Millennials in Tokyo: Japan is seeking your leadership.
"Japan waits for a new generation." This is the caption I used for my Op-Ed contribution to the Financial Times on September 23, 2003. In the article, I pointed out the political and economic problems facing Japan at the time. And I stated that a new generation must emerge to bring about change to break through the stagnation.
However, 20 years have passed since then. Although there is a different government, I feel that little else has changed. Or perhaps it has even worsened in terms of politics and economy.
Politics for the sake of factions and bureaucrat-led policies continue to prevail. In terms of the Japanese economy, some of the problems of the early 2000s have improved, but overall, the current situation is almost the same. Once again, I would say that "Japan waits for a new generation."
Morgan Stanley's China Report
Just as I was thinking this, Morgan Stanley released a report that concerns the Chinese economy. It pointed out the same three D's that Japan has experienced: debt, demography, and deflation. Here is what the report said.
First, Chinese debt expanded to 300% of gross domestic product (GDP) in the first quarter of 2023. That is up from 270% of GDP in the fourth quarter of 2019.
Second, the aging of the population is such that by 2035, those over 60 years old are expected to make up one-third of China's total population.
Third, it points out that deflationary pressures are spreading throughout the country. According to the report, this is a result of significant forces to reduce debt in the real estate sector and local governments.
In China, the same thing seems to be happening as when Japan's bubble economy burst in the early 1990s. However, Morgan Stanley analysts believe that China's problems will not be as disruptive as Japan's bubble period. On this they cite (1) asset prices have not risen as much as they did during Japan's bubble and (2) real GDP growth in China has been higher than real interest rates.
The report's suggestion that China's problems will not cause as much turmoil as Japan's bubble period took me back three decades.
The 5Ds Ending Japan's Bubble
From the late 1990s to the early 2000s, Japan's economy was facing serious problems related to the 5Ds: debt, deflation, default, demography, and deregulation. Structural reforms were required to address them.
It was 1999 when David Asher and Andrew Smithers compiled a report on 5D challenges facing Japan. With these 5Ds introduced, I hoped that the movement toward structural change would accelerate. However, due in part to Japan's signature policy of procrastination, the Japanese economy is still suffering from these 5D's.
Although the number of corporate bankruptcies is not as high as it was after the burst of the bubble economy, the level of national debt is still high. Moreover, a declaration of the end of deflation has yet to be made. Meanwhile, demography, in particular, is becoming an increasingly serious issue.
Aging Japan
Japan became an aging society in 1970 when over 7% of the population was over 65 years old. 24 years later, it became an aged society with over 14% of the population. According to the United Nations definition, a society in which more than 20% of the population is aged 65 or older is called a "super-aged society."
As of September 2023, Japan's elderly ratio was as high as 29.1% and is projected to reach 34.8% by 2040. Considering that the future is predicted by the population pyramid, Japan's current demographic problems should have been predicted a long time ago.
Measures have been taken by the government to address the aging issue, such as inducing workers to extend their post-retirement employment. Now the percentage of the working population over the age of 65 in Japan exceeds 13%. That is one of the highest among developed countries. Whether this is a good thing for Japan or not is a matter of debate.
Disposable Income is the New 'D'
There is another "D" problem progressing in Japan today. That is the decline in disposable income. According to The Sankei Shimbun in an article dated October 24, 2023, compensation for employees has increased since 2013, when Abenomics began. Meanwhile, disposable income has recorded a sharp decline since 2021. That is due to the consumption tax hike and increased social insurance premium burden.
Disposable income recorded a moderate increase until 2019, a sharp one in 2020, and then a sharp decline. The disposable income rise in 2020 was due to the provision of special COVID-19-related benefits. Given the unusual increase in savings in the same year, it is reasonable to assume that much of the benefit payments went to savings.
After 2021, compensation for employees continued to increase in nominal terms. However, disposable income continued to decline. Furthermore, price hikes were compounding this trend, causing consumption to fall sharply. As a consequence, declining consumption has caused a decline in Japan's economic strength.
Recurrence of Negative GDPp
Japan's GDP growth cooled to an annualized -2.1% in the July-September period of 2023, This was caused mainly by declines in consumption and capital investment. IMF's economic forecast for FY2023 predicts that Japan's nominal GDP will be overtaken by Germany's in dollar terms and it will fall to the fourth place globally.
As consumption cools down, the proportion of declining disposable income going to food is, by any measure, rising sharply in Japan. This is reflected in the Engel's coefficient. In Japan, the ratio of money spent on food to household expenses is one of the highest among major countries, along with Italy.
According to some analysts, an increase in Engel's coefficient means a decline in the standard of living. For January-August 2023, the average Engel's coefficient was 26.2%. That was a 40-year high, following 26.5% in 1983. In this case, the recent large increase in Engel's coefficient in Japan is not due to an increase in consumption. Rather, it is due to the soaring food prices.
Had the Japanese government taken action earlier, the current economic situation would not be as severe. During the economic recession of 20 years ago, the negative effects of the various 5D problems could have been contained. Instead, now they include declining consumption, the 6th D.
In Search of Leadership
What will it take to restore Japan's economic strength and improve the quality of life of its people? First, there is a need for leaders in political and economic circles who can confront and immediately resolve problems, rather than procrastinate.
After all, it is necessary to break away from the old faction-oriented political system. Instead, we need to build one that stimulates people-oriented economic activities.
To this end, it is hoped that the new generations, Millennials and Generation Z, would head to the voting booths. Japan needs its younger generations to take an interest in politics.
We look forward to new leaders with strong leadership skills emerging from those generations. But for now, we are still waiting for a sign of hope.
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Author: Yoshifumi Fukuzawa
With the exception of the Covid-19 disaster and the war, some of today's economic phenomena were predictable, the root cause of which is demography. In other words, the current situation in Japan is the result of hesitant decision-making. Japan can no longer procrastinate its problems, and the next Japanese leaders must not hesitate to make a decision.