Published in Newsweek Japan 2/10/2019
Change happens, like it or not. Some change is negative, such as the unnecessary hike in the consumption tax. Some change has both merits and demerits, such as the replacement of cash by electronic money – quick and convenient, but at what cost to privacy?
And some change is hard to read, such as the US-China trade war. It could plunge the world into a severe recession, but it could also strengthen the US-Japan alliance and even, at some point in the future, help to change China for the better.
Despite all the uncertainty, there are two reasons for ordinary citizens to be positive. First, Japan is no longer alone in experiencing structurally lower growth. Google the strange word “Japanification” and you’ll get 50,000 hits. As this year’s collapse in interest rates across the globe shows, growth expectations are plunging everywhere, from Europe to Australia.
Second, Japan has been confronting these problems for decades. The psychological adjustment was made long ago and new ways of coping have emerged.
In demographics too, Japan is looking more like a pioneer than an outlier. Ten European countries have lower total fertility rates than Japan. Even Scandinavia, the poster-child for gender equality and subsidized child care, is not immune. Finland’s fertility rate has just collapsed to 1.43, similar to Japan’s.
With poor countries like Bangladesh and Nepal hovering below replacement levels of fertility, population shrinkage could well become a global phenomenon.
An ageing population is only a problem if people are economically inactive for a longer time. As Bank of Japan economist Takatatoshi Sekine points out, Japanese people are getting biologically younger – to the extent that an average 70-74 year old walks as fast as someone five years younger did 10 years ago. Indeed, if biological age is the reference, the long rise in Japan’s dependency ratio (the number of old people relative to those of working age) vanishes.
Currently, some 25% of Japanese over 65 are in the labour force, a far higher proportion than the sub-5% of France and Spain. Given that Japanese in their 80s have conquered Everest and worked as male porn stars, surely genki Japan should at least be rivalling Iceland, where the ratio is 38%.
Granted, there are serious economic imbalances that need to be corrected, notably between the record-high profitability of corporate Japan and the stagnant income of regular workers. Hiking the consumption tax is counterproductive, based on the mistaken view that Japan, the world’s largest creditor nation, is facing some sort of debt crisis.
Over time, though, Japan’s structural labour shortage will shift bargaining power to workers, bringing higher wages and forcing managements to use expensive human resources more efficiently. The result should be better working conditions, better training and more flexible and open corporate cultures that can accommodate women, older workers and foreigners.
The evaporation of interest rates has deprived savers of a meaningful income stream and contributed to the underfunding of pension schemes. Here too corporate change should make a significant difference. For the past 50 years, Japanese companies paid very low dividends, preferring to retain their profits for their own use. With the majority of shares being held by friendly banks and other insiders, ordinary shareholders had little influence.
No longer. The mochiai cross-holdings ratio has fallen dramatically and companies finally have to pay attention to “outsider” shareholders. Thanks to higher dividends and the surge in share buybacks, listed Japanese companies are paying out more than half their profits to shareholders. Dividend yields of over 4% are no longer rare.
This is a major improvement, but pay-outs are still lower than in Europe, let alone the US. With further reforms in governance and constructive pressure from shareholders, Japanese stock should become a reliable source of income–which was the primary attraction of stock markets everywhere until the last sixty years. The beneficiaries would include all future pensioners.
In a country where the vast majority of individual financial assets are in zero return bank deposits, the implications would be huge. Even if the market remained flat for decades, individual investors could receive a healthy flow of income to finance their lifestyles, cushioning the impact of tax hikes and other shocks. The difference between the “bank account tribe” (銀行口座族) and the “dividend tribe” (配当族) would be like night and day.
The news may be bad, but the news is nearly always bad. The message is clear. Keep investing sensibly and keep walking faster. In reality, Japanese living standards, health, wealth and comfort have steadily improved. Given a pragmatic approach to change, that will continue.
The rest of the world should observe closely. A few decades ago, SF writer William Gibson claimed that Japan was the future. It still is.
