An interesting economic experiment is underway in Japan—and its results will hold lessons for the rest of usby George Magnus / August 8, 2016 / Leave a comment
After the financial crisis in 2007/08, a barrage of research reports featured the headline “Turning Japanese,” invoking The Vapors’ 1980 hit song. What the authors meant was that Western countries looked as though they would follow the Japanese experience—following the bust of that country’s massive credit and financial bubble in the 1990s—of a banking crisis, escalating public debt, deflation and a lost decade of economic growth—or over two in Japan’s case. With Western countries also confronting the rapid ageing of society that Japan experienced rather earlier, the comparison hasn’t proven off the mark. But we might well be turning Japanese again in different ways, because of Japan’s latest response to its economic predicament.
Last week, the government, lead by Prime Minister Shinzo Abe, attempted to breathe new life into the economic programme that bears his name, Abenomics. Abe’s programme revolves around the so-called three arrows of fiscal stimulus, monetary largesse and structural economic reforms. Many people have criticised Abenomics for having failed to deliver a sustained rise in economic growth and two per cent inflation, both of which suffered a relapse in 2015, with increases of just 0.5 per cent and 0.3 per cent, respectively. There’s no way that these setbacks can be brushed aside, but neither can Abenomics. Remember that Abe was only elected in 2012.
Japan is a rich country, with an income per head of over over $32,000, and there is little in the way of social tension in the country. Yet its economic confidence is low, its population is shrinking and ageing rapidly, and the economy remains constrained by political blockages to opening up rigidities in the labour market and in service industries. Total population is falling by almost one per cent per annum, and the old age dependency ratio, that is the number of over 65 year-olds per 100 working age people (15-64 year olds) is already 43.3 and expected to rise to 63.8 by 2040. Put another way, there are now 2.3 workers to support each pensioner, but by 2040, there will only be 1.5.
Under Abenomics, the government has succeeded in…