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Covid-19 and the Japanese model

Japan decided on a middle course in its response to the Covid-19 pandemic, which was relatively successful. People took it upon themselves to behave responsibly.

Japan decided on a middle course in its response to the Covid-19 pandemic, which was relatively successful. People took it upon themselves to behave responsibly.

Charles Stanley

in Let’s talk about markets


The Japanese economy was in recession when the virus struck. GDP fell 1.8% in the fourth quarter of 2019 and experienced a further small fall in quarter 1 2020. Japan’s decline of 7.9% in the second quarter was a large fall by historic standards but was at the lower end of declines worldwide as economies were placed into lockdown. 

Japan decided on a middle course in its response to the pandemic. Its government did not impose draconian lockdown controls, but it did declare an overall state of emergency and encouraged companies and individuals to behave differently to contain the spread of the disease. This was relatively successful. Businesses opened doors to improve ventilation, reduced social contacts and imposed social distancing. Individuals wore masks and behaved cautiously. As a result of that or other factors, Japan has experienced fewer deaths than the large European countries despite having double their populations. 

Japan has long been criticised in the West by commentators pointing to the slow rate of GDP growth since the spectacular crash of the early 1990s. An ageing society with little migration has generated large surpluses in both the household and corporate sectors. Companies have lacked enthusiasm for major investment and individuals have saved rather than consuming more than they earn. The country has also earned consistent balance of payments surpluses, exporting more than it imports.

Ballooning debt

To balance the economy the government has ended up borrowing huge sums to absorb the surpluses of the other three sectors. Western critics condemn the high levels of state debt, now over 250% of GDP and worry over how sustainable this model is. In practice, it has proved to be long-lasting and stable, thanks to the fact that the Japanese owe practically all the money to themselves. It is owed in yen which they can print, and the interest rates on the debt have stayed around zero.

Inflation is currently at 0.2% and has persistently been well below the 2% target. The sluggishness of growth and the absence of price rises has led the Bank of Japan to buy up more and more of the state debt. It is now approaching half the total.  This has underpinned the argument that there is nothing unsustainable about levels of state debt, when people will switch a bond for a yen deposit newly created by the Bank, with no danger so far of that generating any inflation. 

Whilst the energetic bond buying has of course created inflation in bond prices, that too is now fairly stable given the consistent wish to keep the 10-year rate of interest around zero. Meanwhile, equities and property prices languish well below the 1989 peaks despite the substantial monetary support.

Others are now looking at the Japanese model as their economies splutter to low growth and find it difficult to generate enough consumption and inflation. Several EU economies have some Japanese characteristics, with ageing populations and sluggish demand. They, of course, rely on the European Central Bank to do the money creation and bond buying for them, which so far has been on a much more cautious scale than the Japanese. They too suffer from individuals saving and companies short of good investment proposals leading to a shortage of demand and activity.

GDP conundrum

One of the features of the Japan experience that critics conceal is the performance in growing per capita GDP. As the population is gently declining in contrast to the populations of countries like the USA and UK with strong inward migration, the per capita growth rates are much more in line than the headline GDP figures. Japan too has reaped benefits from the digital revolution in terms of enhanced productivity and a wider palette of goods and services to consume.  Where Japan, like the EU, has lost out is in not growing large corporates that pioneer the digital revolution.

In the heady 1980s when Japan’s private sector was borrowing to grow the economy and push up asset prices, Japan was a successful innovator in areas like cars and electrical products. It also developed the still-influential Japanese quality systems for manufacturing, entailing managing out mistakes, cutting inventory and going for just in time deliveries. These attributes deserved a premium rating. Today without great companies leading social media or personal computing Japan lacks that magic. It is true Japan still has a strong motor industry seeking to adapt to worldwide government demands to go electric, and still has an important presence in machinery which leads on to more advanced robotics.

Japan is suffering like others from the impact of pandemic measures.  The airline JAL saw a 98% fall in second-quarter passenger revenues on international flights. The economy has seen a loss of revenues in tourism, leisure and hospitality generally despite the efforts to keep more open under sensible rules. The Japanese model has many features that other parts of the world will share in this Covid-19 climate.

Central banks need to act

The world will continue to benefit from Japanese manufacturing ideas, now socialised globally. More countries will discover that if they work closely with their Central Bank, they can get away with issuing more state debt at low rates to provide a state boost to demand at a time of damaged private sector spending. More will also look inwards to national solutions and national self-reliance, as Japan has long done.  The Japanese market is fairly valued for a country which does better than its critics allow, but which has missed out on the digital revolution when it comes to pioneering and building mega-corporations in the cloud.

The new Prime Minister stresses continuity with his long-serving predecessor and wishes to press on with his policies. He has highlighted the need for Japan to enter more fully into the digital revolution and wishes to augment the use of online methods in health and education and is setting up a new Digital Agency. The large US corporations are likely to be beneficiaries as important partners of Japan. The Prime Minister will also inherit the problems with corporate Japan as he perseveres with Mr Abe’s wish to make it more entrepreneurial without it ending in too many scandals.

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