Japan's spluttering economy shows little sign of recovering before the country hosts the summer Olympic Games in 2020, and holds a lesson for others, writes Brian Caplen.

The greatest economic challenge of our times is what policies to set when both monetary and fiscal stimuli are failing. Of all countries, Japan stands out as the one that has tried everything without seeing much in return. European governments could save themselves a lot of heartache by studying Japan’s form. On current evidence, the Japanese economy, which has been mostly stagnant for decades, will still be struggling at the time of the next Olympics in Tokyo in 2020. 

The problems in Japan, as well as in Europe and the US, are structural and they need structural solutions, not monetary ones. These include improving the labour participation rate (which has been falling in the US), addressing the inconsistencies of the eurozone in Europe and pushing Japanese companies to stop saving their profits but invest them instead. 

In an IMF paper released earlier this year, the economist Davide Porcellacchia states that a loss of labour bargaining rights and the growth of non-regular employment in Japan are factors in holding down wages and, in turn, aggregate demand. Elsewhere this is clearly a factor in the rise of populist politics in both in the US and the UK. Fixing it could solve both economic and political problems. True, the Japanese government has been trying to address both of these problems, but much more needs to be done and it will take time for any results to come through. 

Meanwhile, the monetary and fiscal measures continue. According to a Berenberg report: “Japan’s ongoing struggles to sustain economic growth reflect a host of factors that cannot be remedied by more monetary and fiscal stimulus, including dismal demographics and the lack of a viable immigration policy, and an array of economic and regulatory laws and practices that inhibit expansion.”

The danger is that Japan’s poor fiscal situation starts to unravel before any gains from structural changes start to come through.

Brian Caplen is the editor of The Banker.


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