Lessons from Japan’s 30-Year Economy│SHIRAKAWA Masaaki (Former Governor of the Bank of Japan)

Lessons from Japan’s 30-Year Economy│SHIRAKAWA Masaaki (Former Governor of the Bank of Japan)

Uh thank you. I’m Kong Pak from Jan University. Um I’m first of all I’m grateful for the uh mayor Gangj and MBN and organizing of this great forum and Shakawasang thank you so much for your time in visiting soul and to attending uh this great forum and in this session of the 50 minutes uh Shira Kawasang the former governor of bank of Japan will share his own experience and and and insight about the Japan’s economy and and which is which should be very relevant to current state of the Korean economy. me. Uh please join me welcoming Shra Kosan. [Applause] Okay. First of all, thank you very much uh for having me in this u meeting. Uh it is my great uh honor and pleasure to speak before the distinguished audience today. Uh I would like to reflect on the Japanese economy in the past four decades and hope to draw some implications and lessons for Korea. Last year the Korean translation of my book uh which is memoir of my five years as a governor of the bank Japan during turbian period between 2008 and 2013 was published. Subsequently I was interviewed by reporters of three Korean newspapers. Uh what they ask has some commonalities. Will Korean economy follow the same economic path as that of the Japanese economy in the past four decades? I don’t know whether I could provide convincing answers at that time given short newspaper space. Today I have 30 minutes to speak. So I have decided on elaborating on answering the same question. Uh this graph shows the the long trends of the Japanese economy from the mid 1950s to 2012. The Japanese economy recorded high growth period from the mid 1950s to early 1970s. The average growth rate was about 10%. Since then the growth declined but was slightly high and in late 1980s Japan experienced extraordinary economic boom called bubble economy. Then we suffered from the burst of the bubble severe financial crisis and low growth. The period from early 1990s to today is often called lost decades or lost three decades. Although I do not like this, I don’t think this is a right way of characterizing Japanese economy in this period. As you know, there are several similarities between Japan and Korea. First uh both countries recorded enviably high economic growth in the past. Japan four decades ago was today China. Harvard professor Ken Rogoff wrote the following in his recent book memories fate. Uh but from the late 1970s to the early 1990s there was a widespread view and wid view and fear that Japan would eventually overtake the United States as a world predominant trading and economic power. Second both countries have long dependent on export oriented manufacturing sector. Looking at Japan, they are quite influential in the economic uh policy debate. Uh they were sometimes more influential impressive debate than is implied by their share of the economy. View from central banks their call for preventing yen’s appreciation often became headache. Third and more importantly, both countries are faced with severe demographic changes. In Japan, the working age population peaked in 1995 and the cumulative decline ever since is 15%. And total population peaked in 2009. In Korea, uh, peak year of working age population and total population are 2012 and 2020 respectively. Roughly speaking, in terms of demographic change, Korea is following Japan with a lag with a time lag of about 20 years. The parameter which determine future pass of population is of course fertility rate uh which is astonishing low at 0.6 in Korea compared with 1.2 in Japan. In any event, fertility rate in both countries are far below repression level of 2.1. Given these similarities in general and demographic change in particular, I can understand why the Korean reporters ask the affformentioned questions. To begin, I would like to explain the main cause behind Japan’s declining economic growth rate. In my view, there are essentially three. First, the burst of bubble economy. The collapse of Japan’s asset bubble dealt a severe blow to the economy. The scale of the both the bubble and its subsequent burst was unprecedented in modern global economic history. For example, uh commercial property prices in Osaka fell to nearly 10% 10% of their peak value. While the immediate economic impact is well understood, what is less recognized especially by external observers is the longlasting legacy of the bubbles collapse. Japanese company sharply reduce the hiring of regular employment employees and instead increased reliance on so-called non-regular workers who received lower wages and had limited job security. This shift contribute to the widening income inequality and a sharp decline in marriage rate uh which is in turn led to lower fertility rate. In this sense, the burst of the bubble is partly responsible for Japan’s current demographic changes. Its imprint on society has proven to be bursting enduring. Second, rapid aging and declining population have had a profound impact on Japan’s economic growth. Since speaking in 1995, the working age population has declined by approximately 50%. As I said before, this effect is clearly visible when comparing growth rate across G7 countries. In terms of GDP per working age individuals, Japan ranked highest. However, in terms of the overall GDP growth itself, it ranks among the lowest. This uh contrast best underscores the significant drag that is that a shrinking labor force exert on aggregate economic performance. Third, slowing labor