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INDIVIDUAL CASE STUDY

JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION


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Introducton
This objective of this case study is to explore on the strategies to overcome the
economic problems facing by Japanese due to deficit, demography and deflation.
Over the last decade (2002200!", the Japanese economy has underperformed
dramatically, gro#ing an average of $.$ percent per year versus !.$ percent per year in
the previous ten years. %t the same time, the country&s financial system has fallen into
disarray. 'ith a shrin(ing labor force, the standard estimate for Japan in 20$2 ) that is,
before %benomics ) had output per employed #or(er gro#ing by *.0+, year on year.
!" #$%t &cono'c (ro)*&' + ,%cn- n t$+ c%+& +tud./
%fter more than a decade of economic stagnation and deflation and then an
-intensive adjustment period. (2002200!", Japanese bureaucrats #ere hailing the onset
of -concerted consolidation. (200/2000", the final step of their return to return to
economic gro#th. 1nder the principles of -no gro#th #ithout reforms. and -leave to the
private sector #hat can be done by the private sector,. the government #ould continue to
carry out structural reforms. %lthough -regulation, financial system, tax system and
government expenditures. #ere crucial to this agenda, the 2oi3umi government also
sought to privati3e the postal services, to shift some obligations to the provinces through
a threepart reform pac(age and above all, to fix the social security system.
'hile the sounded li(e an ambitious list, the problem facing Japan #as
considerable. 'hen its credit and real estate bubble burst in $440, Japan began running
large fiscal deficits to stimulate the economy. 5y the end of 200!, government debt had
accumulated to $0*, of gross domestic product (678". 7ebt service, even #ith
incredibly lo# interest rates #as *+, of tax revenues. 8rices in Japan had been falling
since $44+, pushing do#n nominal 678 and thus tax revenues.
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INDIVIDUAL CASE STUDY
JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION
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8erhaps the biggest problem, ho#ever demographic ) the rapid aging of Japan&s
populations. 5ecause of Japan&s extraordinary longevity, it no# had more than one
million people (out of $29 million" at least 40 years old. 'ith fertility rates having
dropped belo# $.*, Japan faced an absolute decline in its population beginning in 2009.
Over the next 20 years, Japan&s population over 0/ #ould gro# from 2/ million to */
million. The implication of these numbers for immigration policy and a competitive
#or(force #ere huge. 5ut for the government, pension and healthcare costs #ere even
more immediate issues.
0" #$%t %r& t$& c%u+&+ o, t$& (ro)*&'+/
The combination of slo# gro#th and the decline of the aggregate price level have
each contributed to Japan&s financial crisis. The single most important problem for the
financial sector has been the anemic gro#th of the Japanese economy over the last
decade. :igure $ sho#s 678 gro#th over the last !/ years to put recent performance in
context. %fter averaging more than *.+ percent bet#een $49! and $44$, gro#th dropped
to $.$ percent over the last decade. Obviously, if there had been more gro#th in the
$440s, the financial sector #ould be in better shape no#.
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INDIVIDUAL CASE STUDY
JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION
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The more challenging ;uestion is ho# much the financial sector problems themselves
independently contributed to the gro#th slo#do#n.. :irst, it is implausible to argue that
the decline in stoc( and land prices at the beginning of the $440s can be blamed for the
financial sector problems today. This simple explanation fails because the ban(s and
government financial institutions continue to ma(e losses on ne# loans today. Therefore,
the crisis cannot accurately be described as merely delaying the recognition of bad ne#s.
<econd, recapitali3ing the ban(s (and insurance companies" #ould not be a
sufficient step to restore gro#th. The ban(ing problems reflect the poor conditions of
their borro#ers. 8utting capital into ban(s to ma(e up for past losses #ould be pointless
if the underlying corporate problems are not addressed. %s =aballero, >oshi, and
2ashyap (2002" emphasi3e, the gro#th problems today cannot be due solely to a lac( of
solvent financial institutions. There have al#ays been international ban(s (and insurance
companies" operating in Japan, and the number rose substantially as a result of the so
called -5ig 5ang. deregulation that #as completed. <o the problem is not just that the
domestic financial institutions are undercapitali3ed.
8olicies li(e these have been aimed at tac(ling a gro#ing social problem for
Japan?the country&s aging population, #hich depends on a robust #or(force for its
future #elfare. 5ut the government has been reluctant to follo# other countries facing a
similar crisis that have thro#n open their doors to immigration.
7espite having one of the #orld&s fastestaging populations, Japan is a nation that
remains deeply anxious about the social conse;uences of letting in too many foreigners.
1" I+ 2o+u'3+ %nd T%4&n%4% don- t$& r-$t t$n- + %ddr&++n- t$& (ro)*&'+/
Japanese 8rime @inister <hin3o %be&s program for his country&s economic
recovery has led to a surge in domestic confidence. 5ut to #hat extent can -%benomics.
claim creditA
Bnterestingly, a closer loo( at Japan&s performance over the past decade suggests
little reason for persistent bearish sentiment. Bndeed, in terms of gro#th of output per
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INDIVIDUAL CASE STUDY
JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION
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employed #or(er, Japan has done ;uite #ell since the turn of the century. 'ith a
shrin(ing labor force, the standard estimate for Japan in 20$2 ) that is, before %benomics
) had output per employed #or(er gro#ing by *.0+, year on year.
