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Japan -- the sun can also rise

An aging nation will still have a bright future if it boosts productivity with tech

It is commonplace for sober commentators to have grim views about Japan's economic future, based on its extremely poor demographic prospects, and its weak productivity record so far in this millennium.

It is true, that in the long term, economic growth is essentially driven by two things; the size and growth of the working population, and its productivity. When these factors are applied to Japan, virtually all observers think that the economy can grow -- at best -- by 1% in real terms on average over the long term, and most consider the figure may be closer to 0.5%.

This is without even taking account of the eventual reduction of the economy-boosting monetary easing that its central bank has presided over for nearly 20 years. It isn't difficult to think of very pessimistic scenarios if the Bank of Japan terminated its QE, and short, and long term interest rates started to rise.

Then the absence of stronger economic growth could create a vicious circle of higher debt servicing and higher debt levels, which would make achieving the country's current low real growth potential even harder.

Much of this pessimism is quite conventional thinking, some of which, I used to find easy to share, during my 30 years-plus of visiting Japan as an active participant in international financial markets.

However, on a recent trip now as Chair of Chatham House, I found myself thinking thoughts I hadn't expected.

A crucial point to reconsider is the difference between an economy's size and its inhabitants' wealth. Due to Japan's well- known aging and low birthrate, it is highly likely that by 2050, Japan's population will be down to around 100 million, from 127 million now.

If this is reflected in a smaller working population, it is highly likely that Japan's nominal gross domestic product will not be much different from today. However, size is not wealth, and the flip side of Japan's population decline is that, with the same amount of nominal GDP and around 20% fewer people, average wealth per person would rise by the same figure, 20%.

Having spent a large part of my career thinking about so-called emerging economies, I have frequently been attracted to their burgeoning populations, and rising work forces.

In Asia, India, Indonesia and perhaps Bangladesh, epitomize the potential. But as many skeptics have often pointed out, how come these demographics have not translated already into much more successful economies? A surge in youngsters seeking jobs can be a boon or a burden depending on whether they find work.

Alongside this, it is interesting to observe that most of the world 's wealthiest countries are not usually the largest (with some notable exceptions such as the U.S. and Germany). Luxembourg, the Netherlands, and all the Scandinavian economies are among the world's wealthiest. So, in Asia, is Singapore.

Perhaps Japanese policymakers might start thinking more about how to be an Asian version of the wealthiest European societies as opposed to getting stuck in the pessimism about losing their mantle as Asia's largest economy. Can Japan become like the Netherlands, generally content with its larger neighbors, in Japan's case, China, and potentially India and Indonesia?

On my recent trip to Tokyo, I began to think that this is not impossible, as long as Japan's leaders pursue policies to boost productivity -- the only way that higher income levels can be achieved when the workforce is no longer growing.

One key advantage that Japan may have over the U.S. and much of Europe, is the closeness of its relations with China, which put it in a good position to benefit from China's impact on the world without underestimating the potential risks.

Japan has now for some time been profiting from China becoming its number one export market, and in more recent years, perhaps a prime destination for Chinese tourists.

Japan has been profiting from China as a prime destination for Chinese tourists. (Photo by Akira Kodaka)

While the U.S. and much of Europe fashionably worry about how to restrict Chinese competition and risk constraining bilateral development, Japan has learnt to perhaps put some of the obvious concerns about China into a more positive context.

Also, unlike its western rivals, Japan has not just one but both of the world's one-billion-plus population countries comfortably within its economic reach. As well as China, India offers Tokyo huge opportunities. As in China, Japanese companies are well-established with, for example, Suzuki Motor dominating the auto market.

Japan has two key things to offer. Firstly, as any longtime visitor to Tokyo can testify, Japan has made encouraging progress on urban environmental sustainability, which can be applied to the rising but polluted cities of China and India.

Secondly, China's President Xi Jinping's needs some outside wisdom about how to advance his ambitious Belt and Road Initiative (BRI) better, following the skepticism it has generated, including from its intended beneficiaries, such as Sri Lanka.

Japan, with decades of experience in supporting infrastructure development in emerging Asia, is well placed to help Beijing think better. Tokyo is also in a position to persuade India to overcome its reluctance to involve itself in BRI.

Japan can deliver an even bigger boost to its own economy via technology, including digital tech, robots, advanced materials and artificial intelligence. During my recent trip, senior officials shared their thoughts on Japan's role as chair of the Group of 20 this year, especially with regard to tech challenges.

In modern GDP accounts, many forms of social media aren't measured as contributing to GDP. For example, Facebook use doesn't appear, because it is free. Perhaps we might one impute a value that a representative sample of users could estimate that they would be prepared to pay to use it, and so impute values for different uses of Facebook or other social media. Indeed, this could influence future social media development by creating a more objective framework for assessing the use of everyone's time and distinguishing the productive and non-productive.

What matters is what countries do in adapting technology. Japanese policy makers can translate this into a simple mantra, "What appropriate policy decision allows for this particular technology to truly advance productivity?".

Many countries have taken it for granted that all technological development is by definition, helpful. Japan may be in a position to develop a more targeted and efficient approach better than most, not least as it knows it needs to use technology to cope with its shrinking population.

Japan has in recent years lagged others in productivity. Having been first among OECD countries in 2000, as per OECD data, it was down to 14th in 2015. There is clearly room for rapid improvement, for which tech is indispensable. I think newer figures will show Japan is already climbing/will soon climb back up the ranks.

I don't want to disparage the valid reasons why people in my old universe in finance have been so skeptical about Japan for so long, as those issues are big challenges, but perhaps Japan's coming, smaller, population might have a better future than many now think.

Jim O'Neill is a former chairman of Goldman Sachs Asset Management and a former British government minister. His career at Goldman Sachs spanned 1995 to 2013, the bulk of it as chief economist. He is credited with coining the acronym "BRICs."

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