One of the memorable comments from the 2005 Davos Meeting was by a noted Iranian scholar on the “importance of power in diplomacy.” . In describing the sources of power in diplomacy, he argued that in addition to military power and soft power, diplomacy drew its force and vitality from economic power and the control of mineral and energy resources.

How can economic power or the control of resources contribute to diplomatic power? And, how can economic power and control of resources be converted into diplomatic power? The subject of this “Action” is the role of “economic power and resource power” in enhancing diplomatic power.

There are various ways to convert economic power into diplomatic power. The pursuit of economic partnership certainly is not the only available path. A country with large foreign reserves can generate diplomatic power by entering into swap agreements with countries with limited reserves. A recent case in point is the yen-won swap agreement between the central banks of Japan and Korea.

After the October 18, 2011 Japan-Korea Summit Meeting, I found the following obscure headline in the papers: “Japan and South Korea Agree on Over Fivefold Increase in Bilateral Swap to $70 billion (about 6 trillion yen).”

Most of the public is unaware of the significance of this headline. The Korean economy fared relatively well after the Lehman Shock. But with the onset of the European crisis, foreign investors began to remove their funds from Korea, leading to a sharp drop in the exchange rate of the Korean won. This development has also made it increasingly difficult for Korea’s second-tier companies and SMEs to locally procure foreign currency denominated funds. Korean banks have borrowed heavily from European banks, and the reversal of these flows as a result of the European crisis can re-create the conditions of 1997 and Korea’s “IMF crisis” by exhausting Korea’s foreign reserves. To take preemptive action against this possibility, the Bank of Japan and the Japanese government agreed to back Korea up with foreign currency loans. The Korean government expressed its gratitude for this measure. This is one example of how economic power can be used in bolstering diplomatic power.

How about resource power? Japan imports almost all of its mineral and energy resources. Therefore, it has no resource power of its own to use in its relations with other countries. However, by carefully formulating and implementing strategies for accessing and acquiring resources, Japan can avoid being forced to submit to the will of other nations.

Japan must never forget that the embargo of oil exports to Japan provided the trigger for this country’s participation in World War II. Furthermore, consider the recent actions of the Chinese government in sabotaging the supply of rare metals. It can be said that this action was taken in retaliation for the arrest of the captain of the Chinese fishing boat that deliberately rammed a Japanese Coast Guard patrol boat off the Senkaku Islands. This is a clear indication of China’s intent to use access to resources to enhance its diplomatic power.

When told, “We are stopping exports,” a country reveals that it has no bargaining power if its only response is to plead not to do so. To gain bargaining power and a compelling voice at the diplomatic table, Japan must flaunt a “do as you wish” attitude. This requires a constant effort to diversify the sources of our mineral and energy imports.

Japan’s gross domestic product (GDP) is the third largest in the world. With net foreign assets of about 251 trillion yen, Japan has been the world’s top creditor nation for the past twenty years running (second is China with about 144 trillion yen). Japan holds the world’s second largest foreign reserves, which now exceed $1 trillion (first is China with about $2.4 trillion). With US government bond holdings of about $900 billion, Japan is also second in this category (first is China with about $1.1 trillion). In terms of official development assistance (ODA), Japan ranks fifth with annual disbursements of about $11 billion. Finally, Japan enjoys considerable advantages with more than 120 million domestic consumers, excellent technological capabilities in manufacturing industries, and a commanding position in the global supply chain. For Japan, these are all important sources of comparative advantage.

However, compared to its national power, Japan’s presence is on the decline. The reason is the government’s lack of vision and strategy. In recent rounds of economic diplomacy and acquisition of resources (resource diplomacy), Japan has been left behind by Korea and China.

Let us take a look at recent events in resource diplomacy. In August 2011, Korean President Lee Myung-bak visited the three Central Asian countries of Kazakhstan, Uzbekistan, and Mongolia and finalized business deals valued at $12.1 billion. This included agreements on gas field development, construction of gas-chemical plants, and resource and energy cooperative agreements. Furthermore, on a total of three occasions, President Lee sent his own brother and member of parliament, Lee Sang-deuk, as a presidential envoy to Bolivia, which holds half of the world’s proven reserves of the rare metal, lithium. Subsequently, the two countries signed an agreement in August 2011 for conducting joint research on the development of lithium resources.

