The Japanese economy?

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1 The Japanese economy? Franz Waldenberger Japan Center and Munich School of Management --University Munich LMU 1

2 Outline 2 1. GDP economic recovery 2. GDP per head two lost decades 3. Employment more flexibility 4. Deflation no end in sight 5. Rich country poor government 6. Old, but genki population 7. Increasing income disparities 8. Japan not as international as you think 9. Conclusion

3 1. GDP economic recovery Real GDP growth 1998 to 2011 OECD economic outlook, Nov

4 2. GDP per head two lost decades Relative position in GDP per head 1950 to Japan Germany US

5 3. Employment more flexibility Unemployment jumped up from 4% in 2008 to 5.6% in 2010, but it is still low in international comparison. However, the share of longterm unemployment is high (33.3), despite low and short unemployment benefits. Irregular forms of employment (part-time, temporary, etc.) make up for more 1/3 of total employment. Employment protection regulation is less strict than in continental Europe and has been further loosened. Minimum wages are relatively low. Labour costs proved to be flexible during economic downturns. The burden of taxes and social contributions on wage income is moderate. 5

6 4. Deflation no end in sight Consumer prices started to decline again in Nominal interest rates remain very low less than 2.0 on government bonds! Relieving fiscal debt services. The banking sector is suffering from low profitability (especially regional banks), mainly due to low interest margins. A solution would require higher nominal interest rates and fewer banks! 6

7 5. Rich country poor government Japan continues to have the largest amount of net foreign assets world wide (2,500 billion USD in 2008). On the other hand, the Japanese government is burdened with high debt (gross debt about 200% of GDP, net debt 100% of GDP). However, interest payments are very low (1.1% of GDP), and almost all government debt is held by Japanese investors. The tax burden is still relatively low. There is room for consolidation, however, Japanese politicians do not seem to be serious about fiscal consolidation. 7

8 6. Old, but genki population Rapid ageing: In 2050, 40% of the population will be 65 and older. As a result of ageing, household savings dropped from 10% in the late 1990 s to below 3% in recent years. To secure the viability of the pension system, the retirement age is being lifted, benefits are being reduced, contributions are being raised. In addition, the government is pouring more tax money into the system. The impact on employment is limited due to the high employment rate of elderly in Japan even beyond the age of 65. To compensate the reduction in employment due to ageing, productivity will have to grow by 0.3% annually to maintain the level of GDP per head. 8

9 7. Increasing income disparities Household income in Japan is slightly less equally distributed than in other OECD countries. Little change over the last 10 years when measured by the Giny coefficient. The poverty rate (share of households with income less than half the median income) is relatively high (15%) and has markedly risen over the last decade. The poverty gap (difference between average income of poor to median income) is rather small. There is little redistribution of income by the government. 9

10 8. Japan - not as international as you think China has become Japan s most important trading partner in recent years surpassing the US. Export and import shares are comparatively low (recently around 15% of GDP). The same holds true for inward and outward FDI stocks (4% and 14% of GDP respectively). Japan s low degree of internationalisation remains a puzzle. It cannot be explained in terms of tariff or non-tariff barriers or product market regulation. 10

11 9. Conclusion Japan continues to fall behind in GDP per head. It needs to redirect private savings from the public to the private sector through consolidation of fiscal deficits. More investments are needed in education and training. The economy needs to further internationalize in terms of trade and FDI. Demographic change requires mid-term adjustments, but longer life and reduced population density should result in net welfare gains. 11

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