Bill Emmott on Japan's Future

[Mulboyne]

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.

[Mulboyne]

In fact, the basis for my longer-term optimism also shares something with that immediate prospect: I think that Japan's economy can now be thought of as normalising, and that we should evaluate the "normal" prospects for Japan as being rather better than the 1990s. But I need to explain more than that.

My first principle is that the period from 1990 to 2005 was truly an exceptional period. Some commentators saw it as somehow exposing the "true" weakness of the Japanese economy. I see it differently: I think it exposed the huge consequences of the bursting of the bubble in stock and property prices in 1990-92, and of the resulting failure of the banking system. This period resembled, in historical terms, the period of the 1930s Great Depression for the United States. The USA had fantastic growth in the 1920s, the so-called "jazz age", but it ended in a bubble and the Wall Street Crash of 1929. That produced a huge banking failure and a deep deflation. But this terrible decade of the 1930s did not mean that America's economic system was somehow deeply flawed. It was an exceptional period. By 1945, the USA was the most powerful country in the world. The 1950s were a golden economic age for America.

Now, I am not suggesting that the same is going to be true for Japan. An ageing society and a falling population do mean that Japan cannot be "number one" like America. But the 1990s were exceptional for Japan in a similar fashion to the 1930s for America. Fortunately for Japan, the world economy was strong in the 1990s and there was no move towards protectionism and cutting trade, as in the 1930s, so the slump in Japan was not so deep. But its strongly financial character, with huge non-performing loans weighing the banks down, and the banking system as a whole virtually collapsing, did represent an extraordinary set of conditions. And those conditions have now gone. Japan's new banking system is far from perfect. But its flaws are no longer deep and fatal.

For this reason, I don't think it can be right to treat developments in the past 15 years as any guide to what might happen in future. It was a period of financial meltdown, in which vast amounts of capital were misallocated—wasted, in other words—by the government, by banks supporting zombie companies, and by zombie companies themselves. At the very least, we can say that capital in future is not going to be used as badly as that. But what we must also ask is whether the situation that led to the bubble itself during the 1980s, and to some of that huge waste of capital then and afterwards, is still in existence in Japan. In other words, has Japan changed enough to avoid simply reproducing the same problems?

My view of the 1980s is that the problems that emerged in Japan should be seen as the result of three things: the loss of economic discipline; the loss of the ability of the economy to adapt flexibly to changing circumstances; and, a related factor, the growth, in politics, of the ability of special interest groups to resist change and to seize resources for their own benefit.

The loss of discipline was partly a result of the weakening of the main bank system as the economy matured and as capital became abundant; it was also the result of complacency or hubris, as companies came to see themselves as supermen, able to do whatever they wanted. The loss of the ability to adapt was a result of the unwillingness of bureaucrats, companies and politicians to deregulate large areas of the economy, which left them inefficient and over-protected. And that was the result of complacency plus the successful efforts of special-interest groups to resist change.

So our question now has to be: has this changed? Is there now more discipline, more ability to adapt, and less ability for special-interest groups to resist change? The answer to all three is yes. The reason is in part simply the chastening effect of 15 disappointing and often dangerous years. But it is also the outcome of the huge number of incremental reforms that have taken place in those years, of the political system, of regulation, of the structure of the financial system, of corporate law, and many more.

For my rather free-market taste, there remains too little market discipline, too little competitive pressure, too much interference by the government and too little deregulation. But things are a lot better than they were. Many sectors enjoyed some more liberal deregulation during the 1990s, particularly telecommunications, transport and energy, which has lowered costs for many users. Changes in corporate law and in attitudes have introduced some new pressure from shareholders for companies to be more profitable, focus their businesses better and pay higher dividends. And the abandonment of the huge public-works spending, combined with the determination of the Koizumi administration to reduce the role of government in the financial system by privatising the post office and the other state-owned banks, are reducing the ability and incentive for politicians and interest groups to block change or to divert money in their direction. The public finances are in bad shape, and the ageing society is going to make them worse, so there is little chance that future governments will be able to change this trend of a smaller state to any great extent.

