Question: Which of the world’s biggest economies is holding an early election this month dominated by debate over radical economic reforms?
Two clues: The economy, long in the doldrums, is showing signs of life, thanks to improving exports and a restructured private sector. An ageing population is making structural reform an urgent priority.
The answer: Not one, but two countries – Japan and Germany.
Just my point in my earlier post, and the more this connection is recognised the sooner we’ll enter the zone of framing meaningful solutions. As the FT writers suggest, there are many intriguing parallels between next Sunday’s Japanese election and the German ballot one week later.
The first and most obvious is this:
Both must press for reforms that tackle problems from ageing populations. In Japan, keeping the status quo spells inevitable economic decline because of a shrinking citizenry, which fell by 30,000 in the first six months of this year.
Germany’s main economic problem is high unemployment, not demographic change. But the country has one of the fastest-ageing populations in Europe, a trend that will put yet more pressure on the welfare system and lead to a dearth of qualified workers by the end of the decade.
But then there would be this:
“Japan’s banks have cleaned up their bad loans and consumer prices are on the verge of stabilising after a decade of deflation. The best companies, some of which have spent years restructuring, are making record profits and exporting vigorously. Unemployment, at 4.4 per cent, is off its peak.
Germany’s problems are different and its prospects more mixed. Unemployment, in absolute terms, is at a 70-year high, and while exports are booming, domestic consumption is stagnating because of flat income growth and fears of joblessness. As in Japan, companies in Germany have restructured extensively. Cost cuts, mass dismissals, and lower unit labour costs have boosted their profits; banks have resolved bad loan problems of the 1990s.”
So in both cases the banks have cleaned-up their act, in both cases companies have pursued far-reaching structural reforms that make them highly competitive, in both cases exports are booming, and in both cases domestic consumption proves to be enduringly week.
The key difference is the unemployment rate, but here it should be remembered that Germany’s under-65 labour force hasn’t started to decline like it has in Japan, so the situations aren’t quite comparable yet.
Another similarity seems to be that both countries still fail to take inward migration seriously as a policy tool that can ameliorate the force of the population change: Japan has virtually no immigration, whereas Germany is notably ‘cool’ on the topic (see, for example, Germany’s failure to take advantage of the opportunities offered by the EUs eastern expansion (and today here), and how the UK – very wisely – did).
Another area the FT doesn’t mention is monetary policy. Japan has been stuck in a monetary ‘black hole’ for many years now, with interest rates at zero per cent. What hasn’t been so commented on is the fact that Germany seems to be in a comparable situation (See this post on the topic of the monetary transmission mechanism). ECB economists themselves continue to note that M3 consistently comes in way above target increases, but German internal consumption stubbornly resists showing signs of life.
Finally – as the FT writers also note – the two countries are held together by another issue, the worry of how their respective political systems will respond if the remedies being offered are geared to tackling the wrong ailments.
You can find a fuller exploration of the Japan economy issue in a post I did last week on New Economist.