11 February 2019

Lessons from Japan on how to reboot growth

By Ian Stewart

The financial crisis of 2008-09 pitched Western economies on to a lower growth path. In recent years growth across the industrialised world has run well below the rates seen in the years before the financial crisis.

The slowdown came much earlier for one major economy. Japan’s post-war boom ended in the early 1990s with a recession and a collapse in the equity market. Since then growth rates have averaged around 1.0 per cent a year, a quarter of the rates seen in the ‘70s and ‘80s.

For most Western countries low growth is a phenomenon of the last ten years. For Japan it has been going on for a quarter of a century, exacerbated by a shrinking and ageing population. The steps Japan is taking to try to bolster activity show how other Western governments could try to tackle their own, more recent, growth problems.

GDP growth is determined by the growth in the number of hours worked and the productivity of workers. Japan is trying to raise both. Japan needs more people to work, and to stay in work until later in life.

Female workforce participation has risen sharply in recent years. More than half of Japanese women now return to work after childbirth, up from 38 per cent in 2010. Female labour force participation has risen above the US for the first time in more than 40 years. However, with a high proportion of Japanese women in part time and non-regular jobs there is significant scope to improve the quality and amount of work available to women – and in so doing raise growth.

Japan’s growing population of older people are the second group that the government is trying to encourage back to work. Rising life expectancy – and Japan’s is the highest in the world – has already raised the effective retirement age. A higher proportion of over-65s are in work in Japan than in any other major industrialised nation. But with 28 per cent of the population aged over 65, roughly double US levels, and with that share rising, the authorities want to do more. The government is increasing the public pension for those who choose to draw it later and is considering raising the retirement age for civil servants.

The most obvious response to an ageing population would be to increase immigration. In Japan this remains controversial. By Western standards Japan is a homogeneous society with a strong cultural identity. Immigration rates have risen but are low, with 2 per cent of Japan’s workforce foreign-born, compared to 17 per cent in the UK. Most foreign workers have no route to permanent settlement. In 2016, the latest year for which data are available, Japan accepted 95,000 permanent immigrants, rather less than Belgium and Austria and fewer than one-tenth of the number accepted by the US or Germany.

The climate has changed somewhat in recent years. In December, after bitter debate, Japan’s parliament passed a bill to accept more than 345,000 overseas blue-collar workers into areas of acute labour shortages – albeit for five years and without their families. The bill also created a second visa category, for high-skilled workers who could bring their families to Japan. Immigration seems likely to increase, but to levels far below those in other rich countries and on a very selective basis.

Japan’s government is also trying to raise productivity growth. Part of this lies in shaking up existing ways of doing business. Successful structural reform is the holy grail of economic policy. Mrs Thatcher pulled it off in Britain through privatisation, tax cuts and union reform. Changes to labour regulation in the early 2000s helped transform Germany from a high to a low unemployment country.

Japan wants to reform its labour markets, particularly getting more women into work, liberalise agriculture, cut corporate tax and improve regulation. It’s a sobering rule of structural change that before it creates winners it creates losers. France’s Gilets Jaunes are a manifestation of this rule. There has been no great backlash against reform in Japan, but progress has been slow. Last year the IMF called for the government to reinvigorate its programme of structural reform.

The other great hope for Japan lies in technology. Japan’s factories are highly automated, with robots more prevalent than in virtually anywhere else in the world. The challenge is to repeat this success in the often labour-intensive service sector. (For Western consumers inured to self-service checkouts the prevalence of human lift attendants in Tokyo department stores is both delightful and extravagant.)

Researchers are working to develop robots that can deal with non-routine tasks, from cooking to caring for elderly people and cleaning, where humans beat machines hands down. Japan produces plenty of eye-catching stories of robotic advances. But, as with the famed hotel run by robots which opened in 2014, the reality is sometimes less sensational. Last month the hotel ‘fired’ half its robots for the simple reason they couldn’t do the job, replacing them with people.

In time necessity may yet prove to be the mother of invention. In a land with few migrants, with unemployment at just 2.3 per cent and endemic labour shortages companies are working hard to develop machines to augment and replace humans. Given Japan’s success in factory robots it might seem rash to bet against them.

Japan’s experience confirms that all routes to faster growth are hard. Progress has been patchy and Japan’s growth rate remains lacklustre. Yet the surge in the number of women and older people going out to work demonstrates that change can happen.

Japan has the unfortunate distinction of leading the rich world in terms of challenging demographics and slower productivity growth. The rest of the rich world has similar, if less acute, problems. The success or failure of Japan’s experiment will offer lessons for us all.

Ian Stewart is Deloitte's chief economist in the UK