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Wednesday, May 2, 2012

Inviting economic suicide?

Special to The Japan Times

HONG KONG — The International Monetary Fund has just reported that India has overtaken Japan as the world's third biggest economy in purchasing power parity (PPP) — the measure of the amount of money needed to purchase the same goods and services.

Now it is at least semi-official: Japan's economy is on the skids. A report just released by a think tank of the Nippon Keidanren, the country's most powerful business organization, says that by 2050, Japan will no longer be a developed country, predicting years of negative growth from 2030 onward.

"Unless something is done, we are afraid that Japan will fall out of the league of advanced nations and again become a tiny country in the Far East," says the report in Japanese by the 21st Century Public Policy Institute (21st CPPI), the research institute of Keidanren.

The report should serve as a wakeup call to Japan's economic and political establishment to take radical remedial reforms. The worry must be that there are few people inside Japan Inc. who have a clue about how to remedy the situation, still less the necessary political clout.

The 21st CPPI predicts that in the best-case scenario, Japan's gross domestic product in 2050 will be only one-sixth of China's and one third of India's, as the country struggles to stay ahead of Brazil as the world's fourth biggest economy. If Japan does not take remedial measures, it will drop to ninth place in the world, behind France and barely ahead of Indonesia.

According to the IMF, the European Union has the largest GDP, worth $15.8 trillion, followed by the United States with $15 trillion, China with $11.3 trillion, and India now narrowly ahead of Japan, with $4.458 trillion against $4.44 trillion. In per capita terms, of course, the U.S. and Japan are far ahead of the two Asian giants: U.S. (sixth in the world), $48,387; Japan (24th), $34,740; China (92nd), $8,382; India (129th), $3,694 (all in PPP).

The reasons why Japan's economy is faltering are predictable enough: a dwindling workforce caused by a chronic low birthrate together with low savings, slowing industrial productivity, and shriveling investment. Japan is the industrial world's trendsetter in aging population; its population fell by 0.2 percent to 127.8 million in October 2011.

By 2060, the country's population will drop to 86.74 million people, according to the health ministry. By 2050, almost 40 percent of Japanese will be aged 65 or over, compared to about 23 percent today, itself an unprecedentedly high burden for any country to bear. The working age population will fall from about 63 percent to 52 percent.

My criticism of the think-tank report is that it is too static. It almost looks as if the real damage will only occur after 2030 and 2040. The report forecasts that from 2030 onward Japan's GDP will fall by 0.17 percent a year, accelerating to 0.46 percent by 2041 and to 1.32 percent a year by 2050. In reality the damage has already started, and the risk is that if quick action is not taken between now and 2020, it may be too late to stop Japan's economy going into a tailspin.

Tackling the real issues is complicated by distracting immediate problems exacerbated by the last year's triple disasters of earthquake, tsunami, and nuclear meltdown at Fukushima.

The need to take precautions to make sure that Japan's other nuclear reactors were safe against natural disaster led to popular panic and closing of nuclear plants for checks. Consequently, today only one of Japan's 54 nuclear reactors is working and the fuel import bill has soared. The impact was seen in the record trade deficit of ¥4.41 trillion in the fiscal year ended March 31. Imports of liquefied natural gas to make up the shortfall from nuclear energy are running 20 percent higher than a year ago.

Prime Minister Yoshihiko Noda has expressed his determination to get the nuclear plants operating again, warning that the alternative is electricity cuts of up to 20 percent in some areas during Japan's sweltering sticky summer. But the government's assertion that the nuclear plants at Oi are "more or less" safe to resume is an object lesson in political folly.

Noda is also playing with political and economic fire in his determination to double Japan's 5 percent consumption tax by 2015. Without economic reforms preceding it, the tax hike could damage the economy.

Even without the disasters, Japan's economy was facing problems, especially in its relationships with the rest of the world. The relentless rise of the yen, which hit 75 against the U.S. dollar last year, has damaged export prospects and the confidence of an economy, which has depended on exports for most of the small growth it has eked out recently.

The yen's fall this year to 81-82 against the U.S. dollar has offered small relief. Industrialists say that only 90-100 will offer them a competitive fighting chance. The yen has remained high against other key currencies, notably the South Korean won. All this has led to belated soul-searching within Japanese industry as to whether it should be trying to compete in the global mass marketplace or moving more aggressively to higher-quality production.

The early stages of a sclerotic aging society have seen Japan's social security spending absorb more and more of the budget, and are behind the government push to raise taxes. But the debate has been unimaginative with little talk of reform.

One possible saving grace that, according to 21st CPPI, would help rescue Japan from coming economic oblivion would be greater participation of women in the economy.

Japan comes a lowly 94th out of 134 countries in the World Economic Forum's ranking for women in the economy. Women shave difficulty moving up in a male-dominated economic world. Just to take a tiny example, only this month did Japan's leading dental school at Osaka University appoint its first woman professor in 60 years, Mikako Hayashi, even though women comprise half the dental students.

The recent diverging fortunes of high-flying aggressive Samsung and loss-making Sony illustrate the plight of Japan's once unbeatable technological giants in a world where leading-edge electronics and shipbuilding have gone to South Korea, computing and semiconductors to Taiwan and mass manufacturing to China.

Consultants McKinsey and Co. recently produced a devastating series of reports on Japan's lagging high-technology companies, pointing out the irony that for an export-dependent sector: Most major companies are geared to an inefficient domestic market, have been slow to innovate, and are stuck with organization models that don't cut it in a modern globalizing world. McKinsey urged revising human relations and marketing functions and opening the door to women, foreigners and diversity to be better able to compete.

But as the Olympus Corp. soap opera demonstrated with the choice of new directors, Japan Inc. will close its doors to outsiders when cornered. Michael Woodford, the British president who exposed the dubious accounting and massive losses at the company, was voted down. Some Leading Japanese even welcome their isolation: The "Galapagos effect" is now a popular term for Japanese technology that only works in Japan.

Kevin Rafferty, a Hong Kong-based journalist, has reported on the World Bank for 35 years and was managing editor at the bank in 1997-99.

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