Module 05 Course Project - Preserving the RelationshipFrom the b.docx
ReischauerFinalPaper
1. Combatting Japan’s inimical debt to GDP ratio
INTRODUCTION
Once considered an unstoppable force, the Japanese economy has suffered significant
setback due to the economic stagnation also known as “lost decade”. One of the primary reasons
for this setback is the overemphasis on Debt
reduction as opposed to Debt ratio. The US is
trillions of dollars more debt than Japan but its
sustainable because their debt to GDP ratio is low.
(“Public Debt”) Japan’s debt ration stands at 240%
("Debt- External") whereas the IMF finds, in a
broad study of 23 advanced countries including
Japan, that the median maximum debt ratio should
be 183% of GDP. ("From Stimulus to
Consolidation…”) The impact of high debt-to-GDP
ratio is simple. High ratio makes it more difficult
for a country to pay external debts, and may lead
creditors to seek higher interest rates when
lending. ("Debt-To-GDP Ratio…”)
Bloomberg finds that the major cause for the recent 2014 recession Japan faced was due
to the political consumption tax hike. (Ujikane) This “good intention” tax hike severely hurt the
anticipated economic recovery. The tax increase decreased confidence for the Japanese people
and undermined government efforts to create growth boosting opportunities.
0 5 10 15 20
United States
Japan
United Kingdom
France
Germany
Italy
China
India
Amount of debt (trillions)
Absolue amount of
external debt
0 50 100 150 200 250
Japan
Italy
France
United Kingdom
Germany
United States
India
China
Debt to GDP %
2. This paper, thus looks at the debt ratio and more specifically on the ways to improve the
GDP (increase denominator) instead of reducing debt (the numerator). To reach the IMF goal of
183% Japan will have to inject 2 trillion dollars into its economy. It is generally suggested that
the GDP can be increased by increasing productivity, diversifying its workforce, and spurring
entrepreneurial innovation. This paper studies and analyzes the impact of these reforms on the
debt ratio. Specifically, it concludes that (1) workforce participation has to improve
considerably to combat the age crisis as well as help increase GDP (2) productivity needs to
increase due to globalization and (3) Innovation needs to be fostered to preserve good quality
jobs.
Productivity
Labor productivity measures the amount of goods and services produced by one hour of
labor. More specifically, labor productivity measures the amount of real GDP produced by an
hour of labor. ("Labor Productivity Definition…”) Higher labor productivity makes goods
cheaper, increases GDP and results in high wages.
As illustrated by the chart,
Japan’s current ratio of GDP to hours
worked are at the low end at 40.1
compared to other developed countries
such as Germany and US which both
have a ratio above 50 as shown in the
chart. Furthermore, over the past 30
0
20
40
60
80
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
GDPperhourworked
Productivity level
United Kingdom United States
Italy Japan
France Germany
Netherlands
3. years Japan has been one of the slowest growing developed countries in terms of productivity.
("Level of GDP per Capita…")
Historic Overview
Japan has a state assisted Capitalism structure that worked very well in the 70s but
globalization has made it difficult to sustain. It is not possible for the government to continue to
provide assistance without increasing taxes and thus depressing economy. Even after the crash of
1991, the government promoted and protected particular industries while discouraging foreign
and even domestic competition. Government protection of highly inefficient industries such as
construction and food processing tends to waste resources and causes Japanese individuals or
firms to pay much more for the products than they would otherwise pay if they were to outsource
it globally. (Ellington 139) It’s clear that this approach does significantly more harm than good
as they are making the industry non-competitive and the resulting products are difficult to sell at
higher price in the global market. Moreover, when industries such as food processing,
construction, textiles, and other manufacturing industries “enjoy” monopolies due to protection
by the government, it tends to disincentives product quality and reduce overall productivity in
these industries and thus further reducing global competitiveness. In fact, these policies enforced
by tariffs and informal trade barriers have allowed Japanese industries to have productivity levels
that are 25-60 percent that of the comparable industries in the United States and other developed
countries. (Ellington 139)
Coincidentally, the developing country India went through a similar disastrous economic
crisis in the year 1991 but because of its different approach it quickly recovered and grew faster
later on in the decade. Instead of increasing economic autonomy and protectionism as Japan did,
India did the opposite and transformed its economy by embracing economic liberalization.
