It's big, but it does nothing to address structural problems.
By Milton Ezrati
The National Interest
August 29, 2016
The National Interest
August 29, 2016
The Japanese economy certainly needs help. After a brief surge last year in response to Abe’s earlier stimulus, it has relapsed into recession and stagnation. Real growth during the last four quarters came in little different from zero. Three of the last five quarters have registered no growth or outright economic declines. The country’s unemployment rate remain relatively low at 3.1 percent of the workforce, but only because decades of low birth rates have slowed the flow of young people into the labor market so completely that even this stagnant economy faces a labor shortage, itself a contributing cause of the economic malaise. Meanwhile, Japan continues to suffer from deflation. Consumer prices fell on balance during the past four quarters, helping to stall growth by prompting both households and businesses to wait for lower prices before consuming or spending on expansion.
To be sure, the package the government just unveiled is impressively large. It amounts to ¥28 trillion ($ 274.4 billion), over 6.5 percent of the economy. It rivals the emergency stimulus Tokyo implemented during the financial crisis of 2008–09. Relative to the economy’s size, it surpasses Washington’s failed stimulus of that time. Still, the impact will come on slowly. Tokyo plans to spend only ¥4 trillion in the current fiscal year ending in March.
The weakness of these latest policy measures, however, lies neither in their size nor in the schedule of disbursements. It resides instead in their composition. For one, the policy distorts itself to answer criticisms of the last stimulus. Because the government’s last effort gave corporate tax breaks and made efforts to promote exports by pushing down the yen’s foreign-exchange value, it was characterized as too pro-business. This latest policy slate tries to avoid such accusations by providing cash handouts of ¥15,000 ($147) each to some twenty-two million low-income Japanese. That benefit may make political points and may cause brief economic surge as these unfortunate people spend their boon, but it hardly provides a basis for ongoing growth. The policy offers a second form of support by reducing premium payments on public pensions and easing admission criteria to the system. These measures may have a more lasting effect but are far from an answer to Japan’s economic needs. Meanwhile, a third provision for more college scholarships can only be described as cosmetic.
The most suspect part of the package lies its emphasis on infrastructure. The bulk of its monies will go, the government says, to dredge harbors for cruise ships and greater agricultural exports. It will provide additional monies for subsidized loans to other infrastructure projects, including new hotels and a magnetic-levitation rail link between Tokyo and Osaka. This is how the LDP has long repaid its donors and constituents, giving the former lucrative government contracts and the latter an improved quality of life at the taxpayers’ expense. It is unlikely to help much. The party has done so much of this for so long that it has all but exhausted promising infrastructure options, while government debt outstanding has risen to some 260 percent of the gross domestic product (GDP). Japanese joke regularly that past largesse has so exhausted potential projects that every river in the country now has a concrete bed. The reference to agricultural exports gives away the game. If it is risible for Japan to look for economic salvation in agriculture, it is hardly surprising to see the LDP give yet another benefit to a sector it has long favored and that has always loyally voted for it.
Meanwhile, these new initiatives all but ignore Japan’s fundamental aging problem. The Japanese have had such low birth rates for so long that the flow of new entrants to the workforce has fallen short of those retiring. The country’s labor force has actually begun to shrink. Meanwhile, because the Japanese are the longest-lived people on earth, the proportion of dependent retirees continues to expand. At present more than one Japanese in five is of retirement age. The economy today has barely over two people of working age for every person over 65. With the number of producing hands and minds falling relative to a growing dependent retired population, it hardly surprise that the economy faces growth impediments. Yet all the new bill can do to address this fundamental problem is make a small provision for more childcare facilities for working parents and provide longer maternity leave, presumably to encourage families to have more children. Though few would criticize such steps, they seem small indeed next to the extent of the problem.
It is hard to believe that Abe is unaware of these policy inadequacies. The needed changes are widely discussed in Japanese business, academic and policy circles. If the country has cultural problems with immigration, other policy measures can enhance its available workforce. Provisions to keep people on the job longer could help, and efforts or to get more women to participate in paid employment certainly would. There is potential, too, since even now Japan has a low average retirement age and also has one of the lowest female work participation rates in the developed world. But these solutions need more robust encouragement than the government has offered to date. Perhaps Abe has little choice. Perhaps his fellow LDP legislators have forced old practices on him. Whatever his problem, until he or someone else can break away from past patterns and address Japan’s demographic imperatives, optimism about that country’s economic prospects will come only with great difficulty.
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