PESEK on Japan’s shrinking population

As if he were aware of MF’s recent discussion on the economic effects of Japan’s shrinking population, Bloomberg columnist William Pesek weighs in with some characteristic commentary. Pesek reports on some economists who claim that population aging and a shrinking work force would, contrary to popular belief even in mainstream Japan, have no detrimental effect on the economy as long as there’s sufficient growth in productivity, which is apparently a piece of cake. Pesek, as the headline of his column would suggest, thinks this prospect of a healthy-yet-possibly-shrinking economy so flies in the face of how we understand conventional economies that he called on the authors of Freakonomics to investigate. Here’s the main thrust of the argument:

[Sharmila Whelan of CLSA Asia-Pacific Markets:] “Access to labor, technology and capital are the least of Japan’s problems,” Whelan said. “Creating an environment where there is unhindered entry and exit of new businesses and new ideas are born resulting in continuous innovation and cost savings is the greater challenge. Japan has a long way to go, but the process has started.”

Let’s hope so. Otherwise, the world’s No. 2 economy could shrink along with the ranks of the Japanese.

I think the productivity question is a big “if” in this equation as the creation of the above-mentioned enviornment remains a major sticking point. Without the political leadership of a Koizumi, Japan’s government seems keen to rest on its laurels and fall back on public works spending and support of export industries that promotes the status quo of dangerous stagnation in Japan. But now, we have Abe as prime minister. And as I’ve noted before and as has been borne out by recent events, including the reinstatement of the “postal rebels,” the failure of the Abe administration to follow MOF’s line and divert gas taxes away from road building, the political leadership just isn’t there right now to provide that energy. Sure, initiatives that have LDP/bureaucratic consensus, like education and defense reform or the promotion of further government outsourcing can move through the Diet smoothly, but Abe so far seems to lack Koizumi’s resolve and has found himself on the losing side of crucial policy disputes within his own party. And it remains to be seen whether he will be able to stand up for his stated policy of cutting government debt and expenditures in the face of a boost in tax receipts.

Given the continued decline in public works spending and progression of reforms that were decided in the Koizumi days, Japan is in a much better position than it would have been. But Abe continues to disappoint, and it’s not as if there’s much out there in terms of alternatives. Within the LDP we have Foreign Minister Taro Aso as Abe’s most likely successor. He worked to undermine postal privatization as MIC minister just as he’s undermining Abe’s China diplomacy as Foreign Minister now. And then there’s opposition leader Ichiro Ozawa, who may be a strong politician, but he’s in poor health and not a particularly charismatic leader.

However, there are the makings of new breed of leaders, at least according to the author of the interesting-sounding The Japanese Money Tree: “Investors are ignoring an arguably much more important demographic shift…A younger generation of politicians, executives and policy makers is poised to take charge.” And Pesek goes on to note: “CLSA’s Whelan says fewer people will do for Japan what former and current prime ministers Junichiro Koizumi and Shinzo Abe have been unable to: catalyze an innovation boom that makes Japan more productive.”

These may be some famous last words, but is a generation of young innovators going to provide what the current one can’t? Perhaps it’s more likely that foreign-developed technological advancement will lead to productivity improvement, but can Japan count on that? Another question: What if Japan’s productivity increases, innovation adds vitality to the economy and improves living standards and all that, and the economy still ends up shrinking on an absolute level? Would people be willing to accept it?