Assuming we take the simple, but commonly accepted, definition of recession as two consecutive quarters of negative real GDP growth as our measure–and there’s no real reason not to, I think–Japan slipped back into recession during its last fiscal quarter. The reason: in Groundhog Day-like fashion, the Tokyo government tightened fiscal policy prematurely earlier in the year, producing the same negative result for the third time in recent memory.
–the Japan experience is the reason Janet Yellen is so wishy-washy about raising interest rates in the US
–in a certain sense, technical recession isn’t as bad a thing for Japan as it wold be for, say, the US or China.
GDP growth comes from two sources: having more people working, or having existing workers perform their jobs more efficiently. Unlike the view (often) expressed by one of my Depression-era former bosses, productivity increases don’t come from imposing sweat shop working conditions. They come from investment in education, training and productivity-enhancing equipment.
In Japan’s case, the domestic working population peaked around 1995 and has been falling by about 0.5% per year since. One obvious solution to this problem would be to allow foreign workers to immigrate. But, although there has been some slight movement lately, Japan’s borders remain rigidly closed to outsiders.
Productivity? From 1950 – 19980, Japan was a productivity wonder. However, Japan has struggled to keep up with the more intensive pace of change since then. Why? I think the rigidly hierarchical nature of company social interaction in traditional Japanese companies stifles the voice of innovation from younger employees.
Let’s say, though, that somehow Japan achieves productivity increases of +1% annually despite the “no comments; just follow orders” attitude of top managements. I think that’s too much, but let’s go with it. If so, the overall economy needs half that figure to overcome the decline in the workforce. Real GDP growth has a trend ceiling of +0.5%.
So, the maximum sustainable rate of GDP expansion in Japan is barely north of zero. It shouldn’t be surprising, then, if that figure spends considerable time south of breakeven. As long as the numbers don’t get too negative, Japan will continue to stumble along on its journey to economic insignificance.
–what makes Japan important, interesting …and scary for the US and the EU is that we’re seeing a possible future for us in the Japan of today.
More on this tomorrow.