It’s Been a Long Time Since I Rock and Rolled

Slaughter & Rees look at Japan's efforts to rebound from a prolonged slump.

Japan recently reported robust 3.5 percent annualized growth in gross domestic product for the first quarter—the fastest in years.

The Nikkei stock index has risen about 60 percent in the past six months. Even Japanese music is focusing on the upswing: a new rock band in Tokyo has its members promising to adjust their skirt lengths upward in proportion to the Nikkei’s rise while they groove to topical lyrics such as, “Let’s aim for 3 percent economic growth.”

Whence all this euphoria? The proximate cause is “Abenomics,” the eponymous set of economic policies being pursued by recently re-elected Prime Minister Shinzo Abe. Abenomics thus far has meant mainly fiscal and monetary stimulus. Over ¥10 trillion in new government spending has been announced. And, more importantly, he has promised aggressive quantitative easing led by his newly appointed Bank of Japan governor. How aggressive? As a share of GDP, it is planned to be 60 percent larger than the U.S. Federal Reserve’s quantitative easing thus far.

This euphoria is welcome because in many ways, the Japanese economy has suffered a lost generation. Yes, first-quarter GDP growth was strong. But annual growth over the past 20 years has averaged only about 1 percent, and—because of ongoing deflation—nominal GDP last year was about at its 1991 level. And while the Nikkei has indeed surged, it is still about two-thirds below its peak of 38,957 that it reached … in 1989.

For a generation, Japan has been struggling to generate economic growth amidst grinding and widespread price deflation: of equities, land, commercial real estate, residential real estate, and goods and services. Much of that time it pursued fiscal and monetary easing. Indeed, at about 240 percent of GDP, its current fiscal debt is highest in the developed world. Fortunately, there has been no world financial crisis spurred by a run on the yen by skittish international creditors since most of this government dissaving has been funded by high-saving Japanese households.

But the past generation’s easing has not been sufficient to break deflationary expectations and spur growth. Nor did it halt the growth-slowing pressure of poor demographics. Japan’s overall population began shrinking in 2005; today its prime working-age labor force is shrinking at nearly one percent per year. It is also one of the planet’s most-rapidly aging populations. Its current average age of 46.5 is the second-highest in the world (after Monaco), and by 2025 just two people are projected to be of working age for each retiree—down from a ratio of 6-1 in 1990. Immigration could have helped offset all this, but the country has long been resistant to this flavor of globalization. Today immigrants constitute only about 2 percent of Japan’s total population.

The optimism fostered by Abenomics should be applauded throughout the world. The Nikkei’s plunge late last week suggests that success is far from guaranteed, however. Achieving sustained and sustainable growth will take much more, and policymakers should prioritize measures that spur capital investment and productivity growth. Japan joining the Trans-Pacific Partnership, a new multilateral initiative to liberalize trade, is a welcome step. Robert Plant, lead singer of the iconic band Led Zeppelin, famously belted out that, “It’s been a long time since I rock and rolled.” The same is true for Japan’s economy. With persistence and luck from Abenomics, Japanese bands might eventually have some snappy new lyrics for the world.