Japan’s Uphill Battle

*Three is this many! ☺

Prime Minister Abe was elected 2006 and again in 2012 to bring Japan out of the economic malaise it has suffered since the mid 90s. In 2012 he presented a “revolutionary” economic plan, popularly called Abenomics. The plan had 3 arrows; a massive fiscal stimulus plan, a more aggressive Bank of Japan, and structure reforms. Decades of relative recession in Japan had strengthened the yen and led to massive deflation. Abe, in 2012, set a plan for inflation at a rate of 2% a year.

2% is a world away

Inflation might be bad, but deflation is almost infinitely worse. When your currency gains value, it takes away in incentive to spend, because your money will be worth more in the future. It also takes away the incentive to put your money in a bank, as the growing value of your money would mean the bank doesn’t give you any interest. Interest comes from loans, and there would be no loans because business isn’t growing because nobody is spending. This circle is deadly and can destroy economies.

Spiral of DOOM!

Abe’s second arrow is to increase government spending, that strategy has been effective before, most notably during the Great Depression in the United States with the first and second New Deals. This builds from the idea of Keynesian economics where short term spending can greatly build an economy. Since government spending makes up a large portion of the economy (42% in Japan), government spending can stimulate a drowning economy.

That money would not come from tax payers (increasing taxes would further slow Japanese spending), but from printing new money. Printing new money naturally increase inflation and Japan plans to print between 60 and 70 trillion yen (about USD$ 500 billion). That may see like a lot of money, but that is about USD $4,000 per Japanese citizen. This is the essence of Abe’s first arrow.

Abe’s third arrow is the most complex. To increase productivity in the economy, Abe is deregulating many policies mainly policies regarding labor rules. Traditionally, it had been very hard to fire workers in Japan because of the government regulation. Now, industries can fire ineffective workers with relative ease and hire new, more effective workers. In theory, this business friendly motion, will increase productivity in the labor market without adding to labor costs. The downside of this is less job security for Japanese workers.

Short term looks good, but long term is shakey

Abenomics has, at best, limited success. Japan’s economy has been growing, 3% in Q4 2014. That growth may have been aided by the decades-low price of oil. Japan’s inflation rate is up, but not nearly 2%, it is about 0.6% in April 2015. Despite this sunny side, oil prices cannot stay low forever and have already began to increase.

What goes down must come up

Furthermore, Japan’s larger problem has not been addressed. Japan’s shrinking working population and low fertility rates has caused the number of non workers to skyrocket. Without a growing population, it is nearly impossible for Japan to have long term economic growth.

To add to that, Japan has nearly impossible immigration laws. As a reference point, 1.6% of the Japanese population is foreign born, compared to 14.3% in the United States. This is mainly because of the highly valued cultural heritage held in Japan. Recently a poll has been held and only 37% of Japanese people said that more foreign workers should be brought in. Countries like the Philippines, Indonesia, and Thailand are teeming with people wishing to move to Japan for a better life, but the Japanese public is strongly against it. Many Japanese people are convinced that the few immigrants that live in Japan are behind the economic downturn in Japan.

Allowing in more immigrants into Japan is the clear answer to the problem Japan has faced for more than 20 years. But that is very unlikely to happen in the near future. Until that change is made, Japan is in an uphill battle that keeps getting steeper.

This problem will soon affect many other countries, mainly European ones. Japan’s story should come as a warning, cultural narrow mindedness will eventually come at a very, very high price.

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