In order to contemplate the Japanese economy after 2019, I would like to first look back on the changes that have taken place during the thirty years of the Heisei era (1989-2019). The Heisei era tends to create a strong impression of a Japanese economy in a perennial slump, but we should also remember that many improvements have been made—e.g. life becoming more convenient through the spread of IT and the rise in the Japanese people's life satisfaction—during this period. Nevertheless, the negative legacy of the massive fiscal deficit remains as an outstanding challenge for the next generation.
Priorities for the Japanese Economy in 2019 (January 2019)
Policy Objectives Set at the Beginning of the Heisei Era and Reality
Vice President, RIETI
Policy objectives at the beginning of the Heisei era: Comfort and affluence
When the Heisei era (1989) began, the economic growth rate was still high as the nation was reaching the end of the bubble economy, and under such circumstances, our nation's economic policies placed greater priority on improving the lifestyle of the people than enhancing economic growth. The White Paper on the Japanese Economy (1990) declared that the task at hand for the Heisei economy was to resolve the gap between the nation's production capacity and its welfare, and that we should strive to "basically put greater emphasis on the utilization of our economic capabilities rather than on reinforcing them." The key concept of the Vision of MITI Policies in the 1990s (1990) was the "realization of a comfortable and affluent lifestyle."
After the economic bubble burst, stock prices plummeted and the economic growth rate slumped, which has contributed to the image of the thirty years of the Heisei era being an economic slump. It was the end of the first year of the Heisei era (1989) that the stock market hit its all-time peak. The real economic growth rate on an annual basis remained at 1.2% throughout the 30 years of the Heisei era, which was significantly lower than the over 4% of the 1980's. The rise in total factor productivity (TFP) during this time was less than 1%. As a result, Japan's share of global GDP, which peaked at 17.6% in 1995 due to the effects of the strong yen plunged to 6.5% in 2016. With the end of the Cold War and the increasing globalization of the economy, China overtook Japan in 2010, and in 2016 accounted for 14.6% of global GDP, becoming an overwhelming economic presence.
Nevertheless, many improvements also took place during this period. It was only after 1989 that mobile phones and the Internet became widespread. The number of subscribers to mobile phone services subsequently increased by 200-fold and Internet usage exceeded 80%. The convenience of everyday life has improved exponentially with the advent of online shopping, the spread of the Internet reservation system and the increase in free online content.
The "Public Opinion Survey on the Life of the People" (Cabinet Office) has been surveying the people's satisfaction with their present lives over a long period of time. Although there has been some amplitude in the past 30 years, those who are "Satisfied" increased from 66.8% in 1989 to 74.7% in 2018, and those who are "Dissatisfied" decreased from 35.9% to 24.3%. The people's satisfaction with their present lives in 2018 reached the highest level since the survey began 60 years ago. While the degree of life satisfaction has risen for all age groups, the rise in the satisfaction with life among the younger generation, namely those in their 20's and 30's, is particularly marked. Thus, the life satisfaction by age group in 2018 presents a completely different picture from that of the beginning of the Heisei era. (See Figure 1).
While this may be a reflection of the decline in "expectations," it may also be related to the fact that the younger generations are reaping the benefits of the spread of IT to a greater extent. The percentage of people who "Have spare time" also increased by approximately 10 percentage points compared to the beginning of the Heisei era to nearly 70%. Despite the numerous negative changes such as the increase in households receiving welfare from the government and the widening income inequality, I believe that the policy objective set at the beginning of the Heisei era to make the lives of its citizens more affluent has been fulfilled to a certain degree.
More older workers remaining in the workforce
The aging of society and the decline in the birth rate proceeded at an alarming rate. The percentage of productive-age population (aged between 15 and 64) to total population, which had been approximately 70% at the beginning of the Heisei era, declined by approximately 10 percentage points to below 60%. However, this decline in the productive-age population ratio is exactly as predicted. Demographic forecasts from the beginning of the Heisei era based on the National Census of 1990 predicted the productive-age population ratio of 2018 would be 59.0%, which is almost the same as the actual results (See Table 1).
However, the composition of the dependent population presents a complete departure from the predictions. The actual 0 to 14 year old population in 2018 turned out to be 5.07 million (-24.8%) less than the estimates made at that time, while the actual 65 years old and older population is 3.07 million (+9.4%) greater than the estimates. Needless to say, this is a result of the birthrate remaining below expectations and the longevity exceeding expectations throughout the Heisei era. In other words, Japan will need to brace itself for a full-scale decline in the productive-age population ratio going forward.
However, the ratio of the elderly participating in the workforce has risen considerably. The employment rate of men and women in their 60's has risen from less than 46% at the beginning of the Heisei era by 10 percentage points to over 56%. The employment rate of people in their 70's has also risen by nearly 5 percentage points in recent years. While the employment rate of women of childrearing age has risen by 17 percentage points throughout the Heisei period, in terms of the absolute number of labor force supply, the contribution by the elderly represents a far greater number. "Increasing the participation by the elderly in the workforce in line with a long-lived society" is another point which was emphasized by the policy vision at the beginning of the Heisei era, and while it is far from sufficient, a certain level of progress has been made.
Outstanding policy issues for 2019 and beyond
On the other hand, one of the things that substantially deteriorated during the Heisei era was public finances. The government had enjoyed fiscal surpluses until the beginning of the Heisei era, but from 1993 onward, it continued to find itself in fiscal deficits, and Japan's debt-to-GDP ratio ballooned from approximately 60% in 1989 to approximately 200%. The goal of achieving a primary balance surplus, which had originally been set for the beginning of 2010 early in the Koizumi administration has been further postponed to 2025. The main reason for this delay is the loss in revenue due to increasing social security expenses resulting from the greater-than-expected aging of the population as well as the low economic growth rate and the postponement of the consumption tax hikes.
Despite the rise in the degree of satisfaction of people's lives, should public finances and the social security system ever become unsustainable, the people's social safety net could collapse. Public finance is the greatest risk factor for the Japanese economy. High economic growth will increase tax revenue, while at the same time reducing the debt-to-GDP ratio by expanding the denominator. For this reason, it goes without saying that raising the productivity growth rate and enhancing Japan's potential growth rate would be ideal. Especially under current conditions where the labor demand-and-supply balance is tight, medium- to long-term and structural growth policies are unlikely to generate negative, short-term employment effects, making it the perfect time to carry out regulatory reforms and reforms of the employment system.
On the other hand, the idea that an overly-optimistic growth forecast will lead to fiscal deterioration has become a common rule of thumb for every nation. While increased productivity is no doubt necessary, it is best to avoid placing too much hope on rising productivity as a prerequisite when considering the sustainability of public finances and the social security system.
The consumption tax was adopted in April 1989, at the beginning of the Heisei era. In the fall of 2019, the consumption tax will be raised to 10%. Implementing this tax hike and ensuring that Japan's public finances remain sustainable through the reforms of the social security system and other measures will become one of the major outstanding issues to be addressed in 2019 and beyond.
February 6, 2019
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