Learning a negative lesson
The Japanese economy has always set an example - both good and bad - for us to learn from. Japan kept up its fiscal and monetary expansion ever since the yen value shot up after the 1985 Plaza Accord among governments of the U.S. and Europe to depreciate the U.S. dollar against the Japanese currency. Real estate and equity prices went up as a result, but the economy sank into a deep and lengthy recession after the bubbles burst in the early 1990s. Authorities responded poorly to the crash and coupled with structural problems from an aging population and atrophied productivity, the Japanese economy was plagued with deflation and stagnation for the following 20 years.
Since the enthusiastic and nationalistic Prime Minister Abe Shinzo came into office three years ago, the economy has been doing much better. Stock prices have gained more than 80 percent and the dollar has zoomed from 78 yen to 120 yen. The weakened yen boosted exports of Japanese industrial products and drew investment from the outside, bolstering corporate profitability. Hiring and salaries also increased. Consumer prices except fresh food and energy rose above 1 percent. Real incomes are expected to rise over 1 percent this year and next.
Although his approval ratings were damaged by his push for security law revisions to revive military sovereignty through a reinterpretation of the pacifist constitution, Abe was safely reelected as head of the ruling party, which secures his place at the top for the next three years. Following up on his signature “Abemonics,” a mix of economic stimuli with fiscal and monetary easing and reforms, Abe introduced a 2.0 version hyped with slogans about a stronger economy, childcare benefits, and more reliable social security. He was firing all possible arrows to strengthen the economy and fundamentals for further growth.
The agreement by the U.S. Japan, and 10 other Pacific rim economies to launch the largest trade pact, the Trans-Pacific Partnership, last week also raised hopes for further traction for the Japanese economy. The deal will allow 12 nations to expand industrial partnerships in manufacturing and boost exports among each other. Liberalization in farming and services is also expected to reinforce productivity across those sectors.
Despite the flurry of stimulus actions, prospects for the Japanese economy are not all that bright. The central bank has been continuing with unlimited quantitative easing, gobbling up 80 trillion won ($71 billion) worth of government bonds annually, but it is unlikely to achieve its 2 percent inflation target by the first half of next year. The economy contracted 1.2 percent in the second quarter and is likely have done poorly in the subsequent quarter due to reduced demand from China. Bank of Japan Gov. Huruhiko Kuroda is expected to announce additional monetary easing in late October. But monetary maneuvering has little room left. Japan’s public debt level is the world’s highest, reaching 240 percent against its gross domestic product. Standard & Poor’s downgraded the country’s sovereign credit rating last month.
Increasing the birth rate, which is one of the core targets of Abenomics 2.0, also cannot be easily achieved. At its current rate, the country’s population will be reduced to 87 million people in half a century from its current 127 million. Abe even appointed a minister specifically committed to keep the population above the 100 million threshold. But few doubt any policy can help sustain the population without an influx of foreign immigrants.
Korea has been fast in catching up with Japan over the last seven decades after the country was liberalized from its colonial rule. Korea’s per capita income in terms of purchasing power, which was just a fifth of Japan’s in the 1970s, is now hardly different. Japan’s share in global exports nearly halved to 3.6 percent in 2014 from 6.1 percent in 1970. Korea’s jumped from 0.3 percent to 3.0 percent.
But Korea still lags behind Japan in not only economic size but also in its riches of systems, expertise and know-how. In the World Economic Forum Global Competitiveness Index, Japan ranked sixth while South Korea was 26th. Japan has produced 21 Nobel Prize laureates while Korea has zero.
Today’s Korea differs greatly from what Japan faced 20 years ago. But we have been experiencing the same ills - low consumer prices, interest rates and growth - for many years. Our working population has begun to thin because of low birth rates and an aging society. Productivity has slowed. Inequalities among industries, companies and individuals are worsening.
We dread finding ourselves in Japan’s situation a decade or two from now. The lesson of the Abenomics experiment is that no treatment can cure the economy if it has been lethargic too long. In her early days in office, President Park Geun-hye vowed to push the growth rate above 4 percent and achieve an overall employment rate of 70 percent, but few recall those slogans. She must re-set her long-term goals to expedite policies and investments for sustainable growth. Korea has been a role model in Asia for having caught up with Japan through stable advance in democratization and modernization. We must learn the good ways and avoid the bad ones and carve out a future in our own style.
Translation by the Korea JoongAng Daily staff
JoongAng Ilbo, Oct. 16, Page 35
The author is an economics professor at Korea University.
by Lee Jong-wha