The 0% problem of Japan’s economy

Today I intend to look east to the land of the rising sun or Nihon where the ongoing economic struggles have been a forerunner to what is now happening to western economies. Also of course Japan is intimately tied up with the ongoing issue and indeed problem that is North Korea. And its navy or rather maritime self-defence force is being reinforced as this from Reuters only last month points out.

Japan’s second big helicopter carrier, the Kaga, entered service on Wednesday, giving the nation’s military greater ability to deploy beyond its shores………..Japan’s two biggest warships since World War Two are potent symbols of Prime Minister Shinzo Abe’s push to give the military a bigger international role. They are designated as helicopter destroyers to keep within the bounds of a war-renouncing constitution that forbids possession of offensive weapons.

We cannot be to critical of the name misrepresentation as of course the Royal Navy badged its previous aircraft carriers as through deck cruisers! There are of course issues though with Japan possessing such ships as the name alone indicates as the last one was involved in the attack on Pearl Habour before being sunk at Midway.


This is a crucial issue as this from Bloomberg today indicates.

Japan Needs More People

The crux of the problem will be familiar to regular readers of my work.

Japanese companies already report they can’t find people to hire, and the future isn’t likely to get better — government researchers expect the country’s population to fall by nearly a third by 2065, at which point nearly 40 percent will be senior citizens. There’ll be 1.3 workers for every person over the age of 65, compared to 2.3 in 2015.

So the population is both ageing and shrinking which of course are interrelated issues. The solution proposed by Bloomberg is rather familiar.

It’s plain, however, that he needs to try harder still, especially when it comes to immigration……..Researchers say that to maintain the current population, Japan would have to let in more than half a million immigrants a year. (It took in 72,000 in 2015.)……..He now needs to persuade Japan that substantially higher immigration is a vital necessity.

There are various issues here as for example the Bloomberg theme that the policies of  Prime Minister Abe are working seems not to be applying to population. But as they admit below such a change is the equivalent of asking fans of Arsenal football club to support Tottenham Hotspur.

In a society as insular and homogeneous as Japan, any such increase would be a very tall order.

The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?

The 0% Problem in Japan

I thought today I would look at the economy in different ways and partly as a reflection of the culture and partly due to the effect above a lot of economic and financial market indicators are near to 0%. This is something which upsets both establishments and central bankers.

Real Wages

Let me start with an issue I have been writing about for some years from Japan Macro Advisers.

The real wage growth, after offsetting the inflation in the consumer price, was 0% YoY in February.

The official real wage data has gone 0%,0%,0.1%, -0.1% and now 0% so in essence 0% and is appears on a road to nowhere. This is very different to what you may have read in places like Bloomberg and the Financial Times which have regularly trumpeted real wage growth in their headlines. There is a reason why this is even more significant than you might think because let me skip to a genuine example of economic success in Japan.

Given the prevalent labor shortage situation in Japan, there should be an economic force encouraging wages to rise. At 2.8%, the current unemployment rate is the lowest since 1993. (Japan Macro Advisers )

Actually in another rebuttal to Ivory Tower economics we see that unemployment is above what was “full employment”.

One could argue it is a matter of time, but it has already been 2.5 years since the unemployment rate reached 3.5%, the level economists considered as full-employment equivalent. (Japan Macro Advisers )


The latest official data hammers out an increasingly familiar beat.

The consumer price index for Japan in February 2017 was 99.8 (2015=100), up 0.3% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

If you compare 99.8 now with 100 in 2015 you see that inflation has been in essence 0%. This is quite a reverse for the policy of Abenomics where the “Three Arrows” were supposed to lead to inflation rising at 2% per annum. An enormous amount of financial market Quantitative Easing has achieved what exactly? Here is an idea of the scale comparing Japan to the US and Euro area.

As we stand this has been a colossal failure in achieving its objective as for example inflation is effectively 0% and the Japanese Yen has been reinforcing this by strengthening recently into the 108s versus the US Dollar. it has however achieved something according to The Japan Times.

Tokyo’s skyline is set to welcome 45 new skyscrapers by the time the city hosts the Olympics in 2020, as a surge of buildings planned in the early years of Abenomics near completion.

Although in something of an irony this seems to cut inflation prospects.

“This could heat up competition for tenants in other areas of the city”

A cultural issue

From The Japan Times.

Naruhito Nogami, a 37-year-old systems engineer in Tokyo, drives to discount stores on weekends to buy cheap groceries in bulk, even though he earns enough to make ends meet and the prospects for Japan’s economic recovery are brighter.

