Dark deflation era “may end soon”

“There’s a good chance that Japan will soon be exiting its long dark era of deflation.”

That was the optimistic view expressed by Peter Berezin, who runs global investment strategy on behalf of BCA Research when he spoke to Market Watch this week. “This will be a huge surprise to investors,” he added.

It would also be a surprise to most media commentators who tend to define Japan’s economy as “ailing” or “moribund”. From their point of view, deflation is a symptom of national malaise.

Prime Minister Shinzo Abe and the Bank of Japan have a target of two percent inflation, which seems a long way off. The latest inflation numbers will be announced on Friday but the consensus among economists is that the rate will be less than zero, in other words in deflation territory, despite an experiment with ultralow rates.

Broken promises regarding the inflation target have eroded trust in the central bank and have affected the credibility of Mr Abe. Mr Berezin’s optimistic opinion is that the situation could change soon. His view is based on one of the great strengths of Japan’s economy: its very low unemployment rate, which stood at 3.1% in December.

Mr Berezin believes that this low unemployment and a very high ratio of job openings to applicants will encourage employers to offer pay rises to new recruits and to existing staff. Should this happen, the theory is that the newly enriched employees will go out shopping and this will stimulate the economy and push up prices.

Not everyone agrees with such optimism. Bank of Japan board member Takahide Kiuichi argues that the bank’s 2% inflation target is “unfeasible” due to demographic trends, such as a decline in the population of people of working age.

“Price conditions will remain consistent with the economy’s growth potential,” he says.

Deflation is only part of the picture. A country’s economic success is often measured by overall GDP growth. Japan’s growth has averaged less than one percent annually since the 1990s.

A writer called Kevin Drum has written an intriguing article on Mother Jones which claims that the overall GDP numbers tell a limited story. Mr Drum says: “The key metric to judge whether an economy is in good shape is GDP per working-age adult, since that tells you how productive your workers are.”

He claims that GDP per worker in Japan has risen to a higher rate than the United States. This surprising claim counters the view that Japanese workers are not particularly productive. Hard working, productive staff and a low unemployment rate would justify a rise in wages.

Potentially, women could benefit more than men. Mr Abe’s policy of “womenomics” to encourage more women into the workforce seems to be working. The female labour force participation rate was 50.4% in December 2016, compared to 47.8% when Mr Abe took office in December 2012.

Both women and men would be pleased to take a pay rise, especially if it indicates a greater optimism about Japan’s economic future.

Less work could be a lifesaver

Tired businessman sleeping at desk in office

The CEOs of Japan’s biggest companies are encouraging their staff to leave the office early to help ease the pressure of working life.

Once a month, employees will be invited to pack up work at three pm on Friday afternoon, leaving them free to travel, shop or spend time with their families.

The initiative, backed by the powerful Japanese business lobby the Keidanren, follows concern over the intense pressure to work long hours in Japan. This has been associated with death by overwork, or karoshi.

Last year, the head of one of Japan’s largest advertising companies, Dentsu, resigned following the suicide of a 24-year-old employee, which was blamed on overwork.

It is difficult to classify the exact cause of death by stressed employers, particularly if the fatality is linked to a stroke or a heart attack and suicides, such as that of the young Dentsu employee, rarely have one single cause.

Nevertheless, government figures show that 189 deaths were classified as karoshi last year. The media in Japan frequently estimate the actual number is much higher.

Japan has a culture where many people feel they should spend long hours in the office. Men are reluctant to leave before their superiors because they do not wish to appear lazy. In addition, socialising with colleagues after work is the common.

The hard-working, long hours culture started in the 1970s, when wages were relatively low and employees wanted to earn extra money. It continued through the boom years of the 1980s, when Japan’s economy was growing rapidly. Nowadays, people whose companies are affected by the economic slump hope long hours will lift their profits.

Foreigners who spend time inside Japanese offices are often struck by the relatively low productivity which seems to go along with these long hours.

“In a Japanese workplace, overtime work is always there. It’s almost as if it is part of scheduled working hours,” said Koji Morioka, an emeritus professor at Kansai University who is on a committee of experts advising the government on ways to combat karoshi. “It’s not forced by anyone, but workers feel it like it’s compulsory,” he told the Washington Post.

So, what of the initiative to convince workers to leave early once a month on Friday? It is not compulsory, so people are entitled to ignore the guidance. And there’s nothing to stop people trying to make up the hours by doing unpaid overtime on other days or at the weekend.

The criticism of the government’s plans on reducing overtime is that they are also guidelines and not strict laws. That is understandable, given the huge number of small businesses in Japan where it would be almost impossible to monitor people’s working hours. But the involvement of the Keidanren, which represents the big employers, suggests that managers realise that to get the best out of their staff, they need to offer them a rewarding work-life balance.

Interview with China expert Professor Rana Mitter

For China and Japan, the battles they fought in the 1930s and 1940s continue to scar their relationship. On a diplomatic level, there has been no meeting between their leaders since President Xi Jinping exchanged a frosty handshake with Prime Minister Abe in late 2014.

President Xi has worked in recent years to enhance the image of the Chinese Communist party and its achievements in the wartime period, even though many historians believe it was the Chinese Nationalists, not the Communists, who did most of the fighting against the Japanese army. The struggle with Japan therefore continues to be used as a way of providing legitimacy for the current Chinese leadership.

Chinese commentators also often claim that Japan has not properly apologised for its invasion of Manchuria in 1931 and for the Sino-Japanese war, which took place between 1937 to 1945.

Professor Rana Mitter is an expert on the period and the way it influences current political thinking in China. He is Professor of the History and Politics of Modern China at Oxford University in the United Kingdom. Professor Mitter believes it is time for China to stop demanding more apologies, so that the relationship between China and Japan can move forward to the mutual benefit of both nations. He also wants Japan’s leadership to speak out against revisionist views of history.

I interviewed him London at the Sino-British Summit in London in February 2017. I started by asking him about the perception among some Chinese people that Japan still owes China an apology.

I spent he best part of ten years doing research for my book China’s War with Japan 1937-45 entitled “The Struggle for Survival”. I particularly looked at that war from the Chinese side. You cannot study the history of the period without realising that the present-day resonance of the war is still very much a current issue.

And one of the things that you hear repeatedly, often from very well informed people, is the idea that Japan has never fully apologised for its war crimes. You also hear that Japan’s text books are full of misleading accounts or they ignore issues such as Rape of Nanking in 1937. I point out that a succession of Japanese prime ministers has made very comprehensive expressions of remorse and sorrow and horror at the crimes which were committed by Japan in the 1930s and 1940s. Anyone who knows about what the Japanese did in China and Korea and other parts of East Asia will know that these included appalling acts of brutality, there is no question about that.

But we also know that there has been a series of Japanese leaders who have apologised publicly and profusely.

China is talking about taking up the role of global economic leadership. This was something President Xi alluded to in his speech at Davos in January. He suggested that this role suits China because America is taking a more inward- looking and protectionist position under Donald Trump. Where does that leave China’s relationship with Japan?

If China is about taking a leadership role, particularly within the Asian region, then I think it should recalibrate its relationship with Japan. China is seeking leadership so it is pushing hard on economic integration in the region. However, China is aware than no infrastructure can be developed in the region without Japan being included. So, if there is a pivot to Asia by China I think it’s going to have engage seriously with the other countries including Japan. That would be a serious change of direction.

In that scenario, China warms to Japan. But what would China have to do to create a warmer diplomatic relationship with Japan? It seems very cold now.

Yes, I think the relationship is cool, at least on the diplomatic level. There have been no direct talks between President Xi and Mr Abe since they met on the fringes of an ASEAN meeting at the end 2014. Also, there is continuing friction on both sides about the islands in the South China Sea. However, it is important to look at the whole picture. There is a very high level of mutual trade between China and Japan and many Japanese companies are investing in China, so from an economic point of view, China is very aware that it cannot afford to alienate Japan completely. Japan also aspires to increase its profile and leadership capacity in Asia. It cannot do that simply by presenting itself as the country which is in opposition to China. Japan needs to build a new relationship with China. There could be a great deal of mutual benefits for both sides, if they are willing to seize them.

What about Japan’s relationship with the United States? Does Mr Abe need to be careful in terms of the way he deals with Mr Trump? If he tells Mr Trump he wants a bilateral trade deal and that he wants to collaborate with the US on security and defence, what signal does that send to China?

China’s leaders have said more than once which is that the Pacific Ocean is wide enough for two big powers to co-exist there. China is prepared to share influence in the region with Japan. All the countries in the Asia Pacific region will need to work out what it means to have a balanced relationship with the US and with China but I think it is misleading to think of these as mutually incompatible goals. There are a lot of areas where Japan has common interests with China and with the US so there is a lot to be gained from economic co-operation. The fact is that Japan and China will always be next to each other geographically, so this provides economic opportunities.

Some people say that Mr Abe is an extreme nationalist. What do you make of that claim and how does it affect the Japanese-Chinese relationship?

I think one should not take too seriously accusations that Mr Abe is on the wilder fringes of nationalism. He is quite mainstream and he leads a mainstream party.

What I do regard as problematic is that there is a part of Japanese society which takes a very inward-looking and only partial view of Japan and the Second World War. I recently visited the Yasakuni Shrine in Tokyo, where the descriptions on the exhibits blamed the reasons for the outbreak of war almost entirely onto China and other Asian nations and said nothing about Japan’s fault. This kind of rhetoric makes it harder for Japan to put itself forward as a regional leader. I do not think anyone who looks at Japan seriously sees anything other than a liberal, pluralist, democratic state but it is also the case that there as aspects of Japan’s engagement with the past which still make other countries uneasy. So, it would be helpful if someone like Mr Abe, who has the credentials of a patriot, speaks up much more openly to say that any displays of extreme revisionism in the public sphere are unacceptable. It would do wonders for Japan’s image in the region.