Real GDP growth has been positive for seven quarters in a row — the longest positive streak in 16 years. The labour market is also very tight — the unemployment rate sits at a 22-year low of 2.8 per cent and the effective job openings-to-application ratio is at a 43-year high of 1.55. Corporate profits are the highest in history and the Nikkei index has risen to a 26-year high.
But these strong indicators do not mean the economy is overheated. CPI inflation is barely positive — too low for the Bank of Japan (BoJ) target of 2 per cent per annum. As the BoJ’s qualitative and quantitative easing (QQE) continues, and as a result interest rates (measured in terms of government bond yields) are zero or negative up to ten-year maturity. QQE is not expected to end anytime soon because a sizeable pickup in inflation is nowhere in sight.
As Goldilocks would say, everything seems ‘just right’.
But for Japan just as for Goldilocks, the three bears are on their way back home.
The effect of one of them — population ageing and the dwindling working age population — is already seen in the tight labour market. Its more serious manifestation is low potential growth for many decades to come. Despite its record-breaking performance, the Japanese economy is expanding only by around 1 per cent per annum. This is not bad at all when compared against the estimated potential growth rate of less than 1 per cent, but the prospect of very weak growth for a long period of time has discouraged Japanese firms from investing domestically. Despite their high profits, they are either investing abroad or sitting on idle cash.
Another bear that has long been said to be on its way is a fiscal crisis. But in Japan’s Goldilocks story, there is a good reason for why this bear has not arrived: the BoJ’s massive purchase of government debt under QQE.
One cannot blame the government for not taking more decisive action to cut budget deficits. If the government can borrow at negative interest rates, it is almost irrational for it to be serious about fiscal consolidation. Hence, the BoJ’s failure to achieve its inflation target and the resulting continuation of QQE has been a blessing in disguise for the government as it has helped to avoid unpopular belt-tightening measures. The government’s next test on this will be in October 2019, when the twice-postponed consumption tax hike from 8 to 10 per cent is planned to be implemented. Will the government have the resolve to make it happen this time?
To be fair, Prime Minister Abe and his government have been taking many initiatives to strengthen the supply side of the economy. The government regularly talks about its ‘womenomics’, ‘work-style reform’, ‘human resource development revolution’ and ’productivity revolution’ plans. These last two initiatives, which are the most recent, are no longer a ‘reform’ but a ‘revolution’: at the very least, the rhetorical intensity of reform has increased.
These initiatives are much better than classic demand stimulus measures (for which the government has no room left). But there is concern about whether the numbers really add up to anything meaningful when put against the enormous demographic headwind. If they do not and as a result the economy has to endure decades of very low or even negative growth, will Japan gradually decline and disappear?
Not necessarily — a smaller economy due to population decline does not mean a poorer economy. It is entirely possible that Japanese citizens will become individually more prosperous as their economy shrinks. The tight labour market today (which is benefitting job seekers) is testament to this. But when a shrinking economy is combined with a huge public debt overhang, one struggles to be optimistic. The aggregate size of the economy represents the country’s tax base and hence is linked to debt sustainability. If the economy shrinks over time, the ability to repay outstanding debt becomes increasingly questionable.
There is a solution to this problem. But it is another bear whose arrival Japan has been fearing: to substantially open up the country to immigration. New citizens from abroad would contribute to the labour force, to GDP and to tax revenue. What is needed is not a stop-gap import of guest workers whose contributions are temporary, but immigrants who stay and become part of Japan.
The Abe administration has carefully avoided this sensitive issue and no reform or revolution has been proposed in this area of supply-side policy. But it is time for Japan to wake up and welcome this bear home.
Masahiko Takeda is a professor in the School of International and Public Policy, Hitotsubashi University.
This article is part of an EAF special feature series on 2017 in review and the year ahead.
Thanks for a informative analysis. Perhaps it was space limitations but the author failed to note a few things.
First, Abe’s so called ‘womenomics’ has been a lot of talk but no real action. He has not put any more women in his Cabinet than other PM’s have. He has not instructed ministries in the government to promote more women into executive positions. He has not passed legislation or used tax incentives to motivate corporations to do likewise. Thus, women earn 70% of what men do. And they occupy only 9% of executive positions in Japan.
Second, Abe’s so called ‘work-style’ reforms are supposedly aimed at getting corporations to move employees off the part time, temporary track into full time, permanent higher paying jobs with better benefits. A careful analysis of these, however, shows that they are flawed in two significant ways. These are so complex that the average worker does not even understand how they might help him/her. And they allow companies loopholes through which they can avoid actually paying their employees more. For a thorough analysis of these ‘reforms’ one can read a recent article on Japan Focus.
Abe has, finally, begun to talk about using tax incentives to get corporations to hire more people into full time, permanent jobs. But we shall see how this actually plays out. Will it be largely a feel good, marketing campaign with little real substance as his womenomics and work style reforms have been?
Finally, opening up the country to immigration COULD be a significant help. But how likely is it that Abe, a confirmed nationalist who wants the country to return to its glory filled days of yesteryear, going to do this? I’d say, as the old expression goes, ‘somewhere between slim and none. And none left town.’
Perhaps some future PM might be willing to risk proposing and implementing such a revolutionary program in Japan. But I fear that things will have to get a whole lot worse/more desperate before the nationalist bloc in the LDP and many people in the country would seriously consider such a thing. It would have to involve a substantial number of highly educated, skilled immigrants and their family members moving and living there. Would the country be able/willing to provide the kinds of support services that 500,000 or even one million people, for example, a year for the foreseeable future would require?!?
How do things like the unemployment rate reflect the very large number of casual workers on very low wages and unpaid overtime? Has the lack of job security and low wages been reflected in household spending patterns?
Anecdotally from my Japanese partner and friends, the amount of unpaid work done is more than signficant, with many workers feeling they will be penalised, fired or ostracised if they don’t undertake it. My partner works in a hospital and routinely does 12 hour days for less than the wage of a fast food worker. She lives very close to her work, while others have 40minute travel times to/from work.
It seems to me that many of the figures that are presented as “positive” have been heavily massaged or taken at face value.
Thanks to Matt for pointing out something I forgot to include in my comments: that the vast majority of workers in Japan are required to put in large numbers of overtime hours with little or no extra pay. Some people die, either from committing suicide or from actual physical illnesses (it is called ‘karoshi’), from these chronic, excessive overtime hours. Abe recently introduced some legislation aimed at curbing this practice. But, as with his work-lifestyle reforms, it is largely a symbolic gesture with so many loopholes that the actual rate of overtime work will probably not decline to any significant degree.
It is another example of Abe’s reluctance to take on the vested interests of corporations undermines his claims to be helping the average Japanese man or woman. He is a true ‘politician:’ capable of presenting something that sounds like a significant change in practices but in actuality does very little.
The government would not have been facing a deficit if the lost generation had been given full-time, permanent good paying jobs in order to have more kids and the money from the good paying jobs would have put more money into the treasury.
We all know what happens when you give tax incentives to companies – nothing. They just pocket the money and run.