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3 Japan
faces gauntlet of economic
challenges By Vaclav Smil
"Adding insult to injury" sounds like a
lawyerly phrase compared to its painfully
evocative Japanese equivalent nakitsura ni
hachi - literally "a bee to a crying face".
But even that stinging proverb fails to convey
what Japan has been through during the recent
past.
In March 2011, its economy, slowly
recovering from the worst global post-World War II
downturn, was hit by a powerful earthquake
followed by a massive tsunami. That twin disaster
disrupted many supply chains of Japan's important
manufacturing sector and caused a catastrophic
failure of the Fukushima nuclear power plant; the
ensuing fears led to the eventual shut-down of all
of the country's nuclear generating stations,
limited electricity
supply, increased
imports of fossil energies and the first annual
foreign trade deficit in a generation.
But
even without these setbacks the country's record
during the past two decades would stand in sharp
contrast to its 35-year-long rise from post-World
War II destruction (pre-war gross domestic
product, or GDP, was equaled only in 1954) to the
world's second-largest economy whose
accomplishments by the 1980s were widely seen as a
foundation for further advances toward possible
global leadership in the 21st century.
Japan's economic face has not been smiling
for more than two decades, since the early months
of 1990 when the bursting of the real estate
bubble and the falling stock market exposed the
fragility of those seemingly solid pre-1990
achievements and ushered in decades of stagnation
and uncertainty.
The first consequences of
the great economic readjustment that began with
the fall of housing and stock market values more
than two decades ago were excesses of corporate
equipment, staff and debt, all resulting from
large losses of market capitalization. Then -
after a short period of renewed, albeit slower,
growth following eight stimulus packages - the
double dip (GDP declined in 1997 and 1998) led to
collapse of several major banks and brokerages and
the contraction in aggregate demand resulting in
chronic deflation (Saito 2012). Fiscal and
monetary measures could not provide a rapid cure
for massive balance-sheet recession, and long-term
economic stagnation has been complicated by
structural problems, primarily by aging, and soon
also shrinking, population, growing income
disparities and disappearing local economies.
Population growth and projections
Origins, extent and consequences of these
challenges have been described in numerous books,
reports and papers that cover every aspect of this
socio-politico-economic malaise ranging from
aging, sordid party politics and dysfunctional
governments to speculation, deflation, stagnation
and rising inequality. A good sample of this
literature might be seen by consulting (limiting
the selection to English-language books) Wood
(1992), Alexander (2002 and 2008), Nakamura
(2004), Takatoshi and Mishkin (2004), Hamada and
Kato (2007), Sato and Imai (2011) and Hamada,
Kashyap and Weinstein (2011).
There seems
to be little disagreement among the economists
(Japanese or foreign) about the gravity and
persistence of these challenges, and a closer look
at some basic indicators shows the extent of the
post-1989 retreat and readjustment.
In
December 1989, the Nikkei index stood at 39,900. A
year later it was at 20,800 (48% down) but there
was widespread belief that it could, and would,
come back. But by 2000 it was at 13,800 and the
talk of a lost decade became a cliche. Another
decade later the Nikkei ended at 10,000 and by May
2012 it slipped below 9,000, nearly 80% below its
peak value: that is as if the Dow Jones index,
with its peak at 14,164 in October 2007, would now
be bumping just above 3,000 instead of dancing
around 13,000.
The Nikkei index, 1970-2012
Of
course, no stock market is a satisfactory proxy
for the state of a country's economy and Japan's
GDP. Although heavily affected by speculative
trends that were the undoing of the Nikkei and
registering minimal gains and even absolute
declines in some years as in 1998 and 1999 and,
again, during the global economic downturn in 2008
and 2009 overall the economy registered growth
over the decade.
Expressed in constant
monies, GDP was 17% higher in 2000 than it was in
1990, and in 2010 it was 7.3% above the 2000 level
(Econstats 2012). That is a sharp deceleration
compared to a 50% gain during the 1980s and 56%
gain during the 1970s, but no economy of that size
could have continued to grow at rapid pre-1990
rates.
Given the country's very low
population growth (from 123.6 million in 1990 to
128 million in 2010, a gain of just 3.6% in two
decades, the average per capita GDP in 2010 was
21% higher than in 1990. In comparison, the
average US per capita GDP was 31% higher in 2010
than it was in 1990 despite the fact that during
the intervening two decades the country's
population grew by nearly 25%. The French gain was
almost identical to the Japanese increase (per
capita GDP about 22% higher in constant monies,
but the country's population was more than 11%
higher in 2010 than in 1990) while Germany,
despite the high cost of unification, managed a
per capita rise almost as high as in the US (29%),
while its population grew by just 3% in 20 years.
And Japan's share of the global economic
product also declined faster than that in Germany
or the US: between 1991 and 2010 it fell by 37%
(from 9.2% to 5.8%), compared to 31% in Germany
and only 11.5% in the US (from 21.8 to 19.3%, with
all values calculated adjusted for purchasing
power parity).
Post-1990 years have also
changed Japan's often extolled low income
inequality: during the late 1980s the average
income of the top 10% was seven times that of the
poorest 10%; by 2010 that gap was more than
10-fold, or roughly two-thirds higher than in
Sweden, Europe's leading paragon of income
equality (OECD 2011; Sato and Imai 2011).
As a result, Japan is no longer the
country with the least inequality among the major
affluent economies: the latest international
comparison (OECD 2012a) shows Japan's Gini
coefficient (0.329) still lower than in the UK
(0.342) and the US (0.378) but higher than in
Canada (0.324), Germany (0.295) and France
(0.293). By the mid-2000s Japan's poverty rate
(share of the people with incomes below poverty
line) reached 15% and among all OECD countries
only the US, Turkey and Mexico were slightly
higher (OECD 2010).
Moreover, Japan's
poverty gap (percentage by which the mean income
of the poor falls below the poverty line) was also
very high: at 35% it was similar to the US and
Mexican rate while Canada and Sweden had gaps of
only about 25%.
Even more remarkably,
Japan is the only country in this group where
absolute poverty increased and, moreover, only
South Korea's poor have lower income among the
Organization for Economic Cooperation and
Development economies than do the poor in Japan
(Katz 2012).
And it gets even worse when
looking at the elderly: for people above 65 years
of age Gini coefficient is close to 0.4, and for
those above 75 it is above 0.4 (Horie, Oshima and
Tsukagoshi 2008). By 2010, 30% of all retirees and
nearly half of all retirees living alone (mostly
widows) were living below the poverty line - while
the news about the disappearance of billions of
dollars from pension funds, about underfinancing
of those funds and about their mismanagement
indicate more troubles ahead (Fukase 2012).
The recent global economic recessions has
exposed unsustainable reliance on higher
government debt in all major affluent economies,
but Japan is in a category of its own.
By 2011, the country's
general government debt rose above 200% of annual
GDP, compared to 130% in Greece and Italy. In
terms of net financial liabilities, the 2012
government debt was about 52% of nominal GDP in
Germany, 66% in France, 80% in the US - and 135%
in Japan while Greece's net liabilities were 145%
of GDP and Italy's 100% (OECD 2012b).
As a
result, the rating of Japan's debt was repeatedly
downgraded over the last decade: Moody was first
to lower it from the top Aaa to Aa1 in November
1998, S&P followed in February 2001; by the
end of 2011 Moody's rating was down to Aa3,
S&P's long-term rating was down to AA-, and in
February 2012 the agency announced that it will
consider another downgrade if Japan's
unsustainable spending trend is not reversed.
Viewed from another perspective, however,
93% of the government debt has been financed
internally, most of it by deposits held by the
country's banks. In contrast, shares of general
government debt held by non-residents have
surpassed 50% for the US - with China now ranking
first, followed by Japan and the UK (US Treasury
2012).
Similarly, more than 40% of Spain's
and Italy's general government debt are held by
foreigners and the shares are nearly 50% in
Germany and almost 60% in France (Global Finance
2012).
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