Economic background for 2006 in Japan
Before addressing the current situation of the Japanese economy in 2006, it would be advisable to do a little history, since the economic problem that has characterized Japan during these last years of financial crisis could be focused on five key aspects: the great deflation in the real economy and difficult-to-recover loans from banks; the serious deterioration of the regional economies; the stagnation of the business system; the decrease in spending by consumers and the lack of efficiency and transparency in government policy.
As a consequence of the upheavals in the financial system, each year after the collapse of the bubble economy in the early 1990s, the value of assets has been declining at a rate of more than 100 trillion yen annually.. Thus, as a result of the collapse in the prices of stocks and properties that acted as collateral for their loans, Japanese banks had accumulated delinquent loans amounting to more than 1 trillion dollars (25% of GDP) of which 30% were directly uncollectible.
This collapse has had serious repercussions: some large banks have failed and many others have been nationalized to be "cleaned up" and then reprivatized. The total debt of banking and financial companies has been increasing, as well as the number of bankruptcies in the corporate sector, which in April 2003 reached the figure of 1,514 business bankruptcies, mainly motivated by falls in sales (low prices and little consumption), industrial stagnation and difficulties in the recovery of credits. But the case of the banking system is much more serious, since the Japanese banks have inflated the values of the properties that they have received as collateral by more than double their market value.
In the case of Japanese families, due to the 70% decrease in the value of the houses acquired through mortgage loans, losses in the order of 250 billion dollars are announced. Despite low interest rates, mortgages today absorb about 8% of disposable personal income.
One of the measures that is still being applied and that has not completely solved the problem, was the substantial reduction of interest rates to allow delinquent debtors to restructure their obligations and to boost consumer credit. The drop in interest rates reached a historical record of zero for Bank of Japan (Central Bank) loans to the banking system. But since that has not been enough, the government had injected until 2003 approximately 67 million dollars to the fifteen largest banks to improve their balance sheets. In addition, it has financed the merger of a whole series of banks and problematic institutions and other bankrupt ones were directly nationalized.
Despite these measures, the situation of the big banks had remained practically the same, since they did not have anyone to grant loans to because the country was still full of indebted companies and too weak to invest in the future. Hyper-indebtedness, excess installed capacity, extreme weakness of the markets and zero profits explain why the demand for bank credit by companies has registered its greatest decline in all history after the Second World War.
One of the relevant events in 1999, as a sign of this economic chaos, is the bankruptcy of two important regional banks, the Kokumin Bank and the Namihaya Bank. The latter is significant because it is a bank created with the merger, financed by the government, of two other virtually bankrupt banks. The regional banking crisis, which until now had been in the background, would already become something very worrying for the Japanese government.
Regarding the problem of the autonomy of the regions of Japan, it is important to point out that the central government is the one that distributes around 70% of the fiscal income that it collects from the local administrations and uses its fiscal power to keep them controlled. In this sense, real local needs are not likely to be approved by the government. This is limited to approving standard and generalized requests, without taking into account local particularities.
In order to solve this problem and to accelerate structural reform, the creation of 57 special economic zones was approved in 2003, which are subject to preferential liberation treatment, including eight zones in which private companies will be able to undertake agricultural activities.
To revitalize and give more independence to the regions, it is intended to achieve a development based on the specificities of the regions so that they can cover their local administration needs with their own funds, ensuring the income of local taxes.
The special zone is left solely to the initiative of the municipalities and should promote competition between the regions. After the approval of the local assembly, each municipality requests the central government the extension of the regulation that prevents participation in the new activities and thus begins to form "special zones" According to the State Secretariat in charge of special zones, Yoshitada Konoike, the provinces and municipalities have sent petitions to the government to establish another 129 special economic zones. These zones are Japan's first deregulation zones and were part of the structural reforms of then Prime Minister Junichiro Koizumi.
The unfavorable economic environment has limited investment in new projects. The famous steel triangle (politicians, bureaucrats and businessmen), which was the basis of the decision-making system during the time of accelerated growth, is currently in crisis: just look at the great difference between bureaucrats and businessmen. Correcting this situation implies re-establishing an incentive system that rewards the entrepreneurial effort of the Japanese businessman.
