Japan is the third-largest economy in the world, behind the US and China. It'e experience seems to foretell some of the key issues facing other high-income economies, like slow productivity growth, rapid aging, and rising government deficits. But in the last few years, it also seems to have recovered to at least a moderate rate of economic growth. What are some of the main patterns and lessons in Japan? For background, I'll draw on the work of theOECD, which just published one of its "Economic Surveys" of Japan in April 2019.Back in the 1980s, a number of popular books and reports published in the US anointed Japan as the future leader of the global economy. A standard claim was that the disorganized competitive market forces of the US economy were unable to keep up with the
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Back in the 1980s, a number of popular books and reports published in the US anointed Japan as the future leader of the global economy. A standard claim was that the disorganized competitive market forces of the US economy were unable to keep up with the government-directed cooperative ventures of Japan's economy. Then in the early 1990s, Japan's economy experienced a meltdown in stock and housing prices, and its economy entered a period of near-zero growth. Here's figure comparing Japan's in per capita terms to the rest of the OECD countries. The left-hand set of bars show that when it comes to per capita output, Japan's growth was lagging well behind and is now catching up. The right-hand set of bars show how this pattern is linked to an aging population. If one looks only at Japan's output relative to its working-age population, it wasn't all that far behind from 1997-2012, and has actually been ahead of average OECD growth since 2012.
Japan's is facing a situation of a declining population and workforce, and the share of the population that is elderly is on the rise. This rising share of elderly has been driving up government spending on pensions and health care, and together with attempts to stimulate its economy through government spending (much of it on infrastructure), Japan has run up an enormous government debt. In the last few years, it has been aggressively using the Bank of Japan to buy and hold its government debt. Meanwhile, productivity growth has been stagnant. Let's say just a bit more about these patterns.
Here's a figure showing Japan's total population, broken down by age group. The OECD writes: "With Japan’s population projected to fall by one-fifth to around 100 million by 2050, many parts of the country are facing depopulation. Efficiency would be increased by expanding the joint provision of local public services, including health and long-term care and infrastructure, across jurisdictions and developing compact cities."
More than 80% of [Japan's] firms continue to set mandatory retirement at age 60, even though life expectancy at that age is 26 years, up from 17 in 1970. While workers can continue until age 65, most are re-hired as non-regular workers at significantly lower wages and in jobs that make less use of their skills. The right of firms to set a mandatory retirement age should be abolished to allow more workers to continue their careers, while fully utilising their skills. An end to mandatory retirement requires shifting away from seniority-based wage systems by giving more weight to job category and performance. In addition, the pension eligibility age should be raised above 65, as healthy life expectancy has reached 75. Lengthening careers in the era of 100-year life spans also requires lifelong learning and job-related training to avoid the decline in skill levels among older workers. An end to mandatory retirement would increase firms’ incentives to increase such investment in older workers, which is currently low in Japan. Finally, longer working lives would also be facilitated by better work-life balance for all workers by strictly enforcing the new 360-hour annual limit on overtime hours, imposing adequate penalties on firms that exceed it and introducing a mandatory minimum period of rest between periods of work.The share of Japanese women in the labor force has risen in recent years, with a push from expanded child care programs. But Japan has long had a "dual-track" economy, with one set of workers who have regular work, good pay and benefits, and a career path, and a second track of irregular work, low pay, and little chance for advancement. Women in Japan have often ended up in this second track. The OECD writes:
The employment rate for women has risen sharply over the past five years, from 60.7% in 2012 to 69.6% in 2018, well above the 60.1% OECD average (Table 9). However, half of the new workers are non-regular workers. The working lives of women are interrupted and shortened by the burden of providing care for family members, leaving them under-represented in managerial positions and on boards of directors... Removing barriers to women requires policies to: i) improve work-life balance by strictly enforcing the new 360-hour annual limit on overtime; ii) further reduce waiting lists for childcare; and iii) attack discrimination, which tends to exclude women from fast-track career
paths. Breaking down labour market dualism is also essential, as women account for two-thirds of non-regular workers, who are paid substantially less.
Subsidizing small and medium enterprises, as long as they remain small, is not a long-run path to higher productivity. Instead, the dropping Japanese workforce offers a chance for these inefficient firms to be combined, reorganize, managed better, and exposed to greater competition. Many of these companies seem to be in a quirky situation where they complain that they don't have enough capacity to produce--but they aren't taking the steps and making the investments to push for higher productivity of their existing workforce. The OECD report talks a lot about reforms to corporate governance, so that Japan's companies would do less sitting on their piles of cash and more looking for growth and efficiency opportunities. But spreading a more productivity-based mindset across all the companies of Japan, not just the world leaders, isn't an easy task.
For some additional perspective on Japan's economy, Tanweer Akram has written "The Japanese Economy: Stagnation, Recovery, and Challenges," in the Journal of Economic Issues (June 2019, pp. 403-410).