Japan’s economy is stronger than many think
“TTHE MOST The decisive mark of the prosperity of any country is the increase in the number of its inhabitants, âwrote Adam Smith inâ The Wealth of Nations âin 1776. Later, David Ricardo and Thomas Malthus exchanged pikes to find out if the food supply would be maintained. In 1937, John Maynard Keynes warned of a future decline in population, with deleterious economic effects.
Japan is the canary in this coal mine. In the 1980s, its booming economy caused fear around the world. After the bubble burst in the 1990s, public debt exploded and deflation took hold. Many in the West have said Japan’s debt is unsustainable and the Bank of Japan (BOJ) should do more to stimulate inflation. In 2013 the BOJGovernor Kuroda Haruhiko has embarked on dramatic monetary easing. Debt hovered around 230% of GDP. A strange thing ensued: No fiscal crisis hit, and inflation did not approach the 2% target either. âThe standard macroeconomics textbook needs a few more chapters – it doesn’t capture the problems Japan faces,â says Shirakawa Masaaki, Kuroda’s predecessor.
Many rich countries now face a similar âsecular stagnationâ: low inflation, low interest rates and low growth. Although higher inflation has emerged recently, financial markets suggest that secular stagnation will return soon. Demographics are an important factor; Japan just started to age and shrink earlier. As Japan has adapted and others are more like it, some economists are seeing its economy in a new light.
Debt did not turn out to be such a problem. âWhat we thought were tax limits are no longer tax limits,â argues Adam Posen of the Peterson Institute for International Economics (PIIE) thinking group. “[Japan] forced people to face the reality that the interest rate can stay below the growth rate for very long periods of time. Public debt was over 100% of GDP for almost 25 years without causing a crisis.
This helps the country to borrow in its own currency, the government has large financial assets and the BOJ owns a significant portion of the debt. But as Columbia University’s David Weinstein argues, Japan has also managed to contain its spending. Since 2000, he writes in an article with Mark Greenan, per capita spending for seniors has actually declined. âThere is a silent feature that people lack,â says Weinstein. “The markets are bullish because Japan has rare ability to adjust.” With low marginal tax rates, it is also possible to increase revenue.
Some still fear what would happen if interest rates rose. The argument that Japan doesn’t have to worry about its debt because it can respond by raising taxes is “too academic,” says Yoshikawa Hiroshi, president of Rissho University. The increase in consumption taxes is a political loser. Policymakers are also haunted by the specter of external shocks that create new fiscal needs. Recently, Yano Koji, Deputy Minister of Finance, caused a stir with a column comparing the country’s budget situation to the Titanic.
In search of budgetary space
Still, some argue that fiscal policy should be used more forcefully. Many people now regret two untimely increases in consumption tax in 2014 and 2019. Mr Abe’s preferred candidate in the recent recent LDP leadership race called for postponing the government’s primary balance target until the BOJ meets its inflation target. At the end of November, Mr. Kishida’s government announced a huge fiscal stimulus worth 55.7 billion yen ($ 483 billion).
Raising inflation has not been easy. Under Mr. Kuroda, the BOJ extended quantitative easing, adopted inflation targeting, and bought a wider variety of assets. It helped pull the country out of mild deflation, but barely. “We have misunderstood the issue of inflation,” Posen said. “It turns out that secular stagnation is far more real and lingering than we thought.”
Once inflation expectations are anchored around zero, it is difficult to raise them. In addition, wages have not increased much, despite a tight labor market. Unions prefer job stability to wage increases, says Nakaso Hiroshi, former vice-governor of the BOJ. Companies have gradually hired more ânon-regularâ workers on part-time contracts; they represent 40% of the working population, twice more than in 1990. Perverse incentives can help depress their wages: many women limit their hours or their income to obtain a tax deduction for married couples earning less. a threshold.
Aging and shrinking populations can also weigh on demand and therefore on inflation. For Mr. Shirakawa, this is sort of a justification. He quarreled at the BOJ that deflation was more a symptom of factors causing weak growth, not the cause. In a new book, “Tumuluous Times”, Mr. Shirakawa says that the impact of demographic change on growth “is still underestimated”.
Overall growth has remained weak, but per capita growth has recently been comparable to others in the G7. Unemployment has been minimal, longevity has increased and inequality has remained relatively low. âMaybe the Western economists who were so critical of Japan around 2000, myself included, should go to Tokyo and apologize to the emperor,â Paul Krugman, an economist, tweeted in 2020. â It’s not that they did well; but we did much worse.
Yet Japan could still do better. Public spending should focus more on improving long-term growth. Tokyo economists worried the government wasted its pandemic stimulus on handouts: A study by Hoshi Takeo of the University of Tokyo found that tax support in 2020 was more likely to go to companies that were already in business. difficulty before covid-19.
The increase in productivity could help offset the impact of the shrinking population. Mr. Yoshikawa believes that innovation is the key to growth and that aging creates new problems that entrepreneurs can solve. Generation changes can help. While many still prefer stable sarariman (employee) in large companies, some of today’s brightest graduates are going into startups. âThere is an emerging wave – this is a different species,â says Niinami. But structural reforms are also needed, especially with regard to the rigid labor market. It should be easier for workers to move between firms and sectors, and more difficult for firms to exploit non-regular workers.
Yet the pressure for reform is lacking, in part because of resistance from vested interests, but also because life remains comfortable enough. âIt’s not an acute illness, it’s chronic,â says Nakaso. âYou don’t really feel the pain, but it does impact your long-term health. It could be dealt with. As Mr. Posen says, “There are 10,000 yen bills on the ground waiting to be picked up.” Will the Japanese leaders seize them? â
This article appeared in the Special Feature section of the print edition under the headline “Louder Than Many Think”