By John Richardson
The steepest decline in Japanese industrial production since March 2011 has shocked some commentators. We cannot understand why.
“Industrial output dropped 3.3% in June from May, the trade ministry said today in Tokyo, more than twice the median forecast for a 1.2% contraction in a Bloomberg News survey of 31 economists. The manufacturing sector has cut back in response to a slump in consumer spending ” wrote Bloomberg in this article.
A fall in consumer spending was obviously on the way as a result of the Japanese Prime Minister’s mistaken policies of driving down the value of the Yen. All that this did was increase the cost of living, whilst wages remained stagnant.
As he weakened the Yen, Shinzo Abe also felt compelled to increase in the consumption tax. Thus, everyone front-loaded their spending ahead of the three percentage point increase in the consumption tax in April. This led to a 7% fall in retail sales in June.
Why nobody should be surprised at this turn of events is that depreciating the Yen doesn’t address Japan’s central problem: Its ageing population.
All you end up doing by weakening your currency is increasing costs in an economy where total demand, because of a declining working population and growing dependency ratio, is in long-term decline. In other words, you make the problem worse.
The consumption tax rise is a response to this demographic reality as, of course, the tax base is shrinking as more and more people reach retirement age. This makes us wonder how Japan can afford another key element of Abenomics – a plan to reduce the corporate tax rate from 32% to 29% in three years’ time.
As Japan’s population has aged, and so its tax base has declined, the country has compounded its difficulties by spending huge sums of money on stimulus programmes, to the point where today:
- Japan’s debt is now $80,000 for every man, woman and child, according to the IMF and OECD.
- Or to put it another way, current gross central government borrowings equal 24 years of tax receipts.
Even if Japan’s birth rate increased, it would take a generation to solve the problem. We have yet to come up with a technique to make babies grow any faster, and so it takes a couple of decades or so before a big rise in the birth rate leads to a commensurate jump in the size of the working population.
The other option is major immigration reform, but this seems very unlikely in Japan for social and political reasons.
The solution is for the Japanese government to own up to the problem and to admit that driving down the value of the Yen has been counterproductive.
It would also be hugely helpful if the Fed admitted that its programme of quantitative easing was equally irresponsible because where Japan is today, the West is heading because of the ageing of its populations.
All us can then start to adjust to the change in both the volume and nature of demand resulting from the rise the rise in the number of people who are over 55 (see our above chart).