What The U.S. Could Learn From Japan's Latest Recession

Steve Inskeep talks to David Wessel about what's gone wrong with Japan's economy. Wessel is director of the Hutchins Center at the Brookings Institution and a contributor to The Wall Street Journal.

STEVE INSKEEP, HOST:

You might have heard that phrase; first world problem. It's used to mock the trivial complaints of rich people in rich countries. We'll talk this morning about an actual first world problem. It's the relative lack of economic growth in developed nations. The news here is that Japan has slipped into a recession. The current prime minister has called a snap election as a result. Japan has suffered decades of slow growth, and that may be related in part to another genuine first world problem, lack of population growth. We'll talk about what one thing has to do with the other with David Wessel. He's a regular guest on this program and director of the Hutchins Center at the Brookings Institution. David, good morning.

DAVID WESSEL, BYLINE: Good morning, Steve.

INSKEEP: How did Japan get to this point?

WESSEL: Well, Japan is a very rich country with some very big problems. It's an aging society with a population that has been shrinking since 2004. And it's projected to shrink by another one-third over the next 50 years. So that means a couple of things. One is you have a lot of retired people who need to be supported by taxpayers, and they're running out of taxpayers. And secondly, any economy grows only as fast as its workforce grows. Plus, the increase in productivity in Japan hasn't done very well on either one. Now, it's important to recognize that they're leveling off at a fairly rich level. If you look their economy per person, it looks much better than the headline numbers.

INSKEEP: Now, I wonder what the factors are in this slow population growth or even decline in Japan. One of course is a low birth rate, but is there something else?

WESSEL: Well, all industrial societies are aging. That is that people aren't having as many kids as they once did, but Japan is basically allergic to immigration. So while we in the United States have brought in a lot of immigrants to compensate for a slowing birthrate they haven't done that. They also have an unusual for an industrial society antipathy to women working. So they further limited their labor force.

INSKEEP: Now let's talk about the specific response Japanese officials have tried to make to this situation. What has the government been trying to do and why has it not worked?

WESSEL: Well, nearly two years ago they elected a new prime minister, Shinzo Abe. And he came in with what he called three arrows to resuscitate the economy. One was to have a very aggressive central bank cutting interest rates and buying lots of assets to pump money in the economy. Second was to use tax and spending policy to try and get the economy going. And the third was to make politically controversial, but long overdue changes to the structure of their economy - to make retailing more efficient for instance. And Shinzo Abe fired the fiscal arrow, but it's kind of misfired recently because he was so worried about the amount of debt that Japan had that he went ahead and raised the national sales tax in April. And that has pushed them back into recession.

INSKEEP: Which is a another complication that is special to Japan that their debt is so high it makes United States even look rather low.

WESSEL: Absolutely. The debt of the Japanese government relative to the size of the economy is more than double that of the United States. So there's a lot of concern that unless Japan sometime soon starts to figure out what to do about its debt it'll basically be crushed under this big debt burden.

INSKEEP: So Shinzo Abe, the prime minister, has called a snap election. This is certainly going to focus people's attention as the economic numbers have. But given what you've just said what is left for Japan to do in the short term to try to get the economy going?

WESSEL: Well, Shinzo Abe has decided to delay for 18 months another increase in the sales tax. Then there's this whole effort by the Bank of Japan, which has become extremely aggressive after years of passivity. And then the third thing they could do is do things to make their economy work better to stop subsidizing agriculture, to have fewer rules on how service sector works, to bring more women into the workforce. And Prime Minister Abe talks about that, but generally people think that third arrow of his reform has been relatively weak so far.

INSKEEP: Are there lessons here for the United States?

WESSEL: Yes, I think there are. One is that deflation falling prices in wages is a really tough condition to get out of. Secondly, if you move too soon to cut your debt when your economy is weak you could make things worse. And third aging economies can benefit from immigration. And Japan is suffering from its allergy to it, and we can see here in the United States that those people who want to encourage immigration see a huge economic benefit to it for a society where there are more and more old people.

INSKEEP: David Wessell, thanks very much.

WESSEL: You're welcome.

INSKEEP: He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent to The Wall Street Journal.

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