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Japan’s NO EXIT Strategy

One of my sources in Japan was told about a yearend Bonenkai party where an official from the Ministry of Finance, the most powerful ministry at the core of Japan Inc., had let slip some things, perhaps after one too many drinks. He confirmed the view propagated by the Liberal Democratic Party, the victor in Sunday’s election, that the Bank of Japan wasn’t doing its job, that it was just giving away money to the banks which then bought Japanese government bonds instead of channeling it into the real economy.

“That’s why the Ministry of Finance is trying to gain control over the Bank of Japan,” he said. “The Ministry of Finance has pride in its ability and is much more qualified to run things than the Bank of Japan.”

Turf war. For him and his ilk, independence of the central bank is a non-sequitur. And elected politicians, when they try to bring the powerful bureaucracy under democratic control, are a nuisance. Prime Minister Yoshihiko Noda and his Democratic Party of Japan had attempted to do that. Now they’re out.

So a new government is being formed by the party that ran the show for fifty years after World War II and is responsible for building the very institutions and structures that got Japan to where it is today. With a new prime minister, Shinzo Abe—who’d already been through the annually revolving prime-ministerial door in 2006/2007. This “new” government is going to fix whatever ails Japan by spending even more money and by wrestling control over the printing press away from the Bank of Japan.

Alas, Japan engaged in “quantitative easing” on a massive scale long before the term had been invented. It has followed the most profligate Keynesian stimulus policies for two decades. Well over half of its current budget is paid for with borrowed money. The country is drowning in liquidity. Interest rates have been at zero or near zero for over a decade. And by the end of this fiscal year, gross national debt will hit 240% of GDP, the highest in the world [for how the MoF plans to deal with that debt, read.... Japanese Ministry of Finance To Bondholders: You’re Screwed!].

But the economy, unlike Greece’s, is not in shambles, though it’s not exactly humming either. Unemployment is 4.2%, the low for the year, and down from the all-time high of 5.6% set in 2009. Youth unemployment, while causing all sorts of hand-wringing, has been improving. One measure: 61% of the high school students to graduate in March (end of school year) have already accepted job offers, up from 58.6% last year. In the US, we don’t even track that.

The overwhelming problem Japan has is of fiscal nature: debt and deficits can no longer be brought under control. Interest rates have to remain at near zero because the state can no longer afford to pay anything beyond that. Public and private pension funds are unable to earn a yield on much of their holdings but must pay out ballooning benefits to ever more retirees while the number of workers who are paying into these funds is shrinking.

Young people have grown up with this scenario, see it every day, know there is no longer a good exit from the debacle. It’s too late. The pile of debt is too big. Promises about job security and retirement are illusory. They work longer hours for less pay than their predecessors, don’t have enough money to move out from home, and consume practically everything they make [ The Pauperization Of Japan].

Their plight has kept Japan competitive—”thanks” to the labor market reforms by Junichiro Koizumi, Prime Minister from 2001 to 2006. More such reforms are on the way. Consumption tax increases have already been passed. If the new government has its way, there will be inflation—final straw for the young, whose wages won’t keep up with it. These are some of the consequences of a deficit-funded joyride by Japan Inc., the current generation of retirees and near-retirees, and other interest groups.

But they’re leaving their mark on young people in unexpected ways. Gender inequality, for example. A legendary issue in Japan. In 1992, when the government first surveyed its citizens on it, 60% agreed with the statement: “Husbands should work outside, while wives stay at home.” The survey was repeated sporadically; each time, the percentage dropped. By 2009, only 41.3% agreed with it—modern times after all. The next survey results were released today: those who thought wives should stay at home jumped 10.3 percentage points to 51.6%. The highest since 1997. A surprising reversal.

Surprising because of its origin. It wasn’t the older generation, but the young: 55.7% of the men in their 20s thought so, up from 34.3%; and a flabbergasting 43.7% of the women in their 20s agreed with it, up from 27.8%. These are not rounding errors or statistical aberrations but enormous shifts in attitudes.

“I suspect young people today are deeply concerned about their future,” explained Prof. Kakuko Miyata of Meiji Gakuin University, an expert on social psychology. She fingered the economic malaise young people are stuck in and added that “they may wish for the home to be a source of emotional support.” Well, instead of starting businesses to getting things going.

