Thursday, Jul 18, 2024
Update At 14:00    USD/EUR 0,92  ↑+0.0002        USD/JPY 151,69  ↑+0.174        USD/KRW 1.347,35  ↑+6.1        EUR/JPY 164,16  ↑+0.143        Crude Oil 85,49  ↓-0.76        Asia Dow 3.838,83  ↑+1.8        TSE 1.833,50  ↑+4.5        Japan: Nikkei 225 40.846,59  ↑+448.56        S. Korea: KOSPI 2.756,23  ↓-0.86        China: Shanghai Composite 3.015,74  ↓-15.745        Hong Kong: Hang Seng 16.512,92  ↓-105.4        Singapore: Straits Times 3,27  ↑+0.018        DJIA 22,58  ↓-0.23        Nasdaq Composite 16.315,70  ↓-68.769        S&P 500 5.203,58  ↓-14.61        Russell 2000 2.070,16  ↓-4.0003        Stoxx Euro 50 5.064,18  ↑+19.99        Stoxx Europe 600 511,09  ↑+1.23        Germany: DAX 18.384,35  ↑+123.04        UK: FTSE 100 7.930,96  ↑+13.39        Spain: IBEX 35 10.991,50  ↑+39.3        France: CAC 40 8.184,75  ↑+33.15        

A prototype of policies to curb social challenges common in Western societies

Article - July 27, 2017

From the economic miracle to more than 20 years characterized by a stagnant economy and aging population, Japan is undergoing a deep socio-economic transformation


Japan, as is the case in the rest of the developed world, faces considerable socio-demographic challenges in the 21st century. The world’s 11th most-populated country according to the United Nations World Population Prospects report of  2016 is also the world’s fastest-aging major economy and one of only two nations in the top 30 to have registered a decline in population over the study period. Greater life expectancy, constantly improving medical advances and the historical longevity of Japan’s citizens are bringing the country’s welfare system to a critical juncture.

Globally, the number of people aged 65 and older is forecast to leap from 531 million in 2010 to 1.5 billion by 2050, according to figures from a 2014 Pew Research Center report, which also notes that the population of Japan is expected to decrease by 10% by the middle of the 21st century – which represents a 19% drop in the number of inhabitants overall.

The population of Japan already registers a one-in-four ratio of people over the age of 65 and by 2050 that percentage will stand at a staggering 40% of the total number of inhabitants. This future shift in age demographics poses a formidable challenge today for the administration of Prime Minister Shinzo Abe: by the middle of the 21st century the number of Japanese over the age of 80 will outnumber those aged 16 or under. Overall, the country’s population is also projected to shrink by 30 million over the same period, from 127 million today to 97 million.

Coupled with a stagnant economy and a steadily declining birth rate – which the Nikkei Business Daily and the Kyodo news agency, quoting anonymous government sources, stated would fall below one million per year in 2016 for the first time since records began in 1899 – it is clear Japan faces a mounting crisis in sustaining its welfare system in the medium to long-term.     

As Suguru Miyake, President of Nihon M&A, notes: “The actual employable age in Japan of people between 20 and 64 is shrinking dramatically. Not only is this the working population but by default it is also the one that consumes, so we can expect the effect on GDP to be a decrease by around half. Japan’s current GDP represents 6% of the world but by 2050 it is forecast to decrease to 1.9%. The two main reasons for such a dramatic drop are directly related to the current decline in production and consumption in Japan”

When Prime Minister Shinzo Abe was elected to office in 2012 he outlined a broad spectrum of policies designed to reverse these trends and to set Japan on the path to economic recovery via a triple-pronged program dubbed Abenomics.
Mitsuyoshi Okano, President of leading Japanese lender Suruga Bank, lays out the impact of the Abe administration’s policy on the ground: “The effects of Abenomics on the financial sector were highly anticipated, even more so than the results themselves. The anticipation had to do with the introduction of negative interest rates. This has a very strong influence over investment banking, for the industry as a whole, and for companies with assets under management. Negative interest rates make it very difficult to generate positive revenues. This is something that has created a direct jolt towards our sector as a whole.”

“The key issue we are facing today is that Japanese economies and individuals are too comfortable in their current situations: the majority have lost their aggressiveness and ambitions to go global. The fact that Japan is a peaceful country and that we are the third-largest economy in the world makes our younger generations happy to remain here”

Teruaki Nakatsuka, President and CEO, JATCO

Japan entered into recession in 2014 and although it posted GDP growth of above one percent in 2015 and 2016, the Abe administration is currently sitting on the largest public debt in the developed world, according to the Council for Foreign Relations. More recently, Japan narrowly avoided a technical recession in the third quarter of 2016 and in January the government announced a record $830 billion budget for 2017 as Prime Minister Abe seeks to achieve his stated goal of pushing up the country’s GDP from 491 trillion yen in 2014 to 600 trillion by 2020 with a series of government spending initiatives. Crucially, Abe has also implemented policies to stem the population decline, including allocating a chunk of that outlay to child care support in order to spur birth rates from 1.4 at present to 1.8 – and thus to prevent the forecast drop in total inhabitants dipping below the 100 million mark.  

