Japan Badly Needs One New Year's Resolution

In a week when we learn that Toyota plans to suspend production at all 12 of its Japanese plants for 11 days over the next couple of months, news which follows hot on the tails of last week's report that industrial output shrank at the fastest pace since at least 1953 in November (16.2% y-o-y), with December's Purchasing Manager Index survey - described in JPMorgan's Global Report as the weakest performance registered by any of the 26 countries they track - showing only more and worse to of the same to come, we might like to ask ourselves whether 2009 is likely to hold anything in the way of good news in store for Japan?

Certainly at this point it doesn't look that way. Output and GDP are both falling at almost unprecedented rates, unemployment is set to rise, and that long "historic" recovery we were hearing so much about only a few short months ago now looks as if it belonged to another epoch. Even deflation may well start to raise its ugly head over the months to come, as "core-core" consumer price inflation brushes tantalizingly along the zero percent line.

And, of course, inflation isn't the only thing that's hitting zero in Japan at the moment, since the latest decision by the bank of Japan also took interest rates (0.1%) to a point where they are eerily poised yet again just above the bottom rung of the ladder.

But just why should Japan's economy prove to be so vulnerable to a global downturn? Well, you don't have to look too far to find the answer, it's called export dependence. If you are dependent on exports for your economic growth then you really don't have much choice (as China may also be finding out right now), as your customers go down, then down you go too.

But why is Japan so export dependent? Well here you will find explanations to suit every palate, but if I can just add my 5 cents worth, I would say that the fact that Japan's population currently has the highest median age on the planet is not simply an incidental correlate (nor is the fact that Germany has the second highest median age and is currently struggling with the same problem simply another incidental detail). So something needs to be done to slow down the rapid aging of the Japanese population, and as far as I know there are only two ways to do that, get fertility up, and open the doors to immigration.

In this context it is interesting to note that an 80-strong group of economically liberal politicians in the ruling Liberal Democratic Party (LDP), led by Hidenao Nakagawa, a former LDP secretary-general, are pushing for a change in immigration policy (full story in the Economist here). These venerable gentlemen are calling for the number of foreigners living and working in Japan to rise to 10m over the next half century, and for many of these immigrants to become naturalized Japanese. In addition the Keidanren, the association of large manufacturers, is also shifting position, and last autumn called for a more active immigration policy to bring in more highly skilled foreign workers. The Keidanren estimates the present number to be a mere 180,000. The Economist refers to these moves as bold, I would rather term them "baby steps" in the right direction, although we must wait to see what material outcome such pressures lead to, for good intentions have often been expressed in this regard in the past.

As for fertility, again there is a lot of debate about how to encourage people to have more children, and I am sure there is no easy answer here, but I can think of one thing which would help, and that is a change in the national mindset. You see, maybe it isn't true to say that countries like France, the United States and Sweden will have no problems with population aging, but they will certainly have a lot less than many others, since their underlying pyramids are much more stable. And you know what? Few people in these three countries would question the fact that having enough children to maintain national economic stability is important, while in the worst affected countries - Japan, Germany, Italy, Russia, China etc - we find precisely the opposite situation, with few people thinking of the fertility topic as an important one. Indeed many people in very low fertility countries attempt - often vociferously - to deny that long term demography has any economic significance at all. No wonder then, that people in these countries have less children! Perhaps this would be the best national new year's resolution for the Japanese to collectively make, to push the fertility issue higher up the list of national strategic priorities. Which puts me in mind of that old saying "where there's a will, there's a way". I can't think of a better example of a case where this maxim is just waiting to be applied.

By Edward Hugh

Edward is a macro economist, specializing in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows. He　is a regular contributor to a number of economics weblogs, including Global　Economy Matters and　Demography Matters.