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The decades Japan spent experimenting with massive government borrowing and spending offer the world a cautionary tale.   © Illustration by Chuan Ming Ong
The Big Story

The money pushers: The world is embracing Japan-style economics

While central bankers watch for inflation, the real danger in many countries may be stagnation

MITSURU OBE, Nikkei Staff Writer | Japan

TOKYO -- Until a few days ago, Tokyo had been in the grip of a state of emergency. Throughout the period of restrictions, as always, cavernous wholesale supermarket Gyomu Super in downtown Tokyo bristled with people: Young men pile bulk frozen potatoes into their shopping carts, a bargain at 195 yen ($1.80). Frail seniors scoop up single serves of Chinese noodles or fermented natto beans at 20 cents apiece.

Illuminated by fluorescent light, splashed across the building's unlovely exterior, is the hopeful sign: "Ordinary customers welcome."

"I have to keep my living expenses under control," said Taiki Arai, a 24-year-old student, pausing on his way out of the store. "Since the COVID outbreak, I have no part-time job to supplement my income." A 52-year-old housewife, bags groaning with cheese, fresh cream, eggs and flour, complained that food has become expensive recently. Minoru Kitaguchi, a 75-year-old retiree, said he has no immediate financial issues as he withdrew a large wallet from his bag, but added, "I am a pensioner. I don't want to waste money."

Gyomu Super opened its first store in 2000, after the burst of a property bubble in 1990 was chased by a banking crisis in 1998. As the economy slumped, Gyomu rose, its low prices irresistible to the newly created class of have-nots of Japan's first "lost decade." It eventually entered the restaurant business with all-you-can-eat and Korean barbecue eateries. Kobe Bussan Co., Gyomu Super's owner, saw its share price rise a staggering 40 times between 2012 and 2020, during the Shinzo Abe administration.

Around the same time that Gyomu Super opened its doors to people on ever-smaller budgets, Japan's government launched an audacious monetary policy experiment in an effort to reflate its dented economy. Japan became the birthplace of zero-interest rates, introduced in 1999, and of quantitative easing, launched in 2001 -- both radical ideas at the time.

Twenty years later both policies have become standard central bank practice around the world, first with the global financial crisis, and now in an effort to defray the economic cost of the pandemic. But in Japan, two decades of "magic money" -- as this combination of policies was dubbed last year by the journal Foreign Affairs -- has brought stagnation.

Massive asset purchases by the central bank were supposed to stoke inflation by enabling the government to increase its spending, allowing demand to outstrip supply. Likewise, zero interest rates were supposed to stimulate corporate investment and drive the economy into overheating conditions.

Gyomu Super's stock grew fortyfold during the period when Abenomics created millions of part-time and other insecure jobs. (Photo courtesy of Kobe Bussan)

But while Japan's public debt as a share of gross domestic product now exceeds 260%, the highest among major economies, there is little to show for it. After nearly 30 years of aggressive fiscal spending and monetary policy support, the economy remains mired in low growth and weak inflation, with productivity remaining stubbornly sluggish and wages failing to rise.

Today 15.7% of the Japanese population lives in relative poverty, the second-highest level among Group of Seven nations after the United States.

Meanwhile, economists argue about why. Some take this as an indicator that governments can continue to spend without worrying about inflation. Others argue that failure to inflate the economy for any real length of time exposes a neglect of Japan's structural problems, such as population decline and labor shortages, which are only getting worse.

As the world emerges from COVID-19 era economic stimulus measures, Japan's experience looms large. Last year, total debt worldwide surged by 35 percentage points to over 355% of global GDP according to the Institute of International Finance, driven by governments borrowing to get their slumping economies through the pandemic. Now, central bankers around the globe are fretting about inflation, stoked by stimulus spending, rising commodity prices and consumer demand. However, in Japan, which has more experience with stimulus policies than any other country in the world, inflation is the furthest thing from anyone's mind. Instead, people have other concerns: low wages, low pensions, and low economic growth with few opportunities.

"Inflation expectations are not rising in Japan because wages are not rising," says Yosuke Yasui, a senior economist at Japan Research Institute and former Bank of Japan official. Wage increases depend on productivity, which in turn depend on human capital investment, he said: "The biggest problem for Japan is that it hasn't created enough quality jobs or stable positions that provide workers with new skills and wage increases."

The extended period of low interest rates, meanwhile, has made it difficult to build pensions, which depend on investment in government bonds. Retirement pay at Japanese corporations has been on the decline for the past two decades.

