Japan has enormous debt, falling population, and faces a demographic ‘time bomb’. But my current visit to Japan reveals a vibrant, friendly, and civilised society. So how to make sense of these observations?
My sense is that Japan may become a model for societies adjusting to the new reality of stagnant economic growth. Japan certainly has its share of problems. But it also has world class universal health care, a quality education system, a comprehensive welfare system, and of course, a fantastic train system. The biggest future problem will be the demographic shifts.
The result of a slight decline in population (127.8 million in 2017, down from 128.1 million in 2010) is that population growth is not driving GDP. But a fixation with GDP seems to have overtaken any sense of perspective. A country with stagnant or declining population will have smaller GDP growth, but this is meaningless except for the asset owners who are used to scarcity-driven capital appreciation.
In my home town of Melbourne, road congestion is getting worse, commuter trains are full, and urban property values exceed that of prospective first home buyers. The headline growth figures driven by immigration and population growth seem good, but this is being accompanied by a loss of urban amenity. A developed country will never be able to build transport infrastructure fast enough to accommodate rapid population growth. As O’Sullivan argues, the ability of a society to meet its population’s needs is largely dependent on its stock of durable assets, but a growing population places a much larger burden on expanding the durable asset base than one with a stable population. The reasoning is simple – a growing population only increases the tax base slightly but increases the need for infrastructure spending significantly.
Japan has a mix of subway systems, intercity and Shinkansen services. The subway systems underpin the functioning of the cities. Cycling and walking are ubiquitous. Train car parks outside of the city centres are filled with hundreds of commuter bikes. The lack of mandatory helmet laws seems to be essential to commuter cycling. The City of Melbourne has a great bike sharing scheme, but it is killed by the mandatory helmet laws. Furthermore, Australia lacks a commuter cycling culture. Outside of the inner cities, few people would willingly ride to work. In many cases, it is simply too dangerous – too many drivers lack respect for cyclists. In Japan most bikes seem to have only a basic rear wheel lock or no lock at all. I assume theft is not a big problem.
The income disparity discussed by Piketty is not as bad in Japan as other developed countries. In other advanced countries, executive compensation has gone crazy and the middle class has been hollowed out. But Japan is sometimes classified as a coordinated market economy. The Japanese economy is characterised by a range of deeply embedded cultural values that are distinctly different from the liberal market economies typified by the UK and US. The co-ordinated market economies (incl. Germany, Japan, Denmark, and Sweden) are characterised by homogeneous populations with shared culture and language. These can be contrasted with the liberal market economies, which comprise greater cultural diversity and pioneer origins. Liberal market economies operate with greater emphasis placed on individualism, as opposed to shared values. For example, Japanese corporations operate in a financial, governance, and labour context that supports co-operation and long-run decision making. There is less incentive for employee poaching due to salary equalisation. In turn, employers are more amenable to supporting employee education. These qualities are amenable to securing export-led growth. Japanese corporations can no longer boast about a ‘job for life’, but there remains a distinct cultural difference to the liberal market economies.
At COP15 in 2009, Japan had pledged to reduce its GHG emissions by 25% from 1990 to 2020. This ambitious pledge largely relied on plans to increase nuclear power’s share in electricity supply from 30% to 50%. After the Fukushima accident, however, the country’s entire nuclear power capacity was gradually shut down, leaving a gap of around 30% in electricity supply. The gap was mostly filled by liquefied natural gas (LNG), and also by oil and, from 2013 on, by coal. If Japan continues to rely on more natural gas and coal for power generation, the GHG target will be complicated, if not impossible to achieve. Japan has invested heavily in solar PV, and several trips on Shinkansens reveals plenty of filled roofs, but PV alone will provide only a minor role for the foreseeable future.
Japan is a country with great trust in institutions. The loss of public trust as a result of Fukushima was due to a distinctly Japanese form of regulatory capture, termed ‘amakudari’, literally ‘descent from heaven’, where senior regulators and bureaucrats retire into the powerful executive posts that they once regulated. The consequence of the ‘nuclear village’ was that risks were inadequately borne by operators and the sort of routine safety features found in the US, for example, had not been implemented.
Technology, energy and productivity
We have lived through an unprecedented stage of human history. Gordon and Smil argue that the set of inventions that occurred as part of the Second Industrial Revolution, including the development of electricity, motor vehicles, steam turbine, telephone, refrigeration, antibiotics, the flush toilet, among others, represented epochal transformations. These fed into productivity improvements, economic growth, and fundamental changes to standard of living. The information and communications technology (ICT) revolution has produced the internet and drove productivity gains through the 1970’s through 2000’s, but has not delivered the sort of sustained improvements in standard of living that IR2 delivered. As a conventional economist, Gordon sees technology as key, but biophysical economists place equal, or more weight on the role of energy. The early 2000’s may have marked the nadir for the energy cost share, and the net-energy of our major energy sources is declining. Renewables seem to be be mostly providing a marginal abatement strategy within the boundaries of incumbent systems rather than forcing a fundamental shift in energy supply.
Japan is at the forefront of reconciling the conflicting demands of GHG abatement and ensuring energy stays within affordable bounds through the use of both supply and demand-side efficiency. Over the next several decades, Japan will provide a real-world exploration for how societies reconfigure to support standard of living with stagnant or falling economic growth and declining net-energy of energy supply.