Japan: Time for Change

by Satish Tandon, August 2009

Exactly thirty years ago Ezra Vogel wrote Japan as Number One, which immediately became a bestseller. Its unprecedented success spawned numerous similar works throughout the eighties. We were told that “Japan has dealt more successfully with more of the basic problems of postindustrial society than any other country” (Vogel, 1979). Only ten years later the Japanese economic and property bubbles began to burst and the economy went from “being a model to becoming a muddle” (Kondo, Lewis, Palmade, & Yokoyama, 2001). Throughout the 1990’s the Japanese economy remained stagnant, growing an average of only 1.4 percent a year, prompting some to call this period ‘The Lost Decade’. This compares with the average 3.8 percent growth per annum during the eighties, and 5.2 percent during the seventies. Now, almost two decades after the bursting of the Japanese bubble, nobody can claim Japan is Number One. Its finances are in a mess, economy is stagnant, unemployment on the rise, social security system under serious strain and under-funded, and its people just getting old. Moreover, Japan seems to be a country with no long-term vision. The stagnant economy makes one wonder whether Japan is headed for its second lost decade. The Economist, in its April 4 issue, said as much: "Japan is in danger of suffering not one but two lost decades." In this paper, I will attempt to demonstrate that all the component elements that make a nation great seem to be in a state of decline, if not decay, and that Japan needs to take some very bold measures to arrest this decline.

The Aged Society

There are more old people in Japan (as a percentage of the population) than in any other country. Here ‘old’ means somebody who is 65 or older. The elderly constitute about 22 percent of the population in 2009. The Japanese have been actually aware of the demographic changes taking place in their society for quite some time. The problems associated with an aging society have been discussed extensively, and many scholars have proposed steps that need to be taken to address this issue. But in 1970 Japan already graduated from being an aging society to an aged society when the number of people 65 or older exceeded 7 percent of its population. As the proportion of elderly in the population rises, the number of births continues to fall. In 2009, the number of births is expected to fall below the one million mark for the first time. This represents a birth rate of 0.84, the lowest in the world. It is interesting to note that between 1949 and 1959 the Japanese birth rate declined from 3.3 percent to 1.75 percent (Statistics Bureau, 2009), which makes one wonder whether this was not due to the Japanese spending most of their energy and time in nation-building (after the massive devastation of WWII) at the expense of building a family. It is therefore clear that Japan is fast losing its greatest asset?human resources. As Kenichi Ohmae (1986) says, “The key to a nation’s future is its human resources. The quality and number of its educated people now determines a country’s likely prosperity or decline.” In my opinion, the biggest reason for the birth rate decline in Japan is that although many people wish to get married, have children, and continue to work after childbirth, they cannot fulfill their wishes. This has resulted in fewer people getting married, and fewer still having children, resulting in the decline of birth rate. Hence it is important to create an environment so that people in Japan can get married, have children, and work as they wish.

The falling birth rate combined with the rising numbers of the elderly represents a catastrophic situation for any society. The low birth rate means less people for the labour force, less people paying taxes, less people supporting the economy, less people shouldering the weight of the elderly, less consumption and therefore decreased demand. Rising numbers of the elderly means: more outlays for social security and medical care for the elderly, increased requirement of qualified caregivers like nurses and doctors, and an infrastructure geared towards the elderly. The combined effects of both are a society that increasingly appears to be in a state of decline. According to the Population Census of Japanese Government, the population of Japan peaked in 2004 at 127.8 million and then began to decline. It is projected to decline to 100.6 million by 2050. As of 1 July, 22.6 percent of Japan’s population is 65 and older (Census Bureau, 2009). This percentage is projected to increase to 35.7 percent (or 1 out of 3 persons) in 2050. The government must expand existing childcare services and establish new ones to enable women to continue working. In order to promote day care services by diverse entities and expand childrearing support for all families while maintaining a certain level of quality, legal family-type day care services (nursery mothers), temporary day care services for all children, infant family home visit services (Hello Babies Services), nurturing support visit services, and community-based childrearing support center services should be established to promote implementation of services in municipalities. A bill to amend the Child Welfare Law “making the required amendments for promotion of measures to support the development of the next generation in communities and workplaces including establishing new childrearing support services incorporating family-type day care services, improved nursing care for abused children in family-type environments, and facilitating formulation of general business operator action plans”, was presented to the Diet in 2008 but discarded by the House of Councillors after having been passed by the House of Representatives. It is absolutely essential that this bill is passed to arrest the declining birth rate. In the face of a declining population, unfortunately, Japan’s trademark management practice of ‘Just in time’ inventory cannot be applied in the sphere of human resource management.