As for me, my let’s say uneven relationship with Japan, or more precisely with Tokyo, started in France with a Japanese girl. A “funny as hell nonfiction book about wanderlust and traveling abroad,” as a reader tweeted. Read the first few chapters of... BIG LIKE: CASCADE INTO AN ODYSSEY at Amazon.

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Reader Comments (7)

1. To be xpected Abe got voted in again. They were sent home becuase they made a mes of it, but they guys who were supposed to replace them made an even bigger mess. Mean reverse plus punishment for the ones normally in the opposition.
2. Might have some positive effects but simply donot see see it bringing Japan back to normal growth (not by far).
The debt is the major problem imho. Still not solved the problem from before this on (1990) and now this one is getting on top of it. Average approx 40% tax for a state without much welfare is very expensive alot goes to waist.
Aging. Also a bit of a problem with creating companies that actually make new stuff (they are great at making better versions of existing stuff, but simply too low on Apple stuff. Also in the way that they probably have the good products but subsequently fail to make it to the worldmarket).
3. Unemployment very low. Probably a combination of very low uneducated immigration: good schoolsystem, few are left behind; culture (shame/face thing); hardly social security. Anyway a best practices case for all in the West.
4-5% unemployment basically makes more than up for more aging compared with Europe for instance. However in both parts of the world combined a huge drag on the economy even in good times.
4. Less of best practices their youth. As they are in the situation the West has most likely got into now a lot of things show in Japan now that the West will show later. Imho no country can be on the forefront of the worldeconomy if these kind of generations have to carry the economy, certainly combined with lack of numbers as well. There are not enough of them and most are not remotely worldclass.
5. Another point is that Japan even more than the West imho needs a complete overhaul of its political system. It looks totally outdated. Eg LDP had 3 PMs before they were dropped that were family of earlier PMs (Abe being one, the only one that looked remotely like a PM imho).
December 17, 2012 | Unregistered CommenterRik
Rik - to add to your "low unemployment" comment: I'm always amazed by just how many jobs are still almost exclusively done by Japanese, not immigrants. Wait staff in restaurants, construction workers, salesclerks at convenience stores, cleaning staff in hotels, delivery people.... The country considers itself insular and wants to protect itself from the flood of foreigners seen in other countries. I wrote about that phenomenon in my book, BIG LIKE, a scene at the immigration office where I came in contact with Japanese attitudes towards immigration, a bitter-funny scene.
December 18, 2012 | Registered CommenterWolf Richter

It's not a big deal, but you have two glaring factual errors.

First, Noda's party is the Democratic Party of Japan, not the Liberal Democratic Party.
And the professor's name, Kakuko, is definitely a female name.

December 18, 2012 | Unregistered CommenterSat
Sat - thanks. I don't know how that slipped in. Even my wife can't keep "he" and "she" apart, and she is Japanese :)
December 18, 2012 | Registered CommenterWolf Richter
Imigration in Japan might give us some answers for other parts of the world. Would like to hear your view on that.

1. Basically Japan has the biggest aging problem at the moment. But looking around in shops etc you she a lot of workers that wouldnot have been there if it was a US, UK, Benelux (capacity), furthermore a lot of these workers look pretty good employees (not like in the US or most of Europe, where probably around 20% of the workforce is complete rubbish, and not definitely not only with immigrants, this percentage in Japan looks much lower). From there you see the opportunity to use these ineffectively used workers more effectively. However that is not really what you see happening.

2. Japan had with its eg Koreans very early immigrants. And a culture that is relatively similar (if they ever can be), a culture that does well in nearly all other places (like the US) still after say around a century there is still a social gap.
What is your ideas about this. Will we see something similar in say Europe especially with the badly educated non Western immigrants (their basics looks to predict a much smaller chance of success than with Koreans in Japan) or is this more something typical Japanese?
For especially Europe this question will become essential their locals donot breed and a lot of the workforce have to come from immigrants (that do breed), but what you see is low social mobility and education problems. Or basically what you see is that the increase of educationlevels over generations are simply caused by the fact that parents (mainly mothers) were illiterate and the children got to the minimum level of European education. Which imho doesnot say a thing. Complicated even further by the fact as this rise in education is presented as a huge success (so the problem is basically hidden). Combine with lower parts of the workforce seeing wages heavily under downward pressure in the Western world and it is a drama in the making.
December 20, 2012 | Unregistered CommenterRik
Rik - I don't want to wade into this debate too deeply. In the US, it's a hugely complex emotional and economic issue, with beneficiaries and victims all around and in surprising corners. But there are a few things I'd like to add:

Given that a country has the right to decide how it wants to control the influx of immigrants, Japan has made its decision long ago. In essence, the Japanese like to live in a country that is populated by Japanese. In many parts of Japan, foreigners (like me) are still an oddity.

