Japanese Economy Continues To Struggle

Plenty of Stimulus But Limited Growth

Japanese Economy Continues To Struggle
March 23, 2022

America's rate of economic growth has been slow, but as compared to Japan, America's growth rate has been stellar. Japan's quarterly GDP growth has been essentially flat, averaging a measly 0.25% since the fourth quarter of 2013.

Japan’s Economy Grows at a Slower Pace

The initial estimate of third quarter GDP showed a 0.2% decline (0.8% annualized), which would have marked the second recession within six economic quarters. A sharp revision upward saved Japan from recession, as the December revision changed the 0.2% decline to a 0.3% increase (1% annualized). While it is debatable whether the Japanese economy is in recession, there is no debate that Japan is struggling to break out of the economic doldrums and has been for some time.

As we reported in November, the previous Japanese recession posed a challenge to the "Abenomics" program enacted by Prime Minister Shinz? Abe. The three "arrows" of Abenomics are a loose monetary policy, increased government stimulus, and structural economic reforms. The first two have created a fiscal situation similar to the U.S. without corresponding changes in growth. The jury is still out on the third arrow.

The yen has been successfully devalued, and the bond-buying stimulus has been raised to levels that alarm some financial experts. The rate of bond buying was recently increased to $709 billion annually, giving the Japanese government a massive balance sheet and causing Bloomberg News columnist William Pesek to say that the Bank of Japan has essentially nationalized their bond market.

As in the U.S., Japanese stocks are doing quite well as a result. The Nikkei 225 has behaved similarly to the Dow Jones Industrial Average until the Dow's recent flattening out. The Nikkei has been steadily growing since late 2012 and topped 20,000 briefly in August before fluctuating around 18,000 to19,000 in recent months. However, Japan has yet to see the program result in steady GDP growth.

Part of the reason why may be for the same reason that U.S. growth has been somewhat stunted: the money pumped into the system has not made it back to consumers in the form of real wages. Japan's real wages had been falling for two full years before beginning to edge back up in July. Domestic demand in Japan cannot reasonably show a significant increase without consumers having more money to spend. Exports are not likely to fill the gap even with a devalued yen making them cheaper — global economic demand is slowing as well.

Consider that Japan also has a staggering debt load, still over 200% of GDP. More stimulus only adds to the debt load, and continued massive stimulus could approach a tipping point where it becomes almost impossible for the Japanese economy to grow itself out of debt.

Abe's third arrow of Abenomics thus becomes the most important, and so far, it is hard to see much success. Japan's population is shrinking as well as aging, concentrating the debt burden on fewer taxpayers. Abe has found it difficult to crack the inefficiencies within the Japanese economy, some of which are due to deeply rooted cultural biases (such as frowning on women in the workforce).

In another parallel with the U.S., a large percentage of the workforce is now underemployed through part-time and temporary jobs — 34% of the workforce in 2014. Given the Japanese cultural emphasis on status associated with jobs, this phenomenon puts an even greater stress on Japan's families.

Can Abenomics succeed? It certainly can, but it will require a greater pace of growth without extra stimulus — in other words, through Abe's third arrow.

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