The dramatic contrast between rampant, booming China and an economically sluggish and unconfident Japan was made clear in pessimistic analyses presented at a Washington seminar entitled “animal spirits”.
Deputy IMF managing director Naoyuki Shinohara, a former Japanese vice finance minister, admitted that it had been a couple of decades since he had even heard the term “animal spirits” used in Japan.
Japan had been “hit harder than expected” by the recession that followed financial crisis in the West, Shinohara acknowledged, largely because the country was already in a weak economic condition when the crisis struck.
The challenge of reviving the moribund economy now is “getting even more difficult, given the limited policy tools” available, he said.
Naoko Ishii, current Japanese deputy vice finance minister for international affairs, who also suggested that “animal spirits” is a term that is alien to Japan, listed some of the problems confronting the Japanese economy.
“There is no easy way out of deflation”, she said, pointing out that price falls have been going on in Japan for two decades since the collapse of the country’s notorious bubble economy in the late 1980s.
Once deflation becomes entrenched in this way, it is difficult to change deflationary expectations, she said.
Ishii also pointed to “serious balance sheet problems” in the public sector and to “macro-economic managment” in Japan.
Japanese workers have not seen an increase in their salaries for a long time, long-term employment is eroding and the corporate sector is not investing enough, said Ishii, adding to the litany of economic woes.
If this were not enough, the deputy vice minister also highlighted Japan’s “unprecedented level of public debt”. This is mainly due to rising welfare expenditures in an ageing society, she said.
“We are sitting on a time bomb,” added Ishii, referring to growing strains on public finances at a time when the number of younger Japanese relative to the total population is declining.
Japan tried tax cuts in the aftermath of the collapse of the bubble economy, in an attempt to spur consumption – but it had little effect, and now “there is difficulty in reversing tax cuts under low growth” in order to repair the public finances, she said.
Kathy Matsui, chief Japan strategist for Goldman Sachs (Japan), also stressed the need to “eliminate deflation” in Japan, but warned that “quantitative easing alone is unlikely to work.”
The key to higher returns in the corporate sector is industrial restructuring, Matsui said. But she urged Japanese companies to “kick their capex habit” and in stead “return cash to shareholders” via dividends and share buybacks.
Japan’s “demographic tsunami [tidal wave] has arrived,” said Matsui, referring to the ageing problem. But Japan has the solution in its own hands if only it will make more use of female talent or “womenomics” in the economy, she suggested.