Reform nowhere to be found in a shrinking Japan

Author: Editorial Board, ANU

Japan is shrinking and ageing. The population fell by 618,000 last year and Japan’s society is the oldest in the world with almost 30 per cent of the population aged over 65. In 15 years that share will be one-third. There are 80,000 centenarians and the number is growing.

Each person of working age will need to support more in society as longevity and a low birth rate continue to age Japan. That rising dependency ratio means productivity growth will become even more important to sustaining the living standards of the population.

Japanese society faces that challenge with an eye-watering government debt of 270 per cent of GDP — the highest on record, ever, for any country — compared to 137 per cent in the United States or 48 per cent for Australia, for example. Government debt continues to increase with Japan’s ‘silver democracy’ making it difficult to cut back rising healthcare, aged care and pension costs. Defence spending is rising and there are no plans in sight for chipping away at government debt.

Before COVID-19 Japan had started to unlock immigration, gradually. Even if that resumes when Japan opens up its borders, it would barely make a difference.

Maintaining living standards in Japan will depend on rapid productivity growth.

The two prime ministers who have managed to stay in office for longer than one year since the turn of the century — Junichiro Koizumi and Shinzo Abe — made some progress on reform, but a reform weary society meant progress was limited. The two steps forward from Mr Koizumi’s privatisation and deregulation in the early 2000s were met by one step backwards after he left office.

Mr Abe’s ambitious Abenomics reform package failed to fire on structural or supply side reforms that would have boosted productivity. Instead the arrows that fired were the easier demand side policies with the government spending more and the Bank of Japan keeping the economy awash with cash. Some progress has been made with corporate governance reform, gradual liberalisation of protected agriculture and boosting the female labour force participation rate but all from a very low base.

Enter ‘populist’ Prime Minister Fumio Kishida and his ‘new capitalism’ that was revealed earlier this year.

As Richard Katz argues in the first of this week’s lead essays, what Kishida produced was ‘top-heavy with rhetoric about attaining a “virtuous cycle of growth and distribution”, but very weak on any substantive measures to achieve it. It is equally weak on measures to boost growth-enhancing goals’.

Political compromises have left Kishida ‘with nothing more than a rehash of failed measures laid down by predecessors like Abe’. Reformers have been told to wait until the Upper House elections due in two weeks. It’s also the widely believed timeline for opening up Japan to tourists again. Kishida’s popularity remains high from keeping Japan’s borders closed to appease cautious and risk averse elderly voters.

The good news is that there is low hanging fruit with Japan way behind on digitalisation. Naohiro Yashiro explains in our second feature this week that ‘better utilisation of the digital economy is necessary to overcome labour force shortages brought about by a rapidly declining working-age population’. Digitalisation will underpin productivity growth. Fortunately, Yashiro argues, ‘the momentum for digital reform has survived the recent leadership transition’. But ‘successful digitalisation rests on Kishida’s strong leadership in persuading Japanese people to construct a digital society’ and that’s where the efforts might end.

Hailing from the Kochikai faction of the ruling Liberal Democratic Party that has traditionally had moderate and liberal foreign policies, Kishida has continued the trend started by Mr Abe and former prime minister Yoshihide Suga of fortifying Japan’s economy in its engagement with China. The new disingenuously named ‘economic security’ laws put national security before economics and treat them as substitutes, not complements.

As Toshiya Takahashi explains in our third feature piece, the new law ‘enables the national government to intervene in Japanese companies’ dealings with foreign companies’ across supply chains, basic infrastructure, leading technology and patent publication for sensitive technologies. Takahashi argues ‘the new security policy will have uncertain effects on Japanese security and business’. These ‘economic security’ measures started in 2019 when the Japanese government deployed export controls against South Korea in a heavily politicised manner.

In response to supply chain disruptions from COVID-19 lockdowns, the Japanese government used subsidies in 2020 ‘intended to encourage “onshoring”, or locating production facilities in Japan, of high-tech products to prepare for risks of disruption of imports’. Subsidies of US$2.3 billion to onshore production and US$220 million to expand supply chains to Southeast Asia and South Asia were called ‘China exit’ subsidies in the press. The corporate welfare helped companies already shifting production out of China in search of lower wages and flew in the face of US$12 billion in Japanese investment into China that year aimed at higher value-add business.

Japan has not yet embraced naked protectionism but it’s difficult to distinguish some of the ‘economic security’ or ‘new capitalism’ policies from costly industrial policy. And there’s no sign of any ambitious trade policy. As the global economy looks to recover from the pandemic-induced recession, Japan as the world’s third largest economy can play a major role in keeping global markets open and helping avoid US-China strategic competition from damaging multilateralism. But no Japanese minister bothered to join the other 120 ministers at the WTO meeting that produced a breakthrough Geneva package last week.

What’s needed is to connect the domestic reform imperative with a proactive — not defensive — trade, foreign policy and diplomacy. Japan cannot afford subsidies and industrial policies premised on picking national winners. Economic reform will be easier if the economy isn’t in retreat from the large Chinese economy. Let’s hope that Kishida can grow some political capital after the upper house elections and that he knows how to use it.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

The post Reform nowhere to be found in a shrinking Japan first appeared on East Asia Forum.

from East Asia Forum