For all we complain about low growth and dimming prospects here in the US, it’s a problem that has plagued the developed world. If anything, we’re doing quite well, thank you. Europe is still struggling to get out of the depression, with high unemployment – especially among their youth. China and other developing nations appear to have hit a wall, unable to round the corner and step up to developed nation status.
And then, there is Japan. “Basket Case” doesn’t begin to describe it.
We last checked in with them over three years ago when Shinzo Abe became Prime Minister and instituted what has been called “Abenomics”. Call it “Supply Side” if you want, as it emphasized growth in the money supply and a cheap Yen to stimulate growth in production. Call it “A license to print money by the Bank of Japan (BOJ)” if you’re a cynic.
But the problems in Japan are much more severe – they are demographic and social. Without a wholesale restructuring they are as doomed now as they have been for an entire generation. There’s a lesson here for everyone.
Where they stand now is that Japan is in a negative interest regime in their money markets for the last two months. Banks that park money overnight have to actually pay for the privilege, meaning they don’t do it unless they have to. There is no real “safe haven” for money, outside of government bonds – and they are climbing almost as fast as money is leaving the nation.
The effect has not stimulated the economy, but has instead produced a stream of strange side-effects.
“Every day is like being Alice in Wonderland,” said Tomohisa Fujiki, head of interest-rate strategy at BNP Paribas Securities Japan. “Interest-rates levels are having no effect on credit demand, the market function is declining. You can’t expect everything to go according to plan.” Money is so cheap that it floats around, looking for new places to essentially hide until it’s all over. Investment? Not on your life. Japan is a scary place to make a long-term stand as deflation continues to rule.
The Yen has actually risen recently, partly in response to the excessive rise in US Treasuries and the flight of money from China.
The current head of the BOJ, Haruhiko Kuroda, is the architect of this crazy world, returning to a solid money based policy. It’s a change from his predecessor, Masaaki Shirakawa, who became a thorn in the side of the government by insisting that structural reform was essential. PM Abe didn’t want to hear that, so the BOJ wound up under pressure to do what it does best – push out more Yen.
The result is worth understanding well by anyone who wants to end the (unusual) independence of the US Federal Reserve System.
What kind of structural reforms does Japan need? This extended quote from policy wonk and experienced bond trader Mohamed El-Erian gets to the heart of it:
The most important lesson from Japan is the need for policy makers to move simultaneously on what Prime Minister Shinzo Abe calls the “three arrows” — monetary easing, government spending and business deregulation.
The first two arrows alone, as Japan has discovered, do not suffice. Structural impediments to growth also must addressed, including counterproductive entry barriers to certain sectors, inadequate infrastructure, poorly functioning labor markets or pockets of excessive indebtedness. Otherwise, policy disappointments will be the rule rather than the exception, even as unconventional monetary policy loses not just its effectiveness but also risks becoming counterproductive.
That’s all good as far as it goes, but it still separates economics from the people who make up the economy – a huge mistake. Social and economic policy are more and more one thing these days, and Japan doesn’t have an economic problem as much as a social one. The population is aging rapidly and birthrate has fallen well below replacement.
These are trends that are happening across the developed world, so this is where we all need to pay attention.
How did this happen? Japan has never experienced key social reforms, particularly where it comes to the role of women. Barataria has long argued that the entry of women into the workforce was one of the reasons why wages have been suppressed since the 1970s, given that there has been a net excess of workers for the amount of paid work to go around. As difficult as it has been for us to adjust it’s even worse for Japan – which did its best to never reform, never change, and never accept women into the workforce.
The result is a nation very much on decline, with every retiree supported by only two workers. We’re not far behind in this trend, either, which is to say that there will necessarily be a need for more social programs to support the poor if these are nothing more than the existing Social Security and Medicaid. Japan’s pension system is not as robust as ours and it’s under far more stress. It’s killing them.
Meanwhile, the life of a Japanese woman is miserable and there is no place for a solid family life in their current arrangement. Hence the doom.
That’s not to say that El-Erian is wrong in his assessment, which is very similar to the Barataria plan for restructuring our economy here in the US. The goal has to be to avoid the problems that have plagued Japan – and we’re doing much better economically and socially to start with. But demographically?
Next year, as loyal readers know, is the turning point. As the peak Baby Boom born in 1952-1958 starts to hit 65 years old there will be job openings like crazy. A few structural reforms here and there will make all the difference as qualified workers become more scarce and wages start to creep up. There will be a need for more education and training, yes, but the opportunities will be here.
As long as workers start to make enough money to fuel a boom at the same time they have to pay for more and more retirees it will all work out – as it did not in Japan. There, things only limp along from bad to worse. The inability to reform socially as well as economically has put them down the rabbit hole with no way out.
How well are we doing? Look at Japan. It could be a lot worse.