In fact, my optimism depends on that prediction, that the state is going to continue getting gradually smaller and less influential, and on a prediction that, bit by bit, there will be further deregulation and reform designed to increase the amount of competition in the economy.

This does not mean that Japan is becoming an American-style free-market economy. Nothing that has been done by the reforming governments of the past 15 years, either the Hashimoto administration's "financial big bang" or the Koizumi administration's privatisation programme, has made Japan become appreciably more like America. The popular idea that somehow Horie and livedoor showed the risks of structural reform seems to me to be ridiculous: it just doesn't fit the facts. I believe that Mr Horie must be considered innocent until a court has proved him to be guilty. But if he is indeed guilty of what he is accused of then he doesn't represent any new trend, or any risky outcome of reform: instead, he would be a thoroughly traditional criminal. There is nothing new or reform-oriented about false accounting or market manipulation: many previous Japanese financial criminals have done these things throughout history. The only thing that was new about Mr Horie was that he wore T-shirts and exploited the media in order to attract investors.

What has really been happening has been something different, something that remains incomplete. It is the adaptation of the Japanese system of management and economic policy to a more modern setting, by encouraging more competition, making managers more accountable to the law courts and to shareholders, and by reducing the role of the government in guiding business and directing the flow of money. That process can also be seen in the arrest of Mr Murakami, the shareholder activist: even if that arrest was also driven by annoyance at the new wave that he represents, its main importance is as a high-profile effort to enforce the rule of law in securities markets. Overall, what this means is that, in a very Japanese way, companies are going to become more competitive and profit-oriented, but while also keeping their Japanese style of management, based on a very co-operative and protective relationship with employees.

This new, better discipline and new, better adaptability will, after all, be taking hold during a period when Japan's labour force is shrinking, year by year, thanks to the low birth rate and the retirement of baby-boomers. The excess labour of the 1990s has already gone. Now labour is going to be in short supply, which will make Japanese style co-operative management more important, not less. Companies will not be able to afford to hire and fire in the American way. They will have to try to make better use of their female employees, in order to harness their talents. Most of all, they will need to increase their productivity rapidly, in order to overcome the effects of labour shortage, rising wages and the fierce competition from countries such as China. They will do so through increased use of machines and IT, often at first seeking to catch up with IT innovations exploited in the USA during the past few years.

[Mulboyne]

For that reason, my expectation is that Japanese productivity growth is now going to accelerate. No one can predict exactly how much. But with less capital being wasted and with a changing set of competitive disciplines and incentives, the likelihood must be that productivity will increase really quite rapidly. And if that is right, then economic growth will continue at a faster rate than the OECD's prediction of 1.3% a year, and living standards will go on rising too.

This is not a prediction of a boom. There is not going to be a return to the high-growth period of the 1960s, for the shrinking and ageing labour force makes that impossible. But, as long as the process of reform and increasing competition is maintained, I think there is every chance of a surge in productivity growth. Japan could even become something of a productivity leader once again, as it was in the 1980s.

Much does, of course, depend on the state of the world economy as a whole. Japan may be a physical set of islands but it cannot be an economic island. Exports and currency movements are too important for that. What can we expect from the rest of the world?

Well, I think it depends more on world politics than on economics. Right now, if you look at the world from a political point of view, you are likely to feel gloomy: there is so much terrorism, war, instability, energy insecurity, nuclear proliferation and so on. But if you look at it from an economic point of view, the world looks like it is in a golden age, and in many ways it is. The world economy has grown in the past 3 years at its fastest rate for the past 40 years, and growth is more widely spread than ever before. The reason is globalisation, or more specifically the effort to join in the free market economy made since 1980 by China and since 1990 by India, the former Soviet block countries, Latin America and parts of Africa.

This has generated new trade, new investment, and a new feeling of resilience in the world economy, as it no longer depends so exclusively on one or two countries, such as America. It does exhibit a huge imbalance, however, with a huge trade deficit in America and a huge capital surplus in Asia and the OPEC oil producing countries, which looks a dangerous situation. It is like in a skiing resort: there is an imbalance of snow, and there is a danger of an avalanche.

