October 4, 2019
Bank of Japan
Has Japan's Economy Changed?:
Challenges and Prospects
Speech at the Japan Society in New York
(New York, October 3)
Masazumi Wakatabe
Deputy Governor of the Bank of Japan
Introduction
It is a great honor to have the opportunity to speak to you here at the distinguished Japan
Society.
Has Japan's economy changed? My answer is both yes and no. The economy has been
changing in a positive manner, but the change is far from over. I would like to talk about
changes in Japan's economy and its challenges from a somewhat longer-term perspective.
"Because Japan has experienced decades-long stagnation, today's society is a very difficult
place to live for you." This comes from a children's educational comic book published in
August 2013.1 This phrase reflects the general mood back then, when the economy was
under prolonged stagnation.
About 30 years have passed since the early 1990s, when the asset price bubble collapsed in
Japan. Looking back, this 30-year period can be roughly divided into three separate decades.
In the first decade, aggregate demand fell after the collapse of the bubble economy, the
so-called "three excesses" of corporate debt, production capacity, and employment
materialized, and attention was drawn to the nonperforming loan problem of financial
institutions. In the following decade, although the disposal of nonperforming loans
proceeded on course, the economic growth rate remained low. Also, deflation became a
problem, with the annual CPI inflation rate staying in negative territory. These two decades
are sometimes called Japan's "lost two decades." And the last decade is the period from the
early 2010s up to the present.
As there has been lively discussion on why Japan's economy remained stagnant for such a
long time as the "lost two decades" after the collapse of the bubble economy, I will not go
into detail.2 Instead, as an introduction, I would like to discuss Japan's declining and aging
population, which is considered to be not only one of the factors behind the "lost two
decades" but also highly likely to continue. Japan's economy has faced the structural
problem of a decline in working-age population since the mid-1990s. The total population
started to decline in the 2010s, but the working-age population aged 15-64, which is the
major source of labor supply, already began to decrease in the mid-1990s (Chart 1). In other
words, since the mid-1990s, Japan has remained in a period of so-called demographic onus,
where the working-age population declines at a faster pace than that of the total population.
This stands in contrast to the United States, where both the total population and the
working-age population have continued to increase consistently. The decline in the
working-age population has been pointed to as one of the reasons behind the stagnant
economic activity in Japan's "lost two decades." In fact, when we decompose Japan's
potential growth rate into the number of employed persons, hours worked, capital stock, and
total factor productivity (TFP), we can find that the number of employed persons
contributed negatively from the late 1990s through the late 2000s (Chart 2).3 The decline in
the working-age population is considered to lie behind this development.
That said, I believe the negative effects on the economy of a declining and aging population
have been rather exaggerated. First of all, as Chart 2 shows, the contribution of the number
of employed persons is not so significant; capital stock and TFP contribute more to the
potential growth rate. Historically speaking, throughout the post-WWII era, an increase in
capital stock and TFP has contributed more than a change in labor input to a rise in the
economic growth rate. Also, international comparisons show no evidence that a declining
and aging population leads to a decline in per capita growth rate.4 In addition, there are a
number of transmission mechanisms through which a declining and aging population can
affect the economy (Chart 3). Admittedly, a decline in the working-age population could
exert downward pressure on economic growth, since the labor supply will decrease.
3
The potential growth rate here and the output gap, which will be discussed later in the speech, are
based on estimates made by the Bank of Japan. The estimation results should be interpreted with a
certain latitude.
4
Using OECD data from 1970 through 2011, one study shows that there is no correlation between
per capita GDP growth rate and population growth rate. See Hatta Tatsuo and Nippon Institute for
Research Advancement, eds., Chihō sōsei no tame no kōzō kaikaku: Dokuji no yūisei o ikasu
senryaku o (Tokyo: Jiji Press Ltd., 2018), p.7.