4. Specific changes India made include a reduction in import tariffs, deregulation of markets,
reduction of taxes, and greater foreign investment. Liberalization has been credited by its
proponents for the high economic growth recorded by India in the late 1990s and 2000s. (Saikia)
However, due to political and cultural reasons, it’s difficult to achieve higher productivity
instantly. Major macroeconomic and micro economic policy reforms are necessary to get rid of
the old protection policies and increase productivity/competition within Japanese industries. One
such policy is the Lifetime Employment Contracts that have been place for ages. Even though
these loyalty centric contacts have many upsides for certain employees in the big picture it is
hurting the overall health of economy and reducing the overall productivity. By holding on these
commitments, Japanese companies have put themselves at a huge disadvantage and also not
doing any favors for the Japanese citizens.
The economist reports that because companies honored this commitment through
multiple recessions almost all workers had to take pay cuts and waive bonuses, and many of the
companies had to cease hiring new graduates. Internationally known HR thought-leader from the
Silicon Valley, Dr.Sullivan, finds that hiring graduates is essential to increase innovation and
productivity, aspects that Japanese companies desperately need. ("The Business Case …”)
Furthermore, the economist finds that due to this system a boom of part time contracts occurred
instead of actual job openings. Sadly all these part time “jobs” paid 1/3 of the normal wages and
drastically lessened demand of goods all over Japan, greatly harming the well-being of the
Japanese economy. (“The Sun Also Rises” 2)
In contrast, in the United States, it was very common for a working man in the baby
boomer generation to stay in the same job for 30 years but as times changed so did the average
employee retention in the company. According to MetLife’s 10th Annual Study of Employee
5. Benefits Trends report a record low of 42% of all employees feel loyalty to their employer.
("Declining Employee Loyalty…”)While, it’s harsh capitalism and has increased distrust
between employees and employer, the overall economic benefits are easy to observe. The
productivity of the companies has increased and the salaries have gone up.
By now it’s clear that increasing productivity is necessary for Japan to compete on the
world stage and if accomplished will benefit the Japanese three-fold.
First, on a microeconomic level the consumers and workers will enjoy a much higher
quality of life because as the productivity increases, a lower amount of input is necessary for the
creation of goods. This leads to lower prices and less working hours for the people in the
economy.
Second, Japanese companies that increase productivity will be able to generate more
outputs with less input and therefore will have better margins through lower costs. This allows
for better compensation for employees, more working capital and an improved
competitive capacity.
Thirdly, on the macro level an increase in productivity will increase confidence in the
Japanese economy and increases GDP. It is clear that by just improving the per capita GDP from
40.1K to 50K will add $1 Trillion to Japanese economy. That’s half of the target. Note that GDP
per capita is directly proportional to the total GDP of the country (Roubini); hence 25% increase
in productivity from 39.3 to 50 will increase total GDP from $4.4T to $5.5T.
In conclusion, it’s clear that Japan’s outdated policies are not working in today’s global
markets. By ridding itself of cultural influences, creating sensible reforms to combat debt, and
6. restructuring its highly regulated macroeconomic policies Japan can gain a strong foot-hold in
the economic world stage that it had previously dominated.
WORKFORCE DIVESIFICATION
Expanding workforce is critically important for increasing GDP. In fact, this needs to be
the first step towards increasing GDP. In 1970s in US, when women and a huge cohort of baby
boomer men were entering the workforce, 65% of GDP growth arose from workforce expansion.
(Barsh) Hence, diversifying the Japanese workforce to increase women and immigrant
participation is extremely important because firstly it has a huge potential to increase Japan’s
GDP but secondly, and more importantly, it will help mitigate the age demographics crisis that is
approaching Japan quickly.
It is projected that by 2025, there will be communities in Japan where 87% of the
population is 65 and over. (Dr.Ogawa) Today there are around 4,700 administrative offices and
branches around the country, and Dr.Ogawa believes most of them are going to have to be closed
because depopulated areas will be all over the country. Also citizens, who are 75 and over, will
need nursing attention, medical care, social security, and other entitlements.
