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Sep 11, 2012

Economic growth: I think it’s spurning Japanese …

As the world's fifth largest economy, what happens in Japan matters. And the country's multifaceted problems appear not to be able to be corrected, writes Stephen Koukoulas of Business Spectator.

Japan is poised to slip back into recession. Quite staggeringly, this would be the sixth recession since the start of the 1990s. June quarter real GDP rose a tepid 0.2% but the partial indicators since then are pointing to a contraction in the September quarter with sharp falls in industrial production and weak retail spending.

In yet another blow to hopes of a turn in global economic activity, the dismal state of the Japanese economy points to more downside risks to commodity prices and, as Australia’s second largest export market, more problems for Australia’s export sector.

Japan is the world’s third largest economy — marginally smaller than China but around 50% bigger than Germany and about 110% bigger than France, which is the fifth biggest economy. What happens in Japan still matters for the global economy even if it no longer grabs the headlines in the that China, Germany, Spain or Greece now do.

The problems in Japan are multifaceted and do not appear to be able to be corrected. According to IMF data, net government debt is estimated to be 135% of GDP in 2012 and that on current projections, government debt will reach 164% of GDP in 2016.

The overwhelming majority of the debt on issue is held domestically given the still high level of savings, which means there is little immediate concern about Japan’s ability to finance these record high levels of debt.

Remarkably, that is the good news. Japanese government bond yields are incredibly low. All bond yields, out to 10 years, are below 1%; the 30-year bond yield is 1.9%. So clearly, there is no funding threat to the government’s budget deficit, which this year is estimated to be about 9.5% of GDP.

Demographic factors are a long-run structural issue holding back growth and the ability of the economy to expand. Over the past decade, annual population growth has averaged less than 0.1% per annum and in recent years, Japan’s population has stopped growing at all. This matters because it means that the construction sector, for example, will continually be depressed. There is little need to build new roads, houses, offices and shopping centres, for example, because there is effectively no net increase in population to move into those houses, work in the offices of go shopping in any new shopping centres.

In countries such as the US, by way of contrast, population growth is about 0.7% per annum — which translates to about 2.5 million people per annum that need services and will add to the labour force and support economic growth.

The demographic factors in Japan are even more troublesome when account is taken of the ageing population. Already, almost one quarter of the population is aged 65 or older and this proportion is forecast to climb steadily towards 40% by 2050.

These trends are a severe handbrake on economic activity. The older age cohorts have a low propensity to consume, which will suppress consumption spending. The working-age population is also shrinking and the so-called dependency ratio, which measures the proportion of the population that is working relative to children and older retirees, is falling. In other words, the proportion of the population in employment, that have the highest productivity, that pay taxes that fund education, health and aged care, is falling.

These depressing economic times have entrenched almost two decades of deflation. Since 1994, the GDP deflator has fallen by a cumulative 18% — a fall without precedent. This ongoing fall in prices is poison for the economy — consumers and business continually postpone the purchases knowing that the item they wish to purchase will be cheaper in six or 12 months.

The Japanese stock market and the wealth destruction from the market crash is also another constraint on confidence and spending. This morning, the Nikkei will open at 8870 points, some 75% lower than the peak level in 1990.

This protracted economic gloom and deep deflation in Japan has provided a model for the rest of the world. It has prompted the rapid implementation of near-zero interest rate policy throughout most of the G7 countries as the global crisis hit and quantitative easing is now a viable policy for the US, the eurozone and the UK.

In Japan, there seems no policy framework to kick-start the economy. The Bank of Japan has had interest rates at zero for more than a decade. Fiscal policy is ineffective and constrained by the massive debt levels. Demographics are unhelpful and will remain a problem. Japan, it seems, will have another decade of low, deflationary economic growth. It is hard to see what policymakers can do to prevent this from happening.

*This article was first published at Business Spectator

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22 comments

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22 thoughts on “Economic growth: I think it’s spurning Japanese …

  1. Julie Briggs

    Great article – I like the emphasis on talking about the facts of the situation.

  2. Scott

    “It is hard to see what policymakers can do to prevent this from happening”

    I think the most important thing would be an increase in skilled migration and to use incentives to get women into the workforce. Only 40% of the labour force is female which is way under the norm for most developed nations.

    These go against the Japanese culture of course, but I think it is time for a change if they want to get their economy sorted.

  3. Jimmy

    Scott – Interesting points, it would eb quite the dilemma for the Japanese though, hold on to your cultural heritage or improve you economic performance, which is more importrant to your society?

  4. Glen

    Typically blinkered business journalism. What matters to an individual — as opposed the owners of some monopoly corporate — is not aggregate GDP but rather GDP per capita. GDP per capita growth in the US is running at about 0.8%; in Japan it’s about 0.2% on your figures. That’s hardly a huge difference justifying a wrist-slitting article about the woes of latter. It sure has some woes, but so does the US.

    Eventually, population growth will have to stop or reverse. Everywhere. So eventually some generation of business journalists will have to notice that aggregate GPD is not the measure.

  5. Jimmy

    Glen – “GDP per capita growth in the US is running at about 0.8%; in Japan it’s about 0.2% on your figures. That’s hardly a huge difference justifying a wrist-slitting article about the woes of latter.” Well it is when you consider the US is travelling terribly and Japan has been in it’s funk for almost 2 decades where the US was growing strongly in the early 2000’s.

  6. Steve Gardner

    “The ideology of endless growth is the ideology of the cancer cell.” — Edward Abbey. The earth’s population cannot grow indefinitely, nor can we continue to consume resources at current levels. Therefore, at some point, we are going to have find some other way of conceiving what economic success is, and how to get there.

  7. Jimmy

    Steve – Any idea as to what that would be? How many people are employed in construction and manufacturing?

  8. Steve Gardner

    I don’t really, Jimmy. Big transitions are always painful — and what could be bigger than giving up the idea of ever-increasing consumption as the sine qua non of economics? If far more people are trained to build and make things than are required to actually build and the things that are needed, then a lot people are in for hard times. You can talk about re-skilling, but that’s never going to be the answer for everybody. We’re going to have to rethink everything from scratch, while continuing to live and work as we do that.

  9. Jimmy

    Steve – Even if re-skilling was the answer reskilling into what? If we cut back on population growth & consumerism to just what we need then what industry will be left untouched, what is the new area of employment.

    This would be more than a big transition, it would be the scrapping of our way of life.

  10. Edward James

    Not happy to respond to Paul Barry! I am Edward James a crikey subscriber !!!!! 0243419140