This has major ramifications for an economy like Japan's, which depends on the elderly to drive consumption -- not on young married couples buying houses and furniture. People age 60 and older account for half of Japan's household consumption.

More elderly Japanese deal with the growing uncertainty by staying in the workforce. Former bearings company employee Kiyoshi Kosuge is one of them.

Kiyoshi Kosuge, a financially comfortable 72-year-old who works part-time at a hydrogen refueling station, wonders why the government cannot live within its means. (Photo courtesy of Koureisha)

The comfortably-off 72-year-old, now a part-time attendant at a hydrogen refueling station, says his motto is to live within his means. He looks at ballooning public debt and wonders why the government cannot do the same.

"A hermit crab chooses a shell that is right for its size," he said.

Widening gap

While Japan's government has been dizzyingly profligate, the private sector is increasingly stingy. That is the essence of the problem Japan's government faces, and it has frustrated multiple prime ministers -- most recently Shinzo Abe, who retired in 2020. "My government will ... use every policy tool at its disposal to grow the country out of deflation," he vowed in front of parliament in 2017.

"Abenomics," launched in 2012, was a pro-business economic policy. It aimed to reverse Japan's deflationary trend with a three-pronged program: a big boost in government spending, massive debt purchases by the central bank, and pro-business initiatives like corporate tax cuts and free trade.

Between 2012 and 2020, under Abe's tenure, nearly 5 million jobs were created, pushing down the jobless rate to as low as 2.2% in 2019 -- a 27-year low. But three-quarters of these jobs are nonregular: short-term, easily expendable and outside the scope of training programs that are available to regular employees. Nonregular workers are vulnerable to recession and COVID-19. Their income is typically about 40% of regular employees.

"My government will use every policy tool at its disposal to grow the country out of deflation," former Prime Minister Shinzo Abe pledged in 2017. (Photo by Hideyuki Miura)

The legacy of Abenomics is a widening gap that continues to dog the labor market, between well-off office workers and insecure part-timers. Removing this gap has been a key policy target for years, but there has been little progress. If anything, it became more entrenched under Abenomics.

Yuko Honda, a single mother and job seeker in Tokyo, is one of those caught on the wrong side of this divide.

The 45-year-old lives with her daughter on welfare support of about $1,300 to $1,400 per month. One-off benefits of $450 have been provided by the government this year and last to help out low-income families with children amid the coronavirus pandemic. She has taken up a free web design course to retrain and get a job.

She dreams of moving to an apartment with a bathroom sink and a slightly larger kitchen. But she does not have a starry-eyed view about her future and keeps her spending tightly under control.

She needs to start with piecework jobs, but getting the first contract will be a big hurdle, she said.

"It was a completely new field. The textbook is full of words that I didn't understand. I had to look them up first," Honda said. As she tried to complete the online course, she also discovered that even a contract job is hard to land because of her lack of experience.

Yuko Honda, a single mother in Tokyo, is taking a free web design course with the hope of picking up skills that can land her a job. (Photo courtesy of Yuko Honda)

The government faces a challenge in that it must find a way to retrain 20 million nonregular workers and 2 million unemployed. As its debt mounts, though, the government finds itself with less fiscal and monetary maneuverability. Prime Minister Yoshihide Suga, who came into office in September, has belatedly started addressing the issue, but economists expect the share of nonregulars in the labor force to eventually top 50%.

Honda, one of the few with the drive to try, faces mounting odds. Employers tend to focus their investment on the most talented employees, a practice experts call "cream skimming." It makes sense for an individual company, but for the economy as a whole could result in underinvestment in human capital.

"If the private sector doesn't spend, the government has to spend instead"

Kozo Yamamoto, the architect of Abenomics

The crucial problem with Abenomics is that the private sector never chose to copy the government's free-spending ways. Instead, over Abe's tenure, the corporate sector increased its savings by 56% to a record $4.4 trillion by the year ended March 2020. The amount is equivalent to 26% of total assets, according to data from the Ministry of Finance.

During the same period, employee compensation expanded at 2% a year on average, but when inflation and tax increases are taken into account, wage growth averaged less than 1%.

"If the private sector doesn't spend, the government has to spend instead," says Kozo Yamamoto, a lower house member of the ruling Liberal Democratic Party and the architect of Abenomics. "The private sector is stuck in a deflationary mindset. That's why they don't make investment."

Quality versus quantity

Japan's failure to generate sustained growth can be traced back to some clear causes. Fiscal programs are typically geared toward projects that can show quick results, such as public works construction. In the early 1990s after the property bubble burst, the overwhelming concern of policymakers was how to even out Japan's increasingly ragged economic performance.

