Why you should care

Fixing what’s wrong with the world’s third-biggest economy would help everyone, not just the Japanese.

You can see it in the thousands upon thousands of small restaurants throughout Japan that are way overstaffed. Or in the legions of far too many cleaners waiting at Tokyo station for the next bullet train to arrive at its final destination.

Japan has a persistent problem: its workers are surprisingly unproductive, based on stats on how much stuff is made and how many services are offered per hours worked. Fresh from his decisive victory in Sunday’s parliamentary elections, Prime Minister Shinzo Abe will have the best chance in years — and perhaps for years — to tackle this low level of labor productivity. He’ll try to do it by pursuing his radical economic policies, dubbed Abenomics, which promises to jump start the country’s economy.

“It could send a powerful signal about a commitment to economic reform.”

Robert Pekkanen, professor at the University of Washington, Seattle

Yet Japan’s economic woes will have no solution unless Abe follows through with a critical part — the so-called third arrow — of his policies, and prompts the country that once reinvented consumer electronics and set world standards for automobile quality to give its hardworking population the tools to be more productive. Japan’s workers are only 62 percent as productive as American workers, according to the OECD; that ratio’s been gradually decreasing since it peaked in 1997 at 68 percent. I once visited the bottom rung of the supply chain for Japan’s car assembly business: a rural senior center where (mainly) women in their 70s and 80s carefully picked out colored strands to bundle into wire harnesses. Such sights have long been familiar in Japan.

So there’s a lot of bad news. But there’s also a big opportunity for Abe to fix the woes and convert them into major growth.

Japan’s snap election:

In parliamentary systems like Japan’s, the prime minister can dissolve parliament and call early elections, before they are required, to seek an electoral advantage.

Abe arrived in 2012 determined to stop Japan’s backslide. His chosen head of the central bank, Haruhiko Kuroda, began to flood the financial markets with money. That hasn’t stopped. The radical approach reversed 15 years of deflation, pushing up prices modestly by under 2 percent, sharply weakening the yen, and helping to tighten the job market. But a premature lifting of the sales tax earlier this year pushed the economy into an unanticipated recession. Japanese consumers held back on spending in the face of rising prices, increased taxes and stagnant wages. Abe took advantage of disarray in the opposition to hold a snap election, calling for a renewed mandate for his reforms.

Now it’s showtime. Robert Feldman, managing director at Morgan Stanley in Tokyo, sees a strong likelihood of Abe pushing ahead with difficult reforms in the wake of the electoral victory, including trimming government outlays on health and social security while boosting R&D spending. It’s simple math. Japan’s labor force is shrinking at half a percent a year as the population ages, while productivity has been increasing at just 1 percent annually. In order to grow even a modest 2 percent annually, it needs reforms. Yet those reforms, which would remove protections for industries such as health care and agriculture, are unpopular and could erode Abe’s public support. Abe cleverly went to the voters before the pain could really set in, says Robert Pekkanen, professor at the University of Washington, Seattle. Although Pekkanen has doubts about Abe’s determination, he does say Abe now has the political space to move ahead. “It could send a powerful signal about a commitment to economic reform,” he says.

Others aren’t so sure. Primary opposition to structural reform comes not from opposition parties but from factions within Abe’s own party that depend on targeted industries for political support. In addition, “a large majority is hard to discipline,” says Tobias Harris, analyst at Teneo Intelligence. Putting more money into consumers’ pockets is as important as reform. While big export companies might manage that, 70 percent of Japanese work for small and medium enterprises that don’t benefit much from the stimulus.

Prime Minister Shinzo Abe giving a press conference at the Chancellery in Berlin, Germany.

Japanese Prime Minister Shinzo Abe gives a press conference at the German Chancellery in Berlin.

Source Reynaldo Paganelli/Getty

In spite of Japan’s scary government debt — 227 percent of annual economic output and growing — it faces no immediate crisis, since almost all the debt is held by Japanese. But that won’t last forever. As Japan ages, retirees are running down savings, a trend that will eventually force Japan to borrow from foreigners, who will insist on higher interest payments and evidence that the country can repay, says Edward Lincoln, adjunct professor at Columbia University. No one knows exactly how long that’s going to take.

In the meantime, Abe might still choose the easy political road and simply hope that the weaker yen spurs a growth in exports. That’s what Gerald Curtis, a political scientist at Columbia University, predicts. Part of the issue is cultural. Curtis says that Japan could, in theory, cut back on those bullet train cleaners “and have dirty trains like we have on the East Coast” of the United States. But the Japanese love all that inefficient service and the low unemployment rate that goes along with it. Still, one thing’s for sure: Abe’s hungry for a legacy. And this is as good a shot as he’ll ever have.

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