On Freeters and Other Exotic Creatures in a Land of Plenty

The sustainability of Japan’s society is in doubt for various reasons, writes Wim Romeijn.

China, Europe, and even the United States are all said to be at risk of “Japanification”: a protracted malaise of low growth, low inflation, low interest rates, and skewed demographics necessitating quantitative easing on a massive scale.

A lost decade, which started in 1991 with the Bank of Japan (BoJ) trying to deflate a housing bubble, became two. The economy went moribund, only to morph into a lost generation of an estimated 17 million people trapped in precarious jobs, on subsistence wages.

Some have given up on the career ladder, preferring a hermit-like existence, often at the parental home, refusing work, study, and social interaction. The Ministry of Health, Labour, and Welfare estimates the number of hikikomori at 700,000 — with double that number showing signs of reclusive behaviour.

The loners are joined, figuratively, by around 10 million “freeters”, usually fresh out of college but unable to secure employment. Most have never held a steady job and depend on the gig economy. Freeters, usually depicted as a burden on society, live in hope that changing demographics and a tightening of the labour market will bring the rungs of the career ladder within reach.

It’s Alive!

That may happen soon. After decades of lacklustre performance, the economy has sprung back to life. Q2 data show economic output growing at an annualised rate of six percent, making Japan the top performer amongst major global economies. Most analysts were caught by surprise. They had predicted robust growth — but at a rate half or less than the one reported.

The expansion was fuelled by strong exports on the back of a weakening yen. The growth spurt has pushed GDP to its pre-pandemic size in real terms, although consumer demand remains feeble.

Home to the world’s third-largest economy, and its largest (net) creditor nation, Japan suffered a Covid recession in Q2 2020, when economic activity slumped almost eight percent and wiped out the gains from “Abenomics”, the suite of pro-growth policies introduced by prime minister Shinzō Abe in the early 2010s.

Japan took longer than most to recover due, in part, to disrupted supply chains, lingering restrictions on tourism, and strained ties with China — and that country’s softening economy.

Refusing to join other central banks in their rate hikes, the BoJ announced a change to its yield-curve control policy, doubling the cap on the benchmark 10-year government bond yield to one percent. The benchmark interest rate was kept at minus 0.1 percent.

Since 2016, the BoJ buys government bonds whenever their yield approaches the stated cap. Those interventions can be costly. At the start of the year, the BoJ spent an estimated ¥13tn (£70.5bn) in a single week to defend its policy against hedge-fund short-sellers. The bank hopes that inflation will retreat so it can keep its yield-curve control policy and avoid significant interest rate adjustments.

Any rise in the interest rate spells trouble, given that the government already dedicates 7.4 percent of the Budget on servicing the national debt — more than it spends on defence or education. While Japan’s debt-to-GDP ratio hovers around a dismal 220 percent, its net international investment position (NIIP) stands at almost $3tn (£2.4tn), meaning that the country’s assets outstrip its liabilities. A consistently large current-account surplus strengthens this position, but does little to alleviate the government’s annual interest payments.

Old Country

In The Wealth of Nations, Adam Smith surmised that the “most decisive mark” of prosperity of any country is the increase of its population. Some 150 years later, in 1937, John Maynard Keynes warned of the deleterious economic effects of a declining population. David Ricardo and Thomas Malthus philosophised over the effects of trade and food supplies on population growth.

By Adam Smith’s metric, Japan is doing rather poorly. With a low fertility rate (1.33), its population is declining from a high of 128 million in 2010 to a projected 87 million in 2070.  By that time, almost 39 percent of Japanese will be 65 or over. The working-age population, 15 to 64, is expected to have shrunk to about 45 million — even taking into account a projected quadrupling of immigrants.

The ratio of workers to pensioners is set to decrease from the current 2:1 to 1:3 over the next 50 years. The sustainability of Japan’s society is in doubt.

In his last New Year’s address to the nation, Prime Minister Fumio Kishida warned that the birthrate had fallen “to the brink of not being able to maintain a functioning society”. The government is expected to announce a set of measures to boost the birth rate, including financial support of up to ¥600,000^[1] (£3,250) to defray expenses and postnatal costs.

Former BoJ governor Shirakawa Masaaki is afraid that standard textbooks on macro-economics need addenda to cover Japan’s problems. In his book Tumultuous Times: Central Banking in an Era of Crisis, Masaaki argues that the impact of demographic change on growth is “under-appreciated”.

What sets Japan apart from most of its peers is the fiscal space available to government. With low marginal tax rates, there is room to raise revenues. The country also borrows in its own currency, and its debt, while high, has failed to produce a crisis. Japan essentially faces no fiscal limits to spending. Late last year, the Kishida cabinet again unveiled a stimulus package worth ¥55.7tn (£301bn) to stave off deflation.

Old vs New

Some economists fret that the stimulus cash is being wasted on companies in the old economy, struggling with change and slow to innovate. Japanese car manufacturers, once first movers in electric mobility, have become laggards.

Of the 10.5 million cars Toyota sold last year, just 24,000 were EVs; Tesla sold 1.3 million. The company’s much-touted but improbably named bZ4X all-electric SUV suffered an embarrassing glitch: the wheels literally fell off some owners’ cars.

The episode, addressed with a recall and quick fix, illustrates the possible predicament of the entire industry — and a repeat of how corporate Japan lost its edge in semi-conductors and consumer electronics. No Japanese car manufacturer features in the top 20 for global EV sales. Industry analysts blame two bets Toyota made: that hybrid vehicles would win out, and hydrogen fuel cells would provide the primary EV power source.

Too Much, Too Late

Toyota’s CEO Koji Sato, formerly chief engineer at luxury brand arm Lexus, seems determined to play catch-up. He has vowed to release no less than 10 new EV models over the next three years, and boost sales to 1.5 million units by 2026. Honda, meanwhile, has teamed up with Sony and plans to knock out 30 models by 2030.

The push may come too late, with newcomers surging into the vacuum left by Japan’s industrial behemoths. Electrification has also significantly lowered the car industry’s formerly formidable barriers to entry, last successfully breached by Kia of South Korea.

BYD (Build Your Dreams) of Shenzhen, China, is hot on the rear bumper of Tesla in the race to become the world’s largest EV manufacturer. The company, founded in 1995 and in the vehicle business since 2003, could already claim that title if hybrid vehicle sales were included.

Complacency lurks as Prime Minister Kishida talks about a “new model of capitalism” — but seems in no hurry to detail his ideas. Japan — well organised, prosperous, harmonious, and largely content — feels no urgent need to define a vision, preferring instead to drift towards the future.

It helps that the nation does not suffer political polarisation and has little time for populists. But its cohesion and well-established pragmatism warrant, and facilitate, a more proactive approach to the issues at hand — lest Japanification is to gain a whole new meaning.

^[1] $4,080 / €3,800