productive growth uh which is one of the two fundamental drivers of e economic expansion alongside population growth. Although Japan’s productivity growth is not dramatically different from that of the United States or Germany, it has nonetheless slowed over time. There are many contributing factors, but if I were to highlight just one, it would be Japan’s longstanding system of lifetime or long-term employment system. This system functioned effectively as a so social safety net during the high growth post period. However, by late by the 1990s, the economic landscape had changed dramatically. The bubble had burst, the burning war had fallen and it revolution had begun. While Japan’s unemployment rate remained relative low, thanks in part to lifetime employment, the downside a delay in reallocating labor across farms and industries. Moreover, a lack of diversity in corporate management, a hallmark of traditional Japanese companies, proved ills suited to the demands of globalization and rapid technical change. I will come back to the issue of lifetime implement system later. Among the three causes I just mentioned earlier, I believe the one that draws the most interest from Korean audience is a second demographic change. What I would like to emphasize here is that surprisingly it often takes many years for people to fully grasp the severity of this issue. In the early stage of democ transition, people tend to remain rather sanguin even as they casually discuss the topic in everyday’s conversation. In Japan, it is only relatively recently that people has begun to truly recognize the gravity of the situation. Even today however there is no broad consensus on the implication of population decline. Public discourse tend to fall into two camps. One says don’t worry technology such as robotics and AI will solve the problem. The other says we don’t know how to raise fitive rate and there may be no effective measures. Uh it may be already too late to change course. Personally I subscribe to neither view as I will explain shortly. When discussing demographic change it is essential to distinguish between aging and population decline. For most citizens, the impact of aging is relatively easy to recognize, often through personal experience, such as caring for elderly parents. The consequences of population decline, however, are more subtle. Despite the fact that retirees pension income outly depends on what the working age population produce, population decline is like a slowm moving picture and its severity is not easily understood especially in its early stage. Have economists responded? Economists for the most part have been relatively optimistic. As I said before, their typical argument goes something like this. What matters is per capita income which determined well-being of individuals. As long as we remain productivity growth, we do not have to worry about declining population. This argument is technically correct but only as a definitional point about economic growth. The real question is whether productivity growth can be sustained in a society with a shrinking population. There are two issues that many economists tend to overlook. One is the complex interplay between demographics and productivity. The other is the role of structural factors which might be termed as social norms or implicit social contract. Both are equally important. Yet for those who do not live in a society experiencing population decline, it is difficult to imagine the situation vividly. So let me elaborate on these two points. Based on J Japanese Japan news experience, I would like to highlight three mechanism through which population decline can lead to slower economic slower productivity growth. Uh first uh aging influence productive growth through change in voters preference. As for as the population ages, politic uh political pressure tend to shift government spending away from basic research and education and toward social welfare program. This allocation redu reallocation reduces public investment in areas that drive long-term productivity. This phenomena is often referred to as gray hair democracy. Second, slow up adoption of new technology. Economywide productivity growth depends heavily on society’s ability to embrace new technologies. While technological innovation has a potential to raise productivity, older generation are generally slower to adopt it. I often find myself asking my daughters to help me install new IT devices. Uh this is a personal example but it reflects a broader societal trend. Third, delayed resource reallocation across regions. Population decline also hampers productivity by throwing the reallocation of resources across region. As this map illustrate, many municipalities are losing population while growth is concentrated in few areas such as Tokyo. The blue line shows municipalities uh which are losing population and red area shows the area in which population is increasing. As you can identify there are only few municipalities which are seeing increase in population and municipality population falls below a certain threshold. It becomes increasing costly to maintain public infrastructure, roads, hospitals, elementary schools and so on. The economic scale of a location is a key determinant for productivity. Yet political and social constraint often delay necessary adjustment. discussing how to boost productivity, we often focus on technology and innovation such as increasing digital investment. While this is undoubtedly important, it is only half the story, we must also consider whether society is capable of embracing flexible resource re