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Japan’s Economic Dilemma: Comfortable Decline or Painful Revival?

The Wall Street Journal, 3 December 2014 - With Abenomics at a Crossroads, Our Correspondent Writes on the Difficult Choices Facing Japan
TOKYO—“Recession,” “stagnation,” “slump,” were the ominous labels I constantly read describing Japan before I moved here in late 2009. After I’d settled in, a better word seemed “kaiteki,” which means “comfort,” and conveys a wide range of virtues like convenience, reliability, safety, even charm. I was struck by the disparity between the world’s perception of Japan and the remarkable feeling of prosperity here—compared not just with the bubble-era Japan I saw when last living here 20 years earlier, but with the America I experienced in the interim, during its own boom times. Jacob M. Schlesinger. Jacob M. Schlesinger. . Tokyo in recession showed none of the distress you would expect in the U.S. or Europe: no boarded-up storefronts, garbage piles, beggars, trashed subway stations or any hint of serious street crime. If anything, the city had spiffed up considerably during the “lost decades” of my absence. Near my financial-center workplace, the dumpy cinder-block office buildings with smoky coffee shops were replaced by gleaming towers anchored by gourmet dining and high-end clothing stores, bustling with customers. In my home neighborhood in a more traditional part of the city, old businesses did frequently shut down—but the space would close only during a frenzied weekend refurbishment, reopening Monday with rows of bouquets outside used to celebrate new openings. The numbers don’t lie. Japan’s economy, by many measures, has been in historic decline, causing distress for a growing underclass of workers who lack permanent full-time jobs and for regions far from Tokyo where the population is shrinking. But the country has, by and large, managed a relatively comfortable, peaceful decline. That helps explain why it took so long for an aggressive response, in the form of Abenomics—and why the public has so quickly developed second thoughts. Having covered Japan’s topsy-turvy politics and economics for The Wall Street Journal over the past five years, this is what I see as the defining tension in the country: deflationism vs. reflationism, two starkly different visions of Japan’s future. Deflationists emphasize stability, see demography as destiny and believe Japan’s aging, shrinking population inevitably dictates a stagnant economy. Their response: minimize risk, disruption and division to make that transition as comfortable as possible—like a nation planning for retirement. Reflationists consider that outlook unnecessarily defeatist. To them, risks and disruptions are a price worth paying for a more expansive, dynamic future. The deflationists held sway for much of the past two decades; the reflationists have been ascendant for two years under Prime Minister Shinzo Abe. After enjoying early high popularity, Mr. Abe faces growing doubts, calling a Dec. 14 election as a national referendum on his revival program known as Abenomics. The vote will recalibrate the balance of power between the governing philosophies, helping determine not only Japan’s economic direction but also its diplomatic and military role in the Asia-Pacific region. ‘So far, at least, Mr. Abe’s dice-roll hasn’t triggered the deflationist market-meltdown nightmare. Neither has it delivered the clear recovery promised by the reflationists.’ . By branding Japan’s pre-Abe regime “deflationist,” I’m not suggesting the country’s leaders intentionally sought to induce an enervating cycle of falling prices, wages, consumption and investment. But having stumbled into that state in the late 1990s, they tacitly concluded it wasn’t so bad—and the commonly prescribed cures risked doing more harm than good. One measure: The “lost decades” unemployment-rate peak was 5.5%, far below double-digit recession levels for the U.S. and Europe. “Mild deflation has been, to some extent, a price that Japanese society has paid to secure ‘maximum employment,’” Masaaki Shirakawa said in a 2013 speech shortly after retiring as Bank of Japan governor. The cautious Mr. Shirakawa had become the deflationists’ main face, the chief punching bag of the reflationists. Deflation, he suggested, allowed Japan to spread and limit the pain from its decline, because firms could cut wages instead of carrying out U.S.-style mass layoffs. That attitude, perhaps jarring to Americans, seems more mainstream in Japan, where mistrust of market messiness runs deep. The Pew Research Center this year asked people in 43 countries whether they agreed with the statement: “Most people are better off in a free-market economy, even though some people are rich and some are poor.” In Japan, 51% disagreed—just one of four countries where a majority doubted capitalism’s net benefits. I have sympathized at times with Japan’s stagnating stability. I helped cover last year the battle between Seibu Holdings Inc. and its biggest shareholder, private-equity giant Cerberus Capital Management LP, which was pushing for American-level profits. Cerberus detailed what it considered Seibu’s absurdly inefficient operations, including the four-car, six-stop Tamagawa train line on Tokyo’s outskirts. I knew it well: It was the line my daughters rode to school. I could see the logic of the frustrated American investors—and also the costs their blueprint would impose on communities. Japan’s risk aversion heightened as the population started falling about five years ago, entrenching the nation’s self-image as