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New research reveals the myth of Japan's 'lost decades'

Prolonged economic recovery has been a period of increasing well-being

| Japan
Young family walk along a street in Tokyo on Aug. 9: the allocation of spending between children and the elderly is at the core of political discourse in Japan.   © AP

Hiroshi Ono is professor of human resource management at Hitotsubashi University Business School. Kelsey J. O'Connor is researcher in the economics of well-being at STATEC Research, Luxembourg.

Demographic change, stagnant economic activity and a prolonged period of recovery put tremendous pressure on the Japanese people starting from the early 1990s.

As the decline in fertility accelerated, matched by the rapidly advancing aging of the population, Japan's traditional family-based system of support faltered. At the same time, opportunities for lifetime employment and its ensuing benefits decreased. How did the Japanese people cope with these adversities?

According to traditional economic thinking, stagnant economic activity should correspond with stagnating well-being. However, that was not the case. Our latest research, published in Oxford Economic Papers, shows that the so-called lost decades were actually a period of increasing well-being in Japan.

Government-provided support was effective in filling the void left by weakening family support and changing labor market conditions.

Starting in the 1990s, the Japanese government invested heavily in building a state-sponsored support system, including, for instance, generous subsidies for parental leave and improved access to child care and elderly care facilities.

Our research shows that these reforms correspond with improving satisfaction with life, especially among the targeted groups, namely young parents, women and the elderly.

This is important as life satisfaction reflects what individuals deem to be relevant to their quality of life, including both economic and noneconomic concerns such as employment, health, quality relationships and how they spend their time such as caring for the elderly or bringing up their children.

These findings also overcome common limitations in quantitative research because they are based on advanced decomposition techniques that account for important confounders, such as health, education, income, nuclear family composition, marital status and employment status.

The fact that life satisfaction improved after 1990 is not trivial: the improvement took place in a period when people from 10 other developed countries with comparable data experienced stagnating life satisfaction.

Moreover, it is worth recalling that Japan experienced rapid economic growth during the 1980s but no corresponding increase in life satisfaction over the same period. This result suggests that welfare state policies may positively affect life satisfaction more than income, economic activity or gross domestic product.

Additional studies support our conclusions. For instance, in 15 European countries, people reported higher life satisfaction when their countries increased social support expenditures over time. Generous unemployment insurance in Europe buffered individuals from the impact of the 2008-09 global financial crisis.

Although many of the studies are based in Europe, at least one study indicates that greater government support is associated with higher life assessments similar to life satisfaction in countries around the world, including Japan.

In this latter study, the importance of government support is similar to that of GDP and more important than taxes, which are not related to life evaluations at all. Collectively these studies, which are based on multiple contexts and analytical techniques, suggest government support positively affects people's lives.

This insight is quite remarkable. Few factors have lasting impacts on life satisfaction. For example, income losses, such as during recessions, correspond with a decrease in life satisfaction, but income growth over an extended period has no meaningful impact on average life satisfaction.

The distinction between gains and losses is partially due to individuals' tendency to adapt to and compare their circumstances keeping up with the Joneses.

There are, however, some positive examples. For instance, when income inequality declines or social capital improves, income growth is related to greater life satisfaction. In Japan's case, greater government support appears to be related to lasting increases in life satisfaction.

There are still challenges ahead. Our results suggest aggregate well-being increases when social support becomes more generous. If, on the other hand, increased spending for one group comes at the cost of another, this results in the reallocation of well-being.

In "Redistributing Happiness: How Social Policies Shape Life Satisfaction," authored by Hiroshi Ono and Kristen Schultz Lee, the authors discuss such a reallocation in the case of Scandinavian countries, where happiness is transferred from unmarried individuals to families.

The Japanese government has spent more on social support generally, and spending on the elderly is higher than the Organization for Economic Cooperation and Development average, owing largely to their aging population.

Women rest in a park in Tokyo on Nov. 2: Japan's spending on the elderly is higher than the OECD average.   © AP

Still, spending on families is still below the OECD average, as reported in the article "Young voters feel unrepresented by politicians in aging Japan" published online on Oct. 29, which suggests Japan prioritizes the old over the young. More support for families could further improve quality of life and may lift Japan out of low fertility, but this raises uncomfortable questions.

As highlighted previously by Charles Yuji Horioka and Reiko Kanda, the allocation of spending between children and the elderly is at the core of political discourse in Japan. Should the Japanese government spend more to support families at the cost of spending less on the elderly? This tension will not be resolved in the near future.

Japan's experience supports the view that whether or not economic growth improves well-being depends on certain conditions. In particular, the findings support the assertion of the often-cited Professor Richard Easterlin that a strong state-sponsored social safety net provides one of the conditions for improving people's well-being.

Francesco Sarracino, senior economist at STATEC Research, Luxembourg, contributed to this article.

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