Furthermore, investment may be reduced as firms and individuals expect continuous
depopulation and slower economic growth accordingly. However, the impact of the decline
in working-age population on the economy will not necessarily be negative. For example, in
response to the decline, those who used to be outside the labor market may start working
and their potential may be unlocked. If this happens, the positive impact on the economy
can offset the negative impact. Also, firms may promote innovation and increase
labor-saving investment in such areas as information and communication technology as
well as artificial intelligence (AI) in order to make more effective use of scarce labor. If
such developments improve the overall productivity, the economy can continue growing,
even in the face of the structural problem of a declining and aging population.
What has actually happened in Japan's economy in recent years? The economy was in a
period of prolonged deflation in the second half of the "lost two decades," that is, from the
late 1990s through the early 2010s (Chart 4). The output gap remained in negative territory
for a long period, and the CPI continued to decline at an annual pace of around 0.4 percent
on average. However, Japan's economy has improved significantly since the early 2010s,
when the Bank of Japan introduced quantitative and qualitative monetary easing (QQE),
which differs considerably from the past policy frameworks.5 The output gap has improved
for the past few years, taking hold in positive territory. The economy is no longer in
deflation in the sense of a sustained decline in the CPI. Thus, you can see that Japan's
economic activity and prices have improved clearly, although the declining and aging
population has continued to weigh on the economy in a structural manner.
In the next part of this speech, let me describe the positive changes in Japan's economy, by
comparing the present situation with the "lost two decades" or under deflation. I sometimes
feel that many people do not necessarily have an accurate picture of the current state of
Japan's economy since they have a deeply-entrenched negative image of the bubble burst
and deflation as well as the current declining and aging population. Thus, I will elaborate on
the positive changes in Japan's economy, in the hope that you will better understand the
current situation. On that basis, I will also talk about the challenges. I personally think that
economic growth and price stability can be achieved even given the structural problem of a
declining and aging population. That said, it is true that there are many challenges to be
tackled beforehand. I would like to share my opinions on these challenges, which should be
addressed with a view to ensuring further strength in Japan's economy.
I. Achievements and Changes
I would like to talk about what kind of positive changes have taken place in Japan's
economy, by comparing the situation now with the "lost two decades" or under deflation.
A. Improvement in People's Lives
First, let us take a look at changes in household income as a whole (Chart 5). Nominal
disposable income did not increase for a long time following the late 1990s. During this
period, real disposable income, adjusted for inflation, increased moderately because prices
continued to decline somewhat. However, households could not feel the increase in their
income as nominal disposable income did not increase. Since the mid-2010s, there has been
a notable change, as disposable income has increased clearly in both nominal and real
terms.
How have people perceived this change (Chart 6)? In a public opinion survey, people were
asked how satisfied they are with their current lives. The proportion of respondents
answering that they were satisfied declined clearly from the late 1990s, to a level below that
in the 1980s. However, it has increased notably since the early 2010s, and recently
registered a record high. This improvement in people's satisfaction with their lives is likely
due to an increase in their income stemming from economic improvement. In fact, in the
same public opinion survey, the proportion of respondents answering satisfied with their
income also rose significantly.
To see how far economic improvement has spread to households, I would like to look at the
poverty rate (Chart 7). The poverty rate for all households has peaked out in recent years,
although it was previously on an uptrend. In particular, the child poverty rate has started to
decline. Of course, there is room for improvement regarding the problem of poverty, but it
is suggested that the improvement in financial conditions for a wide range of households is
already happening gradually.
B. Changes in Labor Market Conditions
What lies behind the improvement in people's satisfaction with their lives? The answer is
changes in labor market conditions (Chart 8). The unemployment rate has declined recently
to around half the level of the deflationary period. Since the working-age population has
continued to decline in Japan, some may suspect that this is just due to a decline in labor
supply. You can see in this chart, however, that the improvement in the employment
situation since the early 2010s has been accompanied by an increase in the number of
employed persons. This implies that the recent tightening of labor market conditions is
mainly due to an increase in labor demand, not a decline in labor supply. This improvement
in the employment situation has brought about an increase in household income, with the
number of employed persons increasing and wages rising moderately.
