Turning Japanese—again

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 putting deflation at arm’s length, and, according to a recent article in The Economist, lifted employment by 1.5 million even though the working age population has dropped by twice as much. But what really catches the eye about Abenomics—more so now than in the last few years—is the way in which the authorities are trying to milk simultaneously economic stimulus and structural reform of the labour market, in effect killing two birds with one stone.

For example, a leading goal has been to get more women into the workplace. The female participation rate—in a country that has culturally been a tough place for women—has risen by four percentage points since 2011 to about 66 per cent. Many women have gone into part-time work, or into what the Japanese call “irregular work,” that is outside the formal labour force, and the gender pay gap is still too wide. But positive change has certainly begun. The government has created about 200,000 new childcare places, and plans to raise this to 500,000 by the end of 2017. It has also cut taxes that penalised females as second earners. Even though these measures cost the public purse in the short-term they will ultimately strengthen the economy’s capacity to grow—more so than one-off tax measures do. This is part of Japan’s undertaking of what economists call “supply-side reforms.”

Now the government is planning not only to continue with these initiatives, but also to raise minimum wages and possibly increase wages for public sector workers and ease admission to public pension schemes; encourage private companies to increase employee compensation; ease the burden of care of family members and pay cash benefits to the lowest paid; and continue with corporate governance reform. This is designed to encourage not just efficiency, transparency and the appointment of outside directors, but also to incentivise companies to spend more on wages, dividend distributions, and capital spending. These measures and spending on ports and other infrastructure facilities are billed as costing Y28 trillion over the next few years. Most of this, as we have come to expect from Japanese fiscal announcements, is not new spending, which accounts for just Y4.6 trillion or 0.9 per cent of GDP.

Nevertheless, in conjunction with the Bank of Japan’s ongoing QE programme, the authorities hope that they can reboot their longer-term economic goals and simultaneously help to regain control over Japan’s public debt of 250 per cent of GDP. As GDP in money terms (which is the denominator of the debt to GDP identity) increases, so the debt ratio “should” stabilise, and eventually fall. That’s the theory, at least, and Japan will have to strive hard to get this to happen because its structural fiscal deficit is still too large, at about 6 per cent of GDP.

In August, markets were disappointed that the Bank of Japan did not ease policy further. But the QE programme is already earmarked to lift the central bank’s ownership of government bonds from 33 per cent to 55 per cent by 2018, and it is now buying up twice as much as the annual new net issuance of government debt (that is to say the net of bonds that are being rolled over or refinanced). Next month the central bank might be inclined to announce new initiatives so that new fiscal and monetary policies are seen to be working hand-in-glove. Whether this amounts formally to what people call “helicopter money,” which is where the central bank finances some part of government spending or tax cuts by creating new money, we shall see.

In any event, what’s going on in Japan now may have significance for other countries—the UK and the US at least. The Bank of England announced a relatively ambitious programme of new initiatives last week, and we wait for the first iteration of the new government’s fiscal policies, which will come in the Autumn Statement if not before. We know that its target of a fiscal surplus by 2020 will be abandoned, and that it may be more inclined to spend on capital projects to address the post-referendum economic deterioration. In the US, the economy is in better shape—which we saw again with last week’s employment data for July—and both presidential candidates are campaigning on economic platforms that break with the fiscal regime of the last few years.

Using the labour market as the vehicle and target for economic stimulus and structural reform at the same time is an interesting Japanese experiment, with potentially illuminating lessons for the rest of us.