Revitalizing the Japanese economy

Samangie Wettimuny

On March,11 Japan will mark the first anniversary of 3/11 catastrophe. Here are excerpts from an interview with Prof. Shujiro Urata of the Waseda University Graduate School of Asia Pacific Studies, Japan held at the Foreign Press Centre, Tokyo on Japan’s economic issues, post earthquake economic recovery and the Economic Partnership Agreements in the Asia Pacific region.

The major economic problems currently faced by Japan are low economic growth, lack of dynamism, closed economy, declining and ageing population, declining savings rate and growing huge government debt. Although the Japanese economy is opening up in the recent years, still it is largely a closed one. When considering the GDP growth rates in the recent years, it is evident that Japan’s GDP growth rate is below the world average and below the US. China’s economic growth is phenomenal. (See Graph 1) When compared to the US and China in terms of nominal GDP, Japan was surpassed by China in 2010. Japan is number 3 in terms of economic size after US and China. (See Graph 2)

The Japanese economy was hard hit by 3/11 disaster when the country was affected by a massive tsunami, earthquake and nuclear radiation leakage. However the country’s economy has not been doing quite well all these years. As Prof. Urata said when the country was hit by the Asian Financial Crisis in 1997-1998, the country’s economy was not only hit by the crisis alone, but also by the increase of consumption tax that led to deterioration in the Japanese economic performance. Currently there are discussions on tax and social security issues and the government is trying to raise the consumption tax. As the opponents argue the earlier 1997 experience has set a good lesson to the government not to increase the taxes at a critical moment like this.

2008/2009 global Financial Crisis

At the time 2008/09 financial crisis initially hit the US and the European economies, the East Asian countries including Japan were confident that they won’t be affected as their economies were quite stable. But the negative impacts were soon felt by the East Asian economies mainly as a result of deduction of exports to the USA and other European countries. In fact that led to substantial reduction in Japan’s growth rate.

Even when firm entry and exit rates are taken into consideration, it is evident that the Japanese economy is stagnant when compared to that of US. In the US both rates are quite high compared to those in Japan. That means new dynamic challenging firms enter the market, and others exiting it which leads to more dynamism. But such dynamism cannot be observed in the Japanese economy in the recent years. (See Graph 3)

Trade - GDP ratios and FDI-GDP ratios show the openness of the economy and as the Graph 4 shows in terms of Trade-GDP ratios Japan and US are relatively close compared to the world average and particularly when compared with China FDI-GDP ratio, Japan is the lowest. That is one of the reasons for the lack of dynamism in the Japanese economy.

Japan’s population started to decline in 2007. In terms of composition of population, those aged between 15 - 64 are labeled as the labour force and that itself started to decline from the 1990’s (1995) and the percentage of ageing population is on the rise. The three fundamental supply side partners needed for economic growth are increase in labour input, increase in capital input and increase in productivity. Here in Japan the labour inputs are declining, so unless Japan opens up the labour market for foreign workers or immigrants, economic growth cannot be expected from labour inputs.

Capital inputs

In Japan Gross Domestic Savings (savings by domestic, government and corporate sector) are also declining. Therefore, unless we successfully attract foreign investment, the possibility of achieving economic growth by increasing the capital inputs is not so likely. Hence to achieve economic growth or maintain this living standard, it is necessary to increase productivity.

When looking at the economic growth from the demand side, consumption, investment, expenditure, exports-imports are taken into account. Here what should be emphasized is that we cannot expect government expenditure to push the economy forward as there is very limited room for government expenditure to be increased due to huge government debt. Government debt-GDP ratio keeps on increasing resulting from huge government expenditure - mainly due to socially security payments and particularly due to the 3/11 disaster. Hence the future prospects concerning government debt-GDP ratios are not so bright.

Revitalization

“Now giving all the problems that Japan is faced with how can we revitalize the Japanese economy? One key element here is increasing productivity. Unless we are successful in increasing productivity we cannot achieve economic growth that we hope to achieve. And there are a number of policies that the Japanese government can adhere to, to improve the productivity and out of them opening up the Japanese economy is a very important policy which could achieve this goal including productivity.”

The role of FTAs

The DOHA development agenda under the WTO is not going anywhere. In such a situation what could be done is opening up the economy unilaterally, but that too is not quite easy. Hence the second best alternative is Free Trade Agreements (FTAs) - the agreements which eliminate tariff between the member countries. It is obviously beneficial to Japan to enter into FTAs with Asian countries, especially with East Asia. In recent years East Asian countries (including developing countries) such as Japan, China, Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand and Australia experienced substantial trade liberalization. (See Table A) For example China’s average tariff rate in 1992 was as high as 40 %, but came down to 8.9% by 2007.China entered WTO in 2001 and that of course was an important reason for China’s reduction in tariff rates.However there are still high tariff barriers, particularly for some sensitive industries. In the case of China all the sectors still have very high tariff rates.

Although the tariff rate for Japan is quite low already, for some agricultural products tariff rates are extremely high. The condition shows that there is still room for further trade liberalization. As Prof. Urata emphasized even for FDI liberalization the situation is quite the same. Given different situations further trade and FDI liberalization would lead to expansion of trade and investment which in turn lead to economic growth. That is the way that world and Japan should follow.

The special characteristics of Japan’s FTAs are trade and FDI liberalization, facilitation, economic cooperation and improvement of business environment (improving customer procedure- simplifying documentation of customer procedure and so on.) Characteristics such as economic cooperation are very important when establishing FTAs with developing countries. Also Japan’s business is very keen on having some content which deal with business environment and particularly Japan and Mexico FTAs exclusively deal with this improvement in business environment and they were successful.

The motives behind Japan’s FTA s which are also common with other countries are to expand export market for Japanese firms, improve investment environment for Japanese firms, obtain energy and natural resources, promote structural reforms in Japan (in the field of agriculture), improve and establish good relationship with other countries and to provide economic assistance to developing countries. External pressure is necessary to promote domestic reforms.

Impact of FTAs

A major short run effect is the trade and Foreign Direct Investment (FDI) expansion between and among FTA members. It is important to know that the short term impacts of FTAs such as reduced production and employment could be negative. The expansion of imports will replace domestic production and reduce local employment opportunities. That is why there is a great deal of opposition to the FTAs, especially from sectors such as agriculture. Various measures including gradual phase in liberalization, temporary assistance to negatively affected workers, structural reform and other policy measures can moderate the negative impacts during the transition period.

However economic growth is a major medium to short run effect of the FTAs. Great impacts can be expected from FTAs which have comprehensive components such as facilitation and economic cooperation. The larger the membership the greater the impact of the FTAs.

As Prof. Urata finally noted East Asia’s rapid economic growth has been attributable to rapid expansion of trade and FDI, which in turn resulted from trade and FDI liberalization. To achieve further economic growth, further trade and FDI liberalization and facilitation would be effective. Region wide FTA should be established: EAFTA (medium level), CEPEA (medium level), TPP (high level FTA), and gradual liberalization should be pursued, Then it is necessary to expand it or merge with other FTAs to lead to global trade liberalization. FTAs can also be established with the rest of world – with the US, the EU and Latin American countries. Japan should lead CEPEA and join TPP. Japan has shown interest in joining the TPP negotiation and is currently conducting talks with the negotiating members.

[email protected]