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.18 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 2008.19 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’.20
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.21 You are thirty-six times less likely to be robbed.22 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.23 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.’24
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.’25 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.
• • •
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.26 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’.27 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.28 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’.29 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.’30 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.31
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.’32
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.
Still, nothing of the sort has happened yet – not, anyway, until Shinzo Abe came along with his deflation-busting plan in 2013 (see Afterword). And with prices still falling, it seems premature to worry about excessive inflation. Some economists have even gone so far as to argue that Japan’s debt pile is not so bad, but actually evidence that the government has been doing more or less the right thing. Richard Koo, an economist at Nomura, talks about a ‘balance sheet recession’.33 As he sees it, ever since the bubble burst in 1990, massively overstretched companies have dedicated themselves to paying down debt. Even those that have managed to restore healthy balance sheets are so traumatized they have no more desire to borrow or invest. Their unwillingness to borrow makes conventional monetary policy useless. Richard Jerram, now chief economist at Bank of Singapore, compared Japan’s failure to reboot the economy through monetary expansion to a pub where endless free beers are lined up at the bar, but whose customers are so past the point of inebriation, they are in no mood to imbibe further.
We should not forget the magnitude of the shock caused by the bursting of Japan’s bubble. According to Koo, so deep was the fall in land and equity prices that it cut the value of all Japanese assets by a sum equal to 2.7 times the country’s entire 1989 GDP. That is bigger than the loss sustained by the US after the 1929 Wall Street crash.34 For all its problems, in Japan there has been no Great Depression. The big mistake was allowing the bubble to inflate and pop in the first place. But having done so, according to this reading, Japan’s authorities were correct to compensate for a massive fall in private sector spending by ramping up government spending and loosening monetary policy. It is a classic Keynesian argument for counter-cyclical spending.
For many years, arguments about Japan’s strange economic circumstances were a matter mainly for Japanese specialists and academic economists. That is no longer the case. After the collapse of Lehman Brothers and the subsequent global financial crisis, nearly every western government faces similar problems to Japan. They too are suffering balance sheet recessions. Their companies and households have also stopped spending. Their central banks have lowered interest rates to practically zero and started printing money to buy bonds, a policy known as ‘quantitative easing’ that was pioneered by Japan from around 2003. In seeking to learn the lessons of Japan, economists have drawn diametrically opposite conclusions. The debate has been particularly shrill in the US, which now has gross public debt above 100 per cent of GDP and, like Japan, borrows more than 50 cents for every dollar it spends.35
At the Republican National Convention in Tampa in 2012, a giant clock showed the national debt ticking ever upwards towards $16 trillion. Mitt Romney, the Republicans’ presidential candidate, even said the US should consider a return to the gold standard, a policy that would severely restrict the Federal Reserve’s ability to print money. Many Republicans have also opposed spending to compensate for the fact that the private sector is in sharp retrenchment. In a Wall Street Journal opinion piece called ‘Arigato for Nothing, Keynes-san’ (‘Thanks for Nothing, Mr Keynes’), the US business newspaper said the lesson of Japan was that Keynesian fiscal stimulus didn’t work, precisely the opposite of Koo’s conclusion. Japan was a ‘rebuke to those who argue Keynesian sprees help unleash private-sector-led growth down the road’.36
Japan’s debt, however, has not risen primarily because of spending on ‘bridges to nowhere’ as its critics often say. Undoubtedly, there has been some of that, though most such spending happened before the bubble burst, not after. Big stimulus packages ended in the late 1990s. Under Koizumi, as we shall see in the next chapter, public works spending was sharply scaled back.37 In fact, there are two main reasons for Japan’s ballooning debt: falling tax revenues and the stagnation in nominal GDP. Government tax revenues have halved since 1990, an extraordinary fact that reflects the prolonged slump in nominal growth – a sign of how damaging deflation can be. The pay of many workers has fallen below the income tax threshold, corporate tax revenues have dropped and the slump in land prices has hit inheritance tax. That suggests that Japan’s main problem has not been too much spending (and printing), but too little growth. With the mildest of inflation over the past fifteen years, Japan’s debt problem would not look nearly so bad.
Paul Krugman, the New York Times columnist, is famously on the Keynesian side of the debate. In one column he characterized the ‘debt worriers’ in his country as misunderstanding the nature of national debt. They thought of it as if a family had taken out a mortgage it would have trouble repaying, he wrote. That was a bad analogy. While families had to pay back their debt, governments didn’t. All they had to do was ensure that their debts grew more slowly than their tax income – precisely what Japan has failed to do. US debt from the Second World War was never repaid, Krugman said. It just became increasingly irrelevant as the economy outgrew it.38
Some economists regard Krugman’s analysis as fantasy. For Japan, like the US, they argue, the only way back from perdition is to cut government spending and raise taxes. Cranking the printing presses will merely lead to hell down the road. In Japan’s case, one reason for saying that is the assumption that it has a bloated state, with an overly generous social security system and an unsustainable penchant for laying concrete. Money is wasted, no doubt. But the size of the Japanese state is not especially big compared with other advanced countries. According to the OECD, general government spending, which includes central and local outlays, was 43 per cent in 2013. That compared with 40 per cent in the US, 47 per cent in Britain and an average of 49 per cent in Europe. Still, no state can go on for ever spending more than it can raise in revenue. Japan’s finance ministry has been advocating higher taxes for years. Political realities and economic emergencies mean it has mostly not had its way, although the government of Yoshihiko Noda, prime minister from 2011 to 2012, passed legislation preparing for a doubling of sales tax to 10 per cent by 2015. ‘Our thinking is that economic growth and fiscal consolidation are compatible rather than contradictory,’ Koji Omi, a former finance minister, once told me.39 The logic is that, if the public knows the national finances are on a sound footing, it will be less inclined to make precautionary saving and more relaxed about spending.
Japan has never been able to test out that hypothesis since it has never got its fiscal situation under control. But in Britain, David Cameron’s government put the theory into practice by implementing what has been
called ‘pre-emptive austerity’. Rather than increasing government spending to counteract the effects of falling private investment, it has sought to cut expenditure.40 So far the results are not encouraging. By the summer of 2012, Britain’s GDP was marooned at 4.5 per cent below its 2008 peak and the country had entered a double-dip recession. (It’s true that by this time Japan was into recession number three.) Anatole Kaletsky, an economics commentator, declared the UK’s experiment in fiscal tightening a failure. From 2010, when Cameron’s government started cutting, Britain’s performance diverged sharply from the US, which had continued to relax its fiscal policy. Since the UK adopted austerity, the American economy had done almost three times better, Kaletsky wrote. As a result, Britain’s debt had risen more as a proportion of a diminished GDP. His conclusion was that ‘any country determined to control public borrowing should forget about fiscal austerity and instead do everything to grow as fast as it can’.41
Bending Adversity: Japan and the Art of Survival Page 17
