Articles:
Japan Tests Secular Stagnation Thesis

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?