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Japan urged to deal with debt, demographics

Tax hike alone insufficient as nation faces workforce decline while mired in stagnation

by Takashi Kitazume

Staff Writer

Japan may be “the canary in the coal mine” for other industrialized economies as many of them try to grapple with mounting debt problems and face demographic challenges ahead.

A law was recently enacted to double the consumption tax rate by 2015 to cope with rising social security costs, but is Japan acting fast enough to put its fiscal house in order? Or as it seeks to build a long-term growth strategy, does Japan have viable solutions for a shrinking and aging population?

Those were among the observations made and questions posed by veteran journalists from Britain who spoke at a symposium in Tokyo, organized on Sept. 14 by the Keizai Koho Center under the theme, “A growth strategy for mature economies: How to boost prosperity and well-being.”

“After the crisis in Japan’s economy, the financial boom and bust in the 1990s and the early 2000s, it again seemed that Japan had a lot to learn from the Western countries,” said Chris Giles, economics editor of the Financial Times. “And now, after we’ve gone through something similar 20 years later, maybe the boot is again on the other foot. It’s our time not just to say what you can learn from us, but also what we can learn from you.

“Japan does seem to be the canary in the coal mine — you have suffered some of the problems of advanced mature economies before the other ones, and is currently experiencing depopulation and demographic changes faster than other economies,” he said.

Since the 2008 global financial crisis triggered by the collapse of Lehman Brothers, industrialized economies have been busy dealing with crisis fighting and crisis prevention, but those immediate challenges aside, Giles said the mature economies need to look at “what makes economies rich and successful over a long period.”

Long-term trends in economic performances of the Group of Seven advanced economies show that countries go through spurts and stagnations. But one thing is clear: Getting a growth strategy right “can make a big difference on how societies with similar knowledge and similar levels of development can perform over a long period,” Giles said.

Key short-term considerations to prosperity includes the rising public debt, inadequate design of the euro, commodity prices and the global fight over resources, weak banks, etc. “But in the longer-term, to boost prosperity, you can either boost your input — how much capital there are going into the economy, how much labor have you got going into the economy — or boosting productivity, making these inputs work better,” Giles said.

And labor input is a problem for Japan, where the level of the working-age population is declining rapidly, he pointed out. “The Japanese workforce is shrinking, it’s old, it does not have enough women in it, and it does not have enough immigrants in it,” he said.

Britain “is the country in Europe with the least concern about demographic decline” after it dealt with its own potential problems through high levels of immigrants, said Dominic Lawson, a columnist for The Sunday Times and The Independent.

The U.K. resolved the postwar bottlenecks in labor supply with newcomers from the former British empire, and more recently accepted a large influx of labor from the former Soviet bloc countries in Eastern Europe as part of the single European market, he said. “In both cases I think there is no doubt that the national economy benefited — and certainly grew more rapidly than it would have done without such migrants,” he said.

With its traditional hesitancy over accepting a large migrant workforce, Japan may have an alternative — its companies using their immense cash reserves for increased acquisition of assets overseas, including takeovers of foreign companies in areas where Japan has a lot more to learn, Lawson said.

But yet another alternative, he said, is greater use of women in Japan’s labor force. “Compared with the United States and Britain, Japan has not been successful at retaining skilled and educated women within its workforce,” he said.

Japan’s demographic challenges today are closely watched by many Western economies because “in the coming decades we’re all going to have higher numbers of elderly people who make up a proportionally larger share of the population while there will be relatively fewer working-age people to support them,” said Ian King, business and city editor for The Times of London.

Citing United Nations data, King said 31 percent of Japan’s population is already aged over 60 and that is going to rise to 42 percent in 2050. “And the rest of us are approaching a similar situation. The U.N. projects that in 2050 there will be 42 countries around the world with higher shares of over-60 people in their population than Japan has now,” he said. “The question is, how do we meet the challenge?”

While some European countries have recently raised the retirement age for workers, Japan already has a high level of elderly people’s participation in the workforce, he said, noting that around 77 percent of men aged 60 to 64 are still in the labor force.

But the female employment rate remains much lower than in other mature economies, he said, adding that if the female labor participation catches up with that of men, Japan can have millions in extra supply of labor. While the percentage of women between the age of 15 and 64 in either full- or part-time work in Japan has improved from 58 percent in 2005 to 60 percent in 2009, the figure is “still way behind” countries such as Norway at 75 percent, the U.S. at 66 percent, or Germany at 64 percent, he noted.

One more possible solution to Japan’s declining workforce, King said, will be greater mobility in the labor market. “Unlike Britain, Japan has never historically had much of liquidity in the jobs market. If you start your career at Toyota, the chances are you will probably end it at Toyota,” he said. A greater mobility in the labor market where workers readily change their employees “creates the market for talent” and will “in all probability help to deal with the demographic challenges and cure stagnant growth,” he added.