Since taking office in 2003, Chinese President Hu Jintao has visited Africa more than ten times as part of an active program of top-level diplomacy. Backed with an abundance of funds and investments in infrastructure projects, these visits have been instrumental in acquiring extensive mineral and petroleum concessions for China. In addition to its approach to African countries, China has recently adopted a more aggressive stance in its resource diplomacy vis-à-vis Central and South American countries. (Because Chinese resource development is frequently “tied” to Chinese companies, they fail to contribute sufficiently to local job creation and technology transfer. For this reason, they are generating friction and criticism for being “neo-colonial” projects.)

China has also made important progress in the area of oil and gas development. The three companies of China National Petroleum Corporation (CNPC: exploration and development), China Petroleum & Chemical Corporation (SINOPEC: refining and processing) and China National Offshore Oil Corporation (CNOOC: offshore exploration and development) are involved in more than 100 crude oil and natural gas related projects in the Middle East, Africa, Central and South America, Central Asia, and Russia.

As we can see, Korea and China have been pursuing diplomatic initiatives based on national strategies and have successfully integrated economics, resources, and national security into these initiatives. This is truly laudable. Particularly noteworthy is the success that President Lee Myung-bak has had. With his background in the business world, President Lee adopted the slogan “Global Korea” immediately after taking office and launched an active program of overseas strategies. It appears that President Lee is guided by a strong will and determination to emerge victorious from fierce international competition, a determination born of the nightmarish experiences of the Asian currency crisis when Korea came perilously close to default and economic collapse. The Japanese must learn from Korean strategies and executive abilities with due humility.

We must not lose sight of the economic resources that underpin Japanese comparative advantage and the nation’s human, monetary, and knowledge-based resources. These must be strategically combined in multiple layers to generate comprehensive diplomatic power. This will require Japan to adopt a proactive stance in economic and resource diplomacy so that it can enhance its international presence to a level consistent with its economic power. To achieve this purpose, this “Action” proposes the following.

1. Economic Power Is the Source of National Power—the Implemention of Growth Strategy

Economic power is the source of Japan’s national power and diplomatic power. We must step back to this starting point and reaffirm its significance. If Japan succeeds in bolstering its economic power, global society will look to it with growing interest, attraction, understanding, and expectation. Acting as a powerful magnet, this will draw people, money, goods, and knowledge to Japan. In turn, this will enhance Japan’s diplomatic power and international presence by expanding trade, increasing the economic dependence of other countries on Japan as an open consumer market, increasing both outgoing and incoming foreign direct investment, and by increasing Japan’s overseas assets.

Specific measures for accomplishing these goals will not be discussed here as they were covered in the preceding series of “100 Actions” on the subject of “Economics and Industry.” The important thing is to convert the foreign currency reserves, net overseas assets, and technological prowess Japan has acquired through its economic power by investing, lending, and returning them to other countries in a manner that will earn their gratitude. What Japan really needs is a diplomatic strategy that gives careful thought to this matter.

2. Generate Diplomatic Power from Economic Relations—Joining the Trans-Pacific Partnership

Japan’s “Heisei Opening” by joining the Trans-Pacific Partnership (TPP) would make up for its tardiness in establishing economic partnerships and would allow Japan to benefit from the accelerated economic growth of the Asia-Pacific region. Moreover, TPP membership would act as a triggering mechanism for the revitalization of the Japanese economy. Certainly, TPP will have positive and negative effects on different products and business domains. But on the whole, estimates indicate that it will give a positive boost to Japan’s GDP. It will also send out a strong signal to the world that Japan is determined to “open the country.” There is no doubt that this will attract greater international attention and interest.

Consider what would happen if the free trade agreement with the United States is ratified by Korea’s National Assembly and comes into effect. Compared to their Korean competitors, Japanese companies would be placed in a position of serious competitive disadvantage in US markets. TPP participation would allow Japan to avoid this outcome and to enjoy the same competitive conditions.

TPP participation can also be expected to generate some external benefits. First, Japan has for many years been interested in concluding bilateral free trade agreements with the European Union, China, and Korea. TPP membership would accelerate these negotiations that have been stalled for so long. Second, if TPP develops into a new framework for regional economic integration in the Asia-Pacific region, it is quite possible that TPP’s advanced rules in such areas as trade and investment will become the de facto rules for the region.

It is exactly for this reason that Japan must participate in TPP negotiations and intervene to make sure that advantageous rules are adopted. US Ambassador to Japan John Roos stated in a speech that TPP provides an excellent opportunity for the United States and Japan to take the leadership in transforming world trade into what it should be. Japan should use the TPP to prove how economic partnership can be effectively used to enhance its diplomatic power.

