Amid the doom and gloom of recent world economic reports, Japan has provided a rare source of good news. In the first quarter of the year, its economy grew by 0.9%, indicating an annual growth rate of 3.5%. This is considerably higher than most comparable nations; the US is growing, but at a lower rate, and much of Europe is still in recession.
Japanese growth is particularly welcome as the country’s economy has stagnated for much of the past two decades. Confidence is in short supply, and investment and consumption are lacking. Even zero interest rates have failed to encourage spending. The high value of the yen has resulted in a negative trade balance; Japanese products have simply been too expensive to export.
So what is Japan doing right? And how much credit can Prime Minister Shinzō Abe and his “Abenomics” programme take for the recovery?
Since taking office in late December, Abe has pursued a three-pronged economic strategy: an expansive monetary policy with the central bank injecting more money into the economy (quantitative easing); an expansive fiscal policy with higher levels of government borrowing and expenditure; and a programme to achieve structural change and higher productivity, particularly through encouraging a larger and more flexible workforce.
The initial signs are seen as encouraging. Over recent months the value of the yen has fallen by around 30% against the US dollar, making exports cheaper, while share values have risen significantly. Growth has been driven mainly by cheaper exports, followed by residential investment and consumer spending.
But the target of a return within two years to 2% inflation is likely to prove tough. There is as yet little sign of a return to inflation, and the longer term effects of the monetary and fiscal stimulus remain unclear.
The pros and cons of “Abenomics” have been vigorously debated. Some commentators have condemned the strategy as fundamentally flawed. For one US commentator it is one Ponzi scheme on top of another. Others are concerned about the apparent erosion of central bank autonomy.
As cash is pumped into the economy firms have invested in speculative activities, driving a rise in share values. Investment banks and brokers have benefited, but core business investment has remained very sluggish, with would-be borrowers reluctant to take on debt.
A cheap yen may have stimulated exports, but it has also increased the cost of imported energy, already ballooning following the Fukushima nuclear disaster. The past tendency of government spending to be diverted by political agendas – usually those of Abe’s own Liberal Democratic Party - into unproductive infrastructure projects increases scepticism about its potential for stimulus.
Don’t forget the third prong
Even the optimists, though, agree that the expansionary monetary and fiscal policies will only deliver the desired outcomes if the third element, structural reform, can be promptly implemented. Reform is vital for sustained economic growth, and without it the government’s debt burden could become totally unsustainable.
Japan already has one of the world’s highest debt to GDP ratios. The combination of even higher debt - increasingly held overseas - and stagnant revenue is potentially disastrous. But delivering on structural reform and greater efficiency through labour market change will be tough.
It’s the demography, stupid
Demographic change remains at the heart of all workforce issues. Japan has the world’s fastest ageing population, and estimates suggest that by the middle of the century nearly 40% of the population will be of retirement age. In that time Japan’s population will have fallen to around 100 million, compared with over 120 million today.
Immigration presents one possible solution, but it is still a fraught issue in Japan. While there are a significant number of workers from other parts of Asia – temporary and permanent, legal and illegal – any kind of open door policy remains politically difficult, particularly in the absence of growth and improved employment prospects for Japanese nationals.
Making better use of highly qualified women seems an obvious solution to worker shortages associated with the changing demographic profile. However, this is in conflict with the traditional Japanese pressures on women to care for the elderly within the family, to have more children and reverse the decline in the birthrate, the persistent unequal career prospects for women, and their reluctance to put up with the work demands conventionally accepted by many of Japan’s male workers.
Above all, increasing women’s workforce participation requires modifying deeply held Japanese cultural traditions. This may be almost impossible to achieve in the shorter timescales required by Abe’s economic strategy.
Too early to judge success
Abe was not elected because the Japanese were confident that he could bring them out of stagnation - confidence in politicians remains at an all time low - but rather because he at least seemed to have a concrete strategy that offered a better chance of success than those of his opponents. To what extent the positive signs in Japan’s economy are the outcome of Abenomics rather than a lucky set of circumstances is difficult to judge at this point.
Earlier Japanese history perhaps gives cause for optimism. Expansionary government expenditure, low interest rates and currency depreciation helped Japan’s rapid emergence from the Great Depression.
We must take the positives from recent events. Japan still has its problems, but it remains the world’s third largest economy and its prosperity matters for us all.