For the past quarter of a century Japan has enjoyed stability. Perhaps too much stability: for more than two decades, prices, wages and interest rates have barely changed even though the structure of the global economy, technology and market conditions have changed remarkably.

That stability was achieved largely by failure to confront some difficult structural challenges. The government has spent its way through the problems of the past two decades, accumulating record debt as the population aged and shrank.

What might appear to be an unsustainable strategy has, nonetheless, not faltered in Japan, although that doesn’t mean it will be viable indefinitely.

Japan’s population peaked in 2008 and last year it shrank by 800,000. The working age population peaked a decade earlier and the proportion of elderly in the population continues to rise. Japan is a super-aged society with around 30 per cent of its population over 65, the highest share anywhere in the world.

Living standards remain high. A potential economic growth rate for the country of less than one per cent a year means that living standards or per capita incomes can rise with a shrinking population.

Japan’s headline GDP growth rate has been above one per cent, unemployment remains very low due to labour shortages, corporate profits are high and the stock market is at its highest since the asset bubble burst in the early 1990s.

‘Despite these positives’, Masahiko Takeda explains in this week’s lead article, ‘most of the Japanese populace is unhappy’.

The return of inflation to Japan after the pandemic has seen prices rise faster than nominal wages, reducing real wages with new downward pressure on living standards.

Travellers to Japan in the past year will not have noticed the inflation because the yen is very weak. It has depreciated against the US dollar and most major currencies in the past two years. The depreciation of the yen is one factor that’s made it more difficult to attract migrant workers to fill labour shortages.

‘The weak yen’, explains Takeda, can be explained by ‘the large interest rate differentials between Japan and other advanced economies’. As interest rates were raised in other industrial economies to fight inflation, the Bank of Japan held its headline policy rate steady at essentially zero – where it’s been stuck for the past two decades. Japanese capital has flowed to the United States and Europe where it can earn higher low-risk returns.

Fortunately, Japan’s inflation appears transitory. The headline consumer price index peaked at 4.3 per cent in January 2023 and has now fallen to 3 per cent. That’s still above the 2 per cent target of the Bank of Japan but the BoJ is constrained by the burden of the government’s debt in fighting inflation directly by increasing the interest rate.

The Bank of Japan is starting to normalise monetary policy — from unconventional monetary policy that’s been the norm in Japan for more than two decades — and the yen should strengthen as a result. But the pace of change will be slow. If interest rates rise, the payments on Japan’s outstanding government bonds will increase substantially.

Japanese government finances were ‘very close to collapsing’, according to Finance Minister Miyazawa in 2001. He said the government needed ‘a fundamental fiscal restructuring aimed at rebuilding our finances in the 21st century, looking 10, 20 years into the future’.

Public debt was then 130 per cent of GDP. It has since steadily grown to roughly 263 per cent of GDP. That is the largest debt to GDP ratio in the world, ever.

There is no fiscal surplus in sight — the government is spending more than it earns through taxes, adding to the stock of debt.

Japanese public debt is sustainable so long as the market believes it is. Like any debt, it will have to be paid back eventually, and the best-case scenario – also the one that is most unlikely – is for the economy to grow out of it.

The corporate sector is sitting on huge cash reserves that are not being utilised and Japan is the world’s largest creditor with huge amounts of capital invested around the world. But without changing the trajectory of the debt as a proportion of GDP, most scenarios are destabilising. It’s no wonder the magic of modern monetary theory (which advocates that the government can and should print as much money as it needs to spend because they cannot go broke) is so appealing.

The Kishida government passed a major bill in December 2022 to increase defence spending substantially over the next five years, breaking through the post-war limit on defence spending of 1 per cent of GDP. That’s on top of the rising pension and healthcare costs for the elderly and large-scale subsidies to industry, especially to semiconductors, supposedly a critical domestic industry. Japan has joined the US-led global industrial subsidy race, although not quite so wholeheartedly. It’s a race to the bottom that Japan may not be able to afford.

The New Year begins with the Kishida government and the ruling Liberal Democratic Party in crisis, hit by a major political funding scandal. Kishida’s electoral support is at a decade low of 17 per cent. He has removed all the members of the Abe-faction embroiled in the scandal from the cabinet to try to contain the damage, apparently with little palliative effect.