Why has the number of employed persons been increasing despite the declining
working-age population? The answer is a significant increase in labor participation by
women and seniors. Chart 9 shows developments in the number of labor force participants
and the labor force participation rates for working-age men and women as well as seniors
aged 65 and over. The labor force participation rate for each group is defined as the ratio of
labor force participants to the respective population. In the past few years, the labor force
participation rate of working-age men has increased somewhat while being at a high level.
Meanwhile, the number of labor force participants among this group has been decreasing,
along with the decline in the overall working-age population. In contrast, the labor force
participation rate of working-age women has been rising consistently. Through 2012, the
number of labor force participants among this group decreased as the impact of the decline
in the overall working-age population was large. Since 2013, however, the number has
started to increase as labor participation by women has accelerated further. As for seniors,
the number of labor force participants increased for a while after the mid-2000s along with
a rise in the elderly population, even without a rise in their labor force participation rate.
Since 2013, the number has been increasing at a faster pace, as seniors have become more
active in participating in the labor market. As we have just seen, labor participation by
women and seniors has increased considerably, and this is a significant change observed in
the labor market since the early 2010s.
What then has prompted more women and seniors to enter the labor market in Japan? In the
case of women, I first need to explain the past situation of their labor participation (Chart
10). Looking at the labor force participation rate of women by age group, the so-called
M-shaped curve was evident in the late 1990s, as the rate was lower at the life stage of
childbirth and child-rearing. This is because, when working women in Japan reached this
life stage, there was a strong tendency to give up continuing to work and leave the labor
market. Recently, however, it can be said that women at this life stage continue to
participate in the labor market, and therefore the curve is generally no longer M-shaped. For
almost all age groups, women's labor force participation rates in Japan now exceed those in
the United States. In Japan, women's labor participation has been encouraged by a rise in
labor demand due to economic improvement as well as by enhancement of the surrounding
environment through various measures taken by both the public and corporate sectors so
that women can balance child-rearing and a career. In fact, local governments have
increased the provision of nursery facilities, and firms have actively set up childcare centers
at their workplace in an effort to avoid losing female employees who are raising children.
More firms have offered further support for parental leave and introduced teleworking
systems to allow employees to work at home without the burden of commuting. Thanks to
these initiatives, fewer women now leave the labor market to raise children.
Next, Chart 11 shows changes in the number of labor force participants among seniors,
broken down into smaller age groups. You can see that labor participation has increased not
only for those aged 65-69 but also for those aged 70 and over. This increase may be partly
due to financial reasons such as the incremental rise in the pension age, but that alone is not
a sufficient reason. As people get older, they tend to work for non-economic reasons, such
as to find fulfillment in life or to make a social contribution. From another perspective, the
slowing of physical aging seems to help seniors to continue working (Chart 12). Compared
with a decade ago, for example, they have become physically younger by about 5 years
based on their walking speed, and by about 10 years based on their number of teeth. These
changes in physical ability mean that it is not unnatural for people to continue working in
their 70s, even though a decade ago it was regarded as natural that they retire at the age of
65.6
In Japan, where the working-age population has been decreasing, an increase in labor
participation by women and seniors is welcome in terms of accelerating economic growth.
However, their labor force participation rates cannot exceed 100 percent. What we need to
do now is to improve the productivity of the overall economy. I will come back to this later.
C. Changes in Firms' Behavior
Thus far we have looked at changes in the household sector, focusing on labor market
conditions. Signs of change have also been seen in the corporate sector.