Budget deficits and sovereign debt have become a common problem for most industrialized economies since the 2008 global crisis. Japan, for its part, has accumulated public debt that today is equivalent to more than double its gross domestic product as its economy has struggled through the past two decades.

Britain’s fiscal consolidation plans under Prime Minister David Cameron’s coalition government since 2010 has proceeded at a pace five times faster than Japan’s efforts, said Kaori Nagao, a reporter for NHK’s international news department, who served as moderator of the discussions.

Moreover, of the U.K. plans to cut the deficit, roughly 80 percent of the total comes from reduced government expenditures and pension benefits, with the rest to be covered by increased revenue through value-added tax hikes and other measures, she said. While Japan has enacted the legislation this summer to raise its consumption tax rate from the current 5 percent to 10 percent by 2015, few concrete decisions have been made to reduce government spending, she added.

Mounting public debt weighs heavily on most industrialized economies. This year, the debt-to-GDP ratio is estimated to be 107 percent for the United States, 88 percent for Britain, 89 percent for France, 79 percent for Germany, 123 percent for Italy and 236 percent for Japan, noted Philip Aldrick, economics editor for The Daily Telegraph.

On the other hand, public debt remains much lower and apparently sustainable for emerging powers, with the debt-to-GDP ratio at 22 percent for China, 65 percent for Brazil, 43 percent for Mexico, 44 percent for Thailand and 23 percent for Indonesia, he said.

One major advantage that the mature economies have that prevents their debt ratings from falling into junk status is their history, Aldrick said. “The only thing that distinguishes the mature industrialized economies is their credibility, but the longer they fail to deal with the debt, the more their credibility will be impaired, so there is a sense of urgency here,” he said.

And even though debate continues to rage in Britain about how to cut the debt, “the underlying fact is the public support of the principle that the debt has to be reduced and deficit has to come down. No one is saying fiscal consolidation should be abandoned,” he said.

Aldrick said this very consensus seems elusive in Japan.

“I heard people say Japan does not need to deal with the debts immediately because its assets are so large, but does that matter? Is the government really going to sell all of its museums and monuments overnight to pay off the debt? Is everyone going to sell their house? Like Japan, Italy has huge assets — bigger than the value of its debt. And yet look what position it is in — it cannot refinance.

“People have also said Japan owes its debts to its own people and banks, and that it is a strength. But again, this is not really sustainable in a declining population,” he said.

Andy Davis, associate editor and investment columnist for Prospect magazine, raised doubts about the ultra-easy monetary policy that has been adopted by mature economies since the 2008 global crisis. The Bank of Japan has adopted a zero interest rate policy on and off for more than a decade now.

“I can’t see any prospect of the present policies of ultra-low interest rates and austerity producing a return to sustainable economic growth over an acceptable period of time. The best outcome that’s possible from the course the developed economies are on is a long period of economic stagnation,” Davis said.

The ultra-easy monetary policy is like a morphine that dulls the worst of the patient’s pain but does not cure a disease, he said. Although the policy “undoubtedly seems to have prevented a total economic collapse around the time of the Lehman disaster, the continued use of this policy over time does not increase demand, but arguably helps to destroy it,” he noted.

Saying that growth depends on people’s expectations for the future, Davis argued that the “very low interest rates are steadily removing the possibility of an acceptable rate of return at an acceptable level of risk for many of the world’s investors.”

Also, the ultra-low interest rates “make debt burdens sustainable that would not be sustainable under normal circumstances and therefore should be restructured,” he said. “This keeps zombie debtors alive and ensures the credit systems remain clogged up with loans that are either non-performing or barely performing. This in turn prevents lending to others who could put capital to better use.”

Expectations and confidence are crucial to growth, and in the U.S., U.K. and some other European economies confidence had until the crisis been generated by the availability of cheap credit secured against rising property prices, he noted. “Now that formula has stopped working, what’s missing is a new source of confidence. It might emerge gradually as people pay down their debts and so have more disposable income. This is what policymakers are hoping for, although no one has any idea how long it takes,” he said.

Another problem of the ultra-easy monetary policy is that it makes it increasingly difficult for governments to get out of their reliance on debt, he said. “As governments accumulate massive stocks of debt, financed by very, very low interest rates, it becomes progressively hard for them to countenance an increase in the rates that they must pay — which would be a natural consequence of economic growth — because it would quickly undermine their solvency. In other words, low rates of growth and of inflation, and indeed possibly deflation, progressively become a necessity in order to prevent the government from becoming insolvent.”

The answer, ultimately, is debt restructuring, which would reduce the overall debt burden and result in higher interest rates, Davis said. “Interest rates need to be higher, not lower. Only then capital would be allocated efficiently, and only then will the confidence to invest return,” he added.