Bank of Japan admits stimulus policy is modelled on Peter Pan

Economic growth


Japan Jun15Peter Pan’ is one of the world’s most-loved children’s stories.But I hadn’t realised it had also become an economics textbook, at least in Japan.  Yet the Governor of the Bank of Japan (BoJ), Haruhiko Kuroda, described his stimulus policy last week as follows to an invited audience:

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’  Yes, what we need is a positive attitude and conviction,”

As readers will know, I have consistently argued that the central banks were guilty of wishful thinking, with their idea that printing money could somehow stimulate growth in an ageing population.  So it is good to know they recognise there might be some truth in the argument.

The chart above, based on Statistics Japan data, highlights the impossibility of Kuroda’s wish to restore inflation and constant growth to the levels seen before Japan’s population began to age:

  • Its BabyBoom began earlier than in the West, and averaged 2.2m babies/year between 1920 – 1952
  • Births then slowed between 1953 – 1983 to average only 1.7m/year
  • Births have since fallen further to average just 1.2m/year over the 30 years between 1984 – 2014
  • Last year actually saw a record low level of only 1m births

Thus Japan has simply run out of realistic options for growth.  Its population is now set for steady decline from 2010’s level of 127m to just 108m by 2050, according to UN Population Division forecasts.

Japan Jun15aWe also know, again from Statistics Japan data, that spending peaks in the 25 – 54 age group, as the second chart shows.  After this, people already own most of what they need, and their incomes decline as they enter retirement.  These spending patterns also matter for the economy, as consumption is around 60% of Japan’s GDP.

Japan has one of the oldest populations in the world, with a quarter aged over 65 years.  Therefore it really is wishful thinking of the first order to imagine that it can possibly return to the growth levels seen when its BabyBoom was in its peak spending mode .  After all, the youngest Boomer, born in 1952, is now 63 years old.

And it is also hard to imagine that the problem can be solved by either increasing fertility rates dramatically, or boosting immigration:

  • Adding more babies now would simply increase the dependency ratio, which measures the number of young and old as a ratio of the working -age population.  It would do nothing to boost growth for another 20+ years, till the babies began to enter the workforce
  • Boosting immigration would require millions of people to migrate to Japan, and would create enormous social tensions as a result.  Japan has never accepted the idea of immigration, and it is unlikely to be accepted now

The great moral of ‘Peter Pan’ is that children have to grow up and join an adult world.  They cannot live in the magic world of Neverland forever.  What a pity that Japan’s policymakers obviously never read to the end of the story.

Of course, if you hand out Yen 80tn/year ($480bn) in stimulus, as the BoJ is now doing, and devalue 50% versus the dollar, you will get a short-term jump in the growth rate.  But then the rate will fall back again, as Japan’s working age population has to pay for the cost of this short-term stimulus through higher taxes.

The greatest pity is that premier Abe chose to ignore the wisdom of the BoJ’s previous Governor, Masaaki Shirakawa. He understood all too well that demographics are far more powerful than monetary policy.


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