Firms have proactively responded to labor shortages. Amid tight labor market conditions,
firms have increased labor-saving investment to save human resources and have used
capital as a substitute. In Japan's manufacturing sector, there has been active labor-saving
investment. Based on the tough experience of surges in crude oil prices during two oil crises
in the 1970s, manufacturers have taken initiatives since the 1980s to cut costs and
streamline production processes, for example, by introducing production robots. In the face
of globalization, large manufacturing firms exposed to severe competition, in particular,
have continued to make such efforts. By contrast, in the nonmanufacturing sector, where
many industries are labor-intensive, firms seemed less enthusiastic about undertaking
labor-saving investment. This is partly because they were able to take advantage of a stable
supply of low-wage workers, such as part-timers, and did not face such fierce global
competition. However, reflecting the recent tight labor market conditions, labor-intensive
nonmanufacturers have begun working toward saving labor (Chart 13). Since the early
2010s, labor-intensive industries such as "construction," "retailing," and "accommodations,
eating and drinking services" have been actively making labor-saving investment, as you
can see from the clear increase in their software investment. For example, even at small
restaurants in Japan, you can find tablet computers at your table allowing you to order just
by tapping. This kind of system helps restaurants to save labor in taking orders from
customers and improve efficiency in sales management. Construction sites, which have also
faced labor shortages, have been adopting new technologies. One example is the
introduction of survey systems using drones. Another is the use of AI to analyze
accumulated information to complement operations which used to rely largely on skilled
workers' experience. The clear rise in labor productivity since the early 2010s appears to
reflect these initiatives by firms, enabled by remarkable technological progress in recent
years.
The changes that I have just outlined may be seen as a passive response to labor tightening,
but you can find more proactive initiatives (Chart 14). There has been a steady increase in
the number of mergers and acquisitions (M&As) made by Japanese firms, although their
total value has fluctuated considerably due to some large-scale M&As. Moreover, although
the firms' entry rate was low during the "lost two decades," it seems that there have been
signs of a rise recently, albeit at a lower level than that of the United States. I think that the
expansion of such initiatives can be seen as a positive change for Japanese firms, which
used to be considered cautious about taking risks after the collapse of the bubble economy.
II. Challenges Ahead
So far, I have talked about the positive changes in Japan's economy after the "lost two
decades." Its growth potential, however, needs to be further enhanced. Moreover, we are
still only halfway toward achieving the Bank of Japan's price stability target of 2 percent. I
think that there are still many challenges to be addressed in raising Japan's growth potential.
In the remaining part of my speech, I would like to focus on the challenges toward raising
productivity in Japan's economy amid a declining and aging population. In order to improve
productivity, it is necessary to invest in human resources so that more and more people can
enhance their knowledge and skills. It is also important to create and maintain an "open"
economic and social system that encourages people to make the best use of their abilities.
A. Expected Changes in the Corporate Sector
As I mentioned earlier, firms' efforts to raise labor productivity by, for example, making
labor-saving investment have spread not only to the manufacturing sector but also to the
nonmanufacturing sector. However, even if labor productivity rises, there is no guarantee
that the overall productivity of the economy, including capital productivity, will increase.
Let us consider the case where capital, such as robots, substitutes for labor. If this is a mere
substitution of one unit of labor with one unit of capital and the value added remains the
same, the overall productivity will not change substantially because labor productivity will
rise while capital productivity declines.
In fact, developments in TFP of various production factors, including the effective use of
capital, have differed from developments in labor productivity growth, which has increased
significantly (Chart 15). TFP growth has been relatively high in the IT-producing sector,
such as for manufacturers of electronic parts and electrical machinery. In contrast, growth
has been sluggish in the IT-using sector, which includes most of the nonmanufacturing
industries with a high ratio of software investment to overall investment, such as
"information and communications," "transport and postal services," as well as "wholesale
and retail trade." While the deceleration in TFP growth has become a common concern
among advanced economies, TFP growth has remained low in Japan's IT-using sector since
the 2000s. Among the many hypotheses proposed to explain this low growth, I would like to
focus on the stance of Japanese firms toward the use of IT.
