The Japanese conservative party which was ousted just three years ago for the first time in modern Japanese history, is about to comfortably win the recently called. This http://www.guardian.co.uk/world/2012/dec/14/japan-conservatives-election-ldp-shinzo-abe” target=”_blank”>Guardian article indicates that the primary impetus is softness towards China in the recent Senkaku border dispute. Continue reading
The IMF in its annual Article IV review of Japan (main report & background studies) “Mild deflation for over a decade has contributed to lower private investment and consumption by sustaining high real interest rates and raising real levels of debt. In addition, deflation has reduced tax revenue, and made it more difficult to contain real spending, which led to a rise in public debt-to-GDP. An exit from deflation is therefore essential to support the recovery and to facilitate fiscal consolidation.” Continue reading
Japan’s current pension system needs to be reformed to make it more sustainable as Japan’s population continues to age: “Its life expectancy has increased over time to 83 years which is the highest in the world today.” Japan’s population ageing and low fertility rates are working in conjunction to raise the nation’s old-age dependency ratio, which is the ration of how many retirement age people there are to how participants in the labor force. Japan’s uses a pay-as-you-go pension system that is putting a higher burden on today’s working generation because the have to support a higher ratio of retirees. The old-age dependency ratio “is expected to rise from 38 percent in 2010 to 57 percent in 2030.” Continue reading
In the upcoming Japanese election, the Liberal Democratic Party is poised to win with Shinzo Abe as the party leader. In Morgan Stanley’s analysis of the effects of different coalitions on Japanese policy and the Japanese economy, they consider two scenarios. 1) A big government coalition with the DPJ, or 2) a small-government coalition with the new “Third Force” parties.
In a news article today by Japan Today, Abe has announced that a coalition with the DPJ will not be considered. This leaves only scenario 2 from Morgan Stanley’s analysis, which has important implications on monetary policy for Japan moving forward. Scenario two calls for aggressive structural reform, in addition to aggressive BoJ action.In addition, unlike scenario 1 Abe wants to keep fiscal spending low and push aggregate supply outward through lowering corporate taxes and reducing business costs.
The result would likely be modest positive inflation, but much extra real growth.
Abe calls for unlimited monetary policy until the inflation target of 2% is hit. In the process, the Yen will weaken which will help make Japanese exports more appealing in the short term.
The end of WWII brought to Japan half a decade of high fertility that facilitated population growth from 78 million in 1947 to its current population of 127 million. With this growth came a high percentage of working age population which gifted Japan with a large labor force providing an economically ideal climate of high savings rate and a low population of dependents.
However fertility rates have been low since the mid 1950s and the population is beginning its long awaited decrease. Furthermore the fall of the total population will have negative implications for the labor force, the savings rate, and tax policy in Japan. With these changes will come changes in consumption and an effect on Japan’s net exports.
In 2012 the first round of baby boomer turn 65. In Japan 65 is the age most workers retire and the effect will be a loss of 2 million workers over the next 3 years. The surge in retirees has implications on both the labor force and the proportion of retirees to the labor force. The increased proportion of retirees will have a negative effect on the savings rate and decrease the tax base which both lowers Government revenue and increases taxes. Finally, consumption changes that are associated with older age demographics will hurt Japanese exports as more of the labor force will focus on service oriented jobs as medical expenditures go up.
Unfortunately this is not a temporary predicament as Japenese fertility has not been at a sustainable level since 1955. Japan will continue to see a shrinking working population as far out as 2050 unless fertility improves (estimates have Japan’s population at below 100 million by 2050). As Japan’s population continues to fall the problems mentioned above will only exacerbate debt. To effectively counterbalance the loss in labor supply and a smaller savings rate Japan will eventually have to increase taxes to a level that is at or above the level of of government expenditure.
New yen headache hits Honda Accord in U.S.: Ohio factory to do double duty for export units
Hans Greimel, [link:] Automotive News — December 3, 2012 – 12:01 am ET
So … the yen’s strength will mean fewer exports from Japan and more from the US. This surely affects suppliers, too: Honda closing capacity has a multiplier effect inside Japan.
Through the recent spillover reports, an important thing to take note of is the interdependence of China and Japan. They have a trading relationship of $340 billion/year. Japan is China’s largest investor and China is both Japan’s largest trading partner and financier.
Especially with the latest political dispute between Japan and China (senkaku/diaoyu islands), their relationship is becoming increasingly strained. Major Japanese companies like Toyota and Japanese Airlines have been hit hard in recent months and there is little sign that the dispute will be ending soon. S&P was recently quoted as saying that if it continues to worsen, “it may hurt Japan’s macro economy and affect the credit quality of rated Japanese companies on a large scale”.
This great interdependence would also leave Japan among the most vulnerable if another type of shock were to hit China. Although a low probability, China does show indicators of a real estate bubble. Would these types of shocks affect Japan in a similar way? If China’s shock was more economical than political, it would still be difficult for Japanese companies like Toyota and Japanese Airlines to grow in the China market. I suppose in the political situation, Japan could look to other areas of Asia to grow, but from the economic shock standpoint, a larger portion of the developing asian economy would be hit and would cause other parts of the world economy to be affected like commodity prices (metals) that are important in Japanese manufacturing.
So in reference to a discussion Hank, Professor Smitka and myself almost got into two classes ago I wanted to bring up the idea of economic growth in relation to technology. What Hank and I were questioning in class was more or less the role of technology in increasing Economic Growth. The failure of this position is determining how much technology really improves productivity thus increasing economic growth. This position has been bothering me since then. And I’ve been really driven crazy over it to the point of looking stuff up about it in class (to which I apologize professor). However, one of the latest Noahpinion posts really struck a cord with me. The post, entitled “Murphy’s Law? or, Follies of a Finite Physicist” is a must read. [continue reading] Continue reading