This Friday and Saturday, Japan will play host to the meeting of the G7- finance ministers and central bank governors. The gathering of the finance elite from the 7 wealthiest developed countries (representing more than 64% of the net global wealth) will take place in Sendai, about 70 km north of Fukushima.
The choice of Sendai is designed to highlight reconstruction efforts in the region, which was struck by the massive earthquake and tsunami in March 2011 that killed an estimated 16’000 people.
Just in time for the finance-meeting (and the political G7-summit a week later that Japan also hosts) Japan’s economy for once produced a positive surprise. First quarter GDP expanded 1,7% on an annualized basis, beating economists’ estimates by far. This growth – based on consumer spending which accounts for about 60% of GDP, while business spending is still contracting – suggests the Japanese economy is managing to shake off a recession or the negative effects of the China-slowdown and a stronger yen with domestic demand having more momentum than previously thought.
For the moment, it’s premature to speak of a rebounding Japanese economy. But if the revision of the initial GDP-figures (which are according to the ‘Financial Times’ notoriously unreliable) would for once confirm the data, and this trend continues in a similar pace over the next months, then Japan really could have found a way back to growth.
This, however, would be one of the bigger economic surprises of 2016.
Why should this be a surprise? Since not everybody might be familiar with Japan’s recent economic history – or it’s deep malaise – we take a look back:
Japan was celebrating an unprecedented real estate and stock market party in the 1980’s. After the bubbles burst in the early 1990s, companies have focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers avoided spending. That led to 20 years with no nominal growth in the economy. Prices of goods such food – or sake – kept falling, creating a deflation. Optimism was already nowhere to be found when in 2011 the devastating earthquake, tsunami and nuclear meltdown in Fukushima happened.
In December 2012, Japanese Prime Minister Shinzo Abe announced radical plans to jolt Japan’s stagnating economy out of its deflationary malaise to growth and inflation. The therapy called ‘Abenomics’ has 3 pillars: unprecedented monetary easing, government spending and business deregulation, a structural reform including slashing business regulations, liberalizing the labor market and agricultural sector, cutting corporate taxes, and increasing workforce diversity.
Abe calls it a ‘3-arrow’-strategy, borrowing the image from a Japanese folk tale that teaches that 3 sticks together are harder to break.
The fate of Abenomics is not yet clear. Some critics argue, it brings major risks as hyperinflation, others state that Abe’s plan may do too little do to reverse deeply entrenched deflation.
Japanese governments have implemented years of near-zero interest rates. In January 2016, the Bank of Japan made the unexpected decision of introducing negative rates.
They’ve also spent trillions of dollars attempting to lift the economy, thereby accumulating the largest public debt in the developed world with over 11 trillion USD, surpassing 245% of its GDP. The International Monetary Fund has repeatedly warned that these debt levels are unsustainable.
Aside this deep economic malaise, Japan is also facing serious social and demographic issues.
The country is currently experiencing a crime wave of shoplifting amongst the elderly – about 35% of all shoplifting crimes are committed by those over 60, and 40% of these characters have committed the same crime at least six times. They want to be thrown into jail and take advantage of the free food, accommodation and healthcare as their living costs are at least 25% more than the basic state pension offered in Japan.
The government worries that if the fertility rate – 1.42 in 2014 – continues to remain low, the population will dip to about 80 million by 2065 and even 40 million by 2115, causing a significant labor shortage and decline in people’s standard of living due to reduced economies of scale.
A huge debt, unsolved tax issues, a strong yen that hurt exports and deep social problems are just a few realities in Japan today. That’s why it would be a big surprise if Japan found a way back to growth mainly based on domestic demand in the first quarter of 2016.
So, Is the Japanese economy really back on track? The only certainty is: Japan has a long way to go before pulling free of the vicious cycle that has plagued the economy and a whole generation of japanese people for decades.
Maybe the country just made a first step of this long way.
Tokyo Stock Exchange: financial markets remain doubtful over Japan’s GDP growth.
Japans Prime Minister Shinzo Abe and his ‘Abenomics’.