National Debt

The national debt of Japan at the end of June, 2009 (MoF, 2009) amounted to 864.5 trillion yen or about nine trillion dollars (at $1=JPY94). This translates to over $65,000 for every man, woman or child in this country. The Japanese debt is now exactly equal to the American national debt in absolute figures even though its economy is only one-half the size of America’s. Japan now enjoys the unique distinction of being the most indebted developed country with its national debt close to about 200 percent of its GDP. The budget deficit during the current financial year is expected to zoom to 15 percent, almost similar to the 13 percent deficit of the United States. In response to the global financial meltdown, Japan earmarked 25 trillion yen ($262 billion) in stimulus spending, further widening the budget deficit. This included measures such as cash handouts and tax breaks on fuel-efficient cars. These measures did provide some relief as evidenced by a small 0.2 percent rise in household spending in June, a government report showed. But there is a limit to the recovery-inducing power of stimulus packages, or measures based solely on government spending aimed at demand generation. “Once the impact of government’s fiscal stimulus fades, growth will slow unless economic reforms are in place to bolster private spending?something Japan, alas, never did” (The Economist, 2009). It is therefore doubtful that the government’s pump-priming measures will have much effect on the economy once the money earmarked for stimulus spending runs out. The stimulus package included a one-time payment of 12,000 yen (20,000 yen to those 18 years or under, and 65 years or over) to all nationals and resident aliens. During 1992-2000, Japan introduced ten stimulus packages worth more than one hundred and sixty trillion yen to pull its economy out of recession, but the economy remained mired in recession. The expansionary monetary policies actually did lead to the economy showing signs of recovery twice, but the revival could not be sustained because consumer demand remained weak. The problem with stimulus measures is that its short-term gains come at the cost of long-term liabilities. The earlier stimulus packages were designed to prop up businesses, especially construction companies, which aimed to fulfill demand that was non-existent. Those stimulus packages only served to maintain existing structures of production against the preferences of consumers. The thing with Japan’s earlier stimulus measures, Krugman asserts, is that Japan failed to get the most out of the resources it employed by not addressing the problem of inadequate demand (Krugman, 2005).

The Economy

Speaking at a formal dinner reception in 1996, the chairman of the Federal Reserve, Alan Greenspan, described the then-booming American stock market as an example of irrational exuberance. He might as well have used those words in 1986 to describe the booming Japanese stock market. It’s interesting how parallels can be found for any situation. Not lessons, though. The Japanese stock market started its spectacular rise in 1986 and over a 5-year period tripled in value, when the Nikkei closed at 38,915 on December 29, 1989. The Dow started its surge in 1994 when it was 3,600 and in January 2000 it hit 12,800, almost quadrupling in 5 years. The Japanese economy contracted at an annual rate of 15 percent last quarter as a result of the global financial crisis. During the same period, the corresponding figures were 9.6 percent for Europe and 6.1 percent for the United States. Compared to this, India’s economy is expected to grow by at least 6 percent and China’s by about 8 percent this year. Even as exports seem to have started to pick up, Japan’s jobless rate rose to its highest level in six years to 5.4 percent in June, according to the latest data from the statistics bureau in Tokyo. At the end of June, wages were 7.1 percent lower compared to the same month in the previous year.

The Japanese double-digit growth of the fifties and sixties was mostly based on almost unlimited access to the huge American market, at a time when there was little or no competition as at present from rival Asian exporters. Both of those conditions no longer exist. The global financial meltdown has significantly weakened demand in Japan’s biggest market, while at the same time Japanese manufacturers face stiff competition from other Asian suppliers. To overcome this situation, Japanese manufacturers need to reorient themselves to meeting demand in other countries like India, China and Russia which are still growing at a much faster rate than Europe and the United States. The combined population of China and India is nine times the population of the United States. As anticipated, if both these countries grow this year by 8 and 6 percent respectively, and maintain this rate of growth over the medium term, the opportunities for Japan will be immense. The Japanese business strategies, like its world view, therefore need to be reformulated as they were based on a global economy centered on the United States.

Japanese exports to the United States during 2008 fell 15.8 percent, moreover, when we compare export figures for 1999 and 2008 there is a drop of 2.8 percent (Value of Japan's Exports and Imports by Major Country or Region, 2009). In other words, Japanese exports to the United States have remained almost flat except during 2005-2007. The weakening of consumer demand in the United States as a result of the financial crisis will ensure that Japanese exports in 2009 will suffer a further hefty drop in the current year. On the other hand, Japanese exports to China and India are not expected to show any decline. If we take the same 10-year period (1999-2008) for purposes of comparison, Japanese exports to China grew by 387 percent and to India by 197 percent. In the case of Russia, Japanese exports registered a whopping 1175 percent growth during the same 10-year period (Value of Japan's Exports and Imports by Major Country or Region, 2009). It is therefore imperative that if Japan must stick to its export-led economic growth model, it needs to bring about a shift in its emphasis on the American market to a more balanced approach that recognizes the potential of emerging and developing economies.

