The International Monetary Fund has a checkered past on giving
Asia advice. Ask officials from Jakarta to Seoul about this, and you’ll get an
earful. Now, it’s Japan’s turn to get some dubious guidance from the
That advice, handed out by IMF Managing Director Kristalina
Georgieva at a press conference on Monday, is to raise Japan’s consumption tax.
In fact, Tokyo had just done exactly that – to disastrous effect.
Last month, it hiked consumption tax to 10% and promptly saw the dangers
of tightening fiscal policy amid a global trade war: a 14.4% plunge in retail
sales in October and a heightened recession risk.
Still, the IMF bigger-picture warning is prudent. A fast-graying
population and, among major economies, the world’s biggest debt burden – two
and a half times economic output – is a dangerous combination. It is the stuff
of credit downgrades and surging debt yields.
Yet – given how highly taxed workers’ salaries in Japan already
are – the IMF’s suggested hikes, to 15% and then 20% over time are, well, nuts.
Japan needs to deal with this issue in ways that don’t penalize
the consumption needed to hasten gross domestic product.
Tokyo’s plight matters for two reasons. One, a debt reckoning in
the world’s third-biggest economy would reverberate everywhere. Two, Japan’s
experience will soon enough be shared by other major economies including South
Korea, Hong Kong and, eventually, China.
Korea, for example, just recorded for the third quarter the
lowest-ever fertility rate anywhere – 0.88 kids per woman. Seoul, home to one
in five South Koreans, had the country’s lowest rate, 0.69.
In Japan’s case, there’s an argument that increased productivity
and automation can save the day. The earth’s balance is fragile enough today,
never mind in 2050 when 9.7 billion people are expected to walk the planet.
Japan really is humankind’s laboratory for figuring out how to produce greater
output and wealth with fewer people.
Indeed, some thinkers see the glass as half full.
“In a world of rapidly expanding automation potential, demographic
shrinkage is largely a boon, not a threat,” says Adair Turner, a senior fellow
at the New York-based Institute for New Economic Thinking. “Our expanding
ability to automate human work across all sectors – agriculture, industry, and
services – makes an ever-growing workforce increasingly irrelevant to
improvements in human welfare. Conversely, automation makes it impossible to
achieve full employment in countries still facing rapid population growth.”
consumer pools dry up
The IMF differs. It warns that “a rapidly aging population and
shrinking labor force are hampering growth.” Its economists say that the
aging workforce could knock 1 percentage point off annual GDP for the next
The number of working-age Japanese in the labor force is now the
highest since the 1960s. As of 2018, the ratio of open jobs per applicant was
1.6, meaning it’s about to surpass an all-time record reached in 1963. Japan,
it follows, is literally running out of even moderately skilled labor, denting
productivity and top-line GDP.
Japan’s population began contracting in 2010. Since then, it’s
lost more than 1.4 million people. Between 2010 and 2011 alone, the
US added 2.3 million bodies to its future workforce.
Looking ahead, things look even more dire. By 2040, more than a
third of Japanese will be over 65, the worst old-to-young ratio in the world.
Today, Japan is home to roughly 126 million people. By 2065, the United Nations
reckons there will be at least 28 million fewer inhabitants.
It means that, over time, Japan will have fewer people making
goods and performing services and fewer people buying them. In the last year,
there were nearly 68,000 fewer high schools around the nation than 12
months earlier. Fewer houses are being built as demand drops. As Moody’s
Investors Service pointed out this week, demographic dynamics are stretching
local-government budgets for schools and social welfare programs.
Fewer babies, meantime, are making this a secular trend, not just
a cyclical one. In 2018, the number of newborns fell to a record low of
918,397, the third straight year of sub-1 million births.
“What this describes is an economic doomsday machine,” warns US
economist Robert Samuelson, author of Untruth: Why the Conventional Wisdom
Is (Almost Always) Wrong.“The increasing number of older Japanese has already
put enormous pressure on the government’s budget.”
Since 1991, he says, public social spending — mainly for
retirement pensions, health care and long-term care — has doubled as a share of
gross domestic product, from 11% of GDP to 22% of GDP in 2018.
Japan’s debt burden might seem less dire if there were
enough young workers taking over for retirees, what economists call
the “replacement rate.”
But there aren’t.
In light of this, Japan’s 10-year government bond yield is at an
impossibly low 0.11%. Compare to 1.8% in the US. This is odd, considering
Japan’s debt-to-GDP ratio is approaching 250% while America’s is 106%. And,
considering that Japan is bleeding workers, while the US is comparatively
Prime Minister Shinzo Abe’s government has sought to fill the gaps
by importing more foreign labor. He’s nearly doubled the inflows in the last
five years. Yet the 1.45 million foreign workers in Japan right now are a drop
in the proverbial bucket of what’s needed to deepen the labor pool. Japan also
is having a hard time wooing talent put off by inflexible labor laws, long work
hours and high living costs.
Abe’s Liberal Democratic Party also is relying on sale tax hikes
to stabilize the national balance sheet. This, too, has been a bit of a wash. A
2014 increase to 8% from 5% resulted in a mild recession, prodding
Tokyo to draw up fiscal stimulus packages.
In plain English, that means a step aimed at reducing debt ended
up increasing it.
Will last month’s hike to 10% require a similarly costly response?
Likely yes, given that real wages fell in eight of the first nine months of
2019. Exports plunged 9.2% in October from a year ago as US President Donald
Trump’s China tariffs upended Asian supply chains.
South Korea is in a similarly precarious place, both in the short
and long runs. Trump’s trade assault on China is slamming South Korea’s
all-important export engine. The bigger problem is how South Korea risks
following Japan down a demographic rabbit hole.
Korea’s standing as the world’s 11th-biggest economy is being
jeopardized by declines in the working-age population. Just as in Japan, this
impedes growth, imperils innovation and leads to spiraling health-care costs.
What makes Korea’s record-low fertility rate so worrisome is how
hard Seoul is working to stabilize things. It’s spending billions of dollars a
year: free nurseries, subsidized childcare leave, cash stipends. But still,
there is no baby boom.
But for now, Japan’s economic scale and massive debt load
take precedence, as the IMF’s special attention attests. It’s time for Tokyo to
find a way to raise tax revenues via growth and new job creation – preferably
from a new generation of scrappy startups that create jobs and new wealth. Big
tax increases are the wrong idea at a moment when Japan needs economic
tailwinds, not headwinds.
The IMF erred terribly in the 1990s when it advised Indonesia,
Thailand and South Korea to hit the fiscal brakes amid a financial crisis.
Tokyo is hardly there yet. But Japan would be wise to go its own way,
incentivizing new growth areas rather than killing demand with ill-timed tax