Until the end of 2005, the fourth problem facing the Japanese economy currently lies in the lack of incentives for personal consumption. This is mainly due to job insecurity that has plagued Japan since the early 1990s. Despite the strong generalized and continuous decline in prices (deflation), distrust keeps consumption stagnant, as deflation reduces company profits, stimulates unemployment, decreases wages and aggravates bank debts.
The insecurity in labor income and unemployment have discouraged consumption and increased saving cause-concern. This problem of the decrease in domestic demand has brought serious problems to the Japanese economy, since personal consumption represents 60% of the Japanese gross domestic product, which is key to the economic health of the country.
The elderly jealously guard their savings; families with children are cutting back on spending and even "parasitic singles" - young people who have generous wages to spend and still live with their parents - are beginning to change their wasteful ways. According to some specialists, "the probability of recovery in domestic demand is almost nil." The only way to recover consumption is to increase income and there is no magic formula to achieve this.
In the second half of 2003, the figures revealed that consumer spending advanced only 0.3% compared to the previous quarter. In this sense, the experts stated that many consumers turned to their savings and warned that the rise in consumption is impossible while the unemployment rate remains high. The unemployment rate reached a record 5.5% for three consecutive months in 2003.
The Japanese tend to save more and more than they traditionally have, which has significantly limited the ability of the domestic market to drive demand. Many people save for fear of being unemployed and there is no stable social security.
The high propensity to save should be interpreted as a sign of hopelessness in some of the Asian economies. Uncertainty about the future has raised the level of saving in Japan, but it also contributes to deflation in that country. Obviously, an increase in savings means that there is less demand. This means that companies are holding large investments and obtaining low profits, while resorting to the price cut necessary to get rid of surplus stock. At the same time, there is a reduction in employment that induces buyers to save more and spend less. It is said "the Americans consume more than they produce, and the Japanese produce more than they consume"; the slowdown in demand in this country will not reverse that trend.
The deterioration in domestic demand, the cooling of US exports, the weakness of the Asian economies, the volatility of the stock markets and, above all, the difficulties of the banking and financial sector, are the fundamental causes of the Japanese economic stagnation. The fifth and final problem is the inefficiency and opacity of the public sector: the Japanese people have lost confidence in the government's economic policy to improve the economic situation. Unfulfilled promises by prime ministers, inefficiency in the implementation of announced measures, and political instability have contributed to the loss of confidence in the government. During the past fourteen years, Japan has had eleven prime ministers.The surveys carried out point out that a high percentage of the population believes neither in politicians nor in parties; while recent corruption scandals contribute to that perception.
Political instability due to corruption and the lack of a conscience to move the country forward has also been a key factor in the situation of the Japanese economy. An example of this was the little or no management carried out by the government of the unpopular former Japanese Prime Minister, Yoshiro Mori, who had to resign from his post at the beginning of 2001, after having only been in office for a year, due to a series of scandals, lack of transfer and initiatives to lift the economy, which resulted in a general crisis of credibility towards the government.
The former Prime Minister Junichiro Koizumi, who replaced Mori in April 2001, unlike the passivity of his predecessors, had an exclusive popularity; He is a member of the Liberal Democratic Party and has vowed to move Japan forward with a series of structural, fiscal and economic reforms.
Following unsuccessful attempts by numerous prime ministers to lift Japan out of its worst postwar crisis, the Japanese seem ready to give a politician a chance who does not promise security and new life, but rather admits that the reforms needed to revive the economics have a price.
Successive Japanese governments wasted the entire decade of the 1990s looking for a way out of stagnation. One after another, they adopted “eleven fiscal stimulus packages” (increased public spending, including arms spending and tax cuts), amounting to $ 5 trillion, a figure higher than Japan's GDP ($ 4.5 million million dollars). The failure of each of these packages to move forward with the economy was followed by a larger one.
In the course of the 1990s, as a consequence of the injection of public funds, the Japanese debt grew to reach 6 trillion dollars, equivalent to 120% of GDP at the end of 1999. The phenomenal injection of public spending It did not manage to get the country out of the recession because companies over-indebted and with a huge excess installed capacity did not need to increase their investments. Most state-owned companies are already over-indebted and face insurmountable obstacles to pay the interest on those loans, therefore they fear becoming more and more indebted.
The tax cuts did not manage to increase private consumption because families did not increase their effective income, as a consequence of the generalized fall in salaried income (due to the increase in unemployment and the reduction in nominal wages).
