Japan once again represents a potential future to many in the US and Europe. But rather than the promise of a fast-growing, high-tech economy that it offered in the 1980s, today it raises the spectre of “Japanification” — low growth, virtually non-existent inflation, high public debt and a persistent inability to address any of these problems.
As an FT series has described, there are many lessons for other rich countries from the successes and failures of the archipelago nation in its response to financial crises and its attempt to recover from them. As the world looks for options to prevent long-term stagnation and deal with public and private debt burdens after the coronavirus pandemic ends, many believe Japan can provide a warning of what not to do. In fact, its experience should be regarded as an example to others on how they can age gracefully.
In the three decades since Japan’s real estate bubble burst in the early 1990s there has been little overall economic growth or inflation. The easiest monetary policy in the world — interest rates have been not much above zero for decades — has done little to restore price growth and expectations of its return remain at rock bottom, despite repeated attempts by the Bank of Japan to raise them. This has helped to leave it with the highest proportion of national debt to income of any country.
Japan’s experience is often miscast as stagnation, however. While the economy’s growth in aggregate has been low since the end of the 1990s bubble it has done no worse, and often better, at increasing living standards for its citizens than many other rich countries. A shrinking population has meant that while the total economy has stagnated, income per head has kept pace with elsewhere. Unemployment and inequality, too, are enviably low compared with much of Europe and the US.
The country faces the same problems as much of the rest of the developed world, including an ageing population. With among the lowest birth rates in the world, its population has been shrinking. The country, too, has a structural excess of savings and, while incomes have grown, a lack of demand means Japan has remained below its potential — leaving generations of young people frustrated and missing the opportunities of their parents. The modest success it has enjoyed in increasing women’s employment, as well as encouraging the old to work longer, has kept its labour force relatively stable while corporate investment and technological innovation has raised productivity.
Demographics are more favourable for aggregate growth in Europe and the US. Birth rates are often higher, particularly in countries such as France and Sweden where the state provides the most support for working families. Immigration likewise has been higher, historically, than Japan — although, as immigrants age too, population growth relies on maintaining these rates. Nativism on both sides of the Atlantic may mean that the US and Europe may end up looking more similar to Japan in this area, too.
Japan’s success in managing to remain relatively stable socially and raise living standards in the face of this demographic pressure is admirable. The chief lesson it offers is that a country can continue to improve the material wellbeing of its citizens without a growing population. This suggests one route for other countries to manage this demographic transition.
Paying close attention to how Japan has done this, as well as its missteps along the way, can provide a helpful guide for the rest of the world. Overall, it shows there may be worse fates than Japanification.