This problem of the aging population would be mitigated if there was a younger
generation to pick up the slack for Japan. However, because of the significantly reduced fertility
rate Japan is headed for very rough times. More than 50% of women in their late 20s are single
and last year in 2014 Japan’s birth rate hit a record low. (Dr.Ogawa) If Japan does not produce a
fully functioning young workforce to pay and compensate for the costs of its elderly population
the economy will collapse. ("The Incredible Shrinking Country”)
7. DIVERSIFYING WORKFORCE WITH WOMEN
Japanese women are one of the most educated groups in the world, yet only 30% of them
return to the workforce after child-birth. The Washington Post finds that around 45-50% of
women participate in the labor market, but to understand this statistic in context, 70% of these
women leave the workforce once they give birth. (Wingfield-Hayes)
Countries such as Sweden accomplished greater female participation in the labor market
and in turn saw a substantial growth in their economy. Sweden’s reforms in particular are linked
to their historic annual rate of growth of 2.5% from 1993 to 2010; they outperformed every EU-
15 country as well as the United States. ("Growth and Renewal ..."). The International Monetary
Fund finds that Japan’s annual potential growth rate could rise by about ¼ percentage point if the
female labor participation rate were to reach the average for the G7 countries. This will result in
a permanent rise in per capita GDP of 4%. ("Women, Work, and the Economy…")
Prime Minister Abe recognizes this impact and even made it one of his three main points
in solving the economy; he called it “womenomics”. Prime Minister Abe has promised to create
more child care facilities and has passed legislation to allow women to have more flexible
working hours. Although this might help the cause, it does not address any of the social barriers
women face in Japan and is not nearly enough to bring women back to the workforce. Every
critic from the Economist to Bloomberg finds that Prime Minister Abe’s goal to have 30% of
leadership positions in Japan occupied by a female is improbable looking at Japan’s lack of
progress in these last few years.
The problem is deeply cultural and it is tough to root out all archaic patriarchal laws and
stigmas that have permeated through Japan’s society. One of the big policy hurdles is the 1961
spousal tax break that gave a couple huge tax break if and only if the woman stayed at home.
8. Essentially the law pays the women of Japan who are married not to work. And there’s evidence
this this law directly influences a women’s rationale to not go back into the workforce: “The
Japan Institute for Labor Policy and Training’s 2010 survey found that about 25 percent of
spouses who worked part time intentionally kept their job hours within the exemption threshold;
36.8 percent said they kept their income below ¥1.3 million to avoid paying pension premiums;
and 26.4 percent said they did so to maintain their spousal-exemption status.” (Mizuho)
Down the road, the Japanese government also needs to address the large gender wage gap
to encourage women that are entering workforce to stay. It is very discouraging to all Japanese
women that such a highly educated populous has the worst wage gap of all the countries part of
the OECD. Women are key to sustaining Japan’s disappearing workforce, and the Japanese
government needs to do all it can to help women overcome these old social barrier.
DIVERSIFYING WORKFORCE WITH IMMIGRANTS
Immigration has a huge positive impact on GDP way beyond just increasing workforce
number. Professor of Economics, Gordon Hanson finds that “immigration raises the overall
productivity of the [economy] and thus increases the total gross domestic product (GDP).” He
adds “immigration adds productive resources to the economy, allows greater utilization of land
and capital, and thus increases the total production and total income.”
Unfortunately, Japan has always had strict policies against immigration. To give
perspective, in the United States 14.3% of the population consists of foreigners, comparatively
Japan’s population has less than 2% foreigners. (Cunliff) Japan puts itself at a great disadvantage
by having such strict immigration laws. The most infamous of Tokyo’s new anti-immigration
policies is the “Nikkei” Law. The Foreign Policy asserts that “Passed in spring 2009, the law
allows the Japanese government to pay $3,000 to each unemployed Latin American immigrant of
9. Japanese descent and $2,000 to each of that unemployed worker’s family members to return to
their country of origin. The catch? These workers and their family members would be prohibited
from ever returning to work in Japan.” (Williams)
Although Anti-immigration laws such as the “Nikkei” law and certification tests that
foreign nurses must pass in the Japanese language may be pleasing to the public’s popular view,
it is detrimentally ruining Japan financially.
It is clear that increased Women and Immigrant participation in the economy can increase
GDP by 4 to 10% so around $400B can be added to the economy by these reforms.
