On April 1, the government will announce the name of the new era that will replace the current Heisei period on May 1, when the country's new emperor is set to be enthroned.
The Heisei era started in 1989, the year the world witnessed the collapse of the Berlin Wall, followed by the dissolution of the Soviet Union two years later. The end of the Cold War initially made people in the world hopeful there would be a new era of peace, but these hopes were dashed, and geopolitical instability continued in the world in the past 30 years of the Heisei era. Japan was repeatedly battered by major natural disasters over the same period.
The past three decades were also rocky on the economic front. In 1989, the first year of the Heisei era, the Japanese economy was at the pinnacle of an asset bubble with the benchmark Nikkei-225 Stock Average climbing to an all-time high of 38,915 at the end of the year.
Some foreign observers praised Japan with flattering comments, including "Japan as Number One." The buoyancy of the Japanese stock market seemed only to endorse the unprecedented euphoria. Early in the year, annual spring wage negotiations ended up giving Japanese workers an average year-on-year pay raise of 5.2 percent, leaving Japanese society convinced that wages would keep increasing year after year.
Lessons from Heisei era
However, just after the second year of the Heisei period began, there was a sea change in the Japanese economy. Stock prices began plummeting, rapidly pushing land prices down and bringing an end to the economic bubble all too soon. In the about 30 years since then, the Japanese economy has continued to suffer from the aftershocks of the bubble's collapse. That said, the post-bubble experience gives us many lessons.
The biggest problem Japan had to tackle in the first 10 years of the Heisei era was the accumulation of nonperforming loans (NPLs) that triggered the dysfunction of the banking sector. Efforts to bail out financial institutions saddled with massive amounts of NPLs -- which the government said totaled 76 trillion yen as of 1998 -- made little progress. Why? The banking sector's failure to disclose NPL-related information fully and quickly is not the only reason for the delay in an across-the-board NPL solution.
Another factor was the failure to win public understanding for the injection of massive amounts of public money, i.e. taxes, into the troubled banking sector to overcome the NPL crisis. The government hesitated to mobilize a sufficient amount of public funds in the face of the people's objection of "why should taxes be spent to bail out the banks responsible for the economic bubble?" In this context, we have learned the lesson that delay in implementing a correct policy due to populist opinion will eventually inflict immense harm on the real economy.
In addition to populism, other voices delayed resolving the financial crisis -- those who insisted that the normalization of NPLs would be viable once the economy was back on track to growth and therefore the government should prioritize an economic stimulus package. This approach of emphasizing that "it is good enough to expect the economy to rebound" is tantamount to procrastinating on the solution to a financial crisis without properly attending to the possibility of the banking system collapsing. What happened in 1997 and 1998 was the exacerbation of the crisis in the wake of a series of failures involving Hokkaido Takushoku Bank and Yamaichi Securities Co., among other financial institutions.
Longest boom with no buoyancy
In January 2001, central government ministries and agencies were realigned under the name of administrative reform. In April that year, Junichiro Koizumi became the prime minister. In the early years of the Koizumi administration, the Japanese economy was still in a serious recession, with the unemployment rate soaring above 5 percent, due to the aftershocks of the collapse of the information technology bubble in the United States. However, in 2003 when the government decided to use public funds to bail out one of the country's major banking groups, Japan managed to pass the NPL crisis and was finally back on a growth track, continuing to expand steadily. As of February 2008, the Japanese economy had logged the country's longest postwar expansion, lasting for 73 months. It was named the Izanami boom.
The Izanami boom, which started in February 2002, was far longer than the previous record holder: the 57-month-long Izanagi boom that followed the 1964 Tokyo Olympic Games. Japanese booms are usually named after deities in Japanese mythology. However, there were no signs of upbeat sentiment among Japanese consumers. This was natural given that the average annual growth rate in gross domestic product was only above 1 percent during the Izanami boom, compared with 10 percent for the earlier expansion streak.
The Japanese economy is currently in a new lengthy expansion phase that is likely to outlast the 73-month-long Izanami boom. Yet, it also lacks upbeat sentiment among Japanese consumers. There are two reasons for this -- a sluggish average GDP growth rate, as in the case of the Izanami boom, and export-driven expansion that has little positive impact on workers' wages.