In essence, the Abe administration is playing catch-up as the result of a shift in historical global economic models – a situation that could work considerably against Japan’s interests following Donald Trump’s election to the White House and his determination to renegotiate the terms of the United States’ free trade agreements with the rest of the world. The U.S.’s rebuttal of the Trans-Pacific Partnership between the U.S. and Japan is a case in point. Both Trump and Abe pledged to open dialogue on bilateral trade agreements when the two leaders met in Washington in February but the U.S. block on the 12-nation TPP, which was signed by the participating nations in 2016 but cannot now be ratified, is another blow to the competitiveness of Japanese industry.

During the 1970s and 1980s Japan consistently posted the highest annual GDP growth – averaging more than four percent during the period - of all the world’s developed economies to become the second-largest in the world behind the US and eventually the global leader in terms of GNP per capita by the late 80s. But Japan’s astronomical growth was rooted in the boom in domestic manufacturing and global exports, which in turn was founded on the bedrock of a vast working population and favorable credit conditions for Japanese firms to ply the international markets. Japanese high-tech products outstripped foreign domestic suppliers and brands such as Sony, Toshiba and Hitachi were ubiquitous. Car manufacturers enjoyed their peak of production, with Toyota and Honda to the fore.

In 1973 the first Honda Civic rolled onto U.S. soil and within seven years Japanese-manufactured cars had carved out a 30-percent share of the U.S. market. Japan’s economic strength, particularly in the technology and automotive sectors, led to US lobbyists pushing through the Plaza Accord to depreciate the U.S. dollar to stimulate a recovery from the recession of the early 1980s and increase the competitiveness of US industry – above all that of automotive manufacturers – on the global markets.  

When the Soviet Union collapsed, Japan lost a valuable trade partner: in 1988 Japan-Soviet trade was valued at nearly $6 billion, accounting for 1.6% of Japanese exports and 1% of Japanese imports. U.S.-USSR trade averaged one percent in both directions during the same period and never exceeded $4.5 billion.

Coupled with the bursting of Japan’s real estate bubble and a historically low level of interest rates, these contributory factors led to what became known as the “lost decade” between 1991 and 2000. The causes remain a matter of debate – from consumer and company frugality through monetary policy and demographic factors to the perceived sluggish response of the central bank – but the results are still evident today: pulling Japan out of its economic hibernation and safeguarding the future for a generation tasked, literally, with propagating the population.

As Teruaki Nakatsuka, President and CEO of  JATCO  – an automotive transmission manufacturer that supplies AT/CVT to Japanese automakers including Nissan, Mitsubishi, and Suzuki, as well as to manufacturers around the world such as Renault and GM – opines, Japan faces an impasse on the home and foreign fronts: “The key issue we are facing today is that Japanese economies and individuals are too comfortable in their current situations: the majority have lost their aggressiveness and ambitions to go global. The fact that Japan is a peaceful country and that we are the third-largest economy in the world makes our younger generations happy to remain here.”

“For the next three years, I’d like to promote measures with an eye on the future. Today, Abenomics is entering its second phase,” Prime Minister Abe said in September 2015, nine months after his re-election to a second consecutive term at the head of the government. Abenomics 1.0 might have fallen short of its goals initially but the Japanese people are clearly confident that Abe is the man to see the country through its current challenges and lead them into a brighter – and more populous – future.

Among the second raft of arrows proposed by the Prime Minister are a set of measures designed to persuade a new generation of Japanese to bridge the population divide, an onerous task in a country where the cost of rearing children, restrictive workplace attitudes towards pregnancy and a dearth of affordable and practicable child-care considerations all contribute to a reluctance to take time out to become parents. Among the Abe administration’s carrots to prospective mothers and fathers under Abenomics 2.0 are free preschool education, support for infertility treatments and greater assistance for single-parent families, as well as encouraging firms to provide assurances that positions will be held open after maternity leaves.

The stick, as Richard Jackson of the Center for Strategic and International Studies (CSIS) and president and founder of the Global Aging Institute, points out, are policies that are unlikely to prove popular among voters such as a hike in the consumption tax from its present rate of 8% to a level analysts place at anywhere up to 20%, and cuts in other areas of social welfare such as medical insurance, social security benefits and pensions. According to Jackson’s estimates, maintaining current commitments to pension and health care benefits for the elderly will consume an additional 7% of Japan’s GDP by 2030.

“What Abe is targeting is a truly dramatic shift. Only two other countries, Sweden and Denmark, were able to drastically raise falling birth rates (by 0.4 or 0.5 percentage points), and they had robust state policies and labor market regulations which helped women balance jobs and family, which is different from Japan,” Jackson says.

Japan, like so many other developed countries, faces a challenge to promote reproduction as a mutually beneficial arrangement. Under Abenomics 2.0, baby steps are turning into confident strides.