78 Finance & economics The EconomistDecember 7th 2019
J
apan onceoffered a cautionary tale of how macroeconomic
mismanagement could transform a juggernaut into a laggard. As
weak growth and low interest rates have spread to the rest of the
world, however, it looks more like a window into the future. The
view it reveals is less bleak than it used to be; “Abenomics”—the
growth-boosting policies of the government of Shinzo Abe since
2012—have restored some vim. But as economic growth once again
sags towards zero, it is worth asking whether Mr Abe’s programme,
bold as it has been, is radical enough.
Japan earned its reputation as an economy adrift in the 1990s,
when a popped financial bubble was followed by slow growth, de-
flation and low interest rates. As the government struggled to pry
the economy from its rut, it pioneered policies like quantitative
easing (qe; printing money to buy assets such as government
bonds) that were used around the world after the global financial
crisis. Economists debated how much Japan’s slump owed to weak
demand rather than economic rigidities, for example an insuffi-
ciently limber corporate sector. Some doubted that, after years of
easy money and bulging deficits, there was room left for stimulus
to boost growth. Others reckoned that Japan could escape its rut if
only its leaders were bold enough.
Abenomics showed that Japan’s economy was indeed suffering
from weak demand. Fiscal and monetary stimulus were two of the
“three arrows” of Mr Abe’s agenda (the other being structural re-
form). His government increased public investment and lit a fire
under the Bank of Japan, which set an inflation target of 2%
(stretching, for a country so deflation-stricken) and engaged in
large-scale qe to meet it. The economy quickly responded. The yen
tumbled, giving exporters a lift. Stock prices soared, and in 2013
economic growth hit a respectable 2%. Japan has since built on
these successes. The economy has grown every year, just about.
The unemployment rate has fallen to 2.4%.
But the slump never quite ended. Perhaps it might have, had the
government not raised the rate of consumption tax from 5% to 8%
in 2014 in an effort to cut its mammoth gross debt pile, which
reached 230% of gdpin 2012. Private consumption, which helped
power growth in 2013, shrank in 2014 as the economy slowed to a
stall. The government postponed a second planned increase forfear of starting a recession. Yet even now, five years on, the econ-
omy remains too weak to stomach fiscal tightening. In October the
consumption tax was raised once more, to 10%. The increase land-
ed harder than expected, hurting retail sales and squeezing an
economy already battered by a slowdown in global trade. The gov-
ernment is now preparing a round of stimulus, hoping to tide Ja-
pan through this bout of weakness.
It has become clear, however, that Japan’s demand woes are not
simply an after-effect of financial crisis. Rather they are chronic,
reflecting a profound demographic shift which depresses both de-
mand and supply—and which is creeping its way across the rich
world. Over the past 20 years Japan’s working-age population de-
clined by more than 10m workers, or about 14%. It is projected to
fall by even more over the next 20. Having fewer workers means
lower growth and less need of investment. Although Abenomics
reversed a long decline in investment, spending has been too low
to prevent a steady increase in corporate hoarding: idle cash,
draining demand from the economy. With unemployment so low,
you might expect cash to flow to workers, whose spending could
then energise growth. But incomes have risen surprisingly slow-
ly—partly, the government reckons, because firms are choosing to
automate rather than compete for ever scarcer workers by raising
wages. When firms do invest, some spend on robots.
Limp private-sector spending has in turn kept the government
from cutting its debt. Were the state to begin saving in earnest, de-
mand in the economy would collapse. Japan has long defied pre-
dictions of imminent fiscal crisis. Even so, demography could
eventually break the public purse. At 46% in 2018, Japan’s old-age
dependency ratio—the number of elderly people compared with
the number of working age—is the world’s highest. It is projected
to rise by nearly 20 percentage points over the next 20 years. Shift-
ing the burden of tax away from consumers might reinvigorate
household spending. But economists prefer consumption-tax
rises to higher levies on income or profits, which they fear would
further depress growth. Pressing firms to raise pay, perhaps with
faster increases in the minimum wage, could help in the short run
but accelerate automation over the medium to long term.Hit me Abe one more time
Abenomics may yet fulfil its promise. A short burst of stimulus
could see the economy through the current headwinds. Given a bit
more reform and some luck, growth could rebound—sufficiently,
perhaps, to stabilise government debt even as social spending
grows. But it would not take much bad luck to spark a recession
and reverse the past few years’ hard-won gains. To safeguard Ja-
pan’s economic future, more radical policies may be needed.
Large-scale immigration might do the job. But Japan remains a
closed society by rich-world standards. Just 2% of its population is
foreign-born, compared with 13% in Britain and 22% in Canada.
Instead, Japan may continue to blaze macroeconomic trails.
The Bank of Japan, through qe, has spent trillions in newly created
yen on stocks and bonds. It might instead try distributing new
money to households. That would either raise inflation, prying Ja-
pan from the trap that has held it since the early 1990s, or demon-
strate how best to manage the macroeconomic challenges posed
by ageing and automation. Or it could simply call bond markets’
bluff, and borrow and spend as lavishly on public investment as
circumstances require. Other countries may boggle at such strat-
egies. Soon enough, they will learn for themselves just how tricky
Japan’s position is. 7Free exchange Back to the future
Japan’s economic troubles offer the rest of the rich world a glimpse of things to come