My feeling, though, is that gradual adjustment is a bit likelier than an avalanche. What is likely is a period of slower growth, or perhaps even recession in the US, as interest rates rise because of inflation worries and the property bubble that has supported consumer spending starts to ease or even burst. That will be bad news for Japan, given the America is one of the country's biggest markets. But should not last long—maybe one or two years—and it is countered by good news elsewhere, with strong growth in Japan's biggest single market, China, as well as in India and in Europe, where the German economy is starting to recover.

As long as trade and investment flows remain open around the world, the prospects for continued growth and resilience in the face of the occasional accident or recession look very strong. The golden age has every chance of continuing and becoming even more golden. Except for one thing: the danger posed by politics.

Politics matters because it can cause sudden changes in economic conditions: the closing of markets, the nationalisation of companies, the shifting of prices, the abrupt renunciation of contracts. There are three big sorts of political risk that I think we should worry about:

1. The risk of a nuclear or other WMD terrorist act in the US or Europe leading politicians to renounce globalisation and to close borders against the movement of people and even goods. This would not be sensible in economic terms, but they may come to feel it is unavoidable in political terms.

2. The risk of An al-Qaeda style revolution in an influential country: by that I mean Pakistan because of its nuclear weapons or Saudi Arabia because of its oil. Then, the new revolutionary government could use its nuclear bombs or its oil to threaten the rest of the world.

3. The risk of political instability in China, perhaps following a "bubble" surrounding the 2008 Beijing Olympics, and during which the growing expectations of the Chinese people, thanks to economic growth, start to seriously confront the unaccountable, dictatorial political system of the Communist Party. Then, there could be an economic shock, but also some danger of anti-Japanese retaliation, exploiting popular Chinese resentment against Japan, or a danger of a military confrontation with Taiwan.

It is impossible to predict how likely these are to happen. But they are all risks that could have serious effects on economic trends too. Of the three risks, the one I think is likeliest to happen during the next 5-10 years is the third one, the political instability in China. What we don't know is how dangerous that could become: it might be quite temporary and peaceable, or it might lead to a major miscalculation by the Chinese leadership over the Taiwan issue, in an effort to use nationalism to retain its control, which could in turn lead to conflict with America and Japan.

But let us be more cheerful than that. The forces favouring liberal, open markets and co-operation between the great powers of the world are strong. There is always the risk that something catastrophic could change that. But there is also a good chance that it will not. Fortunately for us in the journalistic profession, there are always surprises, always new events and trends to discover and to write about. They aren't usually catastrophic however. They just force us to adapt.

And Japan now again looks like a country that has the ability to adapt. Its economy is returning to normal, after the exceptional post-bubble stresses and strains. It has been reformed enough, in politics and in the economy, to produce better incentives, more discipline, more competition and more flexibility. With these "normalised" times now about to confront a labour shortage, there is every chance of a surge in productivity growth, which will help living standards also to grow.

In other words, the sun can now rise again. And I expect it will rise again.

[Buraku]

South Korea to provide $3 mln aid to Japan for quake relief
https://www.reuters.com/world/asia-paci ... 024-01-11/

The era of MeToo will continue for a time...Comedians and sex assault allegations
https://www.nippon.com/en/news/yjj2024010800505/

Bill Emmott the Womenomics Britbongistani journalist and consultant guy?

The Great European Disaster Movie
https://www.imdb.com/title/tt4288614/
30,000ft: sometime in the not-so-distant future. Eight year old Jane Monetti sits aboard an aeroplane destined for Berlin Tempelhof, but all is not well. Far below her is a post-Union Europe and countries that collaborated happily at the beginning of the 21st Century are regressing into a fractious collection of isolated nation-states


The good times are almost over for Japan
https://news.yahoo.com/good-times-almos ... 00854.html

[Coligny]

The Great European Disaster Movie
https://www.imdb.com/title/tt4288614/
30,000ft: sometime in the not-so-distant future. Eight year old Jane Monetti sits aboard an aeroplane destined for Berlin Tempelhof, but all is not well. Far below her is a post-Union Europe and countries that collaborated happily at the beginning of the 21st Century are regressing into a fractious collection of isolated nation-states

l

Prophecy ?

Go Division Martel !!!

Feeling like it’s 732 !