Is The Land Of The Rising Sun Finally On The Rise?
An "International Economy Magazine" Symposium
Source: OECD, Constant Purchasing Power Parity dollars
I was one of 20 experts who debated in the pages of The International Economy Magazine whether Japan is headed for boom times, a financial crash, or something in between. It was organized as a response to a Financial Times oped by Ruchir Sharma, the Chair of Rockefeller International, who included Japan as one of seven countries on which he was especially bullish. In fact, Sharma was so extreme in his portrayal that he inaccurately declared that “Labour costs are now lower in Japan than in China,” and spoke of it as if it were a competitive advantage. I and one other participant, Chen Zhao, called him out on this.
Here is Sharma’s passage on Japan: “The most surprising country on my list is Japan, where growth is actually picking up. After being dogged by deflation for years, Japan is also the rare country that gains from a return of inflation — now running just over 2 per cent. Its supposedly weak corporate culture has been raising profit margins. Labour costs are now lower in Japan than in China. The cheap yen is boosting exports and could revive animal spirits in the market as a late reopening from Covid restrictions draws back visitors.”
The responses to Sharma widely varied, with some Japanese participants being among the most pessimistic, even alarmist.
On the optimistic side:
Stanford University foreign policy expert Daniel Sneider contended that “Japan has become, again, a global leader. And it has done so by turning three things that appeared to be sour lemons into a sweet lemonade— an aging society, political stagnation, and a rising China.”
Joseph E. Gagnon at the Peterson Institute for International Economics predicted: “Japan may well be the only G7 economy to avoid recession in 2023 and there is a good chance it will continue to grow at or above trend even as the rest of the world slows down.” He attributed this good fortune to the Bank of Japan’s monetary policy.
Here’s a sampling of the pessimists:
Makoto Utsumi, Former Vice Minister of Finance (MOF) for International Affairs, warned that “Japan is walking along the cliff edge on the verge of a crisis.” He named six factors: including the budget debt, Bank of Japan policy, the weak yen, loss of international competitiveness, the national security environment, and weak political leadership compared to the past.
Takeshi Fujimaki, a former banker and member of the Diet, sounded this alarm: Japan has a bright future. Unfortunately, the bright future will be preceded by a crash of the currency.” He put a lot of blame on the Bank of Japan.
According to James Glassman, chief economist at JP Morgan Chase commercial bank, “Japan’s economy has fared better in recent decades than is often recognized, thanks to Asia’s rising economic tide and to the Japanese business community’s business prowess.”
Among those in between the two poles:
In the view of famed economist Anne Krueger, “Japan’s current spurt is unlikely to presage a shift back to the glory days. But the period of stagnation and declining real GDP may be over.”
Takatoshi Kato, another former MOF official, believes that “Japan is likely to continue muddling through. The risk is that the cream of the younger generation will leave Japan.”
Former US Treasury official Mark Sobel commented, “Japan is having a comparatively strong and robust moment. Don’t count on it lasting.”
Richard Jerram, Chief Economist at Top Down Macro, observed, “Overall, it’s a worrying situation when Japan is looking relatively attractive without having enacted significant domestic economic reforms. It’s a sign of how badly some other major economies have gone off track.”
Before getting to my comment, let me note something. Japan’s economic performance is nothing to write home about. As seen in the chart at the outset, its real per capita GDP is still 1% below its level in early 2019 before the imposition of another hike in the consumption tax. Covid exacerbated the problem of an already-fragile economy. Meanwhile, per capita GDP in the rest of the OECD is 3% above its early 2019 level. That’s hardly a robust recovery and, given the Ukraine war and the fight against inflation, a recession is a serious risk in 2023 and it remains to be seen whether such a recession is mild or severe. What history tells us is that, when the rest of the world catches a cold, Japan often suffers pneumonia, as in the era of Covid and in the 2008-09 global financial meltdown.
Here’s my symposium comment:
Even if Japanese wages really were lower than those in China, which is not the case, how could anyone think it’s a sign of economic health for Japanese wages to drop below those in a country with just one-fourth of Japan’s per capita GDP? Yes, there is wage austerity in Japan, but nowhere close to that bad. Still, it’s bad enough to suppress consumer spending and thus overall recovery. That is why the government is trying to get companies to hike wages, albeit in a rather feckless manner. The rising profit margins lauded by Mr. Sharma are not the result of a genuine increase in efficiency, but of this wage suppression.
As for the cheap yen, most economists in Japan recognize that its costs outweigh the benefits. On the one hand, such a weak yen further depresses real wages by raising the prices of import-intensive food and energy. On the other hand, a weak yen does not boost exports as much as in the past.
That’s the bad news. The good news is that Japan has the best opportunity in a generation to launch an authentic economic revival. It could do so by restoring the entrepreneurial effervescence that marked the postwar high-growth era. This opportunity arises due to several new societal megatrends. Generational changes in attitudes about work and gender relations are leading more and more talented people to tens of thousands of new companies. Many of them are ambitious women regularly denied promotions and equal wages at traditional companies.
The rise of e-commerce is enabling tens of thousands of small and medium-sized firms to bypass the traditional distribution system and sell their products to millions of customers. For decades, the distribution system, which is dominated by incumbent companies, has made it hard for newcomers even to get their products on store shelves. Most importantly, three decades of low growth have convinced many within both the elites and the public of the need for change.
Still, progress remains an uphill climb because of resistance by powerful forces. Bank financing for new firms remains quite difficult. While parts of the government try to promote more startups, other parts oppose the needed changes in regulations, taxes, and budgets. While Prime Minister Fumio Kishida has stressed the need for more entrepreneurship as part of his “new capitalism” agenda, he has yet to offer specific measures to turn his lofty goals into practical reality.
Japan has a pattern of missing opportunities. It would be a shame if it missed this one.
To read the full symposium, click