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Japan's attempts, through Abenomics, to beat back against the tide of demographics may be proving futile.
Japan has lapsed into its fourth recession since 2008, with its economy contracting at a 1.6% annual clip in the third quarter, frustrating hopes that the Abenomics cocktail of fiscal and economic stimulus topped up with deregulation would be enough.
While asset markets have surged, and inflation risen, though less than desired, wages have not kept pace and a rise in a consumer tax in April derailed economic momentum.
The talk now is of more of the same: not just more stimulus from the Bank of Japan, but potentially more government spending, a delay to another planned tax increase and a snap election to allow Prime Minister Shinzo Abe the chance to win a reaffirmed mandate.
With the exception of delaying the planned tax increase, now slated for October 2015, this amounts to more of the same, begging the question of why steps taken thus far have not worked.
"What if the Japanese economy simply can't sustain the desired inflation any more? What if the historical epoch during which that expectation was feasible is now over?" writes Edward Hugh, an economist with a particular focus on demographics. (http://edwardhughtoo.blogspot.com.es/2014/11/abenomics-20-just-what-are-they-trying.html)
"Obviously it isn't difficult to generate a certain amount of consumer price inflation if you raise consumer taxes, and again you can also get it if you devalue your currency, and keep doing so. But as we are now seeing, you do need to keep repeating the moves. There doesn't seem an underlying mechanism there waiting to be kick-started."
The theory underlying Abenomics holds that a fall in the value of the yen will stimulate investment and help, along with other measures, to end the deflationary mindset in which deferring consumption or investment seems wise. That brings on a self-sustaining recovery, one which won't just generate inflation, but the growth needed to help Japan outpace its debt.
But Hugh suggests Japan's particular set of issues, characterized by a shrinking and rapidly aging population, may make this formula less effective.
Instead, we might want to consider the work of Depression-era economist Alvin Hansen, an early identifier of the 'secular stagnation' theme recently expanded upon by Lawrence Summers. In Hansen's views, firms need to see both a strong outlook for profits and for market growth in order to ramp up investment, rather than simply cheap funding costs.
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Take the situation facing a Japanese corporation considering making an investment. It will be fully aware that its domestic market is not only far from healthy, given the shrinking purchasing power of households, but also that the country itself is in the midst of a long-running period of population loss and demographic-driven consumption changes.
While surely a cheaper yen makes investment attractive - after all goods made in Japan will be more competitive internationally - that situation may not be permanent. There is a reason that competitive currency devaluation is called a 'beggar-thy-neighbor' strategy, and that is because it is a zero-sum operation.
Japanese corporations have seen currency moves before and are well aware that they are not permanent. China, Japan's huge and less than friendly neighbor, need only decide, and the yen losses against the dollar could be swamped by yuan weakening.
So perhaps it is not entirely surprising that a self-sustaining recovery in Japan has failed to materialize.
There is only so much which either monetary or fiscal policy would seem to be able to do in these circumstances. The Bank of Japan, after all, can print yen, but not Japanese, much less Japanese willing to consume with abandon.
Despite the fact that the BOJ's most recent avowal of doing more was won with only a 5-4 majority vote among central bank officials, the most likely bet is that both the central bank and Abe stick to their guns.
And after all, it is possible that the problem is simply one of scale, and that a big enough bazooka will eventually be found.
Almost more to the point, there isn't a well enunciated alternative. Surely structural reforms can help, particularly Japanese efforts to increase workforce participation. These things take time, however.
As always with Japan, given its very large public debt, time may not be an unlimited resource. At some point the realization may dawn that Japan can't raise taxes to service its debts and grow.
Expect more stimulus, more liquidity and more yen weakness.
© (c) Copyright Thomson Reuters 2014.
24 Comments
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bonestructure
Okay, what the hell does that title mean? What is 'printing' people and what does it have to do with economics?
theeastisred
bonestructure:
Self-explanatory
nath
I consume little. Others are doing the same. I have the space, but have no furniture in actuality. Do not need any.
I live simply. When I die, the people cleaning up my mess will say...wow, everyone should live so frugal.
JWithers
Nice JapanGal.
I've never seen a moving truck following a funeral procession.
I still hear the saying that it's cheaper to take a vacation outside Japan than it is domestically. If that remains true then Japan will NOT recover from this recession.
My family is reduced our food budget to 1,500 yen a day to survive Abenomics. The only thing that makes this possible to do is Costco. Costco represent money going out of Japan (to some extent).
If Japan wishes to survive then it has got to increase wages so we can afford domestic products. That's the only way this will work.
nath
This is completely incorrect. My family and I went on a week-long drive around Japan last month, staying two nights in 50,000 yen/night onsen, and decent hotels the entire trip. The entire cost of the whole trip - shopping, food, gas, hotels and all - was only 2/3 of the cost of our plane tickets to Hawaii next month. Amd we still have to pay for hotels, rent a car, buy food and go shopping in Hawaii. Overall our week in Hawaii will cost near 3x as much as our week in Japan.
JeffLee
Job insecurity is at an all time high. That's why people aren't spending.
nath
Wish I had thought of this title. You do need probably 10 million more educated 20 somethings to keep the gdp stable, let alone have it go up.
David Varnes
Strangerland, comparing to Hawaii is all well and good, but there are still plenty of other options cheaper than inside Japan. You could fly to most of East and Southeast Asia on package deals that would be cheaper than a lot of trips inside Japan.
