Japan's growth is once again sagging towards zero. Is Abenomics radical enough?
offered a cautionary tale of how macroeconomic mismanagement could transform a juggernaut into a laggard. As weak growth and low interest rates have spread to the rest of the world, however, it looks more like a window into the future. The view it reveals is less bleak than it used to be; “Abenomics”—the growth-boosting policies of the government of Shinzo Abe since 2012—have restored some vim.
Japan earned its reputation as an economy adrift in the 1990s, when a popped financial bubble was followed by slow growth, deflation and low interest rates. As the government struggled to pry the economy from its rut, it pioneered policies like quantitative easing that were used around the world after the global financial crisis. Economists debated how much Japan’s slump owed to weak demand rather than economic rigidities, for example an insufficiently limber corporate sector.
But the slump never quite ended. Perhaps it might have, had the government not raised the rate of consumption tax from 5% to 8% in 2014 in an effort to cut its mammoth gross debt pile, which reached 230% ofin 2012. Private consumption, which helped power growth in 2013, shrank in 2014 as the economy slowed to a stall. The government postponed a second planned increase for fear of starting a recession. Yet even now, five years on, the economy remains too weak to stomach fiscal tightening.
It has become clear, however, that Japan’s demand woes are not simply an after-effect of financial crisis. Rather they are chronic, reflecting a profound demographic shift which depresses both demand and supply—and which is creeping its way across the rich world. Over the past 20 years Japan’s working-age population declined by more than 10m workers, or about 14%. It is projected to fall by even more over the next 20. Having fewer workers means lower growth and less need of investment.
Limp private-sector spending has in turn kept the government from cutting its debt. Were the state to begin saving in earnest, demand in the economy would collapse. Japan has long defied predictions of imminent fiscal crisis. Even so, demography could eventually break the public purse. At 46% in 2018, Japan’s old-age dependency ratio—the number of elderly people compared with the number of working age—is the world’s highest.
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