Most governments around the world seek to maximise economic growth so that their countries can achieve a higher level of development and their citizens can become wealthier. At the same time, they must be mindful that growth does not bring with it inflation. However there is a major exception to these axioms: Japan.

While Japan is currently experiencing its worst recession in the post-war era, with Business Monitor International (BMI) forecasting a 6.1% contraction in real GDP this year, I believe that the economy can eke out 0.7% growth in 2010 and rates of above 1.0% beyond this. Given that Japan’s population is forecast by the United Nations Population Division to shrink by 0.2% annually in 2010-15, 0.3% in 2015-20, and rates of 0.5% or greater from 2020, then Japan’s real GDP per capita should increase even if the economy grows by zero percent each year. In other words, Japanese citizens stand to become richer even amid economic stagnation. Meanwhile, inflation is unlikely to be a problem. Consumer price inflation only made it to 2.4% in the summer of 2008, even with oil prices at a record US$147 per barrel. Absent another oil shock, it is hard to see Japan experiencing significant inflation.

Eventually, the economy might enter a phase of permanent contraction in real GDP terms, but so long as population shrinkage outpaces GDP declines, per capita GDP will rise, albeit modestly. As BMI’s chief economist told me the other day, “Eventually there will be one person left in Japan, but he will own everything there and be the richest man in the world!”

There are of course some key flaws to the argument that population decline will make Japanese richer:

• Firstly, it assumes that income is evenly distributed. Yet in reality, of course it is not. In fact, inequality has been on the increase for years. Some will continue to get richer, others will not.

• Secondly, the current recession, and future recessions, will bite a solid chunk off Japan’s per capita GDP. It could take many years to recoup these losses, by which time Japan might be in recession again. Thus, per capita GDP may progressively drop at each recession, of which we can reasonably expect one per decade.

• Thirdly, with the population ageing rapidly, there may come a point when trend real GDP decline outpaces population contraction. This too will erode per capita GDP.

What Is The End Game?

• Since Japan is probably the first major economy to experience this structural shift, it is difficult to see where all this is heading. Japan can realistically only become richer if productivity is maintained or enhanced. It appears to have the technological requisites to do so, but it is far from clear if a breakthrough can be made.

• The quickest way to offset demographic decline is to accept more immigrants. But Japan is unwilling to do this – especially at a time of recession. In fact, Japan has been paying immigrants to go home and never come back. Yet even if millions moved to Japan, the short-term impact would be to cause per capita GDP to fall, because it would take time to put the new migrant workers to productive use.

• Political change remains a wild card. Even if the opposition Democratic Party of Japan (DPJ) wins the next election, due by October, there is unlikely to be radical change. However, I do not entirely preclude that the current recession and a DPJ victory could serve as catalysts for a social shift which I may not have anticipated.

• Another factor worth considering is that Japan’s population is unlikely to decline forever. Japan’s National Institute of Population and Social Security Research forecasts the population falling continuously to 64 million by 2100 from 128 million at present, but that seems a stretch. I suspect that long before then, the reduction in population density will have triggered a recovery in birth rates, as property and living costs become more affordable. It is also possible that significant immigration will have taken hold by then.

So overall, while I share the generally prevailing pessimistic conventional wisdom on Japan, I do not regard its present circumstances as a permanent condition. The bad news is that a genuine recovery may be decades away.

Tags: decline, demographics, Economy, GDP per capita, immigration, Japan, lost decade, population, stagnation
Posted in: Asia, General
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