The Japanese define "being Japanese" differently that we Americans define "being American." For them, it's much more than citizenship or being born in Japan. A third-generation "Korean" who seems to look, talk, and behave like a Japanese, might still be considered "Korean" and might therefore still be excluded to some extent.

On the other hand, as a white foreigner in Japan, I've had numerous wonderful experiences with people going out of their way to help me or make contact with me. But I've also been excluded or kept at a distance. Some of this has to do with the fact that I don't speak enough Japanese (my fault), and that people are afraid of trying to communicate with me in (my bad) Japanese or in (their bad) English.

My in-laws are wonderful people, and I love them. They make me feel at home. But I think that it might be rather rare. And so I appreciate them that much more.

Every white foreigner in Japan has a long list of great and not so great experiences. Other races might have fewer great experiences and more not so great ones.

But one of the better consequences of this attitude is low unemployment - despite their low-growth economy.

Japan is a very crowded place (at least the two big urban areas where most economic activity takes place) - in a physical sense. So a declining population is a good thing for the people. Per-capita GDP - the only GDP measure that counts for individuals - is holding up. And many Japanese doubt that they need foreigners to supplement the labor pool.

That said, many manufacturers, for example, have brought in foreigners from Brazil and other countries for cheap contract labor without benefits. These people are treated sort of like indentured laborers. And after a certain amount of time, they're let go... and then they have no footing in Japan at all.

As everywhere, immigration is an immensely complex issue and goes far beyond to issue of documentation.
December 20, 2012 | Registered CommenterWolf Richter
That was also the impression I got from Japan. And it is partly unique. Well we would never become Chinese or Korean as well, but Singaporean or Thai (with a lot of effort) might work.
Like to keep an eye on Asia for these kind of developments often what is happening there is completely neglected (for imho some stupid reasons), while a lot of things might give interesting indications. Say Singaporean or Korean healthcare for instance.

Would not be a modell that would work in Europe now. As most immigration has already taken place in the West. It mainly has become a question how to make it work iso do it or not.
US is different again. Attracts a lot of top talent (take the good with the bad). English is often already spoken (but German, Swedish or Dutch is not). Original immigration country.

You are right about it being a very sensitive issue but it is probably even more important long term than the current financial crisis. Opening a lot of discussions. I simply donot think we can avoid those and the sooner you start the more people like us will hold the discussion if you subpress it like is often done you usually see it come up in much more extreme ways.
Things like welfarestate vs semi-educated immigration; robots for simple work taken over, how will the labourmarket look in the future, will low income immigration really pay for Western elderly, what are the alternatives if you need the hands (probably not many imho), can you really stop it (doubtful as evidence shows) etc. Not even mentioning the social issues. Very little objective research most looks simply biased one way or the other. And not only on the immigrants. Say in Europe that the lower part of the labourmarket looks pretty dysfunctional (what I like to do as you can imagine) and people get smoke coming from their ears.

Thought originally in Europe that Poles and Co (Northern Eastblock) would be a good fit. But also there problems have arisen. See how that will work out. Possibly backlash from earlier experience and numbers in a short period of time.
Short term not great imho with the Balkan being next in line and people cannot distinguish a Latvian for a Bulgarian at the moment. For Poles and Co my idea is that it will work out longer term (equally education levels, usually good language skills, rather similar cultures, put a Pole ot Estonian in a nice suit and he could be a German or a Belgian. It works pretty well intra Western Europe (so why not with richer looking Poles, allthough at that point they probably will not move anymore in large numbers).

What would be 'fitting' immigrants in Japan. Russians, Chinese, definitely not. Singaporeans won't come anyway. Thai might do but these travel badly and are generally badly educated (only for simple work), Burmese similar problems. Latin Americans of Japanese decent. But with wages going up there and not offering a real future in Japan probably not a long term solution. As far as I kept track of it they tried a lot of differnt things but nothing really works.
December 20, 2012 | Unregistered CommenterRik

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