Kishida’s days appear numbered but frequent leadership changes are not new to Japan.

Kishida has been in office for two years and a change of leader won’t mean that political instability impacts on economic confidence in Japan. Apart from Abe Shinzo, Japan has had a revolving door of prime ministers since 2006, averaging just one year in office.

Even without a unified opposition or an obvious alternative government, Japan’s democracy is mature and political and social stability high. Abe, as Japan’s longest serving leader, figured out that doing just enough on economic reforms helped to sustain his political capital. The hope is that Kishida or his successor will see much needed economic reforms as a way to grow political capital too.

The days of throwing public funds at problems to alleviate short term pain as a substitute for structural change in Japan may be nearing an end.

Milestones 2023

As we begin the New Year, East Asia Forum would like to acknowledge and pay tribute to the legacy it owes to significant figures who have died in the year or more that has just passed.

Ryutaro Komiya was honoured in a memorial service in Tokyo on 14 March for his considerable contribution to international and Japanese economics, having passed away on 31 October 2022 aged 93. Komiya, who was Professor of Economics at the University of Tokyo until 1986, made important contributions to international macroeconomic theory and the understanding of Japanese international accounts. Notably, Komiya also fostered economic exchange with leading Chinese economists, first visiting China in 1983, and was recognised in China as having made a major contribution to helping Chinese economists think through the approach to the reform of Chinese State-Owned Enterprises. He was also acknowledged in China as an insightful critic of the view that attributed Japanese growth success to industrial policy, He was teacher to many leading Japanese economists and practitioners, including former Bank of Japan Governor, Masaaki Shirakawa, its current Governor, Kazuo Ueda, and Akio Mimura, former Chairman of Nippon Steel, and he was one of the PhD examiners of EAF’s Editor in Chief. Though a critic of many policies associated with Japan’s then Ministry of International Trade and Industry (now Ministry of Economy, Trade and Industry), he was appointed as the foundation Director-General of its Research Institute (now RIETI) in 1987 and served in that role for ten years. Komiya was an early visitor to the Australia-Japan Research Centre and his legacy, as well as that of his intellectual circle, to EAF is considerable.

Acknowledgement: Masaaki Shirakawa

Huang Da died in Beijing on 22 February just four days short of his 98th birthday. Huang was arguably the intellectual architect of China’s modern monetary system and monetary policy. He was a founding member of the Monetary Policy Commission of the People’s Bank of China, serving on the Commission from 1997 to 1999. He was a member of the Finance and Economics Committee of China’s Eighth National People’s Congress. Born in Tianjin, Huang was educated at Huabei Union University, which later became Renmin University, in Beijing. He was President of Renmin University from 1991 to 1994. Huang was not only a leading player in China’s financial and economic reform, but an eminent scholar, known for his ‘four textbooks’ on finance: On Socialist Financial Questions (1981); An Introduction to General Finance-Credit Balance (1984); The Economics of Money and Banking (1992); and Finance (2004). He schooled several generations of scholars, many of whom are prominent in both academic and public life and valued contributors to EAF. Huang made an important contribution to introducing modern economics into China by establishing the Ford Foundation sponsored national Master of Economics Training Program at Renmin University in the mid-1980s. That later led to the joint appointment of Dr Ligang Song to Renmin University and the ANU, the first such appointment between a major Chinese University and a Western university. Huang was a valued friend and counsellor to international specialists on the Chinese economy, including those in Australia.