SPURRING ENTREPRENEURSHIP
Innovation is the 3rd
spoke of GDP. Globalization demands dynamic economy and good
quality work requires competitiveness that cannot be achieved without innovation. If Japan
wants to truly decrease its debt to GDP ratio by significantly increasing its GDP, it must work
towards reaching its full potential in fostering innovation and entrepreneurship.
Businesses in Japan are run by big conglomerates that discourages risk taking and
inadvertently suppresses innovation. This is not unique to Japan and innovation tends to disrupt
big conglomerates hence it’s even more critical for government to make sure that the business
environment is conducive for startups and small companies to survive.
Startups and other innovation creating ventures are essential for a potential turnaround in
Japan’s economic situation and to preserve good quality jobs. BBC concludes that as the global
digital economy grows in importance, under-supporting the entrepreneurship sector gives Japan a
massive handicap. “America and even South Korea continue to come up with the new gadgets and
smartphone-based services that consumers want. Japan’s sluggish mega-corporations such as Sony
10. are unable to match the swift-footed foreign competition and fall further and further behind.”
(Fitzpatrick)
Typically, in an innovation driven economy, there are multiple startups. 1% of the
startups reach $200M mark in about 8 years. (PwC) Research done by PwC for Australia showed
that the economy can increase its GDP by $150B in 8 years by incubating and investing in
startups. This amounts to around 3% of Japan’s GDP. Given that Australia’s GDP is $1.56 T i.e.
one third of Japan, the net gain for Japan can be even higher. With 3x multiple the impact on
Japan’s economy will be $450B which is about 10% of the economy.
According to the Global Entrepreneurship Monitor, Japan’s entrepreneurial activity
today is the lowest within the Organization for Economic Cooperation and Development
(OECD) member states. The report also writes “linkages between universities and industries,
which could induce the foundation of ventures, are practically nonexistent in Japan.” (Keith and
Debroux) An expose done by BBC finds that creating startups in Japan is nearly impossible. All
the venture capitalists in Japan are only interested in backing “no risk” ventures. Even renting
conventional office space can be troublesome since landlords like to see two years’ profit
statement before they open the door for the entrepreneurs. (Fitzpatrick)
The question is why does Japan have such an anti-startup, anti-innovation culture now?
Firstly, the lack of access to capital and office space for entrepreneurs greatly discourages any
entrepreneurial endeavor Japanese residents might undertake but more importantly there is a
cultural phenomenon at play which is even more significant in suppressing the entrepreneurial
spirit. Tokyo-based technology consultant Nobuyuki Hayashi, asserts that Japanese innovation is
stifled due to the very rigid structures and practices ingrained in Japanese society. “Most
[graduates who are hired] went to the same university, studied the same subjects and never met
11. people from outside the group. This is because of the Japanese educational system and how
Japanese recruiting is done,” he says. “Japanese companies tend to hire graduates from the same
school.... leading to lack of originality.”
For Japan to make strides in innovation at a level that is competitive with its global
counterparts Japan must start actively taking a role in helping Japanese entrepreneurs innovate.
Easier access to capital and office space can go great lengths to encourage entrepreneurs in Japan
to take risks and innovate. Ideally, “yutori” principles of a more balanced and relaxed curriculum
coupled with legislative help for entrepreneurs would make the most impact in spurring “out of
the box” thinking from recent graduates.
CONCLUSION
Japan has a long road ahead but if it is able to adapt to the cultural shift and globalization
by updating its economic policies, diversifying its workforce effectively and spurring innovation
creatively, their long term economic prospects will become much better looking. It is important
not only to tackle the bad debt of the past but also to alleviate future challenges due to
globalization and aging population.
As stated in the introduction, Japan needs 2 trillion dollars (~50% GDP) injected in its
economy to fall under the definition of a healthy Debt to GDP ratio by the IMF. By simply
implementing all the reforms analyzed by this paper Japan can make a huge dent (10% from
Innovation, 4-10% from Women/immigrant, and 25% from productivity) into shrinking their
Debt to GDP ratio by roughly adding 1.9 trillion dollars (~39-45% GDP) to their economy.
One thing is for certain though, Japan is one of the most unpredictable countries in the
world and if there was any country that could surprise the world economically, politically, or
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