Japan's lost decade is stretching into decades. It has been almost 20 years since the bursting of a mammoth property and stock bubble plunged the country into an economic deep freeze. Japan's leaders have been wandering in the wilderness ever since, unable to find a formula for growth to replace the model that was found wanting years ago.
The global recession has again exposed the structural weaknesses that plague Japan: overdependence on exports to drive economic growth, anemic domestic demand, inefficient enterprises and barriers to competition. It's no secret that the root of all of these problems is demographics. An aging population is shrinking Japan's labor force and consumer market. The country's working-age population (aged 15 and over) has declined 2% since 1999. Over the same period, the number of workers aged 65 and up expanded 19%, while the labor force of workers aged 25 to 34 shrank 9%.
To end its malaise, Japan needs to find the right mix of policies that enable younger workers and small businesses to become more productive, and that ensure consumers can consume. Those policies are not in place today. The country is a de facto gerontocracy that has failed to adapt to today's economic and demographic realities. Japan must redefine its goals and, at a deeper level, rewrite its social contract so that youth are better served.
The current contract was struck decades ago, when the country needed to rebuild its industrial capacity after World War II. The challenge then was to ensure producers could produce. Political and business leaders resorted to guaranteed job security and total employment as the primary forms of welfare, while workers were supposed to plug any gaps in the social safety net themselves with prodigious savings. Strategic industries were propped up to protect jobs. This system worked fine when earnings were plentiful during the postwar boom. But today the policies sap the strength of small- and medium-sized businesses, a major source of new jobs. At the same time, younger Japanese are crowded out of the workforce by graying incumbents in cradle-to-grave employment.
The government has taken some steps to fix this situation. Labor deregulation in the late 1990s allowed firms to cut costs and become more competitive by hiring temporary, part-time and irregular workers. This change has been, if anything, too successful. Part-timers and temps today make up a third of the labor force, and most of them are young. This group should be a wellspring of domestic demand. Young people starting out in life are usually prodigious consumers as they purchase cars, buy homes and raise children. But part-timers and temps are not eligible for company benefits and certainly not lifetime employment and because they frequently earn too little to contribute to public welfare funds, they are also ineligible for government benefits. Result? Without job security and financial resources, many Japanese of reproductive age can ill afford to start a family.
Moreover, as Japanese must rely on private savings as their biggest cushion when times are tough, they tend to save more than they would otherwise. Even workers eligible to receive government benefits cannot rely on the public pension system for adequate retirement funding. In short, this thin social safety net perpetuates the population decline and prevents private consumption from rising to offset the shrinking number of consumers. You can't expect the population and the economy to grow by guaranteeing survival to only the oldest workers and businesses while subjecting everyone else to market forces.
Policymakers have failed to match increased job insecurity with a corresponding expansion of social welfare. It's true that Japan's public debt is approaching 200% of GDP the highest among developed countries which limits the government's options. Still, the state must deepen the social safety net to better cover the underserved: young workers and families. This will help reverse the population decline, rebalance growth toward domestic demand and remove the need to mitigate unemployment by propping up inefficient companies and farms. Japanese citizens will have to make sacrifices they may have to pay more taxes, for example. But neglecting the demographic problem will only prolong stagnation and risks relegating Japan to has-been status among economic powers.
The lost decade is stretching on and on partly because of the government's tardy policy responses and half-hearted measures. Why delay? After all, Japan is not getting any younger.
Pineda covers markets, monetary policy and Asia as an analyst for RGE Monitor