Has Japan turned a corner? Three years after Shinzo Abe, prime minister, began deploying his three arrows of monetary easing, fiscal consolidation and structural reforms, he is unashamedly positive about the results. Rightly so. He has overseen a surge in Japanese stocks, property prices have risen in metropolitan areas, a lower yen has given the country a boost in exports and record numbers of tourists are flocking to Japan.
Still, the crisis is not over; the lost decades cast a dark shadow. A battle against deflation continues, provincial areas are depressed, wages need to rise and structural reforms, potentially the most significant arrow, have yet to be fully unleashed. The combination of an ageing population and public debt of more than double annual output threatens an avalanche.
The outcome of Mr Abe’s experiment matters outside Japan, and not only because of the country’s role upholding the principles of the international order. Advanced economies are contending with the same challenges that have beset Japan — rising public debt, low inflation expectations, slow growth, an ageing population and China’s challenge to the global economic system. Western nations, too, fret about lost decades.
Some have fared better than others. The US Federal Reserve quickly slashed interest rates and started buying financial assets using newly minted money. But the eurozone has not learnt the lessons of Japan, taking until March 2015 to launch its own programme of quantitative easing. It may be too little, too late.
The west must not repeat Japan’s mistakes. What then were the roots of Japan’s crisis? First, politicians postponed decisions for fear of opposition. This procrastination and risk aversion coloured the Liberal Democratic party’s refusal to deal with non-performing loans on the balance sheets of Japanese banks during the mid-1990s.
Next, politicians failed to react to the demographic transition. Despite warnings of Japan’s ageing population and increasing dependency ratio during the early 1990s, the government showed no sense of urgency. There were no open discussions or public debates — just as there is no meaningful debate today about introducing a systemic immigration policy to address the problem of the ageing population.
Perhaps the primary cause of the lost decades was the inability of policy makers to overcome parochial interests, and instead form integrated strategies that prioritise the national interest. For example, the rivalry between the Ministry of Finance and the Bank of Japan prevented a well co-ordinated macroeconomic policy from taking shape. Quantitative easing lagged behind fiscal expansionism, triggering a deflationary spiral. Japan’s experience tells us that once you are caught in this cycle it is hard to escape. As the controversy over the rise in the consumption tax shows, a similar risk exists today.
At the heart of these problems was a lack of independent review of government policies. The Fukushima nuclear accident exposed this deficiency. Japan’s “nuclear village” — a cosy collection of pro-nuclear energy politicians, bureaucrats, businessmen and scholars — had been pushing a myth of absolute nuclear safety while neglecting to comply with international standards. Japan fell into a Galápagos syndrome: the view that developments taking place in Japan are unique and should be judged in isolation from the rest of the world. Likewise, we must avoid the Galápagos trap of viewing the lost decades as something that could not happen elsewhere.
Certainly, Japan’s lost decades need not have happened. Or at least, the country’s troubles need not have been so severe and drawn out. Fortunately, other mature economies have the benefit of hindsight. The lessons that can be derived from the lost decades are still being written. It may yet be the outcome of Abenomics that provides the greatest instruction.
Yoichi Funabashi is chairman of the Tokyo-based Rebuild Japan Initiative Foundation and editor of ‘Examining Japan’s Lost Decades’