be like “the change brought about in European and world affairs in the 1870’s by the rise of Prussia.”

These views extrapolated an impressive Japanese record. Today, however, they serve as a useful reminder about the danger of linear projections based on rapidly rising power resources.

On the eve of World War II, Japan accounted for 5% of the world’s industrial production. Devastated by the war, it did not regain that level until 1964. From 1950 to 1974, Japan averaged a remarkable 10% annual growth rate, and by the 1980’s was the world’s second largest national economy, accounting for 15% of global output.

Japan also became the world’s largest creditor and largest donor of foreign aid. Its technology was roughly equal to that of the US – and even slightly ahead in some manufacturing branches. Japan armed itself only lightly (restricting military expenditures to about 1% of GNP), and focused on economic growth.

This was not the first time that Japan had impressively reinvented itself. A century and a half ago, Japan became the first non-Western country to adapt successfully to modern globalization. After centuries of isolation, Japan’s Meiji restoration chose selectively from the rest of the world, and within 50 years the country had become strong enough to defeat a European great power, in the Russo-Japanese War.

Can Japan reinvent itself again? In 2000, a prime minister’s commission on Japan’s goals in the twenty-first century called for just that. Little has happened. Given economic stagnation, the political system’s weaknesses, the aging of the population, and resistance to immigration, fundamental change will not be easy.

But Japan retains a high standard of living, a highly skilled labor force, a stable society, and areas of technological and manufacturing leadership. Moreover, its culture (both traditional and popular), overseas development assistance, and support of international institutions provide resources for soft, or attractive, power.

But it seems unlikely that a revived Japan, a decade or two hence, could become a global challenger economically or militarily, as was predicted two decades ago. Roughly the size of California, Japan will never have the geographical or demographic scale of China or the US. And its soft power is undercut by ethnocentric attitudes and policies.

Some Japanese politicians talk about revising Article 9 of the constitution, which restricts Japan’s forces to self defense, and a few have spoken of nuclear armament. Both seem unwise and unlikely now.

Alternatively, if Japan were to ally with China, the two countries’ combined resources would make for a potent coalition. In 2006, China became Japan’s largest trade partner, and the new government formed by the Democratic Party of Japan in 2009 sought improved bilateral relations.

But an alliance also seems unlikely. Not only have the wounds of the 1930’s failed to heal, but China and Japan have conflicting visions of Japan’s proper place in Asia and the world. For example, China has blocked Japan’s efforts to become a permanent member of the United Nations Security Council.

More recently, after Japanese maritime officials arrested a Chinese fishing-boat captain near the disputed Diaoyu Islands, China responded harshly with arrests of Japanese businessmen, cancelation of student visits, and suspension of exports of rare-earth minerals upon which key Japanese industries depend.

China’s actions shocked many Japanese and undercut its soft power in Japan. As one Japanese professor put it, in football terms, China scored an “own goal.” In the highly unlikely prospect that the US were to withdraw from the East Asian region, Japan might join a Chinese bandwagon, but Japan is more likely to maintain its American alliance to preserve its independence from China.

The main danger for Japan today is a tendency to turn inward, rather than becoming a global civilian power that realizes its great potential to produce global public goods. For example, Japan’s aid budget has declined, and only half as many Japanese students study overseas as did two decades ago. An inward-looking Japan would be a loss for the entire world.

Joseph Nye, a former US Assistant Secretary of Defense, is University Professor at Harvard. His book The Future of Power will be published in February.

Copyright: Project Syndicate, 2010.