In Depth

What can we learn from Japan's economic resurgence?

World's third largest economy has recorded its longest period of expansion in more than a decade

For years, Japan was a symbol of how not to manage macroeconomics. As the "lost decade" of growth became two lost decades and the promised radical reforms of Prime Minister Shinzo Abe – dubbed "Abenomics" – failed to bear fruit, Japan looked like a cautionary tale for advanced nations. 

And that was before Abe became the subject of a corruption scandal relating to claims he used his power to help close friends. 

From storming to parliamentary election victory in 2014, Abe's approval rating has now tumbled to below 30 per cent. His ruling Liberal Democratic Party suffered big losses in Toyko's local assembly elections last month.

But the tide could be turning. This morning, new figures were published that show Japan "has recorded its longest economic expansion in more than a decade", says The Guardian

The economy "blew past" economists' predictions of 0.6 per cent growth in the second quarter to register a surge of one per cent. This equates to a "storming" four per cent on a year-on-year basis. 

The figures mean Japan has now recorded six consecutive quarters of growth in a row, its longest winning streak since 2006. 

So is there anything to learn from Japan's nascent recovery that could help revive the UK economy?

Fiscal boost 

At face value the principles of Abenomics are not so different from the policies deployed in Britain to cement the recovery from the financial crisis a decade ago.

The Japanese government and central bank are firing "three arrows" to kill deflation and in the process reshape the economy: unprecedented monetary policy stimulus, a fiscal policy boost and supply-side reforms to raise productivity and support the labour market. 

Compared to the "austerity" agenda in the UK, the "arrow" that stands out is the fiscal boost i.e. government spending on things like infrastructure that's designed to boost the economy.

The Japanese government is trying to increase spending on infrastructure while at the same time reining in its budget deficit.

Although it's spending more, it's also trying to curb welfare spending over the longer term and raising taxes in an effort to balance core government outgoings with tax revenues by 2020, says the FT.

Philip Hammond may be pushing the UK target back to the mid-2020s, but the Japanese plan is still very similar to the balancing act his government is trying to achieve.

Monetary policy 

This brings us to monetary stimulus, which the Council for Foreign Relations (CFR) says has been called "a gigantic experiment". 

It's true that the scale of the Japanese stimulus has been massive, but the UK's monetary easing is similarly unparalleled in history.

Japan's money printing or "quantitative easing" programme has sent central bank assets above 70 per cent. The US Federal Reserve and European Central Bank both hold far less than half that amount. And some Japanese interest rates are now negative. 

But the UK has an active and large quantitative easing programme, which last year was expanded to include buying the debt of companies as well as banks. Interest rates are also at a record low and haven't been increased for more than a decade.

Supply-side reforms 

There are further similarities in the reforms being introduced in Japan to tackle some of its deep-rooted economic problems. 

Japan's aim is "slashing business regulations, liberalising the labour market and agricultural sector, cutting corporate taxes, and increasing workforce diversity," says the CFR.

The country is also tackling a growing demographic problem that has seen the relative size of its workforce shrink by six per cent over the past decade while the number of older people receiving state benefits only grows. 

Ultimately the government wants to increase the size of its working age population, boost stagnant wages and increase the economic participation of women. Above all else it wants to boost productivity to increase the capacity of the economy.

These are the same issues faced by the UK government, whose policy response has included upping the state retirement age, slashing corporate taxes, increasing legal minimum wages and forcing transparency on firms over gender pay and job gaps. 

Rebalancing

What differs are the material changes within the two economies that these reforms are supposed to achieve.

In the UK, the economy is severely biased towards domestic demand – that is, consumer spending. The services sector makes up 80 per cent of the economy and the country has a £4.6bn trade deficit with the rest of the world. Boosting exports is the elusive aspiration.

Japan on the other hand has a steady trade surplus and is renowned as an export economy. Its problem is weak domestic demand driven by years of deflation.

"Falling prices can discourage spending by consumers, who might put off purchases in the hopes that prices will drop further," says the BBC

"That hurts businesses, as it can stop firms from increasing production, hiring new staff or increasing wages."

In its new GDP figures, Japan saw a 0.9 per cent boost to consumer spending which, along with a stimulus from government spending (especially on projects linked to the 2020 Olympic Games), was the biggest contributor to its improved performance.

Debt

Japan is therefore following a slightly more aggressive version of the stimulus-heavy policies being practised across the advanced world. The end goal may be slightly different, but the stopping points are very familiar indeed.

But there is another similarity with the UK – Japan's focus on debt.

Japan's national debt is equivalent to a staggering 250 per cent of its GDP, a far cry from the 80 per cent in the UK. 

That's why it's sticking to a fiscal restraint policy – albeit for now only seeking to balance the "primary budget" rather than debt repayments – even though this includes plans to increase a controversial sales tax that acts as a drag on the spending it's trying to encourage.

Abenomics was designed to boost growth, but sustainably by putting upward pressure on wages and inflation.

The former has been achieved but wage growth in Japan is still negative and inflation is at a measly 0.4 per cent. It will need to do much better with those measures to justify the government's huge investment in such an already debt-laden economy.

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