“We could end up like Japan” – or, worse, “we are heading down the same road as Japan-of-the-1990s”. In 2010, the very worst thing you can say about a country is that it could potentially, or already actually, be like Japan. The idea is bandied about with growing frequency, with the “we” usually referring to the US, but sometimes to ‘the West’ in general. A recent Time magazine article took an in-depth (by Time’s standards) look at The Land of the Rising Sun and explained, in clear and accessible language, what the main factors behind this ongoing disaster are and why they are so persistent (see http://www.time.com/time/magazine/article/0,9171,2005689,00.html). Of course, being Time magazine, this long piece was ‘balanced’ by a shorter one, effectively an op-ed, entitled ‘Crisis? What crisis?’, which cast the whole matter in a positive light.
Fair enough – every half-empty glass can always be presented as half-full. The problem about Japan is that although the glass is half full, it used to be full – and it wasn’t a glass, but a barrel, nay, a veritable swimming-pool. There are indeed several ways of presenting the amazing story of Japan, but they should start with the fact that if, in 2010, to be compared to Japan is the national equivalent of an individual being told he/ she is like a terminal cancer patient with advanced Alzheimer’s – then in 1989, to be compared in any way to Japan was the highest imaginable accolade, which few countries could even aspire to.
It’s all very well to mumble ‘sic transit gloria’ and move on to the next item, but even at the intellectual level the Japanese story is virtually unique. History shows that nations that achieve leading roles tend to enjoy a prolonged period in the sun, at least if they don’t get invaded by their enemies. Japan rose to prominence, was crushed by its enemies and then recovered to achieve much greater prominence, all in the space of 130 years – and then proceeded to destroy itself entirely unaided. The result is that in the span of 20 years, or less than a generation, it has gone from being the object of overt and undisguised envy to being the butt of equally blunt contempt. For a nation obsessed about saving face and avoiding shame, it is hard to conceive of a more abject fate.
But the decline of Japan is not a matter of intellectual speculation, or even moral reflection. It is incredibly, urgently, relevant to just about everyone on earth. Its importance, in fact, is matched only by the degree of ignorance, apathy and ostrichness displayed towards it, on the part not just of the average citizen of Western countries, but by businessmen and politicians as well. Every analysis of Japan notes that the country has a massive and chronic budgetary problem, on a scale that makes the Greeks and other PIIGS countries seem well-managed. Similarly, the degree of. demographic decline in Japan is far greater than that of any other advanced economy. This combination of demographics and budgets ensures that the Japanese government, and hence the nation state, will go bankrupt within a few years. There is virtually no combination of measures that could be taken that would prevent this outcome.
But if there were, they would not be taken. We know that for a fact, because everything that could or should be done has been known, discussed and analysed for between ten and twenty years. However, not satisfied with driving themselves to extinction by not procreating, and with destroying their hard-earned wealth by chronic mismanagement, the Japanese have indulged in a level of governmental and political paralysis that makes the Italians seem the acme of dynamic efficiency and impeccable integrity. This unparalleled cocktail of negative national attributes, at the political, social and human levels, has more than offset the achievements of Japanese corporate stars of yesteryear. The country is now living off its wealth, at the micro and macro levels, buttressed by the high levels of savings that are themselves made necessary by the patchy and skimpy social welfare system.
In the next year or two the national pension system will move into a state of net negative cash flow – i.e. withdrawals from accumulated savings will exceed current inflows of new savings. The pension system will no longer be able to buy the government bonds which enable the government to spend twice as much as it takes in via tax revenues (yes, really; yes, it is incredible; now perhaps you agree that Japan is in a different class of profligacy?). When that happens, Japan will be in trouble – but it won’t go bust. It will fall back on its national reserves, which are so large that Japan is the largest single owner of US Treasury bonds on the planet. It will then start selling them, steadily and consistently, not because it wants to but because it will have to. The impact of that development will be huge and it will be felt across every financial market on earth. That is why Japan is important.