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Big Squeeze in Brazil

A Japanese missile-defense system, spy satellites, and self- defense forces dispatched to global hot spots? Two years ago, any Japanese Prime Minister who backed such notions wouldn't have had his job for long. Howls of protest at home would have been surpassed only by shouts of indignation from Seoul and Beijing. For decades, the central maxims of Japanese foreign policy seemed to boil down to: Write a lot of checks and don't rock the diplomatic boat.

But sometime in the future, generals, politicians, and policymakers on both sides of the Pacific may look back on this year and conclude that it was the moment when Japan's postwar pacifism faded away. A rare confluence of events, motives, and personalities is pushing Japan to assert itself militarily on a scale few would have imagined.

The key mover in this drama is Prime Minister Junichiro Koizumi, who is deftly tapping into the Japanese yearning for a more robust defense, a desire triggered by the September 11 attacks on the U.S. and the rising threat from North Korea. In early June, the Diet passed legislation outlining how Japan would respond to an attack. On June 25, Koizumi kicked off a special Diet session to consider legislation spelling out what role Japanese troops will play in Iraq. If all goes well for Koizumi -- as is expected -- some 1,000 heavily equipped Japanese self-defense forces could be in Iraq by yearend.

Also in June, the government approved a plan to produce with the Pentagon a Patriot Advanced Capability (PAC-3) surface-to-air guided missile air-defense system. That could lead to a sea-based missile system designed to deter an attack from North Korea, says Masashi Nishihara, an international relations professor at Japan's National Defense Academy. Japan fears an assault from Pyongyang, which may be more likely to strike at Tokyo than at South Korea in any face-off with the U.S. Japan could even be readying to remove the greatest taboo of them all. The ruling Liberal Democratic Party has released a national security analysis that suggests Japan consider revising its war-renouncing Constitution, which was essentially written by U.S. occupiers.

Won't Japan's neighbors stop Koizumi from his buildup? Even here, Koizumi's luck seems to be holding. Just as Japan's citizens seem to accept this new assertiveness, Beijing and Seoul -- the biggest victims of Japanese military adventures in the past -- have been eerily silent. North Korea may be one reason. There's little doubt that North Korea's Nodong ballistic missiles have the range to strike Japan, not to mention all of South Korea and much of China. Right now, all three countries -- and the U.S. -- need to stay united if they hope to persuade Pyongyang to eliminate its nuclear-weapons program. "Everyone thinks Japan is moving too quickly and too aggressively. But the Chinese government has decided to deal more realistically with Japan," says Shi Yinhong, a professor of international relations at People's University in Beijing. That means more behind-the-scenes diplomacy rather than public outbursts about rising militarism.

There is no talk in Japan of deploying offensive ballistic missiles or going nuclear. Tokyo cannot afford a gargantuan U.S.-style military. But Japan seems ready to admit some obvious truths: It lives in a dangerous region, and its defense budget, $42 billion, is still one of the biggest in the world. As one U.S. State Dept. official puts it, "Japan has to react to the environment in which it finds itself." That's a world with plenty of terrorists who might happily strike a U.S. ally. If that doesn't kick in a country's survival instincts, nothing will. The French government is offering a hand to Alstom, the Paris engineering group under investigation for U.S. accounting improprieties. AREVA, a government-owned nuclear-energy group, offered on July 1 to buy Alstom's energy-transmission-and-distribution unit for an undisclosed sum. Alstom, which posted a $1.6 billion loss last year, is eager to reassure investors by raising cash but has had trouble finding buyers for some of its assets. On June 30, the day before AREVA's announcement, Alstom shares fell 4.5% when the company disclosed that it was taking a $58 million charge for understated losses at its U.S. transportation subsidiary. Alstom has suspended two of the unit's executives, and the FBI and Securities & Exchange Commission are investigating. Brazil's central bank, widely praised by financial markets for sticking to tight monetary policy in the face of powerful political opposition, may have kept interest rates too high for too long. In a report released on June 30, the bank said that if its base rate remained stable at the current 26%, inflation in 2004 would be 4.2%, well below its target of 5.5%. Since President Luiz In?cio Lula da Silva took office on Jan. 1, the economy has shown every sign of being squeezed. Industrial production fell for four months running through April, and unemployment has risen steadily, to 12.8% in May. Help is on the way. The central bank's report was taken as a clear message that interest rates will fall further, following a half-point cut on June 18.

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