allocation and adapting to new technology and innovations. This is the second issue I mentioned earlier. The importance of social norms, institutions and structural adaptability in shaping economic outcome. I will illustrate this with two example showing this point. First, social factors affecting birth rates. A significant portion of the cost of raising children stem from the foreign income of mothers who must interrupt or abandon their careers. One striking observation is strong positive correlation across countries between birth rate and the share of housework and ch child care undertaken by men. Unfortunately, as this slide shows, Japan and Korea rank at a very low end in both birth rate and men’s participation in domestic responsibilities. Interestingly, noteworthy pattern is that many Asian countries with low birth rate such as China, Hong Kong, Korea and Japan share a confusious culture heritage and intense competition for entry into elite universities. These fact may suggest that birth rate are shaped not only by economic incentives but also by deeply embedded social norms. Second, Japan’s long-term employment practice which I referred earlier. Although the influence of Japan lifetime employment system is waning, it remained dominant among large traditional farms until relatively recently. Workers under this system are often referred to as salary men, a term that is difficult to translate precisely into English. I often I define salary man as someone who makes an unlimited commitment to work anytime anywhere and accept any role within the company. This system uh function well during Japan’s high growth year but today it tend to hinder economic dynamism for several reason. It delays the smooth reallocation of labor across farms and industries. As mentioned earlier, it also discourage open innovation since both the workforce and corporate culture tend to become homogeneous. Most importantly, it is unfriendly to female workers. The old system implicitly assumes the presence of someone typically a spouse who supports the workers’s unlimited commitment. Declining birth rate and under representation of women in manager roles in Japan are in part consequence of this outdated employment model. Given everything I have said so far, it’s natural to ask why has reform been so slow in Japan despite the clarity of the underlying problem. I believe there are three main reasons. First, misdiagnosis of the problem. For many years, the issue was framed as one of low inflation over deflation. The narrative went low growth is caused by deflation. Deflation is mary phenomena. Therefore, the solution is simply to print money more. This explanation was strongly supported by mainstream US academics. People found it appealing first because it was easy to understand and second because the proposed solution as such involve no real pain or sacrifice. But even if inflation rate is increased to positive territory, the underlying problem of demographic change and productivity growth due to v structural factors are not solved. Second, resistance to changing social norms. Social norms and practice are deeply embedded in society and takes a long time to change. People naturally resist altering longstanding habits. While many companies recognize the need for reform, they remain constrained by legacy employment system. Efforts are underway to shift strategies, but meaningful change takes time. Third, absent of sovereign foreign currency crisis. For better or worse, countries that have faced sovereign foreign currency funding crisis have often been forced to implement sweeping reform. This may be familiar to Koreans who experienced Asian financial crisis of 1997 and 1998. Other in examples include the Nordic banking crisis and Greece during the European debt crisis. Japan by contrast has not faced such external pressure. In fact, until very recently, Japan held the world largest net international investment position. Now, I have outline the causes of Japan’s declining growth rate and the reason behind delay reform. I would like to spend my remaining time reflecting on possible implication and lessons for Korea. Let me begin by saying that I do not intend to offer any concrete policy proposal. This is partly because my understanding of the Korean economy and society is limited, but more importantly because outsiders cannot fully grasp the subtle dynamics of a country’s institutions, culture, and social fabric. element that are so essential in the designing effective policy responses. Like any other country, Korea faces complex challenges. But the solution must come from within, from those who best understand the nuances of Korean society and its economic interactions. My hope is simply to offer some food for thought that may help stimulate discussion. First, democracy will undoubtedly and increasingly have a profound impact on the economy. Although people tend to underestimate its full implication in the early stages based on my experience in Japan when it come to action especially effort to prevent a decline in fertility rate my advice is the sooner the better. Once gray hair democracy takes hold, it become extremely difficult to shift the prevailing present mind present oriented mindset or what might call in intergenerational irresponsibility. A Japanese demographer recently shared some interesting figures with me. He calculated the proportion of people who do not have grandchildren rather than just children. For those in born in 1940 and now age age 84 the figure is 15%. For those born in 1970s and 2000 the figures rise to 39% and 45% respectively. We are entering an era