What Japan's recession means for the country

Until the average worker sees some in his/her paycheck we AREN'T going to spend. That is the truth of the matter.

These are dark days, but I sincerely believe Japan is going to be okay. It will still be Japan. There is still a remarkably low crime rate and a sense of social cohesion and collectivism that you will never see in the West. Infrastructure spending remains high and the amount of truly inhuman poverty remains (correct me if I'm wrong here) low.

Metrics like net GDP and even per-capita GDP are not everything. Just look at China--it has a gigantic GDP and is still essentially a second-world country.

Wages are down in Japan and people are putting in a lot of working hours and seeing very little for it. But they go home on clean, safe streets and have stable healthcare. The airports look better than they do in most of the U.S. The trains are the envy of the world.

GDP isn't everything.

Too much corruption and wastefull spending. Drop the taxes. Not sure why taxes always have to go up. Civil servant wages and pensions shouldn`t be higher than in the private sector.

I am amazed, truly amazed that this contraction keeps being referred to as "surprising" or "unexpected". A blind person could see that this was going to happen. Without increases in real wages to deal with the stagnation of the last decade, or any sort of real immigration policy to offset the plummeting workforce in mechanical and construction jobs, of course the economy will contract. The only people who didn't expect this to happen are people too insulated from daily life to notice what's happening outside their towers.

What on earth is "surprising" about this???

Higher taxes+zero wage increase=less consumer spending.

I'm not sure if people not paying close attention to what's been happening in Japan are familiar with just how stupid the underlying rationale behind Abe's economic policies has been, so here it is in a nutshell: Abe figured that chronic deflation was inhibiting Japanese consumers from spending their money, since they figured that they could keep on waiting to buy stuff as prices kept going down.

Abe's solution? Coerce consumers into spending now rather than later by forcing inflation targeting upon them. Make Japanese think they had to go out and buy stuff now before it got expensive later. The consumption tax increase---a regressive measure that hurts ordinary people far more than elites, as anybody who is not a multi-millionaire will tell you--was also a bad idea, but not nearly as jaw-droppingly dumb as the idea that forced inflation would compel Japanese to spend their money.

Japan is at a dead end. Abe is a nationalist ideologue who cares little about economics. He's more worried about his next visit to Yasukuni Shrine in Tokyo. His "Abenomics" plan was, more than anything else, about revitalizing Japan to make it better prepared for confrontations with China. That strategy is finished. China's leaders, already filled with feelings of enormous contempt for Japan's blinkered, nepotistic, and sclerotic ruling class of politicians and bureaucrats, now have every reason to view Shinzo Abe and his supporters as nothing more than a bunch of clueless dunderheads who have thrown Japan back into a perfectly avoidable recession.

Totalitarian collectivism is bad, but a bit of collectivism is better than the anarcho-capitalism than you see in the U.S.

Government can only do so much. Now it's time for business to carry through. Take the risk and raise wages. Spread the wealth so people will start spending.

Japan’s population is shrinking and aging, creating a smaller domestic market and placing heavier tax burdens on younger wage-earners.

Although Japan is now in a recession, counter-intuitively it faces a labor shortage as well (normally high unemployment accompanies a recession).

Ultimately, what this all boils down to is a demographic bubble that year by year is steadily deflating. The government and BOJ can tweak all they want with fiscal and monetary stimulus (yet countervailed by the sales tax hike and other fiscal austerity measures), but the bottom line is demographics.

More than 3 million people were born in Japan in 1946 and each of the several years that followed, compared with fewer than one million last year. Now, with all those born in 1949 hitting retirement age at 65 this year, lots of job vacancies have opened up over the last three years with fewer people to fill the slots — thus the labor shortage. Also, the masses born in the late 1940s were at their peak earning/productivity years in the late 1980s, largely explaining Japan's booming economy at the time.

Now, the workforce is heavily-weighted with older workers not eager to rock the boat as they wind down careers and wait for pensions to kick in. Not good news for Japan's GDP, not good news in terms of potential to pay off the nation's massive debt.

"Abe has promised drastic reforms of labor regulations"

Which means lower wages and lower job security, which is what the latest reforms created. Which means less spending, which means more recession. Dont this people get it?!?

After many years of deficit spending, Japan needs tax increases to get its battered government finances into better shape and cut its total public debt, which is more than twice the size of the economy and the largest among developed nations. A delay in the tax hike will slow that process

instead of taxing, how about shrinking government? after the sales tax hike, government workers got a raise. don't see how that shrinks the debt. the problem is that government has no incentive to shrink itself. they derive their power and influence from passing out money so of course they want more and that is why the MOF is the most powerful ministry and keeps pushing for tax increases.