Acknowledgement: Ligang Song

Allen Gyngell AO passed away in Canberra on 3 May. He was what Australian Foreign Minister Penny Wong rightly called ‘the finest mind in Australian foreign policy’. Gyngell joined what is now the Australian Department of Foreign Affairs and Trade in 1969, was Director General of the Office of National Assessments from 2009 to 2013, the founding Executive Director of the Lowy Institute, Prime Minister Paul Keating’s Senior Advisor from 1993 to 1996 and, until recently, President of the Australian Institute of International Affairs. Perhaps Gyngell’s most important contribution to Australia’s foreign policy debate in recent years was to provide a compelling alternative to the moral hawkishness that marked much discussion of China in Australian public commentary. The growing overlap of interests between left-wing concerns for jobs and right-wing fears of abandonment — the theme of Gyngell’s historical interpretation of Australia’s foreign policy — supplied the political rationale for Australia signing up to a security agreement with a rapidly declining former colonial master and the unpredictable leader of the ‘free’ world. Gyngell subtly led a ‘realist’ school in the Australian debate, with a preference for hard-headed analysis to back clear Australian interests. That school recognised coercion as something big countries use to achieve their ends which may even be welcomed in its replacement of conflict, such as in the form of sanctions on Russia for invading Ukraine. There are real problems and disagreements with China. One is democracy and human rights, about which Australia and China will never soon agree. But Gyngell saw an approach to Asia based on cooperation with democracies, and an ostracisation of authoritarian states, as a recipe for Australia to have few friends and little influence to pursue its interests. Gyngell’s vision of an independent foreign policy saw Australia establishing security in Australia’s region, not from it. Gyngell was a regular contributor to EAF and he leaves a gaping hole in Australia’s foreign policy thinking.

Acknowledgement: EAF Editorial Board

Werner Max Corden AC (Max) passed away in Melbourne on 27 October aged 96. Corden was arguably one of Australia’s greatest economists and undoubtedly its clearest expositor of economic ideas, gifts for which he was internationally famous. A world leader in the field of international economics, he also made major contributions to economic policy thinking and analysis in Australia and the Asia-Pacific region. He was widely known for his work on the analysis of trade protection and his writings had a significant impact on economic policy in many countries, especially the major reform of trade policy in Australia during the 1980s. Corden held two appointments at the ANU, the first between 1962 and 1967, after which he succeeded Sir Roy Harrod at Nuffield College in Oxford. He returned to the ANU in 1976 as head of what is now the Arndt-Corden Department of Economics in the Crawford School of Public Policy until he left in 1986 for an appointment as Senior Adviser in the Research Department of the IMF. Between 1989 and 2002 he was Professor of International Economics at SAIS in Johns Hopkins University, after which he returned to Melbourne to an active retirement. Corden was the PhD supervisor of EAF’s editor in chief and a number of distinguished economists including Peter Neary, Nicholas Stern and journalist Martin Wolf, and was an important mentor to a generation of economists at the ANU. He provided the analytical foundations for what Thai economist and policymaker, Narongchai Akrasanee, has called the ANU school of international economics and its interpretation of Asia’s international trade and transformation. Max did not contribute to, but was an avid reader and supporter of, EAF.

Acknowledgement: Peter Warr

Raghbendra Jha (Raghav) passed away on 20 November in Delhi aged 70. He was a leading expert on India’s economy, the analysis of poverty and in the field of development economics. His published books include Macroeconomics for Developing Countries, Modern Public Economics, Facets of India’s Economy and Her Society (two volumes), and an edited collection Twenty K.R. Narayanan Orations: Essays by Eminent Persons on the Rapidly Transforming Indian Economy. He published prolifically on topics including poverty alleviation, social protection, debt sustainability, inflation, and more. His article ‘Trevor Swan and Indian Planning: The Lessons of 1958-59’ with Selwyn Cornish won the 2019 Peter Groenewegen Prize for the best article in the History of Economics Review. Raghav was long-time Executive Director of the Australia-South Asia Research Centre in the Crawford School of Public Policy at the ANU and a frequent contributor to EAF.

Acknowledgement: Paul Burke

Rikki Kersten passed away on 23 December in Canberra aged 63. Kersten graduated with honours in Arts from the University of Adelaide. She took her PhD in Japanese Studies at Oxford University on leave from the Australian Foreign Service. Her doctoral work followed her undergraduate interest in the development of democracy in Japan. Her professional contributions in later years included analysis of Japanese foreign policy, defence and security affairs. Her first academic posting was at Sydney University after which she took a professorship at Leiden University in the Netherlands, after which she became Dean of the Faculty of Asian Studies at the ANU. She was also Dean of the School of Arts and Director of the Asia Research Centre at Murdoch University. Rikki was mentor and supervisor to many Japan specialists, including PhD supervisor to Lauren Richardson, on EAF’s Editorial Board. As an Honorary Professor at the Australia-Japan Research Centre in the ANU she was an active contributor to EAF’s pages.

Acknowledgement: Lauren Richardson

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University