Lessons of Japan’s Heisei period

It is one of the pure coincidences that history sometimes produces. But the unusual point about the dawn of the Heisei era in 1989-90 is that at exactly the same time as Heisei began a fundamental change was occurring in the Japanese economy, which in turn had profound impacts on society. This was the bursting of the “bubble economy”, which brought the biggest financial collapse in stock and real estate markets and a banking system that had been seen in any advanced country since 1929 – until of course the 2008 Lehman shock.

When I look back at the nearly three decades that have passed since the bubble burst in 1990-92 and the new Imperial era was established, four major characteristics really stand out. They are all aspects of the basic economic reality: that during the three decades before 1990, Japan had the fastest annual average growth rate of living standards (measured as GDP per head of population) among the six biggest industrial economies of the world (USA, Germany, Japan, France, the UK and Italy); but during the three decades of Heisei, Japan’s ranking fell to fifth among these six rich countries, ahead only of Italy.

The first major characteristic of the period is the surprise that was felt by me and other analysts, both foreign and Japanese, about how long it took the country’s authorities, in the Ministries of Finance, Trade & Industry and others, in its big companies and the Keidanren, and especially in the Liberal Democratic Party, to really understand and admit publicly to the reality and magnitude of what had happened.

It was really not until 1996-97, when a major financial institution such as Fuji Bank came close to collapse and when Hokkaido Takushoku Bank suffered an outflow of deposits, that the authorities truly started to accept what was going on. It then took until the administration of Junichiro Koizumi from 2001-2006 before banking reforms were fully and thoroughly carried out.

If we compare this slow and often deceitful approach by the financial authorities to what occurred after the 2008 Lehman shock, we can see that the American response to their crisis was much faster, more honest and more decisive than the one in Japan. But the response in the European Union, especially among the member countries that use the euro single currency, followed quite a similar path to that of Japan in the 1990s.

All of this came as a surprise to foreign analysts in the 1990s because we had all learned about and admired the rapid and decisive response to the double economic shocks of the early 1970s, the huge yen revaluation of 1971-3 and then the oil price hike of 1973. The fact that the response to the bursting of the bubble was very different and far less impressive has changed permanently the international view about Japanese bureaucracy and Japanese politics.

Among Japan’s leading institutions, the Bank of Japan was the one that retained most international respect, chiefly because it had sought to end the crazy debt-fuelled speculation of the 1980s by raising its interest rates sharply. It then put pressure on successive governments in the 1990s and 2000s to make serious economic reforms, resisting calls for a much easier monetary policy.

Yet having begun the Heisei era as a source of discipline, the Bank of Japan is now ending the era as a tool of government policy, by essentially printing the money the government uses to finance its big budget deficit. The central bank now accounts for roughly half of the whole market for Japanese Government Bonds. No one, and certainly not Governor Yasushi Mieno who presided over the raising of interest rates in late 1989 and during 1990, would have believed 30 years ago that such an outcome was conceivable.

The second major characteristic of the era is unrelated to the bubble’s bursting, but has nevertheless complicated government economic policy throughout Heisei. This is the transformation of the country’s population from a predominantly young citizenry to what is now a much older citizenry.

In the late 1980s, as Showa drew to a close, there were only about 3m citizens over the age of 80, while around 35m were aged less than 20. Now there are more than 10m citizens aged over 80 (and about 70,000 centenarians) and only around 25m under the age of 20.

The reason why this complicated the government’s economic policy, and in fact its public finances, is that this dramatic demographic change led to increased public spending on health care and on public pensions, while thanks to retirements the country was losing some of its highest paid taxpayers year by year.

This strain on public finances proved to be manageable without producing any new financial crisis, but it still meant that government debt grew steadily throughout Heisei, even during spells when economic growth was quite strong. Furthermore, this arguably prevented the government from spending more on some other policies that might have helped growth to recover, such as support for scientific research, retraining programmes for employees whose companies faced financial trouble, or making the country’s national universities world class.

The third major characteristic of the era is that the sacrifices and adjustments necessary for the economy to keep stable and even to recover during this era of global competition and rapid technological change were largely borne by ordinary employees. Unlike in America or Europe after 2008, however, these sacrifices were not directed at specific groups of workers by making them unemployed, but were instead shared widely across the whole workforce through cuts in earnings, particularly overtime and bonuses.

This social dispersion of the pain caused by the bursting of the bubble has been much admired for what it reveals about social solidarity. However, we should not go too far and assume that everything was harmonious. Although the employees who were in jobs at the time of the bubble’s bursting in the 1990s did share the pain fairly equally, what then happened was that a much bigger share of the pain was forced upon the next generation.

When Heisei began, about 80% of employees enjoyed regular, long-term contracts. Now that figure has dropped to 60%, with almost 40% working on irregular, short-term and part-time contracts, which means much lower earnings and pension benefits too.

This has gradually divided society but has also produced two other damaging consequences: it has discouraged companies from investing in training these short-term employees, which means that the skill levels and productivity of the average worker has been depressed; and it has meant that, household incomes have stayed low and so has consumer spending.

That is the story of what have often been called “lost decades’, though I would prefer the phrase “unnecessarily disappointing decades”. Yet there is one phenomenon of the period which must not be missed out, and which promises to have a significant and positive impact on the next era.

This is the fourth major characteristic of Heisei: the quite sudden decision of young women (encouraged or at least allowed by their families) to start going to full four-year university courses rather than the two-year junior college courses most had attended before.

Back in the 1980s, only around 12% of 18-year-old girls went to four-year courses, while 35-40% of boys did so. But during the 1990s and beyond the gap narrowed, quite dramatically, as a surge of girls chose to take four-year courses instead. Now, nearly 50% do so, just a few percentage points behind the boys.

Notoriously, Japan lags well behind other advanced countries in terms of the share of leadership roles, whether in politics, business or other fields, held by women. But given the prevalence of age-based hierarchies, this reflects the gap in the 1980s between girls and boys going to university, since it is that generation that now leads the country. Over the coming decades, when the female graduates of 2000 and beyond enter their 40s and 50s, many more of the country’s leaders will be women. Japan’s past, throughout Heisei, has been largely male. But it will now have a far more female future.