Abe should resign to give the position to the talent man.

The debt isn't too much of an issue, Japan doesn't exactly need to ever repay it and can still inflate away. There won't be any Greece-like scenario here, more of an Italy-like scenario where quality of life stays the same forever but no more growth.

"TINKERING WITH TAXES: After many years of deficit spending, Japan needs tax increases to get its battered government finances into better shape and cut its total public debt, which is more than twice the size of the economy and the largest among developed nations. A delay in the tax hike will slow that process."

Complete BS. Government needs to cut its staff, allowances and wasteful projects. Do that first then we'll talk about a tax increase.

And Abe has also raised taxes on the poor by taxing food,clothes,transport etc! It is no wonder that the birthrate is falling - Japanese cannot afford to have children.....

This is a dangerous situation. If the politicians aren't careful, Japan will end up like Korea where everyone is a slave to foreign corporations and banking systems (even Samsung is over 50% foreign-owned; foreign corporations and banks don't care about the welfare of the citizens of other countries and treat them like modern-day slaves).

TINKERING WITH TAXES: After many years of deficit spending, Japan needs tax increases to get its battered government finances into better shape and cut its total public debt, which is more than twice the size of the economy and the largest among developed nations. A delay in the tax hike will slow that process.

What kind of Marxist fool is the author of this article?

Here is how it works. If you raise taxes, this increase is passed on to all income classes. Companies who pay more tax compensate by hiring fewer workers, lowering pay, laying off staff, moving overseas, or simply shutting down. People who pay more taxes compensate by buying fewer goods. When they buy fewer goods, companies produce fewer goods, and thus compensate by not hiring, reducing wages, laying off staff, moving overseas, or simply shutting down This drives down wages further, which further decreases economic activity. As economic activity decreases, taxable profits and income decrease, and the government ends up collecting less revenue.

How exactly did the last tax increase help to pay down Japan's public debt? The increase in the tax was the direct cause of the decrease in GDP, and the decrease in GDP was more than enough to wipe out all of the extra revenue collected, right? Is the author unable to do this very simple math? Does the author think that raising the tax yet another 2% will increase revenue 2%? Does the author live in Colorado? Is he smoking something as he writes?

Does the author realize that Japan's population is decreasing by 6 figures each and every year? Does the author realize why the population is decreasing? Doesn't the author realize that the population is decreasing because the cost of living is too high? And does the author somehow think that further increasing the cost of living will do anything other than push the population down even more quickly? Is the whole world stupid?

the amount of truly inhuman poverty remains (correct me if I'm wrong here) low.

If you think of 'truly inhuman poverty' as absolute poverty then you are correct. But that level of poverty is extremely uncommon across all OECD countries.

But I worry that your comments underestimate the rapid rise of poverty in Japan (especially child poverty). This years study puts nearly 1 in 6 below the poverty line. What relative poverty means for Japan is still pretty unclear though - so strong was the belief in egalitarian society for so long that real data is still very thin on the ground.

How Japan deals with this, and how it stops the wealth gap following a US-style curve, is going to be one of the real challenges to future social cohesion.

Also corporate breaks should only be given to those which are giving raises to their employees. Want the benefits...then help out on your end.

Statistics looking at social indicators show that the most important factor is not the size or wealth of the economy but the degree of fair distribution that determines the quality of a society. For example, the US by aggregate measure is rich, but it has huge inequality and also awful social indicators, such as health, education, social cohesion (crime), etc.

This suggests, considering Japan's demographic issue, that Japan has the ability to address some critical problems if the people are willing to share in the pain of economic decline for the next several decades until the population again stabilizes.

Continuing to follow the US model, with the harsh neo-liberal agenda of Abenomics furthering income and wealth gaps, will be the worst path forward.

Wonder what effect this will have on the value of the yen in the interntional market? Haven't seen any major changes since the news broke yesterday.

Abe has promised drastic reforms of labor regulations, the tax system and the health industry, among other areas, to help improve Japan’s competitiveness

Japan has been recession without growth since 1991. It is not new. When Abe became PM, he did not make the touch structure reform. Such as balancing budget, opening the skilled immigration and promoting the competitiveness of Japanese industries. He used populist fiscal stimulus for reviving the economy. The more he pumps the money for the growth, the more Japan will be indebted. However there was the five minutes economic sunshine of share market boom. Majority have missed out from boom. J Yen has decreased and made Japan export more competitive. However imported materiasl and energy are more expensive.

