“Self-deception is ultimately the reason of Japan’s plight. The Japanese never accepted change was in their interest”- Paul Samuelson
In the 1980’s Japan was the envy of the world, as Japanese corporations dominated in every industrial sector possible. The United States Congress held enquires into Japanese efficiency, as many believed their economy would surpass that of the United States.
This obviously never happened…
In the 1990’s Japan enjoyed their golden decade, kick started by Japanese bureaucrats signing the plaza discord, which lead to an appreciation of the Yen. The Yen appreciated to such an extent that Japanese companies could no longer sell their high quality goods at a low price and, in the face of fierce competition, some went bankrupt. Simultaneously, the bank of Japan used its window guidance regime to increase credit supply in the economy, leading to high levels of speculative investment within the economy. The Nikkei Stock Market Crash, beginning in 1989, saw a drop from 30,000 to 8000 basis points which, when fueled by extensive credit in the economy, led to panic within the Japanese and world economies. The Japanese people lost confidence in the political, social and economic system entirely, and this loss of confidence set the scene for a greying and deflationary economy.
Recently, Shinzo Abe has implemented a 3 Arrow Plan to return economic prosperity to Japan, however, effects so far have been minimal…
In Western societies the notion of life long unemployment is irrelevant, however, in Japan, it plays a huge part in the constructs of social order. Japanese workers were laid off in unprecedented numbers after the Nikkei Crash, and graduates from the top universities in Japan were underemployed. The crash decremented the social fabric of Japanese society. People became pessimistic about the economy, and were less inclined to have children or start families.
One decade later and the Japanese workforce is now insufficient for the level of production in the economy. The demographics of the Japanese population have been distorted to produce a labour shortage: there are a large number of old people who rely on pensions, whilst not enough young people contributing to tax revenue. Consequently, the government runs deficits, resulting in a huge pile of public debt. Though Japan could simply ease immigration policies to fix these problems, social complications arise because Japanese society has always been, and must remain, homogenous. Japan’s current Prime Minister, Shinzo Abe, has decided to introduce more women into the work force as part of his economic revival plan. The policy is promising, however, Japan will need to deregulate its labour market entirely. After the bubble burst, Japanese firms adopted United States style labour hiring practices, where wages were determined by performance evaluations rather than seniority wage, however, academic hierarchy was still present. Japanese firms should move towards fully abolishing the academic hierarchy to allow graduates with the best skills to compete for jobs. Brightening the prospects of Japanese employees is a step towards to increase the population.
Visa programs for expats should also be more generous in terms of their lengths and perks – if more expats were available within the market, Japanese firms would be able to attract the skills to compete in the internationally once again, whilst maintaining a homogenised society.
Public debt is also a problem in Japan, having reached 200% of GDP, and the Bank of Japan must, therefore, commit to its current plan to raise inflation to 2-3% once again. The current Bank of Japan Chief Governor, Haruhiko Kuroda, has implemented a negative interest rate regime, and increased the quantitative easing program to 3 trillion Yen. As a monetarist, I believe the Bank of Japan should be more liberal in its monetary program by further increasing negative interest rates to; punish savers, create incentives to spend, and force corporations to invest earnings into new projects or replace depreciating capital.
Negative interest rates would initially increase prices due to consumption and investment. Rising prices would mean idol cash would lose value, forcing people to spend it immediately. The quantitative easing program would then lower the value of the Yen by flooding it into the foreign exchange. With a lower Yen, Japanese companies would be able to compete internationally and make profits, whilst the domestic problems were solved through government policy. Toyota has benefitted massively from a lower Yen, reporting a profit in 2015. As business prosperity rises and the value of the Yen lowers, corporations will hopefully raise wages to increase the living standards of Japanese workers. With increased company profits and consumption, the Japanese government should be able to service its public debt. 85% of Japanese public debt and 90% of Japanese domestic debt is fixed – so a lower currency value would be a non-issue and inflation would mean the government could service these debts easily.
Given that the social conservative status of Japan needs to be maintained, Japanese public policy should be aimed at ‘filling the gaps’ and allowing current social issues to recover. Whilst some problems are being solved, the Bank of Japan has a responsibility to create a favourable environment for businesses with aggressive monetary policy. Socially, Japan does need to fix its population problem, but considering the amount of infrastructure, monetary policy should be able to fix the public debt and corporate profitability.
Photo credit: Global Research