What’s Happening in the World: Japan
By Chesca Gardaya
Japan has a long history of isolation. They initially waged war within their factions — Korea, China, and at one point, the world. The US war had a very big impact on them and has surprised the world with their miracle growth.
What’s been going on in Japan for the past 30 years? Behind the Japanese miracle lay a deliberate industrial policy orchestrated by technocrats that channeled bank credits, foreign exchange, technology licenses and raw materials towards major firms while erecting tariff barriers to protect infant industries from import competition. They also did not issue bond or shares so this prevented from foreign take-over.
For 28 years, Japan has seen a .5% growth in their real GDP per year. The economy was doing very well: they were the number one country in the world that American economic observers were concerned would take over America. Then came the lost decades when the growth plateaued — as Japan’s share in the automotive and electronics industry grew in the US, Pres. Reagan pressured Japan to re-value yen vs. dollar. This threatened Japan’s export-led growth model industry, leading to an economic recession where interest rates were cut from 8 to 3%. They deregulated the financial markets and turned to capital markets instead of banks, forcing banks to lend aggressively to real estate and construction. As a result, real estate soared in market value higher than the US.
From 1991 through 2001, Japan experienced a period of economic stagnation and price deflation known as “Japan’s Lost Decade.” While the Japanese economy outgrew this period, it did so at a much slower pace than other industrialized nations. During this period, the Japanese economy suffered from both a credit crunch and a liquidity trap. One of the huge impacts of Japanese culture could be seen in how their economy is doing — they are frugal. While the government ran into more deficits to stimulate their economy, these stimulus packages are seen to go back into the banks as savings.
Enter “Abenomics”. To aid these concerns, Prime Minister Shinzo Abe organized a call to take Japan back to its former glory. He set economic policies when he came into power the second time back in 2012. “Abenomics” involved increasing the nation’s money supply, boosting government spending, and enacting reforms to make the Japanese economy more competitive. “Abenomics” has three arrows:
- The first was printing additional currency — between 60 to 70 trillion yen — to make Japanese exports more attractive and generate modest inflation at roughly 2%. Abe increased the inflation target from 1% to 2–3%. As a result, Abe reached the 2% target from job creation.
- The second arrow was new government spending programs to stimulate demand and consumption — to stimulate short-term growth, and to achieve a budget surplus over the long term.
- The third component of Abenomics was more complex — a reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector. This included corporate governance reforms, easing restrictions on hiring foreign staff in special economic zones, making it easier for companies to fire ineffective workers, liberalizing the health sector, and implementing measures to help domestic and foreign entrepreneurs. The proposed legislation also aimed to restructure the utility and pharmaceutical industries and modernize the agricultural sector. Most importantly, perhaps, was the Trans-Pacific Partnership (TPP), which was described by economist Yoshizaki Tatsuhiko as potentially the “linchpin of Abe’s economic revitalization strategy,” by making Japan more competitive through free trade.
Another thing for consideration is how Japan’s demographics have a big impact on their economy. Women are considered an underutilized resource and Abe aimed to increase female participation in the labor force. As a matter of fact, unemployment data doesn’t include females. They are targeting women and encouraging them to be more career-oriented, and for career-oriented women to also have families.
Why the encouragement of women to have families? Japan also has low birth rate. The decline in Japan’s fertility rate has been attributed to several factors such as changing lifestyles, people marrying later in life or not marrying at all, and the economic insecurity of the younger generation. Increasing life expectancy is another driving force behind the aging trend.
Given that Japan is known as the healthiest nation with a longer life span compared to other countries, the government is geared to spend more on geriatric health care and providing pensions than investing in the younger citizens who are in the current and/or the future workforce.
With all of these, did Abenomics work? Like all Japanese economic policies since the bubble burst, Abenomics has worked well at times and stalled at others. Inflation targets have been met and Japan’s unemployment rate is more than 2% lower than when Abe came to power for the second time. Similarly, nominal GDP has increased and corporate pre-tax profit and tax revenues have both seen significant rises. However, Japan’s periods of success have been halted at times by global economic forces, and the country’s most significant economic problem — a rapidly aging population — has increasingly taken the forefront.
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About the author:
Self-confessed ambivert Chesca is a bibliophile and a music lover. This mother of two loves trying out something new, especially when it comes to food and beauty.