Most economists now generally agree that the era of export-led growth is over. If this is true, and it does look that way at present as demand in most parts of the world is not expected to pick up any time soon to the 2007 levels, Japan should make adjustments to its export-oriented economy. It is not necessary what was good for the last fifty years will also work equally well during the next fifty. The political and business environment which existed in the second half of the twentieth century and which helped Japan to become the economic powerhouse it is today, is no longer there. It is therefore imperative that Japan shifts from an export-led economy to an economy driven by domestic demand. “The prospects for overseas economies remain highly uncertain. Therefore, whether the Japanese economy will be able to get on a stable recovery track hinges on the strength of domestic demand”, opines The Daily Yomiuri (2009).

At present, however, domestic demand is down due to lower earnings outlook for both households and businesses. Companies see no need to make capital investments as capacity utilization is low, and supply exceeds demand. According to an editorial in the Daily Yomiuri, “It is desirable that domestic demand move into a self-sustaining recovery mode, which is evidenced by the expansion of consumption resulting from higher employment and higher incomes, supported by policy measures” (Editorial, 2009). To bring about an increase in domestic demand, it is necessary to increase household incomes. In its manifesto, The Democratic Party of Japan has vowed to boost consumer spending by increasing the disposable incomes of Japanese households and to transform the economy into one driven by domestic demand, if elected to power. To convince households to increase their spending during recession, it is necessary to alleviate the public's fears and feeling of uncertainty about their future. In this context, the election manifesto of the DPJ, which promises concrete steps to increase household incomes by such measures as childrearing support, minimum old age pensions, and toll-free highways provide welcome news for the public.

The forces of globalization, spread of broadband internet access coupled with real-time search capabilities, and advances in communication technologies have transformed the world like never before. In his bestselling book, “The World is Flat” Thomas Friedman (2006) lists 10 forces of flatness which are helping to bring about a new world order which can neither be ignored, nor wished away. He explains how these forces of flatness have resulted in a triple convergence:

The creation of a global, web-enabled playing field that allows multiple forms of collaboration, the sharing of knowledge and work, without regard to distance or geography, and soon even language. Global companies lose walls, floors and buildings. Employees are now a vast, global pool of specialists, assembled (and disassembled) according to needs. New opportunities are created for individuals to compete against anyone, anywhere in the world using the new, "flat" rules.

In this emergent flat world, there will be no room for vertical or hierarchical (command and control) systems of management to create value. These will be replaced by flat or horizontal (connect and collaborate) systems of value creation. When we look at Japan through this prism of flatness, we begin to understand why the Japanese economy, with its command and control structures, during the last ten years has remained ‘flat’, and why its outlook for the future is also bleak. Perhaps sensing this, the Democratic Party of Japan (DPJ), has promised to “create a horizontal society bound by human ties, not a vertically connected society of vested interests” in its election manifesto (2009) for the upcoming national elections.

The present government, composed of the ruling Liberal Democratic Party, seems to be out of touch with the reality of people's lives and continues to pursue pro-business policies that favor big businesses and big construction companies. Just as the focus of Japanese economy needs to be shifted to domestic demand, the government’s focus likewise needs to be shifted to people. For well over fifty years now, the government has acted as a ‘partner’ of big business while ignoring the welfare of its own people, perhaps in the belief that if businesses are prosperous the trickle-down effect will take care of the people. As an example of how the government helps big business I will cite the case of Japan Housing Corporation. JHC constructs housing which it then lends to people. In any country a major objective of any government housing body is to provide inexpensive housing to its citizens by a pricing mechanism that makes houses available to people cheaper than the private market rate. Not so in Japan. The Japanese public housing, in most cases, is more expensive than private rental homes available in the same location. This has to change now. Governments are elected by the people, and it is only natural to expect that they will facilitate the creation of an environment which is conducive to the development of its citizenry and provides opportunities to all to improve their standard and quality of life. The guiding principle behind policy-making should be “Putting People First”, not businesses. If the government allows itself to be influenced by this “People First” approach, it will notice that its prolonged neglect of people’s welfare has thrown up opportunities to provide or improve services in childrearing and education, gender equality, health, pensions and old-age homes, and employment. Only then will everyone be able to find fulfillment in work and in their lives.

