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Business News/ Opinion / Easy money isn’t the answer for Japan
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Easy money isn’t the answer for Japan

The true tragedy of Japan's misguided economic policy is that it has achieved almost none of its purpose even as it has eroded the nation's wealth

Japanese Prime Minister Shinzo Abe. Photo: ReutersPremium
Japanese Prime Minister Shinzo Abe. Photo: Reuters

Strolling through Tokyo on a Sunday afternoon, it’s hard to tell Japan’s economy is a mess. Deflation has returned, while growth hasn’t. But Shibuya Crossing remains as packed with diners, bag-toting shoppers and gawking tourists as ever. Lost decades be damned!

Japan had the good fortune to have become wealthy before entering its years of stagnation. Some Japanese are now suffering in an economy that’s endured four recessions in eight years; the poverty rate has reached 16%, its highest level on record. But for many, especially in big cities such as Tokyo, life hasn’t so much deteriorated as frozen in time. GDP per capita, on a nominal basis, is little different now than in 1992. And though the quality of many jobs has waned due to the increase of temporary work, joblessness remains a rarity. The unemployment rate is an enviable 3.2%.

The Shibuya crowds raise serious and uncomfortable questions about the direction of Tokyo’s economic policy. Even as some analysts urge the Bank of Japan to double down on its monetary easing programme and the government to ramp up its own spending in an effort to boost inflation, there’s a good argument to be made that the approach of Japan’s policymakers has been wrong for a long time.

The thrust of Japanese policies since the bursting of its gargantuan asset-price bubble in the early 1990s has been to spur growth with lots and lots of cash, whether from the government or the BoJ. Since 2013, Prime Minister Shinzo Abe has dramatically pumped up that strategy—running large budget deficits, delaying taxes and encouraging the BoJ to print money on an ever grander scale.

Arguably, however, Japan’s main focus should be to preserve the wealth it has already accumulated. With a population that’s ageing and shrinking, Japan can get richer on a per capita basis even if GDP remains perfectly flat. In that sense, deflation—long considered the scourge of Japan’s economy—is actually a boon: Falling prices raise the future value of savings, helping the elderly and others on fixed incomes. In constant terms, Japan’s GDP per capita is 17% higher than in 1992, thanks to deflation.

Efforts to stoke inflation, on the other hand, have proven counterproductive. The BoJ’s zero-interest rate strategy, designed to boost investment and prices, has robbed Japanese of an easy way of earning a return on their ample savings. By far the most damaging error has been made by spendthrift politicians. By abusing the fiscal budget to stimulate growth, policymakers have placed a tremendous burden on Japan’s declining population. In 1992, the government’s debt relative to GDP was just above 70%; now it stands at 248%. That will dump a heavy tax bill on an ever-smaller number of productive workers, eating away at the welfare of future generations and society overall.

None of this is to say that Japan shouldn’t be pursuing GDP growth. The country needs growth in order to create opportunities for younger workers—many stuck in insecure and poorly paid temp jobs—and to improve incomes.

Easy money, however, is the wrong prescription. Rather than lavish state spending, the economy needs deep reforms: deregulation, opening protected sectors, fixing a distorted labour market and integrating more closely with the rest of the region. That would stir the economy’s potential by encouraging entrepreneurship, improving productivity and attracting foreign investment.

Sadly, little of that reform has been accomplished. In that way, Japan’s riches have been as much bane as boon. The comfortable life many Japanese lead has made them content and reluctant to accept the need for drastic change. The Japanese are like the slowly boiling frog that doesn’t realize it is being cooked.

Now, however, a quarter century of bad policy has left the proverbial amphibian pretty thoroughly stewed. The true tragedy of Japan’s misguided economic policy is that it has achieved almost none of its purpose—increasing growth and prices—even as it has eroded the nation’s wealth. Buried under so much debt, and deprived of a proper return on their savings, Japanese are likely to be poorer tomorrow than today. They should enjoy those fancy burgers while they can. BLOOMBERG

Michael Schuman is a journalist based in Beijing.

Comments are welcome at otherviews@livemint.com

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Published: 06 May 2016, 12:56 AM IST
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