Kaerimashita
Essentially people here need to make more babies is what this is saying. Or more immigration required. all predicated on the capitalist model of growth is good, nay even necessary, for economic success. lots about that paradigm not to like.
nath
@strangerland,
True, but that depends on where you go. Guam Hawaii or Okinawa are extremely expensive. Hop a flight to Vietnam, Korea, Cambodia etc and still get it on the cheap
browny1
StrangerL - as others said the destination says it all - and timing. Comparing to a December trip to Hawaii is not quite the eqivalent.
Went to Seoul not so long ago 3 nights 4 days pretty good business hotel ￥49,000 all up each(tickets, transfers, meals & 1 tour). Wife had a one day aesthe (massage, skin rub, body hair etc etc) for less than 10,000. We ate well too. Impossible to do something similar in Japan - impossible.
Ski season starts soon and the highway fees & gas will suck up ￥20,000+ to travel 600ks round trip. I'd like to stay longer and go more often but just can't afford it. But the skiing is cheap!
The reality for most of Japan outside the large commercial centers (about 90 million people) is they are doing it hard. Forget all the nonsense about Roppongi, Ginza etc seeing growth. Forget about all the pumped companies giving higher winter bonuses. Forget about the snaky salary rises. Most Japanese are not on that planet and a considerable % are doing it real hard.
Abe / Aso and the spooner society know diddly.
FightingViking
If you go back to relatives in your own country, there's only the 'plane fare to pay (+ a few "omiyagé...)
Frungy
And is also why people don't want to have kids. Kids are expensive (and Abenomics is just adding to that expense), while companies try to cut costs, and whine about the shortage of human resources while refusing to give proper jobs to younger employees.
All this adds up to a short-sighted economic model that guarantees that the birth rate will continue to fall.
praack
one of the pillars for Abenomics was the expectation that consumers would open their savings accounts and spend, Japangal actually is voicing the thoughts of most of Japan, I Live Simply
Other than hobbies, some artwork, etc - most homes will not have large extravagant spends like the west- will they get into the idea of remodeling the kitchen just because the cabinets are not the same shade as the new curtains?
in fact what will the cost of remodeling a kitchen in Japan cost? not the same as in the USA!
You also have to figure in the Tōhoku earthquake, which dampened the purchasing effect of the populace followed by this long period of raised energy costs due to the lack of clean cheap energy.
The Printing People thing is the last bit- given because the people are still saving, Not reproducing, and unless changes are made will not in the future.
It is not Shinzō Abe fault, he had the vision, it is a collective disappointment that they are failing the vision
Kabukilover
This guy took the long and winding road to say what many posters, myself included, said months ago. Up the consumption tax and people will spend less.it happened.
I say the next phase will be discounts. This is what happens when supply exceeds demand. Watch for de facto deflation.
And yeah, you cannot print people. When people cannot afford children they tend not to have them.
nath
Even a cheap ticket to SE Asia is 50,000 yen. Multiply that by 3.some (2 adults and 2 kids) and we are already at 150,000 yen. Add in hotels, food, shopping and expenses, and we are well over what our week in Japan cost.
browny1
StrangerL - I get your point and partly what you say is true. But a little of Apples & Oranges.
Every summer we try to fit a 5 ~ 7 day camping holiday in. Usually beautiful beach / river location where for a few 万 all up we can enjoy a wonderful relaxing time - in Japan.
But it's a little strange to compare it to my recent Korea jaunt. Both have merit, however for starters one uses my car and one uses an international aircraft.
Travel is certainly getting cheaper here in Japan compared to 10 ~ 15 years ago, but possibly deflation created that cheapness where discounting meant survival for many small businesses. I wonder if it can be sustained or not.
tinawatanabe
People don't spend because they don't have anything they want to buy. The companies should be more creative.
SaitamaRefugee
You have got to be kidding. Out of all the new products being sold by both domestic and foreign companies in Japan, none of them make anything people want to buy?
Please.Its the economy, its not growing. No economic growth means no increase in income for companies and employees. Japan needs to end this QE bunk they've been on for the 30 years; you can't increase demand with a decreasing population.
sangetsu03
Your first point is correct. But according to government figures, last year 70% of Japanese companies reported a loss. It is hard to give proper pay or proper jobs when your company is not earning a profit. And let's not forget that bankruptcy is akin to a crime in Japan, bankrupts lose their right to vote, can never obtain credit, and cannot be given full-time jobs. Company presidents and business owners will avoid such a risk at all costs, so they are not going to invest, hire, or pay more unless they are certain of a positive result. Right now they aren't.
sighclops
@Strangerland
Not sure what roads you took but I've done a fair bit of driving around Japan and it's safe to say that the tolls alone make it extremely expensive. My record was ¥36,000 in 2 days! The roads are very well-maintained, but surely don't justify these sorts of exhorbitant tolls. Driving long distances in Japan is just not possible on a budget.
nath
To be fair, we try to keep toll roads to a minimum, as I prefer the scenery on non-toll roads. You get to see so much more of the country and nature by taking non-toll roads. Usually we take toll roads to get out of the city to the region we are touring, then stay off the toll roads for most of the rest of the trip.
Which is still way less than a single plane ticket to pretty much anywhere.
It is, if you stay off the toll roads. But that's beside the point, as the discussion is not about traveling on a budget, but rather a comparison of the costs of traveling out of Japan versus domestically.
kyk88
One thing not many people talk about is the vanishing countryside. The towns and villages are depopulated, young people go to cities old people dying. Tokyo and Osaka now account for nearly 40 % of the 127 million population. Falling birthrate and rapid aging will lead to an estimate population of 87 million people by 2060. By then 4 in 10 Japanese will be 65 years old. I got this via an AP report . Scary....
Serrano
"Japan, given its very large public debt,"
This is mainly the LDP's fault, isn't it?