It is common knowledge that there is a strong nexus between politicians and construction companies. Previous stimulus packages have mostly centered on creating additional public works projects with a view to keeping the construction companies afloat. While this may have helped in saving thousands of construction jobs, it is debatable whether the projects were either necessary or useful. We often hear of roads in rural areas which lead to nowhere, bridges that do not connect to anywhere, and expensive new buildings which are unoccupied but nevertheless need recurrent expenses for maintenance. It is a common sight in Japan to see roads in perfect condition dug up for re-surfacing just before the end of the financial year in February and March, causing traffic jams and noise pollution. In and around the place where I live, Naka-ku, in Yokohama, I noticed one day recently that traffic lights at all the intersections had been replaced with brand new ones. I do not know whether these traffic lights in other wards of Yokohama were also changed, however, in Naka-ku alone there must be several thousand. I learnt from a police officer friend of mine that each set of traffic lights for one intersection costs ten million yen. Now, it so happens that the traffic lights manufacturers serve as a depository for retired police officers who descend to their new stations in classic amakudari style.

I do not know if exact figures are available for this kind of wasteful and unnecessary expenditure as a result of the politician-business and amakudari networks, but it is believed to amount to several trillions of yen every year. This insidious connection must be broken and the money diverted to projects that directly assist people to lead fulfilling lives.

There was a time when the rate of savings in Japan used to be the highest in the world. Even during the eighties and early nineties, the Japanese savings rate was in excess of 10 percent. In my opinion, the single most important factor that drives people to save is anxiety or feeling of insecurity about old age. As Horioka and Watanabe (1997) point out, the net savings for retirement and precautionary motives are of dominant importance. A discussion paper brought out by researchers at the Policy Research Institute of the Ministry of Finance states: “Japanese households… have been increasing their savings, even though incomes have stagnated, mainly because of uncertainty regarding future income streams and the state of the social security system. Under the circumstances, the Government needs to introduce economic policies that stimulate individual consumption directly. This study proposes a change in the macroeconomic policy stance from investment-led to consumption-driven” (Lee, Yusuf, & Kuchiki, 2003).

On average 93 Japanese take their own lives every day, or almost 4 every hour. According to the latest statistics from the National Police Agency, 17,076 Japanese committed suicide during the first half of 2009, an increase of 768 on the same period last year (NPA, 2009). Among the total number of suicides, 71 percent were committed by men. Many of these people were in the prime of their lives, in their 30’s or 40’s, and cited economic issues such as loss of job or debt as reasons for wanting to end their own lives. The government needs to take necessary steps to address problems arising from an increase in unemployment as a result of the global economic slowdown. Most developed countries have a social safety net that can prevent a person from falling into the depths of economic gloom. The Japanese social security system is primitive and seems to be insensitive to the needs of the people who, unfortunately, fall out of the workforce.

There are several things the Japanese government can and must do to alleviate anxiety among the population. It should promote policies for workers (specifically non-regular, part-time, and daily dispatch workers) that provide support for steady employment and job retention and, at the other end, support for small and medium businesses for job maintenance and creation of new jobs. Such support policies for workers should also include provisions relating to support for women, for people with disabilities, and for people aged 65 or older. The government’s plan (Comprehensive Immediate Policy Package to Alleviate Public Anxiety, 2008) to alleviate widespread anxiety among the population covers considerable ground but it needs to be further refined and strengthened. Moreover, the issues it aims to address are the very issues which require looking at with a long-term perspective. A DPJ victory in the forthcoming general election “could bring welcome changes that address Japan’s ailing consumer demand growth and falling birth rate, such as child support and an expanded social safety net” (Roubini, 2009).

Conclusion

Japan is in a crisis. Its economy has not been able to come out of recession despite repeated stimulus packages and interest rates of close to zero percent. The Government has continued to pursue pro-business policies and failed to address the very real concerns of its citizens about declining jobs, lower incomes, old age uncertainty, inadequate social security, a rapidly aging society and decline in birth rate. Japan needs to show a greater commitment to reform. It needs to cut its budget deficits and bring down the huge national debt. It must put emphasis on improving the welfare of its people through higher incomes, a guaranteed minimum old age pension for all, and a minimum basic wage of at least 1000 yen per hour for its expanding irregular work force. It should focus on fiscal consolidation with a view to bringing down the cost of debt servicing. At the same time, changes in population demographics demand that taxation (including consumption tax), social security and related systems be overhauled to address issues and challenges arising from the onset of a graying society.