For the American economist Ronald McKinnon, professor of international economics at Stanford University, the prolonged stagnation of the Japanese economy has become "the great failure of modern macroeconomics." Many analysts agree with this statement. Despite all the postwar economic policies, they have not worked in Japan.
In recent years after the explosion of the economic bubble, the Japanese economy has been characterized by a whirlwind of falling asset prices, banking crises, reduced corporate profits, and rising state debt. Proof of this is that despite experiencing growth in the Gross Domestic Product (GDP) in the first quarter of 2004, caused by an increase in exports, private consumption continued to be reduced as did production.
These low levels of consumption and production, together with high oil prices, which made imports more expensive, and a slow growth in exports after the first quarter of 2004, implied a reduction in GDP in the second and third quarters of the referred period. year, reaching - 0.2% and - 0.3% respectively.
China became Japan's first trading partner in 2004, ahead of the US. Its largest imports with Japan in that year was steel, for the manufacture of cell phones and automobiles, as large quantities of Japanese steel were bought by China, stimulating Japanese exports.
Analyzing the recovery of the Japanese economy with all its risks, it is worth noting some changes of significant importance that make its economy less vulnerable. First, the health of the banking system has improved substantially. Hard-to-recover loans have shrunk from their peak of 43.2 trillion yen in March 2002 to 23.8 trillion yen in September 2004.
Second, Japan has structurally reoriented with more strength in its investments and its sales towards East Asia, which continues to be the most dynamic region on the planet, especially trade with China.
And third, Japanese companies have made changes to their business system, reducing costs, debts and labor, allowing them to improve their profits and increase their investments.
It must be taken into account that in the previous year 2004, despite the recession of the second and third quarters, there was considerable GDP growth (2.7%), higher than in 2003 (1.4%).
Despite the appreciation of the yen, the increase in exports has been substantial, caused by the accelerated growth of sales to East Asia (25.5%), the EU (21.8%) and the US (9.8%). The increase in profits linked to the export boom coupled with corporate restructuring has affected the growth of private investment, which has been around 6% in the last two years.
Capital investment from April to June 2005 rose 3.6% in real terms and was supported by strong growth in the construction, steel and chemical sectors.
In sum, taking into account the aforementioned elements, it seems that the recovery is transitory, depending on its deflationary spiral and what happens in the international environment during the coming months. In summary, in my opinion, the recovery in Japan so far is temporary but not sustainable.
Koizumi's reforms
On June 21, 2001, the Government Council chaired by Koizumi officially decided the guidelines for the structural, economic and fiscal reforms.
The government publicly promised to make several changes firmly:
1- The definitive cleaning up of the banks' finances.
2- Structural reform in all fields: mainly in the new industry "information technology", public works, social security and the finances of local administrations.
3- Reactivation of the economy by promoting the initiative of private companies.
Seven are the programs for structural reforms:
1) Privatization and deregulation
2) Support for new projects
3) Consolidation of the functioning of social security
4) Strengthening of intellectual assets
5) Innovation in lifestyle
6) Activation and independence of regions
7) The tax reform.
The reform program consists of strongly supporting the privatization of the main public corporations, and converting the Post and Telecommunications agencies into public corporations as the first step towards their privatization. In connection with this in late 2001, the government decided to privatize four public highway-related corporations, starting with the Japan Public Highway Corporation, in addition to the Public Housing and Urbanization Corporation and the Public Petroleum Corporation.
The creation of competent centers in the international arena has also been promoted by creating state universities managed like private ones, without ruling out their privatization. The objective of this university reform is to convert state universities into corporations as soon as possible that can compete in the international framework and enhance their research and education capacity. This strategy aims to promote, at compulsory education levels, the system of free choice of schools by students, the promotion of information technology in education and the generalization of learning English.
The support program for innovative projects proposes the following:
Launch new businesses.
Introduce a tax system that encourages the creation of new companies.
Restructuring and renovation of small and medium-sized companies.
Drive the information technology (IT) revolution and education in this field.
As for the program to consolidate the functioning of social security, a new, more “reliable” one is established, through the introduction of individual social security accounting (greater control) and the creation of an effective health insurance program.
The program to "increase intellectual assets" encourages the transfer of private funds to research and education, giving strategic priority to cutting-edge sectors such as nanotechnology, IT, biotechnology, the environment, and so on.
All based on a strategy to strengthen Japanese technology and be able to compete with European countries and the United States.
