Bending Adversity: Japan and the Art of Survival (17 page)

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Viewed through a different lens, Japan’s post-bubble experience has been less ghastly. First, let’s look at growth on a real basis, adjusted for inflation and for population. That is a sensible thing to do if we want to know how individual Japanese have fared. Adjusting for inflation – or in its case deflation – makes Japan’s numbers look better. That’s because deflation means people can afford to buy more with the same amount of money. Japanese incomes may have been falling, but the price of everything from newspapers and haircuts to housing and sushi have been stuck at 1981 levels.
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Likewise, Japan’s population has not grown much in the past twenty years. Since 2007, it has even started shrinking, albeit still very slowly. Some countries look ‘richer’ in aggregate merely because their population has grown. But unless growth outstrips population increase, individuals don’t feel better off. So, if we’re interested in standard of living rather than investor returns, we should look at growth on a per capita basis.

In nominal terms, you’ll remember, Japan’s economy has barely budged in two decades, while the UK and US economies have grown 152 per cent and 160 per cent respectively. Much of that increase, it turns out, is down to the simple fact of rising prices and a growing population. Adjusted for both, Japan still underperforms, but not by nearly as much. If the size of the three economies in 1989 is rebased at 100, Japan’s economy reached 127 by 2013, compared with 137 for the US and 144 for Britain.
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Japan had a genuinely lousy 1990s. But it turns out that, relative to other rich countries, the last decade has not been quite so bad. As we shall see in the next chapter, during the years Junichiro Koizumi was prime minister (2001–6), the country actually went through a mini-growth and productivity boom. Even after the Lehman shock, which devastated Japan’s export markets, and the tsunami, which destroyed production and hit the energy supply, remarkably Japan has done marginally better than either Britain or the US on a real per capita basis in the past decade. Expressed as an average growth rate, Japan’s real per capita income has risen 0.9 per cent a year since 2002. That compares with 0.8 per cent for the US and 0.7 per cent for Britain and 0.5 per cent for Norway. If we are to describe Japan’s past decade as ‘lost’, perhaps fairness dictates that we do the same for both the UK and the US.
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Other numbers also suggest Japan has not done quite as badly as widely assumed. Unemployment, 4.1 per cent at the end of 2012, never rose above 5.5 per cent even in the dog days of recession. That is much higher than the full employment Japan is used to, but it compares favourably with other advanced countries. According to statistics from the Organisation for Economic Co-operation and Development, in March 2012 the US had a jobless rate of 8.1 per cent, France 10 per cent and Spain a massive 24.1 per cent.
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Sceptics, pointing to overstaffed Japanese construction sites and department stores, argue that headline numbers hide underemployment. That is true. In more market-oriented societies, excess workers might indeed have been sacked. Instead of the company paying them, they would then have needed support either from the state or from their family. Japan’s low unemployment is, then, arguably achieved at the cost of suppressing productivity or, to put it another way, subsidizing work. One can disagree with such a policy. Shareholders would undoubtedly prefer companies to increase profits by laying off workers. But Japan’s ‘stakeholder’ capitalism, which has similarities with continental Europe, is a legitimate policy option. The Anglo-Saxon model, which favours capital above labour, has sometimes helped investors at the cost of higher unemployment.

Economists might counter that the reluctance to sack workers hampers creative destruction. Only by allowing uncompetitive businesses
to fail can labour be directed to more productive parts of the economy. There is some truth to that. Japan’s ‘zombie banks’ have indeed propped up ‘zombie companies’. But different economies reorganize in different ways. In Japan, there has been more corporate restructuring than is widely recognized, often behind closed doors and with less resort to bankruptcy or hostile takeovers. This may be slower and less efficient than in more market-oriented economies. Yet persistently high, and long-term, unemployment may be the inevitable price of the creative destruction process in many western countries – certainly if sacked workers are not properly retrained to move into new industries. In Japan, the industrial re-engineering process, though slow, and perhaps inadequate, is more likely to take place within a large company, at least for those fortunate enough to have a full-time job. Thus Canon shifted its emphasis from cameras to photocopiers without being taken over by a rival company or private equity firm and broken up as might have happened in a more aggressively capitalistic country. Japan’s low unemployment figures, sceptics will point out, also mask ‘discouraged’ workers, who do not bother looking for non-existent work. Nor do they tell the story of high youth unemployment, now at 8 per cent. Such phenomena, though, are hardly unique to Japan. The headline unemployment numbers may disguise the true picture, but they are broadly comparable across nations. However you make the comparison, Japan has lower unemployment than most advanced economies.

