For Japan, Road to Salvation Starts with Productivity

Global Debt and Growth Series Points to Way Out of Debt Spiral

Oct 30, 2013, 12:00 ET from The Conference Board

NEW YORK, Oct. 30, 2013 /PRNewswire/ -- The Conference Board today published Global Debt and Growth Series: Japan, part of its project to analyze and compare sovereign debt's impact on the outlook for 15 advanced and developing economies (see list below). Japan's gross debt-to-GDP ratio, which stood at 68 percent in 1990, has ballooned to 237 percent in 2012. Analysts concur that this level is unsustainable, and that deficits are much too large to be closed by tax increases alone. Moreover, the main buyers of Japan's government bonds—Japanese workers and retirees—are rapidly aging and shifting from saving to dissaving.    

"Given recent monetary policy in Japan's global competitors, Prime Minister Abe's massive quantitative easing program was a necessary move to stave off deflation and currency appreciation," said Stephen Sexauer, author of the report. "Whether Abenomics represents the sea change affecting real output that some predict remains to be seen. Above all else, Japan must return to productivity growth after a generation of stagnation." 

To 2035 and Beyond: Slow Recovery or Total Catastrophe?
Since 2010, The Conference Board has developed a simple but powerful debt-reduction framework based on maintaining per-capita spending while seeking to grow GDP—and thus government revenues—beyond the increases brought by inflation and population growth. The key is productivity growth; over the long term, a debt-to-GDP crisis can in most cases only be resolved by raising worker productivity. This is nowhere clearer than Japan, where annual productivity growth has fallen from 8 percent during the extraordinary catch-up growth of 1956–1973, to 3 percent from 1973–1989, to 1 percent since the equity and property bubbles burst in 1989.  

Today's report derives from this framework two future scenarios for the Japanese economy. The good news is no miracles are needed to effect a long-term turnaround. The report's aggressive growth model assumes annual productivity growth of 1.8 percent, employment growth of 0.3 percent and inflation of 2 percent. Under this scenario, nominal GDP between 2015 and 2035 will rise 4 percent per annum, and debt-to-GDP ratio will fall slowly but steadily: to 150 percent by 2034, 100 percent by 2041, and 50 percent by 2046. A more moderate scenario holds annual productivity growth at 1.8 percent, employment growth at −0.5 percent, and inflation at 1.0 percent; 2015–2035 nominal GDP growth under this model would only average 1.3 percent. On this path, Japanese debt-to-GDP would peak above 275 percent in the next decade, not to fall below 100 percent until at least the 2060s. In this case, either outright default or default-by-devaluation becomes likely.

"Japan is definitely at a critical juncture with regards to its economic future," said Sexauer. "Yet the situation is hardly hopeless. Japanese workers remain among the most productive in the world, even after two decades of tepid improvement marked by an unsuccessful restructuring of the banking system that sapped the forces of 'creative destruction.' There's no reason why smarter policies cannot increase Japan's productivity growth rate. Even Japan's demographic challenges are far from insoluble: Over ten years, a rise in female labor force participation to U.S. levels—i.e., from 49 to 58 percent—would offset retirement-driven declines in the workforce. What Japan needs are policies that incentivize productivity improvement, attract women and older workers to the labor force, and stay in place over the long haul."

Global Debt and Growth Series Videos:

Chief Economist Bart van Ark introduces the series
Economist Stephen Sexauer discusses Japan

Reports in the Global Debt and Growth Series:

Advanced Economies:    

United States, Germany, Spain, Japan (available now) 

France, United Kingdom, Italy, Netherlands (coming soon)

Developing Economies:   

Brazil, China, India, Mexico, Turkey, Russia, Indonesia (coming soon)

For complete details:


Global Debt and Growth Series: Japan |Where Did Productivity Go? 

by Stephen Sexauer (EA 0413, October 2013)

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