Covid-19 and the Japanese model

Mt Fuji

The Japanese economy was in recession when the virus struck. GDP fell 1.8% in the fourth quarter of 2019 and experienced a further small fall in quarter 1 2020. Japan’s decline of 7.9% in the second quarter was a large fall by historic standards but was at the lower end of declines worldwide as economies were placed into lockdown.

Japan decided on a middle course in its response to the pandemic. Its government did not impose draconian lockdown controls, but it did declare an overall state of emergency and encouraged companies and individuals to behave differently to contain the spread of the disease. This was relatively successful. Businesses opened doors to improve ventilation, reduced social contacts and imposed social distancing. Individuals wore masks and behaved cautiously. As a result of that or other factors, Japan has experienced fewer deaths than the large European countries despite having double their populations.

The new Prime Minister stresses continuity with his long-serving predecessor and wishes to press on with his policies.

Japan has long been criticised in the West by commentators pointing to the slow rate of GDP growth since the spectacular crash of the early 1990s. An ageing society with little migration has generated large surpluses in both the household and corporate sectors. Companies have lacked enthusiasm for major investment and individuals have saved rather than consuming more than they earn. The country has also earned consistent balance of payments surpluses, exporting more than it imports.

Ballooning debt

To balance the economy the government has ended up borrowing huge sums to absorb the surpluses of the other three sectors. Western critics condemn the high levels of state debt, now over 250% of GDP and worry over how sustainable this model is. In practice, it has proved to be long-lasting and stable, thanks to the fact that the Japanese owe practically all the money to themselves. It is owed in yen which they can print, and the interest rates on the debt have stayed around zero.

View Full Article– published by Charles Stanley on 25th September 2020