The program to innovate the lifestyle aims to promote a city of multifunctional skyscrapers, greater social participation of women, as well as the creation of a society without waste, or greenhouse effects, and the guarantee of citizen security and public order.
For this, several legal obstacles will have to be overcome, carrying out a reform of the regulations. Rather than allowing the entire country to collapse under the weight of uniformly imposed regulations, bold experimental deregulation in those special zones would be prudent.
The seventh program is the tax reform, which consists of a two-phase plan. In the first, the aim is to clean up the treasury, stopping the issuance of government bonds by less than 30 million million yen; In the second phase, the objective is to achieve a primary balance between fiscal revenues and expenditures in the medium term and thus achieve a surplus. Japan is the only industrialized country that has been steadily increasing public works projects financed by government bond issues.
In the area of tax reform, one of the changes to be made is related to taxes: to achieve the reduction of tax rates as much as possible, as an incentive for companies, ensuring the finances necessary for these tax reductions through mechanisms other than bonds. of the State (for example, by curbing public spending).
But what is new in Koizumi's policy is to provide a broader perspective of the future and to emphasize the reforms linked to changing the economic structure from an industrial economy to that of knowledge.
Carrying out a complete structural reform implies the creation of new industries and employment opportunities, which is achievable through information technology.
This implies carrying out deregulation in all economic and social areas without exception, precisely to promote, according to this criterion, the development of information technology.
This strategy aims to make Japan a world leader in this area in five years. Koizumi stated that the transition from an industrial economy to another of knowledge must be made, which guarantees national and regional security, as well as overcoming the persistent economic stagnation suffered by the Japanese economy.
Economic evolution of Japan in 2006 and its prospects with Shinzo Abe
After the Koizumi reforms and the events in the evolution of the Japanese economy in recent years, we will analyze its evolution in 2006 and the outlook for the coming years with the new Prime Minister Shinzo Abe.
Japanese banks are currently less vulnerable and better able to support economic activity. Two aspects have mainly influenced this improvement: the first aspect is the restructuring of companies and the economic reactivation of the country in a general sense, and the second aspect is the efforts made to intensify banking supervision, which is essential to clean up the banking system.
In this sense, it is proposed that companies are more solid because they have reduced costs and unused capacity, allocating their profits to reduce debt.
The efficiency of companies can be summarized in four fundamental points:
1- The balance sheets of the companies are more favorable: A great effort has been made to reduce the burden of debt, giving good results, especially in medium and large companies. Nominal corporate debt has fallen by 125 trillion yen since 1996, and debt-to-sales ratios are back at pre-bubble averages in the manufacturing sector, with sharp declines in the rest of the economy.
2- Profits have increased: The reduction of labor and other costs, the withdrawal of inefficient producers and suppliers and the strong demand of recent years, the profits of companies have been booming, regardless of their size. The profit / sales ratio is at its highest levels in the late 1980s, both in the manufacturing sector and in other sectors.
3- Excess capacity has been reduced: Since the mid-1990s, the restructuring of companies has included cuts in new investments to reduce excess capacity. This made it possible to eliminate excess fixed capital, and as of 2005, capacity utilization was once again at the average levels of 1980-89.
4- Labor costs have been adjusted: Companies' measures to get rid of excess labor have also been fruitful. After initially resorting to more conventional strategies, such as reducing hiring and overtime, companies have chosen to lay off workers, replacing full-time workers with supposed part-time and fixed-term contracts.
In line with the above, the gradual growth of investment that has been going since 2003, has favored the labor situation with new jobs and salary increases as of 2005, since the job offer is at unprecedented levels and currently the Full-time employment increases faster than part-time.
All these positive trends are increasingly palpable for the Japanese people and international investors. These favorable trends are also reflected in the stock market as stock prices have more than doubled compared to the lows recorded in 2003, as real estate after hitting bottom has begun to increase and consumer confidence begins to be increased.
It should be noted that despite the persistent deflation that has existed in recent years, at the end of 2005, consumer price inflation began to reappear again.
The Japanese economy had a good start in 2006, showing growth in a general sense, as this behavior was driven by strong capital investments that increased by 13.9% in the first quarter compared to the same period in 2005, the second largest growth of this magnitude since 1990; in addition to the 0.5% increase in personal spending and a significant growth in exports.
