It remains wedded to recession, courtesy demography, inflexible immigration policies and a slowing China
Japan seems to have developed a great fondness for embracing economic contraction. After contracting by 0.8% in July-September, on the back of a 0.7% contraction in the previous quarter, Japan is officially in recession again. This is the Japanese economy’s fifth instance of back-to-back quarterly recessions in the last seven years.
Why is Japan hitting the wall so frequently? The latest explanation for all that is going wrong is Abenomics. This is, of course, the easiest explanation that analysts can fall back on. The fact of the matter is since he took charge, prime minister Shinzo Abe has not spared any effort to turn the Japanese economy around. He has taken long-term risks for injecting life into a moribund Japanese economy. Somehow, his policies have not been able to get the investors pumping more money into the economy. Indeed, even now, many Japanese companies have large corporate surpluses. Utilising these surpluses for higher bonus and salaries for workers can increase overall consumer demand.
But corporates seem reluctant to resort to such short-term measures for shoring up the economy.
The real problems for Japan are clearly structural and one of the major ones is demographic. Like all major advanced economies of the world, Japan is also staring down the demographic barrel. Working age population is shrinking fast and the dependency ratio is expanding rapidly. One can criticise China for having an overpowering state aiming to control human habits and impulses, including reproduction. But China has dared to take the bull by its horns by relaxing the one-child norm. Japan is probably too far down the road in introducing any ‘China-like’ measures for correcting course. But the fact of the matter is a workforce that is shrinking each day is reducing the country’s ability to generate economic activity and sustain it.
There are ways of getting out of the demographic trap that Japan finds itself in. And the easiest way, of course, is immigration. Again, Japan has hardly been willing to be flexible on immigration. The Japanese economy is at a stage where a reasonable influx of foreign workers in the economy can work wonders for private consumption and the long-term outlook of its investors, who can be encouraged to part with profits for creating more capacity.
Immigration is a choice where Japan has historically been resistant, probably even more than Europe. The current influx of migrants in Europe might have dual implications: higher social security burdens, but also boosting of aggregate demand at a time when Europe needs it badly. Foreign labour across the world has proved to be an important source of stimulus for their host economies. There is no better time than now for Japan to try the tested lesson from history.
Two other factors complicate matters. Japanese investors, like all OECD investors, have been eyeing opportunities overseas, particularly in emerging markets. However, the current economic outlook for overseas markets is hardly encouraging. Most of the latter are struggling to recharge their growth engines and contemplating long-term structural measures. The biggest setback for Japan in this regard has been China.
For years, China has been a key engine of growth for the Japanese economy. Indeed, the fact that Japan could hold up despite the demographic complexities developing in its economy has much to do with its synergic economic relationship with China. It has been one of the largest sources of imports for China. Japan’s broad-based industrial structure enabled it to supply a variety of items ranging from raw metals to semi-finished parts and components to China, which utilised its large labour for assembling the imports into finished products. The process was facilitated by large-scale investments by Japanese companies in China. Over time, these companies, along with those from Taiwan, utilised the mainland as the biggest assembling centre in the world. The assembled items were exported to far-flung corners of the world, particularly North Europe, and the US, across the Indian Ocean and Pacific Oceans respectively, making China the biggest hub of global maritime trade.
China’s slowdown has had as much effect on Japan as it has had on the resource-exporting economies of the world. Indeed, rising wages make labour-intensive assembling a rather inefficient option in China now. Relocation is the obvious answer as is evident from foreign investors in China searching other locations. But the race for new locations has been compounded by the fact that Chinese investors have now joined the OECD investors, including Japan, in aggressively searching new locations. China has laid out ambitious plans like the One Belt One Road for funnelling its excess capacity at home. Japan, due to strategic discomfort, has stayed out of China’s grand plans.
The tide can well turn in Japan’s favour. The Trans-Pacific Partnership (TPP) would be one of Abe’s big bets in this regard given that it will give Japanese exports new access to the US and several Asian markets. Domestic consumption might also boost from cheaper imports from the TPP. But that is going to take some time. Till then, Japan remains wedded to recession, courtesy demography, inflexible immigration policies and a slowing China.
The author is senior research fellow and research lead (trade and economic policy) at the Institute of South Asian Studies in the National University of Singapore. E-mail: email@example.com Twitter: @amitendu1. Views are personal