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|The sun also rises (leader)|
The Economist - October 2005
The sun also rises
Japan´s chances of prosperity and influence look surprisingly bright
IT HAS taken an extraordinarily long time, but Japan really is now recovering from its debt- and deflation-ridden stagnation of the past 15 years. Proper jobs are being created, wages are rising and economists are raising their forecasts of economic growth—all despite worries about high oil prices and an American slowdown. The prime minister, Junichiro Koizumi, grabbed the world´s attention last month by calling and winning a snap general election, as a referendum on economic reform. Foreign investors are rushing to Tokyo so as not to miss the fun. There is a spring in the step of Japanese politicians and diplomats, relieved that they no longer have to apologise for Japan´s weakness, pleased that they might now be better placed to deal with those bumptious Chinese. They have to pinch themselves to be sure it isn´t all a dream.
In a way, it is. The turnaround in perceptions of Japan has been so sudden that it risks being overdone. The immediate road ahead for the economy still looks bumpy, with prices continuing to fall, albeit slowly, overall lending contracting and a big budget deficit of 6.4% of GDP making tax rises look probable. With their wages rising and jobs feeling more secure, consumers may soon start to spend more, allowing economic growth to be led by domestic demand rather than by exports and capital investment. But that process too is likely to be gradual, as households may well also rebuild their savings, which have been depleted during the past decade.
Gloomy old hands then turn to the longer term to prove that after autumnal optimism will come winter. Japan´s population is starting to shrink, and so is its labour force. With productivity growth meagre in recent years, that implies a bleak future: the OECD recently calculated the country´s potential growth rate till 2010 at a mere 1.3% a year. Mr Koizumi is a radical only by Japanese standards, and his party rules give him but one more year in power. And China, surely, is the real star of Asia, destined to out-sprint the sluggish, over-rigid Japanese and eventually to dominate the region´s politics as well as its economy.
In the short term, it is right to be cautious. Japan´s immediate prospects matter greatly for a world worried about slowdowns elsewhere, and forever depressed about reform and recovery in the other great has-been economy, Germany. But, better though they look, they could be prey to both external shocks and the vagaries of the economic cycle. The longer term is much more important, for both economic and political reasons. If the world´s second-biggest economy is doomed to a genteel decline, then East Asia in future will have one great economic power rather than two and no one to balance China´s rise except India, way over to the west, or an over-extended America, across the ocean.
Yet Japan is not doomed to decline. The slow and steady really do win races, and not just in fables. As our survey in this issue argues, Japan has been going through a long wave of incremental reforms, which together have changed politics, the economy and financial markets far more than most people realise, promising the country a bright long-term future. September´s election result confirmed that that process is now accepted and that it will continue, with a steady slimming of the state´s role in the economy. Until the corporate debt burden had been shed, and until deflation has ended, those reforms always looked beside the point, too weak to counter the ever-present risk of economic meltdown. With that risk gone, the pile of incremental reforms now has a chance to make a difference. And the crucial difference they will make is to the incentives governing corporate, political and financial behaviour.
The slow growth in productivity that makes OECD forecasters gloomy about Japan´s potential was a consequence of the country´s astonishing waste of capital during the 1990s, combined with a reluctance to cut jobs. Money was misallocated during the great stock and property bubble of the 1980s, but then even more was wasted in the next decade, as banks kept “zombie” companies alive and politicians raided the biggest pork barrel in history. Now that is past, even a modest improvement in the allocation of capital and the use of labour would boost returns and productivity. Reforms in corporate law and changes in the capital markets make it likely that the improvement will be better than modest. And, as workers become scarce again, further investment in information technology and other sorts of automation should boost productivity.
The ageing and shrinking of Japan´s population over the next 10-15 years could thus raise productivity, not reduce it. With labour short, sentiment and social concern will not impede efficiency, as they did in the over-manned 1990s. And the strengths that made Japan rich in the 1970s and 1980s—good education, advanced technology and smooth co-ordination within companies—will again come to the fore.
There is plenty more to be done if Japan is to achieve this brighter, high-productivity future. Pension and health costs need to be cut; Japan´s universities need to be revamped; antitrust policy needs to be reinforced in order to foster more competition. Above all, the politicians need to avoid messing up macroeconomic policy by raising taxes too sharply.
If all that is done, however, great prizes are within reach: rising productivity, rising living standards, a rising international reputation and, above all, a rising chance to face up to China on equal, or even superior, terms. Japan´s relationship with China is a scratchy, tense affair; the latest dispute concerns gas and gunboats (see article). If conflict—diplomatic or military—is to be avoided, Japan needs to become stronger, but also to foster other Asian alliances, perhaps through European-style regional institutions. To its Asian neighbours, the Chinese hare is impressive but also worrying. A Japan that showed itself to be a steady, prosperous and reliable tortoise would be an appealing counterweight. In Japanese fables tortoises do win races, but they are also something else: they are symbols of potency.