Japanese banks have improved their ability to control credit risk by assessing the fair value of loan proceeds and establishing more sophisticated risk management systems; as well as the use of financial technological innovations to strengthen its ties with finance companies and businesses.
At the end of 2005, the amount of non-recoverable loans from the main banks was between 1.2% and 3.0%, decreasing compared to the 8% that existed at the beginning of 2002 and the situation of the regional banks also gave certain signs of improvement. By not having as much need to build reserves to cover assets at risk or bad loans, banks have recovered their profitability, although it remains low internationally.
In fiscal year 2005, which runs from April 1, 2005 to March 31, 2006, the six large Japanese banking groups posted record profits, notably reducing their list of bad debts, ending the fiscal year between 0.9% and 2.6% of delinquent loans.
Net consolidated profits of the six giant Japanese banks amounted to 3.12 trillion yen ($ 27.857 million), 4.3 times higher than last fiscal year. These gains were attributed to the large rise in its shares on the stock markets.
It is good to point out that despite the number of measures taken during these years, the problem of bad loans has not yet been completely solved; However, since 2004 the country began to show signs of recovery thanks to a significant increase in exports and in 2005 the economy began to have sustained growth supported by an awakening of domestic demand.
Some Positive Indicators for 2006:
Gross domestic product for the third quarter of 2006 was 2.0% higher than that of the second quarter, which was 1.0%.
The unemployment rate, in November 2006 was 4.0% lower than the same period of the previous year (4.6%), which shows that companies continue to need labor to maintain production increases in the economic recovery that the country is experiencing. Maintaining an average of 4.1% in all of 2006.
In November 2006, Japan's trade surplus increased by 56% compared to the same month of the previous year, mainly due to greater trade with its main partners China and the United States.
Exports in 2006 were up significantly from the previous year, thanks to strong international demand for cars and electronic components from Japan. Imports also grew due to the fact that oil import prices, although they fell somewhat in the month, continued to inflate the account of Japanese external purchases.
In July 2006, the Bank of Japan raised interest rates for the first time in six years, based on strong economic expansion and rising prices, raising the interest rate to 0.25 percent, from levels around the zero percent. The Bank of Japan will adjust interest rates gradually and in small increments depending on the evolution of prices and the economy.
Later, at the October 31 meeting, the Bank of Japan unanimously decided to maintain the reference interest rate at 0.25%, as expected by the market and many analysts. In the first days of January 2007, the Bank of Japan decided to keep its interest rates at 0.25% after a two-day meeting of the monetary authorities. The decision was to keep a watch on the evolution of inflation to ensure the recovery of the Japanese economy, which according to experts will continue to expand moderately.
In December 2006, the Japanese currency appreciated in relation to November of that same year, as it went from 117.31 to 116.06 respectively.
International reserves, in December 2006 reached 895 320 million dollars, of the 881 273 million they had in September 2006. It should be noted that the Japanese reserves, after several years being the largest in the world, now occupy second place globally surpassed by the Chinese, which reached the symbolic figure of a trillion dollars.
The new Prime Minister Shinzo Abe
On September 26, 2006, 52-year-old Shinzo Abe was elected Prime Minister of Japan, coming to power as Chairman of the Liberal Democratic Party.
He is the first head of government born after the Second World War, and the youngest of the entire postwar period. This change of government takes place in a favorable economic situation that continues in a recovery phase thanks to the strength of exports and domestic demand, being the best economic context in more than fifteen years in Japan.
Abe represents a generation alien to the direct experiences of the war and, on the other, the maturing of a process of right-wingization of the Japanese political system and of nationalist tendencies.
He received the support of his predecessor Junichiro Koizumi to replace him and has declared himself a continuation of the structural reform agenda initiated by him, there are elements that differentiate them that will distinguish the course and destiny of the new head of government.
Although it is proposed to give continuity to the main lines of structural economic reform defended by Koizumi, it will seek to correct its social consequences, such as the growing differences between rich and poor. An example of this is his highly publicized project to establish a system that channels the granting of a "second chance" to those who have failed in a specific job or at the head of a company.
In his inaugural speech to Parliament on September 29, Abe made explicit the top priorities his government would focus on:
Give high priority to cutting public spending to rebuild state finances before considering tax increases.
Set a limit on the issuance of government bonds of no more than 30 trillion yen for fiscal year 2007.