Criticism within the ruling LDP has been muted. Quick results are also a political necessity, as politicians are subjected to elections and opinion polls. If support is given, it usually goes to employers rather than to workers on the view that employers would do a better job of raising productivity than workers themselves. The prevailing view has been that, if you give money to people, they will use it for something unproductive -- a pessimistic view of human nature.

Small and medium-size enterprises are also left behind in productivity and digitization, and the training infrastructure for individual workers left stunted, even though SMEs make up 99% of the nation's corporations, 70% of employment and 50% of added value, according to the Ministry of Economy, Trade and Industry.

Advocates of fiscal spending "tend to focus on the size, rather than the quality, of spending," said Motohiro Sato, a professor of economics at Hitotsubashi University and a member of the Fiscal System Council, an advisory body to the finance minister.

"Fiscal and monetary support is difficult to withdraw once provided, and tends to stay," Sato added.

The cost of spending is not noticeable because interest rates are kept low by the central bank. As a result, "people become inured to the debt and allow it to grow. It becomes very difficult to inject a sense of crisis."

There is concern that the West might be following Japan into a sinkhole of low growth, deflation and public debt. (Photo by Ken Kobayashi)

Last October, Dai-ichi Life Insurance, a top manager of Japanese corporate pension funds, announced it would reduce the return rate it has promised for corporate pension policies to 0.25% from 1.25%. The first reduction in 19 years, it will affect pension policies for some 3,000 companies.

The move has sparked a backlash, but it was made necessary by the economic reality: The 10-year bond yield in Japan, which stood at 0.7% before Abenomics, dropped to as low as -0.3% in 2016, following the introduction of a negative interest rate, before the BOJ adjusted its policy to anchor the yield around zero the same year.

Takahiro Tsuna, who was a manager at Dai-ichi Life's investment planning department when Nikkei Asia spoke to him, explains how difficult it has become to earn yields since central banks around the world launched asset purchase programs last year. "The central bank buys not just bonds but equities," he said. "The prices are all going up" -- and yields are going down.

Before the coronavirus crisis, Japanese insurance companies were able to count on foreign government bonds for yields. With central banks launching asset purchase programs around the world last year, there are now few traditional assets that produce decent returns. Partly reflecting the dearth of attractive policies, sales of new insurance policies at Dai-ichi dropped around 30% in the year ended March.

Kidsdoor, a support group for low-income families, argues that government spending has been misdirected. The group runs free online programming courses for single parents and has helped 128 people, including Honda, the single mother, out of some 1,800 applicants.

But Yumiko Watanabe, Kidsdoor chief, acknowledges that her activity is a drop in the bucket, given the 15.7% of the Japanese population living in relative poverty. "Such training should have been provided by the government," she laments. "The number of people in the working-age population is shrinking. We need to invest more in these people so they can produce more. But there is no such investment."

Publicly funded training programs do exist, but such support is not widely used by part-timers or the unemployed. Being on their own, they often lack access to critical information. Experts say government policy is too focused on keeping regular employees on the job and not enough on helping out the growing ranks of nonregulars or promoting job mobility to make the economy more dynamic.

"We need to invest more in [working age] people so they can produce more. But there is no such investment"

Yumiko Watanabe, Kidsdoor chief

Honda said she appreciates the support from Kidsdoor. A three-month Web design course could cost more than $700. "I wouldn't have the courage to do it without financial support," she said.

Kidsdoor's Watanabe underlines the challenge of making these people employable.

Many single parents who come to Kidsdoor "have never received any investment from anyone," she said. "They don't believe they are worthy of any investment. I have to convince them that they are."

Long-term consequences

Abenomics did achieve slightly faster economic growth, until the coronavirus pandemic wiped out much of the gains. Between 2010 and 2019, the economy grew at a pace of 0.9%, compared with 0.6% for 2000-2010. Deflation, price declines of two straight years or longer, has not struck since 2013, though inflation has never risen above 1% on a sustained basis. In an economic outlook report released on April 27 2021, the BOJ acknowledged that it will not be able to achieve the 2% inflation goal while current Gov. Haruhiko Kuroda, an Abe appointee, is in office through April 2023.

Bank of Japan Gov. Haruhiko Kuroda, whose tenure is up in less than two years, isn't expected to achieve the 2% inflation goal he set in 2013.

Abenomics architect Yamamoto, on the other hand, sees demand deficiency as the key culprit for deflation and low growth. If demand, or output level, falls below the capacity, the government needs to fill the gap.

"The coronavirus crisis has shown that the government is the only entity that can be counted on to undergird the economy," he said.

