It’s the rare economic tale that involves suicides, robots and arms dealers. Welcome to Japan, where science fiction may begin to trump economic fact in ways the global audience has yet to realize.
That’s not what the financial headlines suggest. As the press put 2016 to bed, the narrative was of fresh vigor: a weaker yen boosting exports, the Bank of Japan upgrading growth prospects, Nikkei stocks on a tear, Prime Minister Shinzo Abe friending Donald Trump. There’s one problem with this plot and it’s called a calculator.
From his perch in New York, Richard Katz finds something isn’t computing: how a shrinking, aging, baby-starved and highly indebted nation generates 0.5 percent growth on a sustainable basis. Japan surely can if, and only if, it drastically raises productivity. If it can’t, Katz argues, the No. 3 economy will have zero per capita gross domestic product growth for another 45 years, or so.
That’s not a typo. Current trends suggest that between now and the early 2060s, Japan’s 126 million population will shrink 31 percent, while working-age ranks drop 42 percent. Each worker will share the fruits of his or her labor with the ever-increasing ranks of retirees. Without strong productivity, and soon, Katz estimates GDP will fall 28 percent by around 2060.
“Zero per capita growth is bad enough, but it’s just an average, and for millions of people, life will get much worse,” says Katz, publisher of The Oriental Economist. That could fuel the kinds of social strains Japan has long struggled to avoid. “If the total pie isn’t growing,” Katz says, “there’s no way to give one group of people a bigger slice without taking it away from another group.” That, he adds, means epic “intergenerational rivalry: social security vs. education” that necessitates increased public borrowing.
The good news: Tokyo can change this dystopian trajectory by creating a more meritocratic system, scrapping seniority-based promotions, replacing rote education with curriculums championing critical thinking and creativity, increasing research and development, encouraging a startup boom, cutting bureaucracy, increasing gender diversity, importing ample foreign talent and mandating reduced work hours.
The bad: Abenomics has fallen short on all fronts these last four years. So far, Abe has shied away from disruptive changes that would anger his party’s business base, instead favoring increased labor participation among women and the elderly and lots of liquidity.
Abenomics was meant to fire three “arrows” at deflation: monetary easing, fiscal loosening and supply-side reforms. Rather than risk creative destruction, Abe focused on money. His yen devaluation policy aims to increase profits in hopes higher investment and wages followed. But there’s a diminishing returns quandary. Giving 100 farmers 10 tractors boosts output, Katz says. Giving them 50 hobbles efficiency — they merely get in each other’s way.
The BOJ’s problem isn’t a lack of yen in the system, but uses for them. Likewise, Sony’s failing isn’t too little R&D spending, but squandering resources on the crowded TV market when consumers want revolutionary advances in smartphones, tablets and virtual reality.
Sharp, Toshiba and Cannon face similar innovative droughts that show why Abe’s obsession with cutting corporate taxes is the wrong one. No matter how low taxes go and how accommodative interests rates are, investors will shun those making yesterday’s products.
That gets us back to the suicides mentioned above. A major scandal du jour is a 24-year-old advertising woman who jumped off a roof. Before leaping, she posted on social media horror stories of working 100 hours of overtime per month and exhaustion. It was a stinging embarrassment for one of Japan Inc.’s proudest names, 115-year-old Dentsu, and rekindled debate about the nation’s death-by-overwork crisis. Greater productivity might have saved Matsuri Takahashi’s life, and myriad others.
Robots, meanwhile, are among Abe’s favored remedies for a shrinking workforce (see my Sept. 27 column on the topic). His team is reading more Arthur C. Clarke than Adam Smith if it thinks the social earthquake caused by displacing many current workers will go smoothly. Rather than tilt the economy toward a more horizontal and nimble structure, Abe is betting big on machines sure to require gazillions in capital investments. It’d be faster and cheaper to deregulate.
The arms dealer part of this tale could dovetail nicely with U.S. President-elect Donald Trump’s bluster. Tokyo recently lifted bans on overseas weapons sales. As Trump trolls China, Iran and North Korea, Japanese manufacturers like Hitachi, Kawasaki, Mitsubishi, Toshiba and others view ship-mounted radar systems, laser technology, amphibious search and rescue aircraft and quiet running submarines as the next boom industry — Abe’s “fourth arrow.”
Abe claims 2017 will be a year of bold reform. Let’s hope so. Japan may indeed enjoy some growth as the U.S. recovers and China stimulates anew. But none of Tokyo’s policy weapons will boost GDP on a sustainable basis without a productivity surge. Absent one, Japan is looking at a dehumanizing, unpleasant and downright dystopian 45 years.
Based in Tokyo, William Pesek is executive editor of Barron’s Asia and writes on Asian economies, markets and politics.
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