Economic Crisis in Japan: In Search of the Right Recipe

Status: 11/29/2021 5:53 p.m.

Japan has achieved more with a successful vaccination campaign against Corona than any other country in the G7 industrialized countries. In the economic crisis, however, the government continues to look for a way out.

By Ulrich Mendgen, ARD-Studio Tokyo

Japan’s economy is failing. That is why the government in Tokyo has launched a new stimulus package designed to turn the current crisis around for the better. The scope of the aid program is enormous. It provides for expenditures equivalent to 430 billion euros – this corresponds to ten percent of the economic output of Japan, the third largest economy in the world. This is the largest bundle of support measures that Tokyo has put together in the pandemic.

Japan’s way out of the corona recession is difficult. In the third quarter of 2021, economic output shrank by 0.8 percent. Old problems plague the country: the reform backlog, the falling birth rate, the excessive bureaucracy. In addition, there are the challenges of the future that Japan has not yet or insufficiently faced – including digitization and the switch to CO2-free technology.

New, unfamiliar ways

The newly elected Prime Minister Fumio Kishida wants to awaken hope with the new economic stimulus package. He also keeps an election promise. He had announced a “new capitalism” to the electorate. Initially there was even talk of doubling incomes. The word redistribution was also mentioned – to hear this from the mouth of a government politician is extremely unusual in this traditionally economically liberal country.

In fact, the state is now mainly helping medium-sized and small businesses and families. For each child, the parents receive the equivalent of almost 800 euros in cash; Higher earners are excluded. The package also provides tax breaks for companies that pay their employees better. The government ensures direct wage increases in the areas of childcare, nursing and care for the elderly. In the other sectors, the Prime Minister is trying to appeal to the bargaining parties to agree on high degrees.

The problems run deeper

German economic expert Martin Schulz, chief economist at the technology group Fujitsu, expects the program to stimulate the economy in the short term. But he misses “a sustainable growth element”. Although something is being done against company bankruptcies and for rising wages, no impetus for higher productivity has yet to be seen. As far as the long-term effect of the package of measures is concerned, Schulz is therefore “not overly optimistic”.

In order to sustainably improve the economic situation in Japan, major reform efforts would be needed, as many economic experts agree. In particular, when it comes to reducing bureaucracy, digitization and the energy transition, the country is not exhausting its potential, also due to internal political resistance. The new package can improve the income situation of parts of the population in the short term; however, it remains uncertain whether the citizens will actually spend the additional money. Earlier programs are not necessarily optimistic.

Getting into debt à la Shinzo Abe

The huge additional expenses are covered by new debts. Japan increases its debt level with the economic stimulus program to 270 percent of the gross domestic product. Prime Minister Kishida, like his predecessors, relies on increasing money with the help of the printing press. The central bank has been buying government bonds for years, thus ensuring that the state remains “liquid” despite generous spending. The strategy known under the keyword “Abenomics”, named after the former Prime Minister Shinzo Abe, continues to determine the course. With the result that Japan is only guaranteed a top position in terms of national debt for the time being.

The government is expecting strong growth of a good five percent. However, that is only half of what it now wants to pump into the economy. Since Japan is now closing its borders again because of the new omicron variant of the corona virus, the result threatens to fall short of expectations. In the end, instead of a “new capitalism”, there could just be another flash in the pan.

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