Bill Emmott - International Author & Adviser


Japan Tests Secular Stagnation Thesis
FT - January 13, 2015

Watch Japan. Such advice has long been rare, except on “lost decades” or the risks of nuclear power. But for the next 12 months, the world’s third largest economy promises to be a test case for the whole of the West. And the right neologism will be not “Abenomics” but “labournomics”.

Those who do watch Japan are largely focusing on the wrong thing: deflation and the question of whether massive money-printing by the Bank of Japan—which is, so far, what Prime Minister Shinzo Abe’s much-vaunted “nomics” has amounted to—will soon end the country’s years of mildly declining prices. Much more important is what is happening to household incomes. And not just for Japan.

Virtually all western economies have seen wages stagnate or fall in recent years. Economists are struggling to decide whether this is mainly a cyclical consequence of the 2008 financial crisis or whether deeper causes are at play: demography, technology or Chinese competition, all captured by the phrase revived last year by Larry Summers, former US Treasury Secretary, of “secular stagnation”.

Japan is the world champion of secular stagnation. Although its economy has been volatile, what with tsunamis and consumption-tax hikes, one trend has been consistent: real wages have been flat or declining for the past three years, and have had only one brief rising patch during the past 10 years. Yet Japan is at or approaching full employment, with an official joblessness rate of just 3.5%. Companies have been complaining about labour shortages.

Thus far, the price of this scarce commodity—labour—has refused to rise, at least not on an economy-wide basis. Harking back to olden days when “Japan Inc” ruled the economy, Mr Abe has tried to exhort companies to raise wages, notably in the coming spring wage-bargaining round known as the Shunto. Yet that round now covers less than a fifth of Japan’s workforce. It is a sideshow.

So is Japan proof of “secular stagnation”? The funny thing is that the most popular western worry, of rampant automation destroying middle-class jobs, isn’t much happening. So far there is too little investment in labour-saving innovation in Japan, not too much. Companies are cash-rich but loth to spend it in a market beset by anaemic consumer demand, rising taxes (to deal with Japan’s huge public debts) and a slowly shrinking population.

What is happening instead is being driven by labour laws. In the late 1990s and early 2000s, governments responded to squeals by Japanese employers about declining competitiveness by making it easier to hire workers cheaply on short-term and part-time contracts. Now, more than 35% of all employees are such “non-regular” folk.

This is all fine and flexible, and has helped increase labour-force participation by women and by the over-65s (20% of whom remain in work, compared with 5-10% in Europe). But it has left two huge problems. First, the other 65% of employment is as rigid as ever: typically, the law entitles laid-off employees to compensation averaging 24-36 months of pay, which is a big disincentive to restructuring. Second, neither employers nor non-regular workers have much incentive to invest in training or to build up skills.

The result is stagnation: gradually, employment is rotating out of secure, fairly well trained jobs into insecure, untrained ones. Wages for irregular workers are rising, but from a low base. Overall household consumption is stagnant. Remember when Japanese households were the world’s champion savers? Well, the latest data shows Japan’s personal savings rate has gone negative. They are borrowing, to keep living standards up.

Here comes Japan’s test of labournomics. This year, it will first test whether wages do eventually start to rise, broadly and sustainably, as the labour shortage bites, prompting companies also at last to invest in productivity-boosting innovation. Second, and more importantly, it will test whether the Abe government, re-elected in December with a big parliamentary majority, will seize the moment to reform Japan’s labour laws.

What is needed is to replace the dual system with a single labour law that reduces the cost of firing workers to far more reasonable (but still generous) levels so that the market can adjust, while offering equal rights to all workers, full or part-time. Such a law would restore the incentive to train and to learn proper skills.

If western countries such as Japan are to thrive in an era of globalisation, automation and ageing, it must surely be through exploiting their human capital, an asset Japan—along with many other countries—is currently neglecting. And if such labour reforms cannot be done at full employment, when can they be done?


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