According to a survey asking Japanese firms why they have increased their IT-related
budget, many answered that it was to improve business efficiency and cut costs. This is in
contrast with U.S. firms, which have incorporated new technologies to encourage
innovative initiatives such as developing products and services. Although an increasing
number of Japanese firms have recently started to try new technologies, not many seem to
have made them work for successful innovation. New technologies, such as AI and the
Internet of Things (IoT), continue to make rapid progress. I hope that Japanese firms will
adopt these technologies not only to cut costs and streamline production processes, which
they are good at, but also make more active use of them to enhance the value added through
innovation.
B. Expected Changes in the Household Sector: Further Active Participation by
Women and the Young
Then, what changes are expected in the household sector with a view to improving
productivity? As I pointed out earlier, the increased labor participation by women and
seniors is a very positive development for Japan's economy, given the decline in the
working-age population. The next step is to fully unlock people's potential. In the following,
I would like to focus on the challenges toward encouraging a greater contribution by
women and the young.
Let me start with the issue of unlocking women's potential. I would like to first look at
developments in the income levels of men and women over their lifetime (Chart 16). We
can see that women's income level clearly falls behind men's as they get older. One possible
reason is that, in the past, the university enrollment rate of women was relatively low
compared to that of men. Another reason is that women may have less chance to develop
their job skills, since they tend to give up continuing to work in order to raise children.7
With regard to women's job skills, I would like to show an analysis of the gap in literacy
between men and women (Chart 17). Across countries, there is no significant gender gap in
the levels of literacy. As for the frequency of skill use in the workplace, however, the gender
gap is more evident in Japan than in other countries. In Japan, women use their literacy at
work much less frequently than men, suggesting that women are less likely to be assigned
highly-skilled tasks.8
As these observations imply, I think that women's potential has not yet been fully unlocked
in Japan (Chart 18). For example, while the proportion of women to total employed persons
is comparable to that of other countries, the proportion of women in managerial positions is
clearly lower. In addition, surveys on the underutilization of labor show that many women
wish to increase their working hours, particularly middle-aged women who have completed
the early stages of child-rearing. There seems to be quite a few women who want to return
to a full-time job after child-rearing but are unable to do so.
Given the declining and aging population in Japan, it is essential that women not only enter
the labor market but use their abilities to the fullest extent. Is Japan heading in this direction
(Chart 19)? With regard to the educational environment before becoming employed, 30
years ago the percentage of women enrolled in a four-year university was only about half of
that of men, but in recent years it has risen to a level comparable to that of men. Thus, as for
pre-employment education, it can be said that the gender gap has been generally eliminated.
In addition, although the employment rate for women tended to be lower than that for men,
it has recently exceeded that for men. Moreover, an increasing number of firms have been
providing learning opportunities for women during their parental leave so that they can
maintain and improve their skills. There has also been an increase in firms' initiatives to
share work-related information with women on parental leave so that they can catch up
more easily when they return to work. As these examples show, it seems that an
environment is being created to encourage women to make full use of their abilities. Of
course, there are still many women who have completed their child-rearing but have given
up on rejoining the labor market. It is also important to provide these women with recurrent
education to enable them to improve their skills and take positions requiring high skills
when they re-enter the labor market.
Next, I would like to move on to the young. From a long-term perspective, education is
extremely important in improving productivity. Macroeconomic productivity benefits from
creating an environment that enables children to become better educated regardless of their
economic conditions by, for example, providing free education.
Given the globalization of corporate activities, education is also key to developing
internationally competent talent. On this point, I would like to show you some data
regarding the number of Japanese students studying abroad (Chart 20). The percentage of
Japanese students enrolled in foreign schools peaked out in the 2000s. However, the number
of students studying abroad for shorter periods while enrolled at Japanese universities has
continued to increase. This data can be viewed in a number of ways, but I think the fact that
an increasing number of young people in Japan have experienced studying abroad, even if
only for a short time, can be seen as the first step in fostering more skilled individuals ready
for a globalized world.
However, there is still room for improvement in Japan with regard to enrollment in graduate
schools. The proportion of female graduates at Ph.D. level is 31 percent for Japan, the
lowest among the OECD countries, where the average is 47 percent.9
Let me briefly talk about Japan's