Japan takes a kinder approach to growth

August 31, 2009

The victorious Democratic Party of Japan did not put economic growth at the heart of its electoral sales pitch. The party’s manifesto mentions “growth” only once. The word “support”, by contrast, appears 19 times.

Even so, there are reasons for optimism that the DPJ’s softer and more nurturing policies are just what the economy needs.

The global slump provided a painful reminder of the dangers of Japan’s export-oriented growth strategy. Output has fallen even faster than in other rich countries, leaving national income at roughly the same level as in the early 1990s.

After two decades of stumbling between recessions, policy makers need to convince their citizens to spend some of their vast cash savings, which are now equal to 1.5 times GDP. Making the Japanese feel more secure may be the best way of doing this.

There is plenty in the DPJ’s platform that looks encouraging. If Japan’s new government can enact election pledges, Japanese citizens would have fewer reasons to hoard cash.

Parents would benefit from a generous child allowance. High-school education would be made free and university scholarships more plentiful. For the elderly, there would be a minimum guaranteed pension of at least 70,000 yen (about $750) a month. The unemployed would get 100,000 yen (about $1,100) a month during job training.

There are two problems, however. The first is how to pay for this largess. The party’s belief that its $180 billion social agenda can be financed by cutting wasteful spending has left some economists unconvinced. A good deal of the fat in the budget was cut out when Junichiro Koizumi was prime minister from 2001 to 2006.

Canceling public works may be easy. But reducing the cost of Japan’s powerful civil service by 20 percent is a tall order — especially when combined with a drive to strip senior mandarins of much of their influence.

Meanwhile the DPJ seems reluctant to privatize the government’s giant postal savings and insurance businesses. An IPO could provide a large injection of cash without the need to trim costs or raise taxes.

If the Japanese feel the new social programs are unsustainable, they may be more reluctant to spend. With national debt at over 200 percent of GDP, a degree of skepticism would be natural.

The second economic headwind for the DPJ is even harder to overcome. Shrinking pay checks will make it difficult to tempt the Japanese into the shops. This year wages have been falling at their fastest pace on record — 7.1 percent in the year to June.

Beyond the cyclical downturn, deeper demographic forces are at work. As highly paid baby boomers retire, they are being replaced by cheaper youths, according to Edward Lincoln, an economics professor at New York University. This is ratcheting down wages.

A decline in the working age population will also make economic growth more of an uphill struggle. Overall the number of Japanese citizens has been falling since 2005. This makes Japan an unlikely engine of global growth even if the DPJ gets everything right.

Promising as some of its policies are, Japan’s new government will face strong headwinds. But it is good news both for Japan and the world that the country now has a leadership that seems inclined to put the interests of consumers before exporters.

3 comments

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Well,with the recession easying ,it seems Japan would come out of the crisis soon ,but whether it can grow still depends on the policies of DPJ.

Posted by Terrylqr | Report as abusive

Dear Friend,
After some interval,i have started reading of your writings on economic fields.
This article is very nice compared to previous some articles on American economy.
What you said is true on optimism moods were already started from Japanese faces.
I have dreamed that,ought to be change of head,change of same,old party and to new party for capturing power in Japan.
My dream came true,after knowing the results from this website and from BBC World News.
1.Now,time has come for Japanese to spend their huge cash reserves for buying new houses,investment in small sectors and some family outing to foreign countries.
2.No disturbances of government formation with some small parties for stable government.
3.New-Prime Minister Designate has vast experiences on learning,what are the immediate economic and social problems to be sorted out and find a new,vibrant, and practical solutions to elders care,privatization of some public services for better productive in services and for constant cash flow to government treasuries.
4.Japan is facing on very less productive forces,that means,younger population is less than counterparts in other developed and other developed nations.
5.New government should concentrate more on Exports and more friendship ties with western and with Asian and African countries for providing jobs to existing jobless youngsters,under employed.
Japan can compete with China on manufactured products for supply and distribution to local,neighboring markets by reduction of costs and more emphasis on Research and Development.
I can proudly say that,Japanese hard work and national spirits are always very high.
Surely,Japan will be back with new stream in all fields.
She will be a challenge to China in forth coming years.
Looking forward to get more inks on economic subjects from you.
With best wishes.,

Japan, a nation ten times as densely populated as the U.S., is so badly over-crowded that they are incapable of consuming products at a rate necessary to gainfully employ their labor force, thus making them utterly dependent on manufacturing for export. (It’s a fact that over-crowding reduces per capita consumption, simply due to a lack of space for using and storing products, beginning with housing.)

The DPJ is faced with an impossible situation. Japan is doomed to rising unemployment and poverty as nations like China and India begin to muscle in on their export markets.

Pete Murphy
Author, “Five Short Blasts”

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