Japan has never been quite as egalitarian as it likes to think, but its income gap has widened less sharply than in some other advanced nations. In the US, the top 1 per cent of earners has captured nearly all the economic gains of the past thirty years.
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Everyone else has stood still or fallen behind. The same is broadly true of Britain, where the share of the top 1 per cent of income earners rose from 7.1 per cent in 1970 to 14.3 per cent in 2005. That means that most of the growth in the UK and the US has brought little benefit to the bulk of the population. In Japan, what growth there has been has been more evenly distributed. In the mid-1990s, the average income of the top 10 per cent of Japanese was eight times higher than the bottom 10 per cent, a ratio that widened to ten times by 2008.
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Japan’s inequality has widened, but not to the extent of many other nations. Nor has its
equality deteriorated as much as the Japanese themselves imagine. Yoshio Sugimoto, emeritus professor at La Trobe University in Melbourne, says the fast-growth years produced an ‘optical illusion’ of equality since everyone was moving up the escalator. Now the escalator has stopped, he says, ‘it becomes difficult for the illusion to be sustained’.
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Quality of life is hard to quantify. It is also largely subjective. But in some measures, Japan does extremely well. One is the safety of its citizens. By international standards, Japanese crime rates are ridiculously low. In Japan – where it is an offence to own a gun, another to own a bullet, and a third to pull the trigger – you are ten times less likely to be murdered than in the US.
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You are thirty-six times less likely to be robbed.
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Dropped wallets are almost invariably returned, cash untouched. Violent crime is very rare. Japan feels safe not because all the criminals are locked up. In fact, Japan imprisons very few people. It has some 80,000 prisoners compared with 2.3 million in the US.
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Even as the country’s economy has slowed, its society has held together remarkably well. In 2009, newly laid-off workers built a ‘tent village’ amid the fountains and shrubbery of Hibiya Park to draw attention to their plight. But there have been no sprees of burning and looting as there were on the streets of London in 2011, nor the mass demonstrations prompted by a collapse of living standards seen in Greece and Spain.

One mustn’t get carried away. To say Japan has done better than generally acknowledged is a useful antidote to some of the more hysterical analysis. That is not to say everything has been fine. Far from it. Japan has gone from being the fastest of catch-up economies to an also-ran among mature ones. That has caused national soul-searching at home and lessened Japan’s prestige abroad. ‘A nation is happiest when you are chasing someone and there’s no one behind you,’ says Richard Koo, a well-known economist resident in Japan. Since the bubble burst, Japan has stopped chasing, he says. ‘It’s been pretty horrible.’
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We must also take into account the huge public borrowing, which has softened the blow for the current generation but left a huge bill, and a potentially massive problem, for future ones to deal with. In the words of one economist, ‘Living standards have been propped up by
an unsustainable accumulation of debt.’
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Japan’s ‘solution’ to its slowing economy has tended to favour the older over the young. Deflation has preserved the savings of baby-boomers at the expense of creating a vibrant economy for younger generations. In a later chapter we will see how youth, deprived of the certainties and the job opportunities enjoyed by their parents and grandparents, has borne the brunt of Japan’s strung-out economic adjustment.

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In 2005, the finance ministry helpfully drew my attention to the fact that, if Japan’s debt were stacked up in Y10,000 notes, it would reach 1,400 times higher than Mount Fuji. Why anyone would want to do such an odd thing was never adequately explained. But the point was clear: Japan’s debt mountain was unsustainably high. That was back then, when gross public debt amounted to Y538 trillion, about $4.5 trillion at the time, and equal to 150 per cent of Japan’s GDP. The government was constantly adding to the pile. For every Y100 it was spending, it was obliged to borrow Y40 by issuing yet more debt, since taxes – depressed by years of deflation and non-existent nominal growth – were insufficient to meet its spending needs. Now it is borrowing even more. By 2012, more than half of what the government spent was being borrowed. Gross public debt had ballooned to more than 230 per cent of GDP.
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I didn’t dare go back to the finance ministry to discover how high the debt mountain reached now.

