Japan still has believers
John Mauldin, a respected commentator on economic matters in the U.S., describes Japan as “a bug in search of a windshield.”
That’s rather an apt description as you look back at Japan’s economic performance over the last 25 years and compare it with what went before.
Japan’s postwar economic takeoff
Before the financial collapse which began in the early 1990s, Japan was regarded as the great success story of the post-World War II era.
From the 1960s, Japan dominated the booming global high value-added manufacturing sector. But as the end of the 1980s approached, Japan’s stock market was on a tear, property was bubbling, and Japanese businessmen roamed the globe – purchasing high-profile trophies like skyscrapers, golf courses and iconic art works.
At home, they underwrote spectacular bubbles in equity and property markets.
Then it all came undone when the equity and property markets collapsed. Japan’s two ‘lost decades’ began.
The spillover effect
At the time, Japan was Australia’s largest trading partner. But luckily the spillover from Japan’s economic crisis was softened by the opening up of new markets in Asia for our resource exports.
In addition, the 1990s saw the establishment of service-based exports in the tourist, education and financial sectors. Then the China factor kicked in.
Japan’s fall from economic grace was real, if rather exaggerated in the popular version of events. But even with the two lost decades, Japan today remains the third-largest economy and fourth-largest exporter in the world. It was also the first developed economy to pass the tipping point, in 2011, when its population began to decline.
In 2013, a quarter of Japan’s population was aged 65 or older; by 2040 that figure will be more than a third.
The burgeoning debt crisis
The demographics of Japan are daunting, but even more challenging for economic management is Japan’s burden of public sector debt which sits at 230% of GDP.
That’s the conventional wisdom.
Lord Adair Turner, a self-described technocrat with practical experience in financial and public sector operations and regulation, differs.
In a syndicated article published this month, Turner explains why he believes the Japanese debt will never be repaid in the normal sense of the word.
He points out that the government’s debt is not currently being repaid; it’s being bought by the Bank of Japan (BOJ).
Total debt, net of the BOJ holdings, is falling and on present trajectory could be down to 65% of GDP by 2017. That’s Tony Abbott’s comfort zone.
Because the government owns the BOJ it is only the declining net figure for public debt that represents a real liability for future Japanese taxpayers.
Turner points out that monetising fiscal debts to put spending power directly in the hands of companies and households, is what former U.S. Federal Reserve Board, Ben Bernanke, first proposed in 2003.
Turner suggests that the Japanese authorities could make their monetisation explicit by replacing some of the interest-bearing debt held by the BOJ with a perpetual non-interestbearing bond.
The greatest risk is that money markets could become concerned that monetisation would invite excessive inflation with consequential debasing of the face value of the bonds.
However, unlike other heavily indebted sovereign issuers, Japan has relatively few foreign buyers as the locals are content to buy and hold.
Lord Turner’s belief that the Japanese debt problem can and will be solved with little more than a shrug of the shoulders seems too simple to be true.
But he has put it out there with optimism and confidence.
I suspect that the McKinsey Global Institute was hoping to do the same with its report, ‘The Future of Japan: Reigniting Productivity and Growth’.
The decline of Japan from its dominant position in high value-added manufacturing has been shocking both in magnitude and speed.
Japan’s labour productivity growth has stalled at under 2% for much of the past two decades. And today there is a substantial and widening gap between Japan and other advanced economies.
Capital productivity has similarly eroded: the return on investment generated by listed nonfinancial companies in Japan is 23 percentage points below the performance of equivalent U.S. corporations.
If these trends continue, Japan is on pace for sluggish annual GDP growth of just 1.3% through to 2025.
But, say the McKinsey team, “There is still time to head off this outcome”.
Moving toward a more advanced economy
The solution: If Japan can successfully double its rate of productivity growth, with a sharp focus on increasing value- added while reducing costs, it could boost GDP growth to 3% annually.
McKinsey sees fast-moving forces realigning the global economy including an immense flow of global trade, the rise of billions of new urban consumers in the emerging world, and technology breakthroughs.
According to McKinsey, Japan can ride these trends to gain new momentum.
It all sounds so easy. But, the numbers indicate a different story.
There’s still a lifetime of work to be done
While Prime Minister Shinzo Abe has been politically successful with his reformist Abenomics policies, he has not had the same result in the workforce.
Perhaps the best known work practice in Japan is that of lifetime employment.
McKinsey, who have given us a glass-half-full view of Japan’s prospective future, has this to say about the common Japanese practice:
“Japan’s long-standing lifetime employment model has contributed to a certain degree of stasis. Today the legal structures around lifetime employment have mostly been lifted, making the labour market more flexible in theory.
“But downsizing is viewed in a strongly negative light in practice, producing inefficient bureaucracies that lack agility.
“Workers too, are reluctant to advance their careers by changing employers, which limits their incentive to develop new skills.
“Japan has partially addressed this issue by allowing employers to hire non-regular (temporary) workers, or haken. By 2013, more than one third of workers covered by these arrangements, which offer limited legal protection and no pensions.
“Paradoxically, this has taken a toll on productivity: temporary workers have fewer incentives to excel, and employers do not invest in their development.
“At a broader societal level, this situation has created a two-tiered workforce and contributed to inequality.”