an “aging society.” The deflationists’ last great act was the 2012 law doubling the national sales tax. While acknowledging the move could slow growth and deepen deflation, they said the extra money would shore up old-age benefits for baby boomers’ retirement and reduce the risk of investors getting worried about Japan’s huge national debt. Deflation, of course, had downsides and detractors. The “social contract” discouraging layoffs made companies hesitant to hire workers with good salaries and benefits. Japan’s low jobless rate came with more low-paying part-time or temporary jobs, especially for young people who came of age in the deflation era. A nation scaling back its future ambitions to cushion its elderly had undermined opportunities for its youth. ENLARGE iStock . Reflationist concerns extended to Japan’s shrinking relevance in global affairs. China now boasts an economy twice Japan’s size. Beijing’s heavy-handed muscle-flexing over territorial tensions between the two nations—a 2010 export embargo of raw materials, a 2012 boycott of Japanese goods in its domestic market—helped highlight, for reflationists, the national-security hazards of a stagnating gross domestic product. It’s no coincidence the seemingly dormant reflationist cause intensified after these China shocks. Nor was it coincidence that the movement’s leader became Mr. Abe, a politician better known for attempting during an earlier, brief stint as prime minister to restore what he considered Japan’s lost national pride. Japan’s pacifism had, in many ways, become a logical companion to deflationism—a risk-averse foreign policy, compatible with receding national influence. Most of the policies in the “three arrows” of Abenomics—monetary and fiscal stimulus for short-term growth, structural changes for long-term growth—were mulled long before Mr. Abe. What’s new is his declaration that reflation is Japan’s top priority. Deflationists and reflationists generally share a common understanding of the potential rewards and repercussions. What divides them is their tolerance for the risks. Japan is now pushing stimulus to new extremes: The central bank buys—and the government issues—more debt, proportionate to the economy, than any other nation. Japan’s debt problems preceded Mr. Abe, but his attempt to boost growth by delaying the second stage of the tax increase enacted by deflationist predecessors shows a greater willingness to test the limits of Japan’s record-shattering borrowing. Related Coverage Shinzo Abe Calls Snap Election Opinion: The Real Referendum on Abenomics . Why didn’t pre-Abe Japan take those chances? The deflationists feared investors would conclude economic policy had become unhinged, triggering some kind of debilitating market crash. It was always impossible to measure the likelihood of such calamity, but the mere prospect discouraged bolder stimulus. So far, at least, Mr. Abe’s dice-roll hasn’t triggered the deflationist market-meltdown nightmare. Neither has it delivered the clear recovery promised by the reflationists. The Dec. 14 election will direct the next stage in this debate. Mr. Abe is unlikely to lose power, owing to disarray among opposition parties. But a big loss in seats for his ruling party would limit his latitude. If he holds on to a big majority, Mr. Abe’s postelection plans will define just how far he is willing to challenge the country’s entrenched deflationist instincts. For all the turmoil stirred up by Abenomics so far, the prime minister has barely started on the most radical piece of his agenda, the “third arrow” structural changes. That was always going to be the most difficult part to sell to an upheaval-averse public—and even before reaching that phase, reflationism is losing support. In a recent Nikkei newspaper poll, 33% supported Abenomics and 51% didn’t. Some disaffection comes from signs the Abenomics revival is stumbling. But some actually comes from its success, because success isn’t necessarily “comfortable.” Abenomics’s most visible accomplishments have been soaring profits for Japan’s multinationals and soaring stock prices for the relatively small shareholder class. Lower- and middle-income households have seen inflation outstripping wage gains, while small domestic-oriented firms are pinched by rising material costs. Abenomics has stoked a widening gap between haves and have-nots, a disparity the deflationists tried to contain. The current debate comes down to two big questions. First, can Abenomics really succeed in boosting the country’s metabolism? Despite current commentary about its “failure,” I think it probably will, at least modestly—especially with recent new monetary and fiscal stimulus. But the strains that have already emerged will only intensify, especially if structural overhauls move into higher gear. That leads to the second big question: Even if Abenomics can end Japan’s long deflationary era, is that what the country really wants? —Jacob M. Schlesinger, a senior correspondent for The Wall Street Journal, first reported from Japan from 1989 to 1994, and again starting in late 2009. This is adapted from an essay published in Japanese on The Wall Street Journal Japan, to mark its fifth anniversary. This selection of news and comment is provided as a service to Network users, and is not intended to be comprehensive. The articles featured are compiled by external agencies and in no way reflect the views of the ILO, its constituents or partners. Their inclusion does not imply the endorsement or approval by the ILO of the information contained therein.


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