Japan’s lost decade between 1989 and 2000 was due to deep-seated demographic changes as well as economic policy, according to Reiko Aoki of Hitosubashi University.
Aoki shows that:
Fertility rates dropped steadily from 4.5 in 1947 to 1.57 in 1990 and finally to 1.39 in 2010. This drop is significant because it is below the replacement rate, meaning that two parents were producing less than two children, meaning fewer children than parents.
Life expectancy grew to 79.7 years for mean and 86.4 for women in 2010, from 50.1 for mean and 54.0 years for women in 1947. Fewer children and longer life expectancy meant older people began to take up a larger share of the population, thus increasing government pension burdens.
Pension payments did not adjust to reflect real price levels, putting more pressure on government spending. While Japan experienced deflation, the government failed to downwardly adjust pension payments. Such adjustments would have been politically disastrous, particularly as the elder generation grew as an electoral base. As a result, pension burdens became more onerous and crowded out government spending on more productive areas of the economy.
Japan lost its labor advantage through competition, weak investment and fewer workers. China emerged as a major electronics and automobile manufacturer, outcompeting Japan on labor cost terms. Combined with a stronger yen, a tougher export outlook and fewer available workers, Japanese businesses cut back, abolishing lifetime work practices and reducing investment in human capital.
Lack of support for new, high-tech industries. Rigid labour laws impeding the shift of workers from old to new industries, plus a lack of research support in the Japanese education system, have stopped Japan from developing higher-value-added industries, such as life sciences and renewable energy.
Aoki’s reading of the lost decade lays out some of the very serious challenges currently facing Shinzo Abe as he attempts to resuscitate the economy through his Abenomics policy program.
Three years in, the new administration has made some progress, it is deregulating some industries, encouraging more female participation in labour markets, loosening controls on foreign workers and trying to channel capital into new start-ups.
That said, the economy requires sustained reform and Abe cannot ‘kick the can down the road’ as he only has a narrow window of opportunity since, as we have argued elsewhere, continued pressure from an increasingly aged society, which may become more politically conservative, could seriously impede his ability to pass reforms in the future.