How far ‘doves’ can fly: Lesson from Japanese economy

Speculation is rife the Bank of Japan may soon move away from the negative interest rate regime. Japanese consumer inflation data slowed for the third straight month to fall to 2.0 per cent in January year-on-year; this was 2.3 per cent for December 2023.

For Japan, the last time the consumer price index stood below 2 per cent was in March 2022. Since then, inflation has risen to as high as 4.2 per cent in January 2023, only to slide down to 2.3 per cent in December last year.

Notably, BOJ is known for its ‘ultra-loose’ policy and has stuck to it. The Japanese central bank has maintained a policy aimed at keeping interest rates low, spurring spending. If the BOJ changes its stance this April, this will be the first interest rate increase for the country since 2007.

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Japan, an economy in ‘Goldilocks’—an almost ideal position—as was called by Credit Suisse in July last year, now has been under a technical recession. According to preliminary government data released earlier this month, Japan’s economy shrank an adjusted 0.1 per cent quarter-on-quarter for the last three months of 2023; the growth for the third quarter was revised to negative 0.8 per cent, meaning that the east Asian nation was in recession for the half part of the last year. Also, consumer spending and business investment—two important factors for any economy—are lagging.

With this, the data confirmed that Germany took over Japan as the world’s third-largest economy in dollar terms, the position it has held since it ceded the second position to China in 2010.

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Where did it go wrong

Finance Minister Shun’ichi Suzuki had announced that Japan’s public debt had reached a record level of 1.2 quadrillion yen—that’s more than 2.5 times the size of the island nation’s real economy.

The story behind this ‘debt-dependence’ goes back to the 1990s, when, after bursting the economic bubble, countering the slowing economy, and with a graying population, Japan reached a period of declining tax revenue and rising social spending. The expansionary policy became a tool to revive the Japanese economy, which had stagnated since the late 1990s.

The same policy became the bedrock of former Japanese Prime Minister Shinzo Abe’s economic ideas, popularly known as ‘Abenomics’. Again, the same became the founding idea of the entire ‘Abe faction’ of the Liberal Democratic Party, of which even the current premier, Fumio Kishida, is a member.

Reportedly, Abe once called the Bank of Japan a “subsidiary” of the Japanese government.

Down the lane

Even now the trend refuses to cease, Japan has a record 114.4 trillion yen budget for the fiscal year starting next April. The budget has been pushed up by increased military spending and higher social security costs catering to an ageing population; this will lead to more piling of debt.

PM Kishida’s plan is to double defence spending to 2 per cent of the GDP by 2027.

While Japan indeed faces a real security challenge from an ever-assertive China and an unpredictable North Korea, it must also be rethinking the extent of its reliance on the US for its security interests. Furthermore, undeniably, the ageing population needs social security measures. But then, excessive populist spending has its own challenges and they are showing up.

Did we ponder?

Japan is an ethnic nation known for its disciplined population. The nation that was devastated post-World War II was able to become the second-largest free-market economy by 1968. Industrial expansion, the unprecedented development of a domestic market, aggressive export trade policies, and a diversified manufacturing and services sector contributed to what was no less an economic miracle.

Yet, perhaps no economy is all resistant to the boom-and-bust cycle–what goes up, must come down. The policies that are decided and acted upon have their own set of context and relevance; in any case, a policy must be dependent on relevance and not vice versa.

Further, each policy has its flaws attached to it that pile up to show their effect after some time, and here is the test of innovation for the policy makers—how well they design relevant policies—and further, the test is also of the decision makers—how much they can be flexible enough to adapt to the needs of time.

Japan’s dovish monetary and expansionary fiscal policies might have served it in export promotion, meeting the needs of social security, or further helping it better secure its strategic interests, but how far can doves fly? Each economy has its own elasticity, and populist schemes can be carried out only to an extent. This will also apply to Japan.

This is perhaps a lesson the Global South should learn—for both the populations and the regimes–particularly when we see protests, such as the one underway on the borders of Delhi. If Japan has a limit, so had Sri Lanka, and so does India.

The views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.