Japan as Laboratory for the World
Sunday, December 19, 2004 Posted: 08:04 AM JST
Japan is a laboratory for the world claims Robert Alan Feldman of Morgan Stanley: "Already facing severe problems of demography and fiscal deficits, Japan is finalizing an economic strategy that should provide crucial experience for policymakers and investors everywhere."
All developed economies are facing the destructive combination of aging and fiscal deficits. Japan just happens to be a few steps ahead of the pack. Over the last 10 years the Japanese working-age population has dropped by about 2 million. At the same time the overall population increased by the same number of people. Labor force participation has been declining since 1997 and birthrates are at historical lows. For Japan aging is not a future problem, Japan is already facing it right now.
In spite of a growing economy and severe cuts in in public works spending and economic growth the primary balance remains in a deficit of about 4.8% of GDP. This is mostly due to pensions and medical care.
To maintain living standards in Japan, productivity will have to rise by at least as much as the participation rate falls. Japan is now creating a policy strategy to achieve this. It plans to raise productivity and mobilize resources. Japan continues trade liberalization and is actively pursuing Free Trade Agreements with countries around the Pacific Rim. A recent example, being Mexico. Corporate reform is continuing and science and technology are receiving increased support. A top item in Koizumi's agenda for the coming year is further postal reform.
To mobilize resources Japan will encourage higher labor force participation by seniors and women. Higher retirement ages, tax changes, pension cuts, targeted subsidies for child bearing and increases in daycare facilities must help accomplish this. Japan is also looking at increasing immigration, but this is a difficult area as most Japanese oppose it and the country's legal and social infrastructure is far from prepared to deal with immigrants.
Japan will also need to find a way to further cut its sky high fiscal deficits. the pension reform that Koizumi pushed through this year was based on outdated birth rates and will add to the deficits, not cut them. Medical costs are rising alarmingly and technology is way behind. Feldman believes that Japan has no other way but to raise taxes, but Japanese people favor spending cuts to tax hikes in a ratio of about 3:1.
Yet, Feldman believes that Japan will succeed. "Japan has already made much progress on productivity, resource mobilization, and fiscal reform. The track record of reform over the last few years suggests that confidence is warranted, and that Japan will be an attractive home for investors." If Japan does indeed succeed it will act as a guiding light to the world and will be strongly placed to recover its leading economic position on the world stage.
Keywords: national_news business economy
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