No links but here is a lengthy piece which Bill Emmott (former editor of the Economist) circulated to the ATCA. Peter Tasker wrote an interesting reply which I'll post separately
[SIZE="3"]Japan's Future Potential in a Globalising Economy[/SIZE]
As you may know, in February I published a new book, under the title of "The Sun Also Rises". This is an expanded version, in Japanese translation, of a special article I published under the same title. The title shows very clearly that I am optimistic about the economic recovery as well as about Japan's long-term future. It was intended, of course, to act as a contrast to my book published in 1989 in English and 1990 in Japanese, called "The Sun Also Sets", which was pessimistic about the bursting of the bubble economy in Japan.
Consequently, an immediate and obvious question to ask me is whether anything has happened since the article was published that might have made me change my mind. The fall from grace of Takafumi Horie and livedoor late last year is one possible candidate, combined more recently with the arrest of Yoshiaki Murakami, the leading shareholder activist who is accused of insider trading during Mr Horie's attempt to buy Nippon Broadcasting. Another might be the slump in the popularity ratings of the Koizumi administration, which some say casts doubt about the future of reform. A third could be the rising concern about interest rate rises, both in Japan and around the world.
The answer is no: nothing has happened to change my optimism. In fact, the economic data since October have reinforced my view.
It may help if I think back to the beginning of 2004 and explain how my view, and that of my then colleagues at The Economist, has evolved since then. In early 2004, we put on our cover a picture of a crane taking off, and used the title "At last, Japan is flying again". What we meant was that economic growth was by then clearly under way, and it was occurring against a very positive background of corporate restructuring. Company profits were booming and debts were being reduced; in particular, the volume of non-performing loans had dropped a lot and was still falling rapidly. Growth in exports to China during 2002-04 was one big reason for this corporate recovery, because the benefit of exporting to that market was being shared across a wide range of industries and regions.
Another reason, however, was a more mixed blessing: changes in the labour laws and the labour market as a whole were clearly allowing companies to cut their labour costs considerably, by employing many more part-time workers and workers on irregular, temporary contracts. This was very good in that it was allowing flexibility for many companies and helping manufacturers in particular to compete with lower-cost producers in China and elsewhere. But the less encouraging aspect concerned consumer demand: at a time of price deflation, these labour market changes were also maintaining wage deflation, as part-time and temporary workers were being hired on low wages. Households had only been maintaining their spending by reducing their savings. This further drop in incomes promised to bring about more weakness in household spending, making economic growth vulnerable to any drop in exports.
These changes in the labour market also struck me as very interesting. Might they be bringing about a fundamental, long-term transformation in the relationship between workers and managers? Might they be producing a permanently less equal society? My personal interest in Japan's recovery was thus sharpened. So I decided to exploit my privileges as Chief Editor of The Economist by assigning myself to come to Japan for several weeks of research, in order to see if I could find out what was going on and then write a long article about it in The Economist.
My two visits were in March 2005 and then in July 2005. They thus straddled an interesting period in the development of the labour market and so of the economic recovery. By March, the proportion of Japan's total labour force that was accounted for by part-time and irregular workers had risen to nearly 30%, compared with 18% a decade earlier. Full-time jobs, on regular contracts, were not being created. But by July, this had changed. For the first time in many years there was some growth in the number of full-time, regular jobs. There were also signs that wages were beginning to rise, albeit slowly, and that bonuses were rising again too.
This, essentially, was the key piece of evidence to convince me that Japan's economic recovery was now likely to be sustained. The bursting of the bubble in 1990 had left behind three huge excesses, which had burdened the economy ever since: Excess production capacity; excess corporate debt; and excess labour. The excess capacity and excess debt had been cleared away by 2004. But the excess labour had endured, depressing wages and consumption... until the spring of 2005. Now it had gone. Japan could be a normal economy again, with economic growth being helped by a broad range of stimuli: exports, corporate investment, consumer demand. It no longer depended on the public spending that had rescued the economy so often during the 1990s, but also distorted it grossly.
Since then, bit by bit, this picture has become clearer and brighter. Full-time jobs have continued to be created. Wages have continued to rise. The first signs have been seen of a rise in household spending, albeit a gentle one. Companies, too, have been adopting more ambitious plans for investment. Price deflation is nearing an end. The Bank of Japan has felt able to cease its policy of aggressive monetary expansion. Forecasts for GDP growth for 2006 range between 2.5% and 3%, numbers which would have seemed extraordinary only two or three years ago. The sun is rising again.
But will it continue to do so, and how strongly? The case for pessimism is also clear. Japan's population is beginning to fall, and so is the labour force. My own argument, 16 years ago in "The Sun Also Sets", was that the ageing society was a big reason why Japan would not overtake the United States and become "number one", to use the phrase made famous by Professor Ezra Vogel. Since then, the situation looks as if it has become even worse. Productivity growth in the past 15 years has been only modest, at an average of 1.7% a year. If that continues, and Japan's labour force goes on shrinking, then the annual average potential growth rate for Japan for the next five years is merely 1.3%, the OECD has calculated, which is no better than the average growth enjoyed during the past 15 years or so.
In my view, however, that is too pessimistic, especially in terms of the prospects for the next couple of years. Forecasts about longer periods, say of five, ten or even fifteen years, are much more hazardous, since so much depends on whether the right economic policies are pursued and on whether conditions in the world economy as a whole are favourable. Nevertheless, what I do believe is that if the right policies are pursued in Japan, then there is every chance that growth over quite a long period could be a lot better than that 1.3% forecast by the OECD.
What is the basis for my optimism? Well, the basis for the next couple of years is quite simple: there is now the chance for a period of catch-up, as consumer demand grows again, companies invest more and the economy normalises. That too depends on conditions in the outside world, which I will describe in detail later on in this speech. But, put briefly, I would say the global prospects are looking quite healthy, with some risk of a slowdown in the United States being balanced by an upturn in growth in the European Union, and with expansion in the emerging markets, especially China and India, continuing to be very strong—all despite the high level of oil prices. This is very good for a trading nation like Japan. Higher interest rates in America, prompted by signs of rising inflation, could well bring about that slowdown; but if so, that will represent good news, a rebalancing of what has been an extremely unbalanced world economy.