“I do have money, but I’m frugal anyway. Everyone is like that. That’s just the way it is,” he says.

Jaoanese businesses have responded in a way that will be sending shudders through the office of Bank of Japan Governor Kuroda.

Top retailer Aeon Co. is cutting prices for over 250 grocery items this month to lure cost-savvy shoppers, and Seiyu, operated by Wal-Mart Stores, cut prices on more than 200 products in February.

More of the same?

It would seem that some doubling down is about to take place.

The Abe government on Tuesday nominated banker Hitoshi Suzuki and economist Goshi Kataoka to the Bank of Japan Policy Board to replace two members who have frequently dissented against the direction set by Gov. Haruhiko Kuroda. ( Bloomberg)

Also Japan seems ever more committed to a type of centrally planned economic culture.

Japanese government-backed fund eyes Toshiba’s chip unit (Financial Times )

With the Bank of Japan buying so many Japanese shares it has been named the Tokyo Whale there more questions than answers here.


There is much to consider here but let me propose something regularly ignored. Why does Japan simply not embrace its strengths of for example full employment and relatively good economic growth per capita figures and abandon the collective growth and inflation chasing? After all lower prices can provide better living-standards and as  wages seem unable to rise even with very low unemployment may be a road forwards.

The catch is the fact that Japan continues to not only have a high national debt to GDP (Gross Domestic Product) ratio of 231% according to Bank of Japan data but is borrowing ever more each year. It is in effect reflating but not getting inflation and on a collective level not getting much economic growth either. Let is hope that Japan follows the lead of many of its citizens and avoids what happened last time after a period of economic troubles.

For us however we are left to mull the words of the band The Vapors.

Turning Japanese
I think I’m turning Japanese
I really think so

Let me finish with one clear difference we in the UK have much more of an inflation culture than Japan.


18 thoughts on “The 0% problem of Japan’s economy

  1. A friend, currently living in Japan, visited us recently and flagged up another difference between their economy and ours. Namely, that the Japanese people are highly debt-averse – to the point where they don’t use credit cards. For most people and transactions it remains a cash economy.

    I don’t know whether this is reflected in the figures for private debt – but it could explain some of the resilience of their economy.

  2. Exactly;increasing gdp per capita and lower costs for households increase living standards.this is a good thing,the japanese are having a good time.
    The problem is a small segment of the populstion live on insecure temp contracts.

    Public debt isnt an issue for japan and never will be.

    • Hi Intajake and welcome to my corner of the web.

      As to those on temporary contracts things do not seem to be going so well. From Japan Macro Advisers.

      “According to JBRC, a private research center, hourly wages of temp workers declined by 2.4% year on year in March 2017.”

      Quite a reversal from the growth rate of 3.3% in March of last year.

  3. Great blog as always, Shaun.
    The Japanese residential property price index, until recently, seemed to suggest that Abenomics was at least inflating housing prices. However, the most recent estimates, which unfortunately are only for December, suggest that this is no longer the case. The Japanese RPPI had an annual inflation rate of 1.7% in December 2016, down from 2.4% in November. This is much above the Japanese CPI inflation rate for the same months, but the index peaked in September and has declined for three straight months since then.

    • Hi Andrew and thank you

      It is an interesting turn down which made me look at the broader picture. The long term chart shows that the Japanese residential property index was ~250 in the summer of 1990 as opposed to 106.3. So I was there for the peak! But put like that the recent rally is almost invisible and even the 2007 rally looks small. What about you cannot lose with bricks and mortar (property)?

  4. I don’t think the UK is prone to inflation anymore, just deflation or stagflation, allow to explain my reasoning. The £/$ exchange rate lives at $1.40-$1.60 in recent history but I don’t think it’s going anywhere near soon. May calling a general election can only mean economic trouble ahead, the 2 EU agencies leaving at the cost of 1000 jobs being a mere harbinger.

    Wages are going nowhere because the output gap is chronically underestimated, it has to be or where is the wage pressure? Private debt is heading for close to 188% of GDP and the housing market has topped out for the time being.

    Given the above I have no idea where you see inflation coming from short of economic collapse.

    • Hi Bill

      Let me make my position clear which is that over quite a long period of time we have had a higher inflation rate than Japan. Over time this builds up and if we look forwards and Japan continues with an inflation rate of 0% then even one of 1-2% in the UK will lead to quite a difference over time.

      Another sector which is very different is house prices which Andrew’s comment above and my reply highlights.

  5. hello shaun,

    I’d rather the UK was in Japans position than what we currently have (!) ( regardless of a general election )

    even GNP is improving – or was 🙂


  6. After all lower prices can provide better living-standards and as wages seem unable to rise.

    We could do with some house price disinflation but if we did the Banks would be bust and where would our pollies go to get a a good cut of the cake?

    and I think we’re more of the Chinese curse of living in interesting times ….. soon we’ll all be practicing Feng Shui , involuntarily of course….


  7. Hi Shaun,

    Interesting question on the effects of emigration. There are plenty of silicon valley immigrants who have become millionaires, and I seriously doubt that Sergei Brin would have become that successful in the corrupt Russia (see Transparency’s rating). Likewise I doubt that Elon Musk could have created paypal in South Africa. Immigration is not a zero sum game.

    Before Hitler, German science led the world. Following that xenophobia, many gifted scientists immigrated and contributed to the major US achievements in the 20th century, notably the Manhattan project and the Apollo program.

    • Hi ExpatInBG

      Yes there was a great race between the US and USSR at the end of World War 2 to capture as many science sites and scientists as possible as well. Both saw gains and on an individual or small level that is clear as you show. But on a larger scale? For example my part of town has many Portuguese who boost UK GDP but what about the effect on the GDP of Portugal?

      • Immigration raises many issues, not all economic. Mass exodus happens because of problems – lack of opportunity, lack of work and poor pay. It splits families, grandchildren grow up in a different country and may not speak their grandparents language. For your question – how does having thousands of young Portugese collecting Portugese unemployment benefit boost Portugal’s economy ?

        You also touch on immigrant clusters/ghettos. These cause social problems, and I think immigrants have a responsibility to assimilate, learn the local language and culture. This is a source of personal richness – it is beneficial exercise for the brain and cultural richness of learning different view points.

        Part of the UK’s problem is failed housing policy – but some of the British unemployed need to look at themselves. If someone who doesn’t speak the language and has no contacts comes and takes your job …

  8. “The question always begged in this is if the new immigrants boost the Japanese economy surely there must be a negative effect on the countries they leave?”

    To take a succinct tack but more complete response on Expat’s reply:

    If they were in employment and are difficult to replace in the country they left then YES

    If they were unemployed/underemployed and struggling to find employment in the country they left then NO

    “An enormous amount of financial market Quantitative Easing has achieved what exactly?”

    Liquidity to drive markets and to a lesser extent the real economy

    • In theory such things are easy but in practice it is more complicated. What if they stay and do not go back to their home country? Its demographics have been changed for the worse. As to liquidity to drive markets I also note than more than a few markets lack liquidity of which the JGB market is a case in point.

      • I do not see the problem.

        In the case where they were unemployed/underemployed, if they stay their donor country does not miss them as there was no job anyway for them. Demographics wise this will only become a problem if the vast majority of the young were to emigrate and never return – a very unlikely scenario as many will have family ties and peer group ties they will not break. There is also the unkown quantity of the future birth rate in the donor country which may go up or down(eveidence suggests up in the case of a developing country and down in the case of an advanced country), as you say, it is not that simple, but there are more positives than negatives to net emigration from a country with a reasonably balanced demographic and little or no jobs to offer to those whom have emigrated.

        Re QE failing to drive markets the Fed gave it up a year or so ago, so there’s your loss of liquidity which I expect to impact the US markets and economy in the next 3 months. The ECB continues where there is plenty of liquidity?? and the EZ will do comparatively well this year due to QE and narrow money growth?????

        Moving over to Japan, it is, as I’m sure you know, a law unto itself and the obvious explanation of lack of liquidity for JGB’s (outside of BOJ activities) is that it is a mainly domestic market with very little foreign intervention which has become so immense, thanks to BOJ actions the Japanese people and financial institutions cannot provide the necessary amount of liquidity to keep the wheels turning of so large a market.

        I really don’t know which markets that are currently in receipt of QE and are suffering liquidity problems (outside of the JGB market which I have dealt with above) which you are referring to, would you please list the others as there may be something I’m missing?

        Whilst I’m talking about liquidity have you seen the value of the NIkkei? Whilst it is about 7% below where it was a month or so ago the trend over recent years is clear and there’s still reasonable volume currently showing adequate liquidity, whilst I expect further strength later this year and into next year Lack of liquidity??…..

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