If there are people who are upset about large government spending during the coronavirus crisis, "they don't understand macroeconomics," he argued.

Yamamoto was instrumental in bringing about a government-BOJ accord in 2013 that committed the central bank to a 2% inflation target, paving the way for aggressive monetary easing under Kuroda later that year.

Under Kuroda's watch, the BOJ's ownership of government debt swelled to 45% by the end of 2020 from 12% in 2013, when Abenomics started.

"Everyone is happy in the short term when fiscal and monetary measures are taken," said Toru Suehiro, a senior economist at Daiwa Securities. "Growth spurts. Asset prices rise. There are long-term consequences, but they are not so visible."

"People would have complained more" if their lives are more directly impacted by the long-term harm, he said. There are policy issues that have aroused strong public reaction in Japan, such as COVID-19 measures. Fiscal and monetary policy has not.

The beginning of "Japanification?"

Low growth, low inflation and rising debt are a problem no longer limited to Japan. Neighboring South Korea faces structural headwinds similar to Japan's -- a low birthrate and aging population. Last year, the country's birthrate fell to 0.84, despite efforts to reverse the trend since the early 2000s under then-President Roh Moo-hyun.

South Korea's growth rate has fallen from above 4% during the 2000s to 2% to 3% in the 2010s, with consumer inflation hovering around 0.5% or less by 2019-2020.

The country is still an export powerhouse, but it is plagued by youth unemployment. In an effort to achieve domestic demand-led growth, the government of President Moon Jae-in has raised minimum wages by more than 10% for two straight years. But without corresponding improvements in productivity, the measure has led to a drop in employment, especially at small businesses.

Hidehiko Mukoyama, South Korea analyst at the Japan Research Institute, says that "what South Korea needs most is more quality jobs, especially for young people."

For now, Japan remains an outlier, especially in Asia. "Japanification is an issue more for advanced economies at the moment," said Hideo Hayakawa, a former executive director at the BOJ. "There are few developing economies that have experienced a significant decline in potential growth rates."

But the U.S. and the eurozone have sharply increased government debt with the help of central bank financing, making some worry that the West may be following in Japan's footsteps. Inflation has also been following a downtrend in advanced economies, although this year has seen a spike due partly to bottlenecks in supply chains.

In developing Asia, government deficits as a share of GDP nearly doubled to 9.8% in 2020 from 5% in 2019, while government debt jumped 9 percentage points to 65% of GDP, data from the Asian Development Bank shows.

Some say companies like Kobe Bussan are exacerbating deflation in Japan. Company officials disagree, saying they are helping people to economize so they can use the money for something else, such as travel or children's education.

They say they are trying to address people's concerns. A person familiar with the industry said: "You don't know whether you can receive a pension. In fact, the qualifying age is on the rise. People feel that they need to prepare for the future from now."

Kosuge, the retiree, says he does not indulge in any expensive hobbies, except smoking half a pack of cigarettes a day. He dines out occasionally but never consumes alcohol. Instead of buying new clothes or shoes frequently, he says he buys good ones and uses them for a long time. Having paid off the mortgage for his apartment and with his daughter already married off, Kosuge says he can support his wife and himself with his monthly pension of about $2,000.

Kosuge is not too worried about his own personal finances now. But he does not picture a bright future for his country, as the government keeps piling up debt. "The growing debt will eventually catch up with us," he said. "Tax rates will go up," he predicts, pointing to U.S. President Joe Biden's proposal to raise the corporate tax rate. "My worry is that the value-added tax might go as high as 20%" from the current 10%.

Kosuge got his job at the hydrogen refueling station from Koureisha, a staffing agency specializing in job placement for the elderly.

The Tokyo-based company has some 1,100 job-seekers on its roster. Their average age is 70, and many used to work at large corporations, such as Tokyo Gas and Panasonic. About 350 of them have actually landed employment, typically part-time.

Elderly contract workers earn only slightly above the minimum wage, unless they have very special skills, says Koureisha President Fumio Murazeki. "You need skills to get a job," he said.

Murazeki believes demand for elderly part-time workers is going to increase. "Companies want to adjust labor to changes in demand," he said. "The need for temporary workers is going to grow."

Increases in nonregular employment have raised more and more concerns about Japan's two-track labor market. The most recent growth strategy unveiled by Suga expands public training programs to anybody, not just people who are eligible for unemployment benefits. But it remains to be seen how much of an impact this will have.

Murazeki is a former Tokyo Gas executive who harbors concerns about his future and wants to continue working as much as possible, believing, he said, that "you have only yourself to count on."

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