3. Promote Resource Diplomacy Through United Effort of Government and Private Sector

(1) Create a Strategic Council for Resource Diplomacy

Revision of energy policies has taken on extreme urgency since the Great East Japan Earthquake. By extension, Japan needs to rethink its medium- to long-term policies for the acquisition of resources. The time is ripe for creating a “Strategic Council for Resource Diplomacy” (provisional title) under the aegis of the newly formed Council on National Strategy. Membership should be drawn from related government ministries (Ministry of Foreign Affairs, Ministry of Economy, Trade and Industry), the Japan Oil, Gas and Metals National Corporation (JOGMEC) as well as from private corporations in Japan’s leading industries. The mission of this Strategic Council for Resource Diplomacy would be to gather and analyze necessary resource-related information and to formulate comprehensive and systematic resource strategies that are consistent with the future outlook for economic activities and trends in the development of new technologies.

The next task would be to develop a prioritized list of diplomatic policies targeting immediately needed resources and their producing countries. At the same time, economic cooperation strategies should be developed that combine ODA and infrastructure-related exports.

(2) Conduct Proactive Resource Diplomacy on Summit and Ministerial Levels

The government must make a united effort to strengthen and maintain relations with resource-exporting countries. Initiatives in resource diplomacy should be conducted on a sustained and continuous basis and pursued at the summit and ministerial levels while also cooperating closely with the business community. Regarding the provision of economic cooperation to resource exporting countries, assistance programs should not be limited to technical and financial assistance in the resource, energy, and environmental fields. Instead, Japan should aim to develop relations of trust and confidence (win-win relations) by providing multitiered assistance over a broad range of fields, including education and cultural exchange.

(3) Increase Support for Oil and Natural Gas Development Companies

Concrete measures should be taken to increase support for companies involved in the development of oil and natural gas resources. Possible measures include raising the limits on investment and loan guarantees issued by JOGMEC, and expanding the scope of investment and loan insurance for natural resources and energy coverage by Nippon Export and Investment Insurance (NEXI). In addition to using the various programs and measures of the Japan Bank for International Cooperation, the New Energy and Industrial Technology Development Organization, and the Japan External Trade Organization, ODA should be effectively utilized to comprehensively and strategically raise the level of support.

4. Create a Japanese Version of Sovereign Wealth Fund for Strategic Utilization of Foreign Reserves

Japan holds the world’s second largest amount of foreign reserves. However, the investment of these funds is basically limited to the purchase and repurchase of US government bonds. China, with more than $2 trillion in foreign reserves, is investing part of its funds in financial instruments other than US government bonds. These funds are being channeled through the state-owned China Investment Corporation, which functions as a sovereign fund for investing in leading corporations. (CIC: Established in September 2007 with an estimated $200 billion under management, making it the world’s fifth largest investment fund.)

Korea is also investing its foreign reserves through the Korea Investment Corporation. (KIC: Established in July 2005 with a total of $20 billion under management.) Japan should use the examples set by both countries and create its own version of a sovereign wealth fund (SWF). In the very least, Japan should consider diversifying the investment of its foreign reserves.

For a number of years, Kotaro Tamura, former member of the House of Councillors, has been enthusiastically lobbying for the creation of a Japanese version of SWF. Unfortunately, however, his activities have not yet borne fruit. The concept of SWF is frequently criticized on the grounds that, “It makes no sense to invest the money that the government has borrowed from the public.” But given Japan’s foreign reserves totaling 100 trillion yen, it would be sufficient to put aside 10 percent, or 10 trillion yen, for this purpose. If Japan succeeds in establishing a SWF, it will attract a great deal of attention from the world. This is probably the easiest-to-understand method for strategically linking Japan’s foreign reserves to diplomatic power. I am strongly in favor of moving forward on this initiative.

Japan must adopt a stance that shows that it is prepared to use economic and resource power to enhance its diplomatic power. That is the important thing. However, it will require a clear vision and a well-defined strategy. The necessary knowledge already exists in the government, the bureaucracy, and in the private sector. What remains to be added to the mix is leadership. Things will definitely start to move forward if proper leadership is exercised. From there, all that remains will be to establish a deliberative body and to imbue it with a sense of mission and determination. Let us take action together to achieve this objective.