‘Things that can’t go on for ever, don’t,’ an old economists’ adage has it. As long ago as 1999, Japan’s then prime minister Keizo Obuchi pronounced himself the ‘king of the world’s debtors’.
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Debt as a proportion of GDP has more than doubled since then and some economists believe it is only a matter of time before the whole house comes crashing down. For several years, the ratings agencies have put the country on notice. A decade ago, Moody’s infuriated Japan by downgrading its sovereign debt – an assessment of the likelihood of defaulting – to the same level as Botswana.
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More recently, ratings agencies downgraded Japanese debt again. Standard & Poor’s, which in 2011 caused a furore by removing the US AAA rating for the first time in seventy years, gave Japan an AA-minus rating. That still meant Japan had between a ‘very strong’ and a ‘strong’ capacity to meet its financial commitments. But the downward trend suggested its position was becoming
less tenable. Moody’s went so far as to say that the shock to the economy of the March 2011 tsunami and the vast rebuilding costs could push Japan’s bond markets towards a ‘tipping point’. Kaoru Yosano, the minister of economic affairs whom I met in his office in the immediate aftermath of the earthquake, warned that Japan ‘faced a dreadful dream’.
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Ito of Tokyo University said issuing more and more bonds merely staved off the inevitable. The fundamental problem was that the government spent more than it raised in taxes. ‘Who is going to pay?’ he asked. ‘You can’t just keep shifting it to the next generation.’
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Ito had long been a thorn in the side of the Bank of Japan, urging it to set an inflation target. Modest inflation, he argued, would help Japan to float off the rocks of perpetual deficit. In a normal economy, public debt would fall as the economic pie grew. One of the main reasons Japan’s debt had risen so quickly as a percentage of GDP was that nominal GDP itself had been stuck in a rut – at 1990 levels.
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However it got out of its current bind, Ito said, Japan would not be able to rely for ever on the huge savings amassed by previous generations. As things stood, those savings provided the state with an easy source of cheap finance. Companies and individuals deposited savings in banks – when they were not under the mattress, that was. The banks, in turn, bought government debt. Ito said that merry-go-round couldn’t go on indefinitely. Pensioners would start to spend down their savings, reducing the pool of assets to be recycled. Younger people were saving less. ‘Once you hit a ceiling, it is all quite easy to unwind. And once people start selling [government bonds], the prices will go down, there’ll be more selling and the price will go down further.’ Then there would be capital flight as Japanese rushed to safety overseas. ‘It’s a giant Ponzi scheme. I think the end is near.’

That is plausible. Yet people have been saying much the same thing for years. The markets – imperfect though rational people must now accept them to be – have resolutely refused to endorse this pessimistic view. Bond prices have not crashed as so long predicted. Instead, they have done quite the reverse. The markets regard Japanese government bonds not as a time bomb but as a safe haven. As bond prices have risen, yields have fallen. The Japanese government can borrow money for ten years at below 1 per cent, more cheaply, says Peter Tasker, a Tokyo-based strategist, than any government since Babylonian times.
That means Japan’s debt repayments are actually pretty low. ‘For the past decade the Japanese bond market has been making monkeys out of not just the credit rating agencies, but also academics, trigger-happy short sellers [who seek to profit by selling Japanese bonds] and politicians and bureaucrats who see fiscal austerity as a virtue in its own right,’ Tasker says. ‘All have been proclaiming that out-of-control public debt has set Japan on the road to fiscal perdition.’
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One reason things haven’t blown up yet is that, contrary to common perception, Japan is far from being the world’s biggest debtor. In fact, it is the world’s biggest creditor. It has vast claims on foreign assets. According to Jesper Koll, an economist at JP Morgan who calls himself ‘the last Japan optimist’, every week $4 billion more flows into Japan than flows out. The country’s private sector runs a financial surplus large enough to cover the government’s deficit and still have plenty of capital to export abroad. Japan’s much talked-about public debt, then, is not money that Japan owes the rest of world, but money that the government has borrowed from its own people. For most of the past two decades nearly 95 per cent of Japanese debt was domestically owned, although this had fallen (perhaps worryingly) to a record low of 91 per cent by 2013. Still, in the case of Greece and nations that have defaulted in recent years, such as Argentina and Russia, most of their debt was owed to foreigners who wanted their money back. It is possible that Japanese banks and individuals will also develop a sudden craving for their cash. Yet, even at that point outright default is unlikely. One way the Japanese state could default over time would be to cut pension payments or health benefits, something that – in common with governments everywhere – it has begun to do. If push came to shove, the government could also resort to the aggressive use of the printing presses, hoping to float the debt away through inflation. The danger would be that inflation might get out of hand, turning into hyperinflation.