Today Japan is holding a snap general election. The favourite is a Trumpist.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
In Japan, a general election is taking place tomorrow, just months after Sanae Takaichi became the nation’s first female prime minister. Takaichi is an arch-conservative, ultra nationalist and a devotee of Margaret Thatcher. She became prime minister last October by winning an internal party race for the presidency of the beleaguered governing Liberal Democrat Party (LDP), battered by two disastrous elections in as many years and currently without a majority in either house of the Japanese parliament.
However,it seems that the LDP and its new coalition partner, the Japan Innovation Party (JIP), are on track to secure a landslide victory tomorrow, with the main opposition Centrist Reform Alliance (CRA), a new party formed by the Constitutional Democratic Party of Japan (CDP) and the former ally of the LDP, Komeito, projected to lose more than half of the 106 single-seat districts it held previously and retain only 32. The LDP could take 243 seats, and combined with the JIP, get 261 seats, a comfortable majority in the Lower House of parliament.
Takaichi seems to have broad appeal, polling consistently well with women, young and old. She claims that she will be different from all past LDP leaders. She wants to cut taxes for most people, in particular, the consumption tax which drives up prices in the shops. And she seeks to increase government spending on social security and ‘defence’, even if it means higher budget deficits. Takaichi says she is going for growth – not dissimilar to the slogans of the ill-fated, short-lived British Tory prime minister, Liz Truss. Truss’s plans for big rises in the UK budget deficit led to a sharp rise in UK government bond yields and a run on the pound. Something similar is happening in Japan, if at a slow burn. Japanese government bond yields are up significantly and the yen is near historic lows.
Does this mean that Takaichi will go down in flames like Liz Truss? Probably not, but it does mean that all her talk of ‘being different’ will lead nowhere. As in all G7 economies, over the decades, Japanese governments adopted neoliberal economic policies aimed at reducing pensions and welfare benefits. Richard Katz has pointed out that the LDP coalition lowered social security benefits for seniors from ¥2.9 million ($20,000 at today’s exchange rates) in 1995 to just ¥2.1 million ($14,500) now, a 30% decrease in price-adjusted terms. In addition, government spending on healthcare for each person over the age of 65 has been reduced by almost a fifth over the past 30 years. At the same time, the corporate profits tax has been slashed from 50% to just 15%. Profits have doubled from 8% of GDP to 16%, while corporate tax revenue for the government has tumbled from 4% of GDP to 2.5%.
But those cuts in corporate profits tax have not led to improved business investment growth. Instead, companies have hoarded the cash or invested in government bonds and the stock market, with nearly 1 quadrillion yen in liquid assets, of which ¥270 trillion were in cash and deposits, ¥233 trillion in bills and accounts receivable, and ¥460 trillion in investment securities. Net of debt liabilities, nonfinancial corporations’ overall financial asset position relative to their total sales has shifted by more than 30 percentage points since the mid-1990s (or about ¥460 trillion). Put another way, the cumulative net saving of the Japanese nonfinancial corporate sector over the past 30 years is now worth about 80% of Japanese GDP.
The key to the failure of neo-liberal measures to boost corporate investment and so end the stagnation of the Japanese economy since the 1990s has been the decline in the profitability of capital investment. Japan’s profitability of capital has fallen more than in any other G7 economy.
The big long-term issue is Japan’s population. It has been falling and ageing. That allows per capita income growth to grow more than total GDP growth; per capita Japan’s real GDP is up 10.8% since 2010, while real GDP is up 9.6%. But even per capita real GDP growth has been slowing. Those in work are overworked. Japan invented the term karoshi — death from overwork — 50 years ago, following a string of employee tragedies. The large corporates are promoting the idea of a four-day week to relieve this pressure and increase productivity. But there is little sign that this or any other measure is working to raise productivity. Productivity growth is now non-existent.
