according to an article released in february 21st by the economist, the magazine revisted an issue they first discussed in print a decade ago, namely “ japan’s amazing ability to disappoint.”
while the steady economic growth of the past few years has been an encouraging sign, there are major structural problems in the economy which threaten to relegate the japanese market to a decadent future where it would no longer be a “top-tier” economy, according to the economy minister, Hiroko Ota.
while some of the structural issues in the article may be familiar by anyone with a passing knowledge of japan (ie an aging demographic combined with the increasing expenditures on pensions and health care, etc.), there are others which deserve a more thorough examination.
there is the issue of the investment and export driven recovery of the past few years and the surprising lack of an increase (percentage or otherwise) in personal consumption expenditures which usually are the main driver in an economy. this combined with a lack of consumer confidence is troublesome from the perspective of the government’s desire to create a strong domestic market. these bereft indicators, however, are not just problems in themselves, but are indicative of even deeper issues. foremost amongst these is a near halt in wage growth.
this stagnant wage growth is particularly discouraging in a period of near full employment where wages are usually bid up to attract incoming employees in the market. while the causes are myriad, the article lists three large contributors to the issue. first, there is the low productivity growth among the average japanese worker and the low rate of return on labor enhancing capital. without increased returns on investment with employees, most firms find it hard to justify raises. second, there is the problem caused by a large segment of the workforce being composed of part time workers that never develop skills leading to increased incomes over the course of their life. finally, there is the seeming tight fistedness of many firms posting record profits not sharing any of the windfall with their employees.
another issue is the possible ineffectiveness of investment in new plants and equipment by the major firms within the japanese market. part of the issue is the dismal performance of capital investment in japan as compared on average with countries abroad. second is the underwhelming performance of the stock market, which (while leading to better price/earning ratios) has created another area of investment where the potential for returns is low. finally, there are the still low (comparative to other nations) interest rates which make investment in the bond and security markets also unappealing to many firms. this leaves alternative investments; hedge funds, business ventures, land, etc. however, it seems for the time being at least that firms are having a difficult time finding domestic investments that provide them with a reasonable rate of return. the article also lists a factor compounding this issue further, the lack of shareholder oversight exercised over these companies, discouraging them from taking bolder actions to increase value.
yet another issue to be tackled is the inflexibility of the japanese labor market. this is a daunting issue not only because of the scale of the problem, but also the lack of effective solutions that can be offered by public policy. while normally this could be improved through an easing of requirements on hiring and firing procedures. improved on job and off the job training, and encouraging people to enter the workforce, etc. there is no real silver bullet per se.
then there is the issue to which the article devoted the most time, the lack of political progress in reforming taxes, regulations, and public services. suffice to say that with the interest payments on a national debt of 180% gdp and and a health and pension explosion looming, the government has its work cut out for it. moreover with government red tape costing .6% of gdp growth last quarter and the lowest fdi as a percentage of gdp of any major economy, the diet is going to have to face the fact that their policies are impeding their own goals of a growing economy. finally there is the issue of subsidies and tariffs. sad to say, no progress is likely to happen in the near future on any of these fronts.
that leaves the only part of the economy which seems to be doing unquestionably well, exports. while this is the one apparent ray of sunshine in the article, it too is dampened by the fact that this sector of the economy is also the most vulnerable to market forces and price shocks that are completely outside of japan’s sphere of control.
while i don’t agree with the article entirely on its perceived causes of japan’s current issues and finger pointing, it is still an interesting read.
feel free to discuss.
ps. to prevent myself from beating a dead horse i’ll try to reduce my japanese economy articles.
pps. update, here is an article from the wall street journal, looking at the same set of data with a more rosy outlook, surprisingly they find the weakest link in the economy to be the exports data. no wonder people have such a time taking economists and financ professionals seriously.
« Collapse story