If Abe has used all arrows, it is obvious that his Abenomics has failed for recovering Japan economy as sustainable and long term growth. The more he is fixing Japan economy, the more Japanese residents will face the hardship. He is the trouble maker of economy. Not the problem solver.

One problem for Japan is that the top rate is now 55% (45% national + 10% for local governments), on incomes of ４千万円 or higher. This means that every talent on TV, every successful businessman or investor, every landowner, is now in danger of paying more than 50% of his income so that Tokyo can waste at least some of the money on bridges to nowhere, supporting the whaling fleet with tax dollars, and so on. While they might be okay with this while they're working and earning, the number of people who will "vote with their feet" and head to Singapore or somewhere else with a more reasonable tax structure when they retire will be very, very high.

As an American I have basic protection against unreasonable estate taxes below $5 million, but Japan feels entitled to 50% of all my property upon my death, despite the fact that this month has all been taxed already, at a rate potentially higher than 50%. When people realize they have a choice in this matter (e.g. Singapore, Thailand, Malaysia), do you think they'll just sit around and drink green tea and let this happen?

It's hilarious to try to explain Japanese politics to my American readers. Yes, the conservative government raised taxes on the rich. No, really!

What ? They've been doing all those for the past two decades, nothing happened and they expect something to happen now ? I've worked in a few companies like that, things didn't work, instead of "change", let's do it the same way, but harder! The whole country operates on the same drill mentality, ganbaru the hell out, something good will eventually happens.

Its hard to follow or make any sense of any of this. tommorow it will say Japan post a trade account surplus of...or machine orders are higher than expectations...or the Topix has reached record highs. or the unemployment rate is at historic lows etc.

@wtfjapan

But really, he/she is starting to really annoy me with his/her censorship.

I have politely replied to LBW2010's view of Japan which I consider over idealized and very often just plain wrong. But my message was removed for being off topic. But how can it be that LBW2010's message is not of topic, but mine is? I am just replying to him and suddenly I am off topic.

And many points in LBW2010's message are in fact not related to the present news, so exposing them with a positive orientation towards Japan is not off topic but trying to reply to them is suddenly off topic.

Such a jerk, come one.

Demongraphics is the key word. Japan needs to let people work past 65 who want to and are able to. Also more skilled and well-paid positions need to be available for women. There is a lot of unused potential in this country. Yes, women can do more than just serve tea. I would be glad to see women run businesses increase too. Many other changes need to occur as well. You can't have your cake and eat it too.

Japan need to start thinking a totally different way, first they have to find a way to get births up and have child care so women who are very well educated work. If this doesn't happen nothing else will get the economy going. Tax hike only make things worse, wages are not rising so you take the people into a saving mode not to spend. The large group of elderly who are retired and entering retirement will start sucking all the money off the pension rolls welfare will increase because the kids who are coming out of school are not being able to keep up with the competitive edge and are not getting full time employment and being paid enough money survive on their own and to pay into the system. The government prints more money to try to keep up which pushes the country farther and further into debt. The Japan I see now will not be the Japan of prior years, it seems it lost its competitive edge and the people are beginning to feel hopeless and once the government can't provide for the people it becomes total anarchy!

Somewhat agree with you Sangetsu but in the strange world of Japan (respectfully), where protectionism is king, where consumers have very limited choice when buying assets or consumables, they are forced to pay that extra 10 yen for the 130 yen drink. I dont see any reduction in vending machines, its a national obsession to continue to use them. So the suppliers can still remain in business as the people must buy from them. People just buy slightly less. Supermarket shelves and coolers are filled with products from the same domestic suppliers. Its not like the people can choose to go somewhere (unless its Costco, and those guys are surely making it big, if yet to figure out how they got around the distribution network in Japan) They must buy gas from Tokyo gas electric from Tepco, etc. Those extra 10 yen or 8 yen at your 100 yen shops really add up. But I agree that deflating wages while inflating prices is, well, a bit strange, even for Japan

@sangetsu03, @5petals I take advantage of this interesting discussion to explain better my point on Abe and Abenomics … Actually I don’t think Abe is really pursuing the end of deflation for a very simple reason: presently, it can crash the whole country … but Abe has been elected with the mandate to end deflation so he can’t openly tell the truth …

Imho the his real goal is to keep Japan among the leading world economies and he’s planning to do this with the only strategy that, in the present context of open markets and free capital movements, is really working: mercantilism.

