Asia Short Read

Land of the Rising Sun

Described as the Land of the Rising Sun, Japan has experienced unparalleled levels of economic growth and infrastructural development. Yet, one might be taken aback to discover the socioeconomic circumstances which have swept Japan away. Thence it is obligatory that one should understand how Japan could transgress its expectations if, at one point, superseding the United States to having fallen to a level of battling deflation for the past 20 years.

One major factor which greatly contributed to the current economic challenge is the creation of an asset price bubble which abruptly burst at the start of the 1900s. The bubble was created by the signing of the Plaza Accord which caused the yen exchange rate to double in value versus the US dollar between 1985 and 1987. Thus, via a process known as the “window guidance”, the Bank of Japan introduced a system of excessive loan growth quotas which allowed for extreme levels of borrowing. Economist Paul Krugman explains thus, “Japan’s banks lent more, with less regard for quality of the borrower, than anyone else’s. In doing so they helped the bubble economy to grotesque proportions”. In its attempt to regain control of inflation, the bank of Japan sharply raised interbank lending rates in late 1989. This policy led to overly leveraged Japanese banks and insurance companies laden with bad debt as equity and asset prices fell; the Japanese stock market crashed in 1991. Moreover, Japan had always been (and still remains) an exporting country, evidenced by companies such as Toyota, Sony and Honda, contributing considerably to Japan’s GDP. As the Yen appreciated, it became much more expensive for foreign countries to buy from Japan. This added fuel to the flames of disaster.

Another prominent consideration might be societal values, as Japan is a country whose people have a high marginal propensity to save – the fraction of an increase in income that is not spent and instead used for relatively high amounts of saving. This risk-averse, conservative mentality has led to an economically developed, stable nation with large pools of savings. However, in consumer goods, we saw a deflationary spiral, whereby as the demand of goods fell, the prices fell leading to debt defaults which in turn saw higher bankruptcies and thus more unemployment and lower demand. The same was true for asset prices which too saw a negative wealth effect. Hence, consumption and investment slowed, and GDP entered a period of low economic growth.

In addition, one must also consider demographics and the aging population in Japan. Following a massive baby boom in the Post World War 2 period, and life expectancy beginning to increase, Japanese families started having fewer children, with birth rates as low as 1.3. Thusly combined, Japan, according to 2014 estimates, contains a 25.9% population above the age of 65. Estimations say that by 2050, this population over 65 could constitute up to a third of the total population. Additionally, immigration levels are amongst the lowest in the world. Hence, the percentage of productive labour force is on the decline. Falling productivity with an aging population causes a great strain on the economy.

What has the Japanese government been doing to tackle this most profound issue? The response, directly following the Great East Japan Earthquake of 2011, has been the introduction of ‘Abenomics’- a three-pronged plan, introduced by Prime Minister Shinzō Abe, to stimulate growth. The first tactic which he presented to the central bank of Japan was the utilisation of unprecedented monetary easing; in essence, this monetary policy, with interest rates at roughly -0.01%, has seen the costs of borrowing money becoming cheaper and vast amounts of money being printed. Consequently, the monetary base has doubled, printing up to $660billion/ year in yen, referred to as a “money-spewing bazooka”. His aim is to reach a consistent 2% annual rate of inflation; he has only achieved 1.3% as of 2020. Another part of his strategy has been fiscal stimulus in which the government massively increases spending on projects such as public works, government consumption, subsidies and incentives for companies. In doing so, Abe is striving for a more efficient economy with new trainlines, roads and public transportation while still investing in education and healthcare. This should lead to greater corporate profits and, higher wages in the long term, resulting in greater consumer confidence and a return to economic growth. Abe’s third stimulus is business deregulation; by introducing regulatory reforms, liberalisation reforms, economic partnerships and the promotion of certain sectors, Abe is aiming to increase trade as well as heighten productivity.

However, have the Japanese government’s attempts at economic stimulation worked? Having seen a sharp fall in equity prices seen 1990, from its all-time peak of 39,000, the Nikkei 225, after bottoming at 7,500, has recently risen to 24,000 (before coming back to 19,500 on recent global fears of the impact of COVID-19). With the rise in equity and real estate prices, we have also seen some reinflation of the economy. The Yen appreciated to 80 against the dollar in 2011, before depreciating to 110, assisting companies’ profitability. All of this has been achieved without mass unemployment, social unrest and in a very controlled and coordinated manner.

The response which Japan’s government has shown has been exceedingly impressive and efficient, resulting in economic growth, whilst maintaining full employment and avoiding social unrest. All this, as the country shows such strong prospects of being a leading innovator in a world of technological change. Notwithstanding, the question of Japan’s fall from rapid growth must be viewed with the newly transpiring global macroeconomic environment in mind. In the same way that Japan, over twenty-five years ago, was the first country to implement Zero Interest Rate Policy, the United States’ 10-year Treasury bond rates have now dropped as low as 0.5% – the lowest ever seen in US history. This is not an anomaly: the Netherlands’ have hit -0.504% and Germany has seen bond yields as low as -0.61% (all figures as of March 11th 2020). Many economists have postulated that the world is about to enter a prolonged period of low economic growth, drawing parallels with Japan over the last 30 years; Japan could potentially serve as an example for what could happen on a global scale in the coming years. Thus, one may find that the case study of Japan could prove to be essential in understanding and in preventing the current global economic challenge facing us all. For night has not yet encompassed the Land of the Rising Sun.

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