Implement plans to revitalize local economies and provide "second chances" to disadvantaged people with the aim of minimizing the gap between rich and poor.
Obtain the approval of an educational reform that allows the teaching of "patriotism" in schools.
Relive Japan's traditional virtues and family values.
Make Japan a "beautiful nation" full of confidence and pride.
Improve relations with China and South Korea
Increased budget spending by 30.5 percent for missile technology spending.
Japan Forecast in Fiscal Year 2007-2008
After assuming power, the new Japanese Prime Minister Shinzo Abe faces many difficult issues to be resolved that remained from his predecessor Junichiro Koizumi.
Today the stock market and real estate sector are experiencing stable growth, improvements have been made in asset management, deflation is almost over, company profitability has increased and unemployment has fallen.
Fiscal investments and foreign demand, which were the driving force behind economic recovery, have been gradually replaced by investments in business equipment and domestic demand. Although Abe expressed that he will follow Koizumi's reform line, from a general point of view.
However, the short-term economic outlook is very favorable and according to the IMF, the real GDP growth rate could reach 3% in 2006 and more than 2% in 2007.
However, the IMF exceeded its forecast as the Japanese government lowered its growth forecast for fiscal year 2006-2007 from 2.1% to 1.9% due to the contraction of individual consumption in the last months of 2006. For In fiscal year 2007-2008, the government predicts growth of 2.0%.
It should be noted that the efficiency of the allocation of resources has been promoted since managers currently have a greater capacity to base their decisions on considerations of price and quality. In any case, structural rigidities persist that slow down growth.
Thanks to the recovery in domestic demand driven by the strengthening of the labor market, the expansion of full-time jobs for the first time in 7 years and the positive increase in wages, it is estimated that the 2007-2008 fiscal year will have a close very favorable and your economy will grow for sure. However, the fiscal deficit and public debt will remain at a high level.
Japanese banks are currently less vulnerable and better able to support economic activity. Two aspects have mainly influenced this improvement: the first aspect is the restructuring of companies and the economic reactivation of the country in a general sense, and the second aspect is the efforts made to intensify banking supervision, which is essential to clean up the banking system.
In this sense, it is proposed that companies are more solid because they have reduced costs and unused capacity, allocating their profits to reduce debt.
Obstacles to overcome by 2007:
Despite the positive trend in the main indices of the Japanese economy, no essential progress has been made in tax reform. Until the end of 2005, the long-term debts of the central government and local regional governments amounted to 774 trillion yen (about 6.19 trillion US dollars), 150 percent more than GDP, while the fiscal deficit it was estimated at 6.4 percent of GDP, both indicators well above the internationally recognized alarm line.
The main cause of fiscal difficulties is that income is insufficient to finance expenses. Thus, for example, fiscal income for 2005 was 44 trillion yen and expenditures were 82 trillion yen.
The heavy burden of tax debts will be shifted to citizens, increasingly concerned about a rise in taxes that would directly affect consumption and consequently limit macroeconomic development.
In the long term, however, the increase in consumption taxes constitutes an important measure to solve the tax deficit, despite the fact that the average will undoubtedly arouse unease among the voters.
Another aspect of difficulty is the difference between regions and the increasingly polarized wealth. From the mid-1970s to the late 1990s, the income ratio between Tokyo (the highest) and Okinawa (the lowest) was noticeable.
The Gini coefficient, an index that measures inequalities between rich and poor and in which zero means complete equality, had remained below 0.21 in Japan, which shows that the Asian country was among the nations of the world that wealth distribution is more egalitarian.
However, in recent years as a consequence of the long depression and the reform, the difference between developed and underdeveloped regions began to be taxed in terms of economic growth and income.
In this sense, there has even been a visible increase in the number of homeless people. According to a survey carried out in the cities of Tokyo and Osaka, people with low incomes already represent 52 percent of the total population, while high incomes correspond to only 14 percent, figures that constitute a strong contrast against to those registered during the 70s and 80s of the last century.
Such income disparities could easily lead to the eruption of social problems and here is the main dilemma: the continuation of the reforms would please the gap, while their solution would be contrary to the reform policy and could show signs of regression.
With a view to the future, much remains to be done and measures must be reinforced at the following points:
1- Improve the use of labor.
2- Increase competition in product markets
3- Liberalize the agricultural sector
4- Encourage direct foreign investment
5- Reduce the high public debt and fiscal deficit.
