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Tradition And Innovation Battle In Japan’s Economy

(Forbes) – Three news items this week illustrate how Japan continues to balance domestic reform with social stability and demographic change. The macroeconomic picture for the world’s third-largest economy remains bleak, as negative growth returned in two of the last three quarters. The Bank of Japan’s recent move to negative interest rates also has raised doubts about the underlying strength of the economy, without appreciably boosting investment or consumption. Yet the news reveals a more complex picture, in which innovation coexists with traditional patterns of behavior.

Because negative interest rates reduce the profit banks earn from lending, the labor unions at three of Japan’s largest financial institutions announced they will not press for a wage hike during this spring’s annual wage negotiations. Looked at from a cultural angle, the negative interest rate policy has resulted in a reaffirmation of a traditional mode of socioeconomic cooperation in Japan.

The spring negotiations, known as shunto in Japanese, are a peculiar feature of postwar Japan’s economic system. Begun early in the postwar period, they serve as a structured way for management and labor to agree on acceptable terms without disruptive work stoppages. As often commented upon during Japan’s bubble years, the shunto process includes highly choreographed public labor demonstrations that take place for a set period of time, usually a week or so. Meanwhile, behind the scenes, or even beforehand, the real negotiation is taking place in a manner that incorporates the goals of both sides, with Japan’s Trade Union Confederation traditionally providing an overall target for wage increases. The process generally is more cooperative than adversarial, thus explaining in part Japan’s labor stability despite decades of economic sluggishness, but also the lack of dynamism that marks American-style capitalism.

Economic observers are decrying the financial labor unions’ decision not to seek a raise, claiming that it is yet more evidence of the failure of “Abenomics,” the economic reform policies of Japanese Prime Minister Shinzo Abe. Yet the significance of the decision actually lies in what it reveals of Japan’s underlying social cohesion. It may not be an economically optimal decision, but in Japan, the premium put on stability still is a significant factor, and can outweigh approaches focused on self- or group advantage. Moreover, some of Japan’s biggest corporations already had given their largest wage increases in years to full-time workers in 2015, in response to Prime Minister Abe’s call for cooperation in helping boost consumer spending. The willingness to collaborate, at least to an extent, comes from both labor and capital.

This is not to say that Japan’s socioeconomic system is frozen in amber. Compared to when I first visited Japan, more than a quarter-century ago, the retail economy is far more developed and consumer-oriented. Big box outlets were largely local and limited back then, leaving much economic activity in the hands of mom-and-pop stores. Today, Costco and Aeon megastores are a common sight in major cities, while the number of traditional independent stores has greatly diminished. Yet somehow many mom-and-pop operations still hang-on, often in the shadow of the corporate giants, again attesting to an enduring balance.

There is yet little attention paid in the West to the structural reform that has been instituted under Abe. Among the biggest change is the liberalization of Japan’s retail electricity market. By freeing up competition among energy providers, the government is betting on increased efficiency and greater innovation.

What has happened so far appears to be the kind of free-for-all retail battling familiar wherever government reduces its hold on private economic enterprise. According to the Japan Times,complaints to the National Consumer Affairs Center of Japan have soared about aggressive, deceptive, and otherwise shady practices of electricity suppliers.

That is what competition is supposed to be about, as government, business, and consumers learn to navigate an often confusing landscape. Consumers must learn to do their due diligence when they sign contracts and educate themselves about the competing products being offered them. Government has rightfully stepped up its anti-fraud activities, partnering with the consumer center. And businesses that abuse their customers eventually should be punished by the market or learn to be good corporate citizens.

While confusing and disruptive in the short run, giving Japan’s consumers more choice and allowing new entrants into the retail electricity market should result eventually in a healthier economic environment. As it does so, it will provide a model for other liberalization initiatives, including in agriculture, land ownership, financial services, and the like. That may be the key to raising Japan’s sluggish consumer spending, which is fingered as the main culprit in the current economic weakness. Yet, as with the labor union wage negotiations, the real changes will be in the culture of economic activity, rather than simply in the structural realm.

This tension between tradition and innovation is occurring amidst the backdrop of the most severe demographic decline in history among healthy, democratic, industrialized countries. After decades of non-replacement level birth rates, Japan’s population began shrinking in 2004. Meanwhile, thanks to one of the world’s highest longevities, those over 65 years of age may comprise as much as 40% of the population by 2060.

Again, for someone who has lived in and visited Japan regularly since 1990, the change is striking. The countryside is becoming hollowed out, while the ubiquity of the middle-aged and elderly is striking even in the cities. Japan may lose over 27 million workers over the next four decades, an unheard of drop during peacetime. Already, there are reports of some chain restaurants foregoinglate-night hours, due to a shortage of available workers. The falling population may be the greatest threat to Japan’s future.

Yet amidst the dire warnings, there are signs of how the country may muddle through this demographic challenge. While large-scale immigration remains off the table, most of Tokyo’s convenience stores already are staffed by workers from other Asian nations. In the health care sector, nurses and caregivers from the Philippines have been a long-standing feature.

One dramatic result of the demographic shift is in the number of working seniors. Yet another article in the Japan Times reports that more than 20% of Japanese over the age of 65 still work, mostly part time. Some volunteer, thus earning nothing to add to their pensions. Many, however, have paying jobs, everywhere from high-level department stores in Tokyo to local recycling centers. Senior work centers, known as “silver centers,” have popped up across the nation, providing a low-wage venue for numerous activities.

As the article notes, some seniors work because they worry about not having enough savings to last their expected life spans. Others, however, do it to keep themselves mentally and physically active. I can attest to knowing and talking with a number of elderly who continue to work for just that reason. While the typical American worker is driven to retire early to play golf, paint, or travel the world, there is another view of how to spend one’s sunset years. For those in Japan who have no choice, working into one’s 70s or 80s may seem an unfair burden after a lifetime of labor. For others, it gives them a sense of continued purpose and meaning. For both types of worker, however, it keeps them an active part of Japan’s socioeconomic environment.

None of this is to downplay Japan’s serious economic challenges, from huge public debt to a loss of competitiveness. Yet far from being an inefficient, status quo nation, Japan is undergoing a profound evolution, in which the traditional emphasis on social stability is balanced against economic reform and demographic change. The opportunity for innovative consumer services will grow as both the economy liberalizes and society ages. Japan will never return to the go-go ’70s and ’80s, but the country may prove to be far more durable than most observers understand.

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