In early 2004, my colleague Eric Meermann and I co-wrote an article examining a recent stock market jump in Japan. We asked whether a real recovery was taking place, and concluded that it probably wasn’t.
Almost 10 years have passed since we wrote the article. Times have changed. Eric and I are now responsible for managing Palisades Hudson’s New York and Atlanta offices, respectively. Between 2004 and today, I moved to Atlanta, got married, and my wife and I adopted a poodle.
What about Japan?
Despite all the recent developments coming out of Japan, it doesn’t seem like much has changed. Consider a portion of the 2004 article:
“The Japanese are notorious for being averse to change. Recent signs are encouraging, however, with Prime Minister Junichiro Koizumi, elected in 2001, promising sweeping changes to fix the economy. He has made progress, but slowly, held back by the conservative old guard in his own party.”
The parallels between Koizumi and current Prime Minister Shinzo Abe are striking. Abe was elected Prime Minister in 2012, and his aggressive “Abenomics” program has led to a jump in the Japanese stock market. Specific policies have included combating the high value of the yen in order to help Japan’s export-based economy and increasing the money supply in order to create a healthy level of inflation. The yen has dropped over 10 percent year-to-date versus the US dollar, although it is still slightly more expensive than it was back in 2004. Abe’s attempts at less popular reforms, such as making it easier to fire Japanese employees, have been shot down thus far by opposition from lawmakers.
Koizumi also made promises to reform the Japanese economy when he was re-elected in 2003. Not much actually changed, although economic growth did occur on his watch. His proposals to cut pension benefits were widely disliked, and his plans to privatize the government-owned postal service (which was the nation’s largest employer at the time) continue to slog along to this day; after much infighting, the Japanese government eventually decided in 2007 to privatize Japan Post, which offers banking as well as postal services. Today the Japanese Ministry of Finance still owns 100 percent of Japan Post Group, although plans have been floated to list shares within three years.
“Japan has endured more than a decade of economic decline. The country is experiencing deflation, and attempts by the Bank of Japan to fight it have been ineffective.”
To be fair, Japanese GDP has grown from $4.2 trillion to $5.8 trillion since 2004. Of course, considering Japan’s GDP was $5.2 trillion in 1996, Japan is still one of the last countries that comes to mind when considering national growth. Deflation continues to be the norm to this day.
“[Japanese] Corporations are beginning to recognize that they, too, must change. Foreign institutional investors are demanding that Japanese companies shore up their balance sheets and cut costs. Capital investment is increasing, and jobs are being exported to neighboring countries to take advantage of cheaper labor. The Japanese are becoming more open to foreign direct investment and to foreigners running Japanese companies, all in the name of an improved bottom line.”
From the beginning of 2004 through the end of 2012, Japan’s Nikkei stock index declined 2.6 percent on a cumulative basis. Clearly investors weren’t impressed with what they saw. The stories we heard in 2004 about Japanese companies finally tightening their belts are similar to the stories you hear from those bullish on Japan today.
A greater focus on entrepreneurship would be a sign of real change. Japan’s economy still favors older, established companies over startups that could inject new life into its private business sector. Kenji Takaoka, the chief executive of Osaka-based tech startup Pijin, told The New York Times, “Everything about the Japanese economy tends to be skewed in favor of large, established companies and toward Tokyo, and that needs to change.”
“Japanese citizens have very long life expectancies, but begin to receive pension benefits at age 60.”
Today Japanese pensions are available at 65 instead of 60, but Japan’s citizens still rank first in the world for longest life expectancy. As Larry Elkin wrote in this space recently and Eric and I discussed nearly a decade ago, Japan is shrinking and aging faster than almost any other country, and certainly faster than its peers in the developed world. The portion of the Japanese population over 65 is expected to reach almost 40 percent by 2060 under current conditions. There is also still very little immigration, in part due to an ingrained cultural resistance to the concept. A country with so much debt can ill-afford to pay ever more in pensions with fewer workers generating economic value.
“For a country with gross national debt that is already approximately 140% of annual GDP, one has to wonder where the money will come from to pay all these pension liabilities.”
Japan’s government debt is now over 200 percent of annual GDP, and it has the highest ratio of gross public debt to economic output among developed nations. The way to ultimately conquer this debt is through economic growth, but without meaningful inflation and with structural reforms still just a future promise, the Japanese economy’s long-term growth is far from certain.
Japan will hold a parliamentary election tomorrow. If Abe can gain a governing majority in both houses of parliament - not outside the realm of possibility - he may have more leeway to enact the so-called “third arrow” of his three-pillared economic plan: structural reform. If these reforms are targeted correctly, the country could ride a wave of short-term growth into a slower but more sustainable upward trend. However, if Abe is unable to pass meaningful reforms, investors may be scared away for years to come.
At the end of our 2004 article, Eric and I wrote: “Until Japan’s large structural problems are addressed, true revitalization is unattainable.” That hasn’t changed. Though Japan has shown that it is aware structural reform is necessary, we don’t yet know whether it will go as far as it needs to in addressing entrenched problems and fixing broken systems. Its debt burden lingers and its population continues to age.
Japan isn’t beyond recovery. But has recovery arrived? To repeat myself: Not yet.
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