What is worse, Japan has experienced what no other advanced countries have ever encountered in postwar history -- Japanese workers' nominal wages began declining in 1997 and 1998 when the country's financial crisis erupted. When wages remain steady, they can be said to work as a "deflation stopper." But falling paychecks have removed this particular function of wages in Japan. The nation has therefore experienced more than 10 years of moderate deflation with prices falling slowly.
Widening inequality
During the three-decade-long Heisei era, we have undergone the collapse of the bubble economy, the ensuing financial crisis, the Izanami boom, the Lehman Brothers shock, the Great East Japan Earthquake and Prime Minister Shinzo Abe's growth strategy known as Abenomics. Two phenomena have occurred in tandem with these developments: the decline in the birthrate and the rapid aging of the population, and the widening of inequality.
While reasons for inequality vary from country to country, this phenomenon is aggravated in Japan largely due to the aging of the population. Inequality in society tends to worsen when there is an increase in the number of elderly citizens whose levels of income, assets and health vary widely from person to person. What is noteworthy in this connection is the widening of inequality even among the country's working generations. At the start of the Heisei era, one in every six employees was a non-regular worker, but non-regular employees now account for nearly 40 percent of the overall workforce.
Society security is the system purported to ease the problem of inequality. At the outset of the Heisei era, social security benefits amounted to about 47 trillion yen a year, while the comparable annual total now reaches 120 trillion yen, a 2.5-fold increase. Unfortunately, social security insurance premiums cannot fully finance such benefits -- they cover about 60 percent of the entire sum. The shortfalls are filled by public funds. However, tax revenues stop far short of making up for the necessary coverage. As a result, the shortage of fiscal resources for social security spending emerges fully as the source of the state's fiscal deficit.
From best to worst
In the beginning of the Heisei era, Japan enjoyed a fiscal surplus when the state and local government budgets were combined, a development that may be beyond belief from today's point of view. In fact, Japan had the best budget position within the club of developed countries 30 years ago. Today, however, its budget position is the worst in the club.
In October this year, the government plans to raise the consumption tax rate from 8 percent to 10 percent. It should thoroughly explain both why the tax hike is necessary and the entire picture of the current circumstances surrounding the country's social security. It is not enough to talk about possible economic stimulus measures. As the lesson we learned from the post-bubble financial crisis tells us, a fiscal deficit cannot be resolved through economic expansion alone.
While there are advocates seeking to realize fiscal reconstruction through economic growth, some bluntly say the Japanese economy can no longer grow now that the population seems to continue shrinking. In the past decade, the argument has gained ground that the Japanese economy is destined to post negative or zero growth in the years ahead. But it is wrong to expect a population contraction to force Japan's economic growth rate to go into negative territory. It is clearly evident that the driving force for economic growth in advanced countries is not population expansion but per capita income growth.
Needless to say, innovation can help increase per capita income. But there are some pundits who are negative about this empirical observation -- they fear the possible depletion of technological innovation possibilities. Just look around you, and you will definitely find technology progressing unabated. At the start of the Heisei era, we commonly used landline telephones and saw many public telephones on the streets. In 2000, the number of cell phones in Japan surpassed the 50 million mark for the first time, outnumbering landline phones. Technological innovation has never stopped and we now use smartphones.
The aging of the population may cause many problems in society, but such a phase can also offer a very new source for innovation.
As we look around us, there are many matters of concern, including the U.S.-China trade war, a less stable U.S. administration under President Donald Trump, the tightening of monetary policy by the U.S. Federal Reserve and the future of China as the world's second-largest economy.
In any age, all dedicated innovators set their sights on the future of society or industry. Optimism is the mother of innovation, pessimism is not. Optimism stems from a definite will -- not from a casual sentiment.
Special to The Yomiuri Shimbun
Yoshikawa is a professor at Rissho University, before which he was a professor at the Graduate School of Economics of the University of Tokyo. He concurrently serves as the chair of the Cabinet Office's study panel on diffusion indexes for business conditions. Previously, he chaired the National Council for Social Security and the Fiscal System Council, and served as a member of the Council on Economic and Fiscal Policy.
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