Japan’s economy suffered its biggest quarterly contraction in five years in the October-December period, decreasing by 6.3 percent on an annual basis. A fall was expected; a plunge was not.
Economists have pinpointed the causes of the drop with confidence, but they are quick to note that they are temporary phenomena; larger, more enduring problems loom. They are half right. Other, more powerful forces are chipping away at the country’s economic prospects.
Yet, daunting as those factors are, even more compelling are the attitudes of the Japanese public — and there is little indication that they will change and allow the reforms required to put the economy on a more stable footing and facilitate growth.
The 2019 fourth quarter fall was the first in over a year and was the biggest decline since the economy shrank 7.4 percent in 2014 — the last time Japan raised the consumption tax. This time, the contraction was the product of another consumption tax hike, which increased from 8 percent to 10 percent, Typhoon Hagibis and the U.S.-China trade war. All were expected to have an impact, but the consensus view among economists was that the hit would be between 3.5 percent and 3.9 percent, considerably less than the figure released earlier this week.
A rebound is expected in the first three months of 2020, but it won’t be enough to actually grow the economy. If growth remains negative, then Japan will experience a “technical recession,” two consecutive quarters of contraction. That projection preceded the coronavirus outbreak, which looks set to hammer the economy. Production lines have been shut down and Chinese tourists, about one-third of total visitors to Japan, are plummeting as well. China’s economy is slowing, a result of the virus and its own internal difficulties, which will impact this country too.
Japanese officials are confident that this is just a lull. Yasutoshi Nishimura, minister for economic revitalization, expects “a gradual improvement,” and noted that the October tax hike did less damage than the previous increase. He is also thinking of measures the government prepared to offset some of the damage; a ¥13.2 trillion stimulus package was adopted in December and the administration is developing an extra budget to combat the coronavirus impact. The Olympics will provide another big boost as millions of tourists visit for the summer games; estimates are that they will add about ¥32 trillion to the economy, but that assumes that the coronavirus outbreak is under control and the games go on as scheduled. (Uncertainty is not without precedent: The 2016 Rio de Janeiro Olympics occurred amid the Zika virus outbreak.)
Every student of the Japanese economy knows that these issues are worrisome, but the country faces more formidable structural constraints. The International Monetary Fund reckons that Japanese GDP could shrink by 25 percent in the next four decades as the population shrinks and ages — and that assumes the economy grows at the rate registered between 2012 and 2017, a time when Shinzo Abe returned as prime minister and launched his Abenomics economic rejuvenation program.
Abenomics is based on “three arrows”: fiscal stimulus, monetary easing and structural reform, and the three had to proceed in tandem to be effective. The first two have long been staples of Japanese economic policy (although the degree of current easing is unprecedented, and unnerving for some officials) and were accelerated to ease the anticipated pain of the third arrow.
Seven years on, and despite the Prime Minister’s Office’s claim that “Abenomics is progressing” (go to the website for regular updates), inflation remains stubbornly below the 2 percent target — consumer prices rose 0.6 percent in 2019 — while fiscal stimulus provides only a temporary salve as national debt increases, and is now nearly 240 percent of GDP, the worst among major industrialized nations.
Critics fault the government for failing to promote the third arrow: structural reforms. There have been changes, such as promoting and joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, the successor to the TPP) and opening the doors wider for blue-collar workers from overseas last year, but the response to both has been slow.
The inflow of foreign workers in the first eight months of the new visa program came to some 1,600 — far below the up to 47,500 anticipated in its first year. Most reforms have been more symbol than substance (the immigration reform might qualify), that avoid tough decisions. Japan is by no means unique in that, however.
What may be uniquely Japanese is the relative quiescence of the public. Almost alone among developed countries, Japan has not witnessed the emergence of a populist political movement. Even though one opinion poll showed that 56 percent of Japanese pronounced themselves “dissatisfied” with democracy here, their dissatisfaction has manifested itself in “exit” — falling voter turnout at elections — rather than “voice” (noisy protest groups).
At first glance, that is hard to explain when opinion polls, such as a recent Gallup survey, show that nearly as many Japanese said the domestic economy was getting worse (34 percent) as said it was getting better (37 percent). More alarming is a Pew research survey from 2018 which found that a majority (55 percent) characterized the economy as bad, 41 percent (the largest group) believed that on average people were worse off than before the 2008-2009 global financial crisis, and 76 percent think that the next generation will be worse off than their parents.
That’s grim stuff. And yet, NHK’s “Survey on Japanese value orientations,” a poll that has been conducted every five years since 1973, shows that a steadily rising number of Japanese are happy with their lives.
In summer 2019 survey, 39 percent said they were “satisfied” with life in general; “if “rather satisfied” is included, the number rises to 92 percent. That matches the defining belief of Japan’s go-go years when some 90 percent of the population considered themselves to be middle class.
The answer to this conundrum lies in the distinction between present and future circumstances. Japanese know the headwinds they face: They have been constant and well-discussed topics for three decades. Yet if the future looks bleak, now isn’t so bad. In fact, it is pretty good. Tokyo continually reinvents itself and the pace is accelerating as the Olympics approach.
The city is clean, neat and efficient. It offers rich culture, both cutting edge and traditional. One easy measure is the 2019 Michelin Guide. Tokyo is the most starred city with 230 designated restaurants. Paris is No. 2, with 123 restaurants; Kyoto is third, Osaka fourth. Japan has as many Michelin-starred restaurants as the rest of the top 10. Or as one young woman quoted in my book “Peak Japan” explained, “I’ve only known lost decades, but Japan is still comfortable, rich and beautiful.”
Comfort is the key. Japanese have great and understandable pride in their society, one that has an extraordinary record of success and is truly homegrown, reflecting their culture and values. Those who insist on root and branch reforms cannot promise that the changes will work or will offer better lives to a majority of Japanese on terms that they can accept. That perspective explains the failure of a country to heed decades of warnings about a future that grows ever closer.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions.”