Abe Shinzo won his premiership in 2012 with a promise to finally get Japan’s economy moving again. The latest fiscal stimulus package is yet another sign that Abe has failed and that the world’s third largest economy refuses to learn from its mistakes. There have been numerous stimulus packages over the past 20 years and all of them have failed to have the desired effect. It is clear that throwing money at the problem is not the answer and the markets’ negative response to the announcement suggests that they feel the same way.
One of the main challenges Japan faces is its huge government debt with its debt/GDP ratio standing at 229%. Greece’s public debt stands at 176.9 %. This comparison highlights the scale of Japan’s problem. Yet, Abe has chosen fiscal activism over austerity, and the debt is likely to go even higher following the implementation of the stimulus package. Government debt at such a high level that it affects an economy is a huge cause for debate. George Osborne clearly thought that it could seriously affect the economy, and the UK’s debt/GDP ratio was only at 78.4% in 2010 when he announced plans for austerity and referenced the debt/GDP ratio in his main policy goals. Perhaps a period of fiscal frugality, offset by a loosening of monetary policy, could be an option for Japan, yet they have done the opposite. Whether one thinks this is the right decision comes down purely to whether one thinks that having a large government debt hampers economic growth. Japan’s recent economic performance would suggest it does.
Perhaps Abe should be implementing the structural reforms that the Japanese economy so desperately needs. Japan has an ageing population coupled with an extremely low birth rate meaning there are not enough young tax-paying people entering the labour market. The country must overcome its reluctance to accept foreigners if it is to find a new and young labour force stream. A mixture of public opinion and political sensitivity points to the fact that a sudden influx of migrant workers would not be welcomed by Japan.
Yet, as the population gets older and the government debt gets higher, it is possible that Japan will have to open its doors and come to terms with its status as a country in need of immigrants.
There are other crucial structural reforms such as the deregulation of the services sector as well as opening up the services to competition and foreign direct investment. Citigroup Chief Economist, Willem Buiter, argues that these structural reforms over time could boost GDP by up to 40%.
Another possible solution for Japan’s economic problems is to mend the strained relations it currently has with China and South Korea. Japan has been unable to overcome the historic problems and a bitter rivalry between China and Japan has been particularly damaging. At the moment these relationships are too deep-rooted and complex to understand fully or to find a practical solution to. Perhaps China’s economy continuing to slow down and Japan’s stagnating will force an economic union between the two countries. The three Asian powerhouses will eventually need each other to expand their productive capacity and a trade agreement similar to the EU could have significant economic advantages.
Perhaps the target for Abe’s new stimulus package is jumpstarting Japan’s weak domestic market which has hindered economic growth. Slow wage growth has scampered efforts to encourage domestic consumption. Interest rates are at -0.1 % and yet inflation remains at around 0% which is way off the 2% target. Additionally, uncertainty regarding the world economy and the impact of Brexit has meant the yen remains extremely strong. This makes it harder for Japan to rely on its strong exports as the main catalyst for economic growth. In this sense, the stimulus package is welcomed as it should boost domestic demand and increase prices. However, history would show that these packages have been unsuccessful in the past.
Doom And Gloom For Japan
Clearly, there are various problems that the Japanese must tackle before they can finally get their economy moving again. Political and structural reform is absolutely vital to getting out of this mess. Until these reforms are implemented, one can expect more stimulus packages, more debt and more stagnation in the near future.
Have your say. Sign up now to become an Author!
Goldman Sachs Introduces Their Own Cryptocurrency
“A price-stable currency, such as a token pegged to the US dollar, is critical for enabling mainstream adoption of blockchain...
Breakfast Briefing: Elon vs. The Media & Stormy Daniels Day
Elon Musk Hits Out at Journalists The entrepreneur contemplated starting a site allowing users to rate the veracity of online...
Fortnite Is Set to Shake Up the E-Sports World
Fortnite has already taken the gaming world by storm, due in part to its freemium product and fantastic concept. YouTube...
Want European Unicorns? Build Cell Towers in Bulgaria.
This week, all eyes are somehow simultaneously focused on the US while also being rolled back at its ineptitude to...