Conetheless, as many Japanese rightly sense, %benomics can only help the
country&s recovery. %be is doing #hat many economists have been calling for in the 1<
and DuropeE a comprehensive program entailing monetary, fiscal, and structural policies.
%be li(ens this approach to holding three arro#s ) ta(en alone, each can be bentF ta(en
together, none can.
5ut %be has t#o more arro#s in his policy ;uiver. =ritics #ho argue that fiscal
stimulus in Japan failed in the past ) leading only to s;uandered investment in useless
infrastructure ) ma(e t#o mista(es. :irst, there is the counterfactual caseE >o# #ould
Japan&s economy have performed in the absence of fiscal stimulusA 6iven the magnitude
of the contraction in credit supply follo#ing the financial crisis of the late $440&s, it is no
surprise that government spending failed to restore gro#th. @atters #ould have been
much #orse #ithout the spendingF as it #as, unemployment never surpassed /.+,, and,
in throes of the global financial crisis, it pea(ed at /./,. <econd, anyone visiting Japan
recogni3es the benefits of its infrastructure investments.
The real challenge #ill be in designing the third arro#, #hat %be refers to as
-gro#th.. This includes policies aimed at restructuring the economy, improving
productivity, and increasing laborforce participation, especially by #omen.
5" #$%t 6ou*d .ou do to o7&rco'& t$& &cono'c (ro)*&'+/
Bt #ould better to #ea( yen&s exchange rate, ma(ing Japanese goods more
competitive. This simply reflects the reality of monetarypolicy interdependenceE if the
1< :ederal Geserve&s policy of socalled ;uantitative easing #ea(ens the dollar, others
have to respond to prevent undue appreciation of their currencies. <omeday, it might
achieve closer global monetarypolicy coordinationF for no#, ho#ever, it made sense for
Japan to respond, albeit belatedly, to developments else#here.
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INDIVIDUAL CASE STUDY
JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION
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@onetary policy #ould have been more effective in the 1< had more attention
been devoted to credit bloc(ages ) for example, many homeo#ners& refinancing
problems, even at lo#er interest rates, or small and mediumsi3e enterprises& lac( of
access to financing. Japan&s monetary policy, one hopes, #ill focus on such critical
issues.
The real challenge #ill be in designing the third arro#, #hat %be refers to as
-gro#th.. This includes policies aimed at restructuring the economy, improving
productivity, and increasing laborforce participation, especially by #omen. % good start
to help tac(le Japan&s problem #ould be, in addition to boosting the female #or(force, to
encourage more elderly people to go bac( to #or(, said @r. Ta(ena(a. >o#ever, Japan&s
job mar(et loo(s far from ready to accept even such moderate changes.
'hat is needed is the right regulation. Bn some areas, more active government
involvement #ill be needed to ensure more effective competition. 5ut many areas, in
#hich reform is needed, such as hiring practices, re;uire change in privatesector
conventions, not government regulations.
There is every reason to believe that Japan&s strategy for rejuvenating its economy
#ill succeedE the country benefits from strong institutions, has a #elleducated labor
force #ith superb technical s(ills and design sensibilities, and is located in the #orld&s
most dynamic region.
8" Conc*u+on
There are different reasons for the si3able losses lur(ing in Japan&s ban(ing,
insurance, and government agency sectors. Het, the problems in these sectors are inter
related. The ban(ing problems that attract so much attention #ill persist until the troubles
in the other t#o sectors are also addressed. % satisfactory resolution re;uires recognition
of the different driving factors behind the problems in all three sectors and #ould include
measures that address all at the same time.
-Japan #ill have to face the necessity of immigration sooner or later,. said >ei3o
Ta(ena(a, an advisor to former premier Junichiro 2oi3umi and no# an economics
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INDIVIDUAL CASE STUDY
JAPAN: DEFICITS, DEMOGRAPHY AND DEFLATION
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professor at 2eio 1niversity. -'omenomics. alone is unli(ely to deal #ith the scale of
the crisis, according to @r. Ta(ena(a, citing a forecast that Japan&s population #ill shrin(
by one million people a year after 20*0.
GD:DGDC=D<
5an( of Japan, 2002a, -Ce# initiative to#ard financial system stability,. public
statement, To(yo, <eptember $+, available at ###.boj.or.jpIenIseisa(uI02Isei020+.htm.
Bnternational @onetary :und, 2002, -JapanE <taff report for 2002 %rticle BJ
consultation,. 'ashington,7=.
<tiglit3, Joesph. @ay *0, 20$!. The 8romise of %benomics. httpEII###.project
syndicate.orgIcommentaryIshin3oabeandsoaringconfidenceinjapan
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