in which nearly half of the population may not have grandchildren. The implication is sobering. Human beings are both egoistic and artoistic. But as this demographic trend continues, it may become increasing difficult for people to imagine and emphasize with future generation. This erosion of intergenerational bond is deeply concerning not only for economic growth but also for fiscal sustainability. Second, the long-term trajectory of an economy is not predetermined by natural law. It is shaped by the will and determination of society. What matters most is societ society’s ability to set the right agenda and confront its fundamental challenges. In this regard, economists often focus narrowly on financial incentive. But I have to come to believe that social factors play far more greater role than is acknowledged in standard economics textbook. Earlier I mentioned the low shape share of house work and child care undertaken by men in both Japan and Korea. A factor that contribute to low fertility rate. This may point to deeper cultural pattern that both societies will need to address going forward. Even if Korean experience experiences low inflation or mild deflation in future, it should it should not be a cause for alarm provided that financial system remains stable. The truly dangerous episode of deflation are confined to the interval period such as the great depression in 1930s in which financial system collapse. After I left the Bank of Japan in 2013, its balance sheet expanded hugely, but the inflation rate did not respond until recently. And the 10-year average of growth rate before and after the start of huge increase of central bank balance sheet is the same at 0.6%. Human beings are complex. We sometimes become overly optimistic but but other times we are overly pessimistic especially about the future of our own country or society. This has certainly been my observation in Japan though I can speak for Korea. I do not align myself with either the optimist or the pessimist. As for the basic philosophy of the future, future direction for f Japanese economy should head. We are constantly torn between two sword. On one hand, we aspire to build innovation ecosystem like Silicon Valley. On the other hand, we worry about the social fragmentation caused by extreme inequality in the United States. Each country must find its own model of development. What is needed is a reasonable consensus on the kind of society and economy we wish to build. One that acknowledge both our strength and our weakness. Earlier I spoke about the weakness that few pessimist narrative in Japan. But we must also recognize the strengths of our own economy and society. These strengths are often overlooked precisely because they are embedded in our daily lives. Aside from strength of Japanese society, what is the strength of Japan as a country? It used to be technology, but nowadays the US and China are leading in this field. In this respect, the recent survey targeting Asian countries which I recently happened to read has made me aware of Japan strengths. Japan is perceived as most trusted country even though China and the US are perceived as the most influential country. This trust is a valuable asset for Japan as a whole. And this means there seem to be a potential room for Japan to play an important role in certain areas. The same is true for Korea. You may or may not be aware of how the Korean economy is currently viewed in Japan. Of course, Koreans extremely low birth rate has received wide coverage in Japanese media, but more often Korea is discussed in positive light. For example, the fact that Korean’s per capita income has surpass uh that of Japan is frequently noted. Uh Korean companies are seen as most globalized. The most commonly cited example is Samsung often compared to Japan’s once mighty economic firms. A typical explanation I hear in Japan is that Korean corporate leaders possesses a global mindset from the outset. Perhaps because Korean domestic market is similar compared with with that of Japan. In this uh context, the global success of K-pop is also frequently mentioned. I cannot say for certain how accurate these explanation are. But the key point is this. Forming a reasonable consensus about the future begins with a clear understanding of both our strengths and our weakness. In this respect, the the recent statement of Japan Republic of Korea summit meeting in Tokyo says the following. The two leaders conquered to establish a framework for consultation between the two government to share knowledge and work together with a view to finding solution for for common social and economic issues facing both countries such as regional revitalization, declining birth rate and aging population, rapid population decline, agriculture and ensuring resistance against disaster. I completely agree with this. I hope the dialogue between two countries will be strengthened. Thank you so much for your kind attention. [Applause]

Former Bank of Japan Governor Masaaki Shirakawa offers a firsthand account of Japan’s economic journey over the past 30 years and the lessons learned along the way.

Drawing on his experience as a policymaker during an era of prolonged low growth, he analyzes the underlying causes, the unfolding process, and the subsequent changes and challenges Japan faced.

Based on his recently translated book, “Tumultuous Times: Central Banking in an Era of Crisis” the session will provide an in-depth exploration of the roots of long-term stagnation, structural transformations, and the implications for today’s global economy, including key takeaways for Korea.