Spot the problem
Shinzo Abe wants to “invigorate the economy”. To the Japanese prime minister, that means ending deflation and increasing the GDP growth rate. But the problems that his so-called Abenomics are supposed to address are not so severe. And his proposed policies will not address the country’s genuine challenges.
Japan is not suffering from serious or debilitating deflation. In fact, it is not obviously suffering from any sort of deflation. Over the last 20 years, the monthly reading of the consumer price index, set at 100 in 2005, has ranged only from 98.9 to 104.2. The most recent reading was 99.2. There has been a little more deflation in the so-called core index, which excludes food and energy, but the annual rate of decline over the last decade is still less than 1 percent.
Serious deflation, like the 27 percent decline in U.S. prices in four years during the Great Depression, destroys banks and disrupts consumers. But it’s hard to see what harm almost stable prices have done to Japan. The financial system is intact and the infrastructure in good shape. Defenders of Abenomics argue that GDP growth would have been better if prices had been rising gently. But has Japan’s growth actually been inadequate?
At first glance, it looks like Abe’s call for an urgent “revival of the economy” is justified. Japan’s real GDP was 2 percent lower in 2012 than in 2007. Even stretched over the last decade, the annual GDP growth rate has been an unimpressive-sounding 0.7 percent.
Like other already rich countries with ageing populations, Japan’s potential growth rate is very low. It is lower than in Germany, which has more immigration to counter a similar decline in the domestic population. It is lower than in Italy, which has a large, poor southern region that could catch up with the North, boosting the national growth rate.
What Japan has is a declining number of workers: 6 percent fewer 20- to 65-year-olds now than in 1999. At the younger end, workers aged between 20 and 34 years, the decline is particularly striking: down 22 percent from its 2001 peak, with another 13 percent drop almost certain over the next 15 years.
Adjusted for demographics, the Japanese record looks more impressive. GDP per working-age person has increased at a 1.2 percent annual rate over the last decade. That is well ahead of the 0.7 percent rate in the United States, where the number of people of working age has risen by 10 percent.
Japan’s GDP growth rate could be higher, even without letting in more immigrants. The country could put more women into paid work, delay retirements, reduce the unemployment rate and perhaps squeeze out a bit more productivity. But why bother?
The decline in the number of young families means that the same quantity of GDP goes further in Japan than in countries with increasing populations. To keep lifestyles constant, every year Japan needs fewer new houses, cars, appliances, roads and schools. As the population shrinks further, GDP could even start to fall while overall prosperity continues to increase.
Defenders of Abenomics argue that higher GDP will help the country deal with the challenges of an ageing population. That is backwards. The Japanese government and society will indeed have to allocate more people and resources to medical and personal care, and that shift might increase GDP. But any rise will be an effect, rather than a cause, of making the economy senior-friendly.
A more persuasive argument for Abenomics is that faster nominal GDP growth is the best way to erode Japan’s vast sovereign debt burden – currently about 210 percent of GDP, almost all held inside Japan. Defenders admit that Abenomics’ deleveraging will be slow, especially as it cannot even start until the fiscal deficit falls sharply from the current 10 percent of GDP, but they see no plausible alternative.
That is too pessimistic. It should not take decades of unnecessarily high real growth to resolve a problem which is solely monetary and almost entirely domestic. What is needed is a political agreement for truly radical monetary action. For example, the Bank of Japan could use newly printed cash to buy a large portion of very low-yielding debt – 0.6 percent on 10-year bonds. If that retroactive policy change, from borrowing to money-printing, proved unduly inflationary, the BOJ could use its power to control bank balance sheets to keep unwanted money from being spent.
At least Abenomics could theoretically lighten Japan’s sovereign debt burden. For the overall economy, Abenomics is a solution in search of a problem.