Any doubt about Japan’s determination to end decades of stagnation disappeared yesterday, when the central bank announced that it will inject a massive dose of money to revive the nation’s comatose economy.
But the patient may expire anyway – of Japan’s underlying illness, old age.
Japan’s postwar economic miracle will not end so sadly without a fight. Under pressure from the recently installed government of Prime Minister Shinzo Abe, the Bank of Japan pledged to use every stimulant in its financial pharmacy to break the nation’s persistent deflation, support its stock and real estate markets, and get its consumers to start consuming.
In proportion to the country’s population, the scale of the planned BOJ action dwarfs the steps that the U.S. Federal Reserve took during and after the financial crisis. It far exceeds the measures taken in Europe, where the European Central Bank yesterday decided to keep interest rates steady despite a eurozone unemployment rate that has now reached 12 percent, its highest point since the common currency was established in 1999.
Japan’s moves, which also include the fiscal stimulus that Abe’s Liberal Democratic Party has pledged to apply, smack of desperation. Desperation is fully warranted, however. Last November, shortly before the Liberal Democrats swept back to power, the yen was hovering near 80 to the dollar. That level made Japan’s exports uncompetitive and sapped domestic sales by making imports cheaper, except in protected sectors such as agriculture. The yen has since lost around 20 percent of its value, and the Tokyo stock market has rallied by about the same amount.
Yesterday’s announcement is a promise that there is much more to come. For diplomatic reasons, Japan will not publicly announce a policy to drastically weaken the yen, but I imagine Abe would be delighted if his currency would drop to, say, 120 to the dollar – which is roughly where it was when I visited Japan in 2001.
The big risk with this flood of newly printed Japanese money is that it will trigger inflation well beyond the 2 percent annual rate that the Abe government is targeting. That is not much of a risk, however, for the most indebted central government among developed nations. In fact, Tokyo’s only realistic hope of servicing and repaying its debts may be to do so with a depreciated currency.
We want central banks to maintain a sound currency as a rule, but under the circumstances, I can’t quarrel with the Japanese measures. The country has exhausted every other avenue to return to even a semblance of the strong growth that ended when a property bubble burst in 1989.
Yet I question whether even yesterday’s drastic steps can arrest Japan’s slide, because the source of the problem is not financial. It is demographic and cultural.
Japan’s population is shrinking and aging faster than almost any in the world. The average Japanese woman will bear only about 1.39 children in her lifetime, far below what the nation needs to sustain its population. Workers are already leaving the labor force faster than they are being replaced, and the trend will accelerate in coming decades. While other countries can tap immigrants to fill any labor gap, Japan reflexively rejects outsiders, making almost no room for newcomers to flesh out its shrinking labor market.
Japanese single women face a glass ceiling, but at least they are accepted in the labor force. Married women, especially those who have children, are neither widely accepted nor well supported. A Japanese working mom can’t just lean in, because she has nothing to lean on. Child care is scarce and expensive; the country assumes that mothers will provide most of it.
Japanese women just don’t want to have children with Japanese men. It brings the end of their financial independence and tethers them to men whose own prospects are diminishing along with the nation’s, and whose best fate is usually that of an overworked “salaryman” who is seldom home and even more seldom any help around the house.
Deploying vast monetary and fiscal stimulus is the easy part of reviving Japan. Changing the nation’s culture would be much harder.
In the short term, it is possible to grow an economy by stimulating demand and investment or by raising productivity, so financial measures may make things better for a time. In the long term, however, economies grow because the number of people who need goods and services grows. Financial measures alone might slow the rate of decline, but they cannot reverse the demographic-driven trend line.
Japan still has a lot in its favor. Excellent infrastructure and a highly skilled population give it a lot of potential in fields ranging from medicine and biotechnology to advanced manufacturing and design. But compared to peers like Germany, which can tap a much larger eurozone home market and immigrant labor from other European nations, Japan is at a growing competitive disadvantage. Failure to address the underlying issues would mean the country is giving up, preparing to eventually surrender its status as a leading economic power.
I want to see Japan turn itself around. It is our closest ally in the region, a major trading partner and a bulwark against potential Chinese aggression. It is a democracy where speech is free and law is respected. It could be a role model for all of East Asia.
But it will take a cocktail of change, not a single monetary drug, to restore the Japanese economy to long-term health. I hope the country’s body politic realizes this before it is too late.