Japan’s corporations may have increased profits at the expense of wages, but they are not investing that extra capital in new technology and productivity-enhancing equipment. Real investment is no higher than in 2007. Public investment (about one-quarter of business investment) is static. Japanese capital’s image of innovating technology appears to be long gone. The mainstream measure of ‘innovation’ , total factor productivity (TFP) has faded from over 1% growth a year in the 1990s to near zero now, while the huge capital investment of the 1980s and 1990s is nowhere to be seen. So Japan’s ‘potential’ real GDP growth rate is close to zero.
Prime ministers come and go: from Abe to Kishida to Ishiba, but nothing changes. Japan has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has continued to stagnate. With Japan’s corporate sector unwilling or unable to invest, Takaichi is now attempting to end Japan’s stagnation by fiscal spending, cutting interest rates and allowing the yen to depreciate in order to boost exports. It’s a Truss-Trump type policy that has got the Bank of Japan and the financial institutions really worried, as well as foreign investors.
Instead of stagnation, the Japanese economy has now morphed into stagflation, with rising prices, flat GDP and consumer spending and falling real wages. Consumer prices have risen 12% since 2021. At the same time, GDP is barely higher than it was in 2018. Spending, in turn, is stagnant because real wages are down 7% from their 2018 level.
Takaichi wants to boost growth with fiscal spending and monetary easing and ignore the resulting rising bond yields and falling yen. In contrast, the BoJ wants to cap bond yield rises and keep fiscal spending down to cap inflation and stop the yen falling. But here is the dilemma. The BoJ’s aim to reduce inflation via higher interest rates will worsen the stagnation, but Takaichi’s aim to boost fiscal spending and fund it by BoJ purchases will only exacerbate inflation.
Takaichi correctly insists that Japan’s inflation is mostly supply-driven, but she thinks that is a transitory problem and so reckons restoring growth is more important than suppressing inflation. A year ago, she called the BOJ “stupid” (similar to Trump’s attack on the US Fed for not cutting rates) for raising its interest rate from zero to 0.25% (it is now at 0.75%). Takaichi opposes interest rate hikes because she wants to help automakers and other exporters “at all costs”, particularly in light of the Trump trade tariffs on Japanese exports.
Will Takaichi’s policies end up crashing the Japanese government bond market as Liz Truss managed in the UK? I think not. Most Japanese government debt is held by Japanese (88%), unlike in the UK. The risk of capital flight only lies in that portion held by private investors, the net debt. And the latter is smaller than it’s been in decades, mainly because the BOJ has bought so much of the debt since 2013. In early 2013, net government debt held by private creditors peaked at 144% of GDP. Today, it equals just 96% (see chart below).
Yes bond yields are up, but reduced net debt and previous ultra-low interest rates have lowered net interest payments at all levels of government to a trivial 0.03% of GDP in 2024, down from nearly 1% in 2012). This is easily manageable.
But what rising yields and a falling yen do show is that, as Richard Katz has put it: “the slow corrosion of the economy. Decades of submarket interest rates have kept zombies on life support at the expense of healthier companies. A stunning half of Japan’s GDP is produced in business sectors where (total factor) productivity is actually falling, not just decelerating.The chronic deficits are more the symptom of economic weakness than its cause.”
Letting the yen depreciate will not work. The 43% depreciation of the yen since 2021 has not boosted Japan’s exports. Exports in real terms are up just 5% in the last three years. That suggests Japanese exports are just less competitive in world markets. Indeed, Japan’s real trade surplus in goods and services is currently falling at a 15% annual rate. So Takaichi’s hope that allowing the yen to fall will somehow boost Japanese exports and kick-start economic growth is so much wishful thinking.
Nevertheless, Takaichi appears to be riding high for now on ‘making a difference’ as a ‘Thatcherite’ prime minister. And she has not wasted the opportunity to play the immigration card. The number of foreigners working in Japan reached a record 2.57mn last year. Immigrants have really helped to keep the economy going, as Japanese citizens age and the population falls. But not for Takaichi. She has called for immigration controls to stop any change in Japanese ‘culture’ and ‘way of life’. Again, here she follows the Trumpist message.
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