Month: July 2016

Japan: Risk Off?

The Global Financial Crisis reminded us all about the potentially enormous risks of excessive risk taking. However, for several decades now, Japan has struggled against the opposite problem, namely an excess of risk aversion across its economy. And this risk aversion has created very high barriers to efforts to restore economic vitality to the country.

A recent Financial Times article highlights one example of such barriers ( Japan’s tech cannibalism saps Abenomics, July 5, 2016). The long period of weak growth and off-and-on deflation have led many Japanese businesses to focus intensely on cost-saving rather than expansion or broader forms of innovation. Reflecting this, many have made do with old information technologies and equipment. The continued lack of interest in new investment has helped stymie the government’s efforts to move to a higher growth path.

But the issue is a much more general one. Following the bursting of Japan’s enormous asset bubble in the early 1990s, a period of deleveraging by corporates and households, and a caution by financial institutions were to be expected, and were needed.

But the lessons of the Lost Decades appear to have been over-learned. Over the last several twenty or so years, Japanese consumers have become cautious and price-sensitive to the extreme. Large corporates have continued to amass large savings, with investment and wage hikes for workers remaining weak. And financial institutions have become satisfied with assets with a very low–or even negative–return.

In this context, Abenomics can be seen as an unprecedented effort to leap from a low-growth deflationary equilibrium to a new equilibrium characterized by higher growth and inflation and, in parallel, more risk-taking by businesses, consumers, and the financial sector. This, in turn, would require confidence in Japan’s growth prospects and economic policies which, in turn, would require a firing of all three “arrows” of Abenomics–monetary and fiscal stimulus and a new growth strategy (to be followed by public debt reduction).

But after some initial success, Abenomics appears stalled. There are a number of reasons for this, including an insufficiently ambitious set of structural reforms and a less-than-stellar global economic environment . But one important factor is that the forces of risk aversion have proved much more difficult to overcome than anticipated.

Is Japan actually more risk averse than other countries? This is a difficult  proposition to prove, but there is at least some evidence that it is.

  • Nearly three-fourths of Japanese describe themselves as risk-averse, placing them near the top of a 2008 study of 51 countries by Stockholm-based World Values Survey.
  • According to the Global Entrepreneurship Monitor, fewer than 4 percent of working-age Japanese intend to start a business within three years, third-lowest among 54 countries surveyed.
  • Even in the sports world, Japanese play it safe: professional baseball teams in Japan bunt twice as often as Major League teams in North America.

Some of this likely reflects cultural norms, but it is supported by unhappy experience and economic institutions—which themselves may reflect underlying norms. Twenty years of deflation in Japan have likely strengthened already cautious attitudes toward risk. The most recent “coming of age” cohort—those turning twenty years old—have little or no experience with rising prices or incomes, and average nominal monthly earnings are lower today than at their birth. Together with the growth in non-regular employment, this has led to fairly extreme cautiousness on the part of young people in Japan. Machiko Ozawa, a labor economics professor at Japan Women’s University puts it this way: “Within society the young generation should be risk-taking and innovative. In Japan, they are just afraid.”

Institutions also play a role. Bankruptcy laws have historically impled an extremely painful process for the debtors, making second chances rare, and underpinning the natural risk aversion of the population. This, in turn, has contributed to an SME sector with low levels of both entry and exit as well as low levels of productivity growth in the services sector.

Abenomics always had a sizable psychological element to it. People needed to feel it would work before the would take actions that would bring success about. The super-majority in parliament achieved by the government at the start of the process, together with an extremely successful PR campaign (which economist is unfamiliar with “Abenomics” or its “arrows”?) provided hope that “this time would be different.”

But failure to follow through with fundamental reforms, including to labor markets, immigration and regulation (what ever happened to special economic zones?) have contributed to deflate expectations, if not process. Continued macroeconomic support may well be justified but without a convincing case that Japan’s growth policies are more than just that, risk aversion may keep Japan spinning its wheels.