Abenomics Is A Good Try, But Aggressive Economic Policies May Not Be Enough To Revive Japan Why is this advanced society declining? Why Japan's demographic collapse? There is no objective explanation

By Paolo von Schirach

June 23, 2013

WASHINGTON – Today’s Japan may be a sad but realistic illustration of what famed British historian Arnold Toynbee meant when he stated that civilizations do not die because of war or natural catastrophe. No, they silently “commit suicide”. In other words, whatever leaders and policy-makers may try to do, the larger society in some instances loses its optimism and consequently its appetite for growth and innovation. If this negative trend is not reversed, the cumulative impact of economic, social and demographic stagnation is a slow death.

Abe’s economic revolution

Well meaning politicians are trying to rescue Japan. We know that Shinzo Abe, Japan’s super active new Prime Minister, has launched a most aggressive economic reform plan aimed at bringing Japan back to the enviable performance of the glorious 1980s. He has focused on massive monetary stimulus, new investments and a deregulation plan aimed at shaking up Japanese agriculture, services and the health care industry, among other sectors.

At the very beginning there seemed to be genuine traction for Abenomics. The stock market shot up. The Nikkei average went from 9,000 in December 2012 to 15,000 in May of 2013. Buoyed by a lower yen engineered by the Bank of Japan, many Japanese exporters increased their sales abroad. 

Higher growth?

However, beyond the financial markets response, in order to get out of its 20 year slump, Japan would need to have real, sustained growth. Growth is also mandatory if Japan wants to begin reducing its mammoth public debt, now at more than 220% of GDP. But Abe’s plan may not succeed. Indeed, the initial enthusiam is beginning to fade. Japan’s Nikkei average, from 15,000 is now back to 13,000.

Structural reforms not welcome

But why is this economic therapy not working? The fact is that both economic and political analysts believe that Japan as a society is neither willing nor capable to undergo the shake up that Abe would like to see happening. Making Japan nimble, flexible, more efficient and productive would entail going against a myriad of vested interests, including those of small farmers and those who profit from the current service sectors arrangements, however wasteful and inefficient they may be. More broadly, it would appear that Japan is unwilling to give up its entrenched conservative culture, a culture that for instance makes it very difficult for Japanese women to have real careers, especially if they want to work and have children.

Demographic collapse

At a different, but nonetheless economically relevant level, Japan is experiencing demographic collapse. Assuming that current dismal fertility rates will continue, in 2060 Japan will have lost about 1/3 of its population. Imagine that, from 128 million in 2010, to 87 million in 2060. (Data reported by TIME magazine). No babies also means an increasingly older population. And it is unlikely that, while the working age population shrinks, armies of elderly Japanese in their 70s and 80s will be engaged in new productive activities. We are looking at a country about to be transformed into a gigantic nursing home.

Why is this happening in Japan?

Shinzo Abe is doing his best to push stimulus and incentives for new investments and enterprise. However, if  the Japanese society does not respond, there is little else that even the most innovative policy-makers can do.

In all this, the big, still unanswered question is:”Why is this happening”? Japan is an advanced, modern society, with high education standards and an enviable standard of living. Until yesterday it was home of the world’s number 2 economy. Why this loss of zest for growth, innovation and expansion? Why no more babies? Really hard to say.

There are no objective factors that determine decline

When Toynbee stated that civilizations end because of suicide he could not provide “objective conditions” that would “force” societies to lose hope and enter terminal decline. None of this is objective. As I said, Japan is a rich country. There is something deep down in the collective psyche of a people that creates either a ppositive or negative outlook, irrespective of objective circumstances. The Japanese society seems to have entered a terminal phase of pessimism.

Of course, this may change. New ideas may come about that may provide a new wave of positive inspiration that may in turn re-energize this lethargic society. But it is unlikely that the material incentives included in Abenomics by themselves will be enough to cause a transformaation of the cuntry’s collective psychology.

One final lesson that may be drawn from Japan’s inexplicable decline. Classical economics postulates that human beings are rational economic actors who will always respond rationally to incentives. Well, may be human beings are not as rational as economists would like us to believe.


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