Actually I think he wants Japan to grow large trade surplus by means of

yen devalutaion (improves exports and reduces imports) low internal inflation (if you have internal inflation, your goods will become more expensive and hence less easy to export) support for big multinational companies (they have the infrastructure to reach global markets)

As you can see, point 2 is contrasting with his open mandate to end deflation but he is doing it in the interest of Japan as a whole nation …

@Nicola,

I could not follow your post. Your saying he wants low inflation but wants to end deflation in the interest of Japan as a whole?. Free capital movements and open markets you mean as deregulation? From what I have been reading, its the small to mid sized domestic companies that have been sitting on stockpiles of savings, and wont raise wages or reinvest-and this is the crux of the problem, not the multinationals invested abroad. If you could put all that together so it makes sense of what Im missing.

@5petals, defo no problem.

I have not said his real goal (of course in my opinion) is to end deflation but “to keep Japan among the leading world economies” even at the cost of going on with low inflation (actually a little better than deflation) Low inflation is useful to Japanese Export because it keeps prices low hence combining this with yen devaluation, it should be easier for Japan to grow an important trade surplus … Free Capital movements and Open Markets is simply the context we are living in:) WTO is the institution responsible to keep markets as open as possible: for example before Abe’s election in 2012 Japan was considering to switch back to a temporary protectionism to overcome the difficulties related to Big 2011 Tsunami and Fukushima but Abe did not want to so WTO praised Japan for this decision http://articles.economictimes.indiatimes.com/2013-02-21/news/37221756_1_wto-members-protectionism-japanese-trade-policy

Actually yen artificial devaluation is a sort of protectionistic policy but it is a more acceptable one compared to other ones …

Obviously exposing themselves to global competition by means of open markets in the present context with such an overproduction capacity is though and long lasting low inflation / deflation is a common consequence: Eurozone is now falling in Japanese-style deflation, US is struggling to keep inflation close to 2% (and they also have a big debt problem) and also China inflation moved just in the last year from 3% to 1.6% …

To sum up, what I claim is that the only way to end deflation without growing a huge trade deficit, hence enworsening the debt substainability, is to pursue protectionistic policies thus conflicting with WTO (so probably with consequences) None of the big economies has yet decided to follow this kind of strategy so everyone, sooner or later, will see its inflation lowering …

The first step could be a currency devaluation “war” and Abe has already moved along that direction …

Japan’s population is shrinking and aging, creating a smaller domestic market and placing heavier tax burdens on younger wage-earners. Apart from its automakers, Japan’s many manufacturers have lost their innovative edge and have been shifting production offshore. Household incomes peaked more than a decade ago, and a growing share of workers struggle to make ends meet on part-time, contract work.

Pretty much sums it up. But don't worry, Abe is going to win the snap eletion and he'll take it as a mandate to just keep spending like a drunken sailor -- because he, the LDP and Japan know no other way. Glad economic problems there are way in my rearview mirror.

Moderator, you are an a... hole.

Moderator: If you ever post a message like this again, you will be suspended from the discussion board.

Sangetsu03, I almost completely agree with your position. As far as I know, the goal of the tax hike happened in April was to finance the pension system by means of taxes instead of deficit … I think that Abe, whom I consider a smart politician, knew very well that the effect of such a tax hike would have been negative on GDP and imho he developed a plan this … Actually I think he is exploting the fact that he got electoral mandate on his initial plan (including the tax hike of April 2014) and now he is willing to go on vote again with an appealing program based on postponing the next tax hike (also this backed by electoral vote 2 years ago) and with weak opponents in order to improve his position in the Lower House …

Abe, whom I consider a smart politician,

God save us, the only thing worse than a stupid politician is a smart one.

Our democratic systems were intended for us to elect our peers to public office, not create a permanent ruling political class in which our "leaders" are the sons and grandsons of politicians. Funny how some actions have a result opposite from the one which was intended, kind of like tax increases causing reductions in revenue.

But as Hitler himself said, "What a wonderful thing for rulers that people are stupid!"

japan needs to find new resources around their waters and restart their nuclear to create a strong defence to this recession. about population, i think its the media that they have to restrict so people think about their families and children rather than the romance fun or the sleeping in number of beds

...collectivism that you will never see in the West.

You talk like you consider this to be a good thing when it quite obviously isn't.