6- Solve the problem of population aging.
In the short term, the economic outlook is favorable but the main challenge is how to maintain strong self-sustained growth in the face of demographic pressure, as the Japanese population is aging rapidly and the birth rate is well below replacement. The working-age population has been declining since 2000 and the dependency ratio for the elderly (the proportion of the working population of at least 65 years) is the highest in industrial countries.
On the one hand, a shrinking population can maintain its standard of living with a lower global growth rate, but on the other, a solid growth rate of per capita income is required to finance the increase in retirement and health care expenses. health attributable to demographic aging.
Given the contraction of the labor force, per capita growth will depend on the extent to which productivity can be increased by making better use of resources and technological advances.
Another aspect of great importance in the economic recovery is that the financial situation is gradually normalizing, since at the same time that deflation is decreasing, monetary policy will readjust to changing market conditions. In the first stage, the banking system will keep interest rates at zero, but later on with the expected evolution of prices, it is very likely that the interest rate will gradually rise.
Also for many years, the large fiscal deficit suffered by Japan has forced fiscal consolidation measures to stop the increase in public debt and create margin to cover the costs of an aging population. With net public sector debt amounting to almost 100% of GDP, the precarious fiscal situation may well slow the expected recovery.
So far the measures that have been taken have focused on cutting spending, especially on unnecessary infrastructure, but in the coming years, attention will have to be focused on income and the possibility of raising the consumption tax, since the rate in Japan It is the lowest with respect to other industrial countries that also tax consumption.
According to some analysts, other measures that will have to be applied are those of increasing premiums to face the strong projected increase in spending on social security and health care, assuming current trends continue and despite recent reforms For pensions, spending on social security will reach 20% of GDP in 2025, compared to 16% of GDP in 2005. Also during that period, spending on health care will double.
As for the banking sector, the main banks have generated considerable profits in recent years. An increase in profitability will allow banks to repay injections of public capital and strengthen their capital base. In the short term, although rising interest rates should raise profits by increasing interest rate margins, the key to protecting the soundness of the financial sector and avoiding problems is to stop lending by demanding excessive guarantees. In February 2006, after eight years of uninterrupted decline, the growth rate of credit finally turned positive.
Finally, an important factor in Japan's recovery and for its future is the development of the business sector in reducing its debts and expanding its operations in global integration, transferring part of the production to China and Southeast Asia.
Final thoughts
The Japanese government lowered its growth forecast in real terms for the 2006-2007 fiscal year from 2.1% to 1.9% due to the contraction of individual consumption. For this reason, the government foresees a relapse in risk factor deflation for the 2007-2008 fiscal year that begins on April 1.
Despite this risk, the government expects 2.0% growth for the 2007-2008 fiscal year. In this period, the economic recovery in Japan should continue despite the weakness in household consumption.
The government warned that the deflation that began in 1998 is not yet completely eliminated. Although consumer prices should increase by 0.5% in 2007, the risks of a return to negative price developments remain.
Japanese banks are currently less vulnerable and better able to support economic activity. In February 2006 after 8 years of uninterrupted decline, the credit growth rate finally turned positive. Two aspects have mainly influenced this improvement: the first aspect is the restructuring of companies and the economic reactivation of the country in a general sense, and the second aspect is the efforts made to intensify banking supervision, which is essential to clean up the banking system.
According to the government, there have been no continued falls in prices, nor are there any potential risks for them to fall; however, it is still premature to declare that deflation has ended as there are risks from abroad, such as the symptoms of a slowdown in the US economy and the effects of higher oil prices, which could reduce the pace of the Japanese economy.
The new Prime Minister of Japan Shinzo Abe, with a reputation for being a conservative and a nationalist, intends to follow Koizumi's path in terms of continuing the reforms but will focus on correcting the social consequences of this, such as the growing differences between rich and poor. An example of this is his highly publicized project to establish a system that channels the granting of a "second chance" to those who have failed in a specific job or at the head of a company.
Being the second largest economy in the world, sustained economic growth in Japan would bring very important advantages for the rest of the countries, since it would help to balance international expansion and reduce current global current account imbalances.
Japan is in a better position to finish emerging from the long tunnel of the recession, thanks to the improvements described above, as many experts estimate that growth will be much higher in the next decade.
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Daniel Citrin and Alexander Wolfson, “Japan is back”, Finance & Development, June 2006
