My 2 yen: the road ahead for Japan

This is actually my submission to the Economist essay competition:

Please select and discuss one of the following statements.

1. Because living standards are so high, Japan's economy no longer needs to grow

Walking on the streets in downtown Ginza, one can hardly find traits of an economy that has suffered from two decades of economic stagnation.Long lines await outside exquisite sushi restaurants and high-end department stores attract big crowds like always. Yet, talking to college graduates who are about to enter the workforce paints a different picture of the Japanese economy. Graduates’ employment rate hits record-low this year with only 57% have secured employment. More unsettling is perhaps the popularity of terms such as “NEET” (Not in Education, Employment or Training) and “Freeter” (Young people who take low skilled and low paid jobs), which has not only suggested the bleak employment scene but other related social issues.

The argument that Japan’s economy needs not to grow anymore due to the high living standard it has attained should be contested in different ways. In Japan’s high growth era, the fruits of astonishing economic development was shared by the population with an extraordinary degree of equality. In contrast, the last two decades of almost zero growth has left the Japanese society diverging into two polars with a growing portion of low-income population and a group of highly skilled or specialized workers flying above the rest. Growth has always been the magic word in the Japanese model to bring about a general, across-the-broad raise in living standard. However, the growth-oriented strategy is handicapped by the decling workforce in today's Japan. With the population expected to shrink to just 100 millions by 2050, unless Japan’s productivity rises faster than its workforce declines, the Japanese economy is bound to shrink. Japan’s young will suffer the most in this trend with diminishing economic opportunities and a huge burden to support the pensions of the retired. The question then becomes, how can Japan maintain and potentially lift the average living standard that is already decaying with a smaller economy? I would argue that as an extremely developed country, there is no reason for Japan to chase after organic growth if it has come to see the limit of its resources. Rather than trying to boost the overall GDP, GDP per capita at purchasing power parity should be emphasized to maintain and improve the living standard of the future generations.

The seemingly high living standard in Japan, as measured by average income, is marred by the high cost of living. With the agriculture industry closely guarded by the politically powerful interest groups, consumers are forced to pay a high premium for the local grown products while being limited to a meagre selection. Japanese policy making has traditionally focused on the benefits of producers rather than that of the consumers. What is good for Toyota, the old saying goes, is good for Japan. Average disposable income of Japanese citizens, a more direct indicator of how wealthy consumers perceive themselves, was only ⅔ of that of United States in 2005[1]. Moreover, the still relatively high nominal income is a result of substantial economic development in the 60s and 70s but income has not risen in real terms the last two decades.

To increase the GDP per capita at purchasing power parity and thereby raise the living standard, the government can work on lowering the cost of living and thereby makes its citizens feel wealthier, or to increase the nominal income following the long-term growth trajectory. Japanese government has hitherto adopted the latter. Numerous fiscal stimulus packages have been rolled out to fill in the gap left by the retreat of private investment. Yet, the result was far from promising. Public debt soared to an alarming level and sent the public mood to south. Fiscal expansion readily funded by savings of the older generations is unsustainable, and the economy needs investment from the private sector to engine growth. Investment from the private sector, however, is endogenous to growth. The Japanese population alone is no longer big enough to support perpetual growth, and local businesses including the agricultural sector should reorient themselves and look outside of the borders for growth opportunities, particularly in the emerging Asian markets. What Japan also needs is innovations. Most Japanese innovations till now have been developed in large electronic and manufacturing corporations, which is one reason why Japan has been lagging its western counterparts in the software, Internet and other value-added service industry. To facilitate a higher GDP per capita, Japan needs entrepreneurs and start-up companies to open unexplored market.

The irony of Japanese economy is that its strong social and industrial foundation has been working to its disadvantage in an era of globalization. Globalization is a two-blade sword and Japanese economy has been hurt from it so far. Large corporations face intensified competitions and are struggling to keep their cost low, resulting in sluggish income growth and lackluster hiring activities domestically. On the other hand, the semi-closed nature of Japanese market makes it difficult to bring in cheaper and potentially better alternatives from overseas. As a result, both producers and consumers are hurt in the tide of globalization. Some argue that Japan's markets are fairly open. Aside from agricultural goods, the tariff rates are about the same as those of other industrial countries and there are only few import quotas established. But this is only on paper. It is no secret that foreign companies find it extremely hard to penetrate into the Japanese market. Statistics also shows that Japan spends less than half as much as of its income on imports of manufactured goods as any advanced nation[2]. Caught in the middle of globalization and a declining workforce, Japan should further deepen its trade dependence on both exports and imports to utilize its human resources more efficiently.

Japan’s economic strength will recede, but that does not translate to a decline in living standard. Small countries like Luxembourg and Switzerland manage to prosper by achieving a high GDP per capita. Japan will have to go through some soul searching to adopt to this unfamiliar position in the world but it simply cannot afford another rudderless decade.