Abenomics, demographics and economics in Japan

Sake barrels outside the Meiji Shrine--a key business in Japan

Japan, formerly the world's second largest economy after the U.S., has slipped to 3rd in the world, behind China and just ahead of Germany.  It faces the real prospect of falling farther down the economic ladder as its economy continues to stagnate.

Prime Minister Abe has vowed to reverse that decline and recently won a national election that upheld his economic policies.  Just having that certainty of political continuity after years of rapid changes in the political leadership gives Japanese hope that they can turn around their economy.

The decline began in the early 1990's when their real estate bubble burst.  Since then, Japan has had an extended period of deflation--the longest in recorded world history.  Meanwhile, the yen has fallen from 76 to the dollar in 2011 to 120 to the dollar today.  To fight this, Abe has set a goal of 2% inflation based on a 3 pronged policy.  He calls this the 3 arrows (1 arrow can easily be broken, but 3 arrows held together are impossible to snap). 

First is fiscal stimulus, much like the U.S. implemented after our own real estate bubble burst.  Infrastructure projects, social programs and medical care have been key investments.  Next is monetary easing, similar to the Fed's quantitative easing, implemented by having the central bank purchase government bonds.  Third is regulatory reform, which has long been needed.

For example, the agricultural sector is highly protected in Japan.  The rice tariff alone is 700%, making it impossible to import rice and keeping domestic rice prices very high.  The government spends more on agricultural assistance than the entire sector actually produces.  50% of a farmer's income comes from the government.  Farm plots are small and often isolated, so one of Abe's reforms is to enable consolidation, letting small, unproductive farmers go out of business and enabling larger, more successful farms to buy their land.  Right now, driving through the countryside, you can see tiny fields, each belonging to a different farmer.

A second area of regulatory reform is referred to as "womenomics".  This is a complicated story and one heavily tied to cultural norms and restrictions.  Japan is very averse to immigration, but its population is in freefall, now past the point of no return (if that is ever inevitable).  The population is both shrinking and aging so that, but 2050, Japan expects to have only 1 worker to support each retiree, down from 2.5 today.  That is obviously untenable.  But, Japan doesn't even fully employ its existing population because women are discouraged, in many ways, from working.

The glass ceiling in Japan is low and virtually impermeable.  PM Abe is talking up reforms that encourage women to enter and stay in the workforce.  It remains to be seen if this, in fact, will happen.  His stated goals include passing legislation requiring that 30% of management positions be held by women by 2020, supporting increased child care options which are now very limited and heavily regulated (child care centers, for example, must have a registered nurse on staff), and enforcing laws that prohibit harrassment of women in the work place.  More on this in a later blog.

In Japan's work culture, men still work very long hours.  If the boss is still at work, you have to stay also.  This is beginning to change as younger men object, but clearly makes worklife difficult for women with children.

Demographics is Japan's greatest economic problem.  There are more people over 65 than under 15.  By 2050, 40% of the population will be over 65.  Right now, retirement age is 60.  That will soon go to 65.  Under Japan's very limited immigration policy, guest workers can come into the country to work for several years, but must go home at the end of that period.  Women are getting married later, now at the average age of 28, and refusing to have many children.  Clearly, this is one area of huge economic risk that Japan is only beginning to deal with.