Is Japan’s sun rising?

TOKYO — When I participated in the Chatham House/Daiwa Research Institute conference on the post-Brexit Japan-UK relationship in Tokyo last month, it was my first visit back with Japan since my departure from Goldman Sachs almost six years ago. Prior to this trip, I had been visiting the country regularly since 1988, so it was helpful to see things from a slightly more detached perspective.

By and large, Japan in 2019 feels relatively stable when compared with other advanced economies. A decade from now, I would not be surprised if it continues to show the highest real, inflation-adjusted, per capita GDP growth rate in the G-7.

True, Japan’s annual GDP growth has averaged just 1.1 per cent so far this decade; but its declining population and shrinking workforce is already translating into stronger per capita performance. In fact, given the country’s demographic challenges, it might well be outperforming its long-term growth potential.

Moreover, the Japanese government has begun to publicise its efforts to attract certain foreign-born workers, having finally recognised that immigration will be necessary for future growth. That has been obvious for at least 20 years now. Yet, in hindsight, Japan’s long refusal to adopt a pro-immigration strategy no longer seems as mistaken as it once did, given the recent backlash against globalisation in Europe and the United States.

Later this year, Shinzo Abe will become the longest-serving prime minister in Japan’s history. Having taken office after two decades of successive Japanese leaders playing musical chairs, he has delivered a remarkable period of stability. In particular, his signature economic strategy, “Abenomics”, has produced a number of successes. In addition to experiencing strong real per capita GDP growth, Japan’s persistent deflation seems to have come to an end, and there have been marked increases in women’s labour-force participation.

Then again, Japan is also nearing the 20th anniversary of its foray into quantitative easing (QE). The remarkable duration of this unconventional policy may owe something to the fact no one can be sure what will happen if it stops. But it also continues simply because, despite massive liquidity injections and measures to cajole companies into raising wages, inflation remains persistently below the 2 per cent target that Abe instructed the Bank of Japan (BOJ) to pursue.

Under these conditions, ending QE is simply not an option. Still, in principle, one can question the wisdom of continuing with it indefinitely. It is obvious that the BOJ cannot achieve 2 per cent inflation without introducing significant monetary risks; and it is not at all clear that a 2 per cent target is sensible to begin with. Even if it is, there are risks to pursuing such a narrow objective at the expense of other policy priorities. Many countries learned this the hard way back in the 1990s.

Nonetheless, the BOJ will maintain its current approach at least until Abe leaves office. The question is what happens after that. With the BOJ having become such a distortionary presence in bond and equity markets, its curtailment of QE could have far-reaching implications across the global economy. Unless the end of QE coincided with a dramatic improvement in the government’s debt position, which is highly unlikely, bond prices finally would be in for a tough time.

That could also be true for equities, given that the BOJ has become one of the top-10 largest shareholders in many Japanese companies. On the other hand, if the BOJ ends its share purchases, equity markets will suffer less distortion and there could a more important role for individual stock analysis. No doubt, these variables, along with a planned increase in the Japan’s consumption tax, will occupy financial analysts’ minds for some time to come.

As for the broader topic of our recent conference, I have realised that there are more areas for cooperation between post-Brexit Britain and Japan than I had previously thought, owing to the oddities of each country’s economic situation.

For example, with so much experience in managing the tricky relationship with China, Japan probably has some wisdom to offer other developed countries. For governments around the world, the challenge is to strike a balance between reaping the benefits of Chinese growth and avoiding the attendant security, cyber and financial risks.

I suspect that policymakers in the United Kingdom will share Abe’s enthusiasm for stronger cooperation on data protection and cybersecurity, an issue that will feature prominently at the G-20 summit in Osaka this June. They would also welcome Japan’s advocacy for a better rules-based system of global governance. And, of course, they might have something to learn from Japan’s recent success in striking trade deals across Asia and with the European Union. If the UK is determined to go it alone on trade, strengthening its commercial ties with Japan will be absolutely necessary.

And who knows, if Abe’s overtures to Russian President Vladimir Putin pay off, he might even be able to teach the rest of us something about Kremlinology. But on this issue, at least, we would do well to keep our hopes in check.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury minister, is chair of Chatham House. Copyright: Project Syndicate, 2019.
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