Japan’s spectacular emergence, up until the 1990s, was a subject for study in many universities across the world. But with its later deep recessions, following the double stock market and property bubble, the Japanese saw their purchasing power reduced and this affected consumption. Faced with this decline in consumption, local companies invested less. Prices fell and Japan descended into deflation, which was light but cronic. Because massive unemployment was avoided by freezing salaries…

To counteract the slump in private consumption, different Japanese governments chose to implement fiscal stimuli, but without much success. Japan’s public debt is 250%. And in the last few years, this has obliged the government to hike taxes (depressing private consumption even more). On the other hand, the Bank of Japan (BOJ) launched an ultra expansionary monetary policy to try to fuel consumption and investment in 2013. The BOJ injected, within the system, up to 700 billion dollars extra annually at 0% interest rates. This last measure, far from driving a new economic boom, created new deflation of 0.3% in 2016. The Japanese banks did pay for lending money, at negative rates…But Japanese consumers prefer to save. They don’t want to spend.

Double-edged stimuli

To emerge from its stagnation, Japan just has to regain the confidence of its consumers. Get them to spend money. Because at the moment, Japanese firms have more than enough liquidity to invest. Specifically, two billion dollars in liquid assets which they won’t invest while private consumption remains depressed. So essentially, the solution to the Japanese sudoku is to reactivate consumption. The BOJ knows this, as does the government. But it’s rather complicated to know what key to press, above all because Japanese consumers are extremely conservative. Some measures have been proposed recently, like reducing extraordinary hours to fuel consumption. Or copy the US tradition of Black Friday, the day in November when there are the most aggressive sales in the run up to Christmas. But it’s the classic situation of the snake biting its own tail. For consumption to pick up, the Japanese need to earn more. But companies are not prepared to pay higher salaries while private consumption continues to fail to boost their sales. In the meantime, Japan’s fiscal and monetary policies only make the situation worse.

Furthermore, with all the above, it’s likely the Yen’s depreciation will accelerate. Given the rate hikes in the US, it could depreciate by 10%, to 125 to the dollar, in 2017 alone.

As a guideline, it’s worth reassessing the measures proposed up to now by the Japanese government, those known as Abenomics. The still prime minister, Shinzo Abe, advocates three strategies or ‘arrows’ for starting the country’s economic recovery. The first consists in substantially increasing public spending. The second in implementing structural reforms which make the productive system more efficient. And to support both these strategies, the BOJ will continue to inject liquidity into the system to consolidate an inflation target of 2%. Of these three strategies, the second one seems to hit the origin of the problem without a doubt. If productivity increases, salaries would rise as well as consumption. And if taxes are cut as well, because the structure of the public sector is more efficient, then the consumer’s purchasing power would increase. All this could give rise to a virtuous circle where consumption would rise without costs doing the same via inflation. At the end of the day, it’s a question of trying out different recipes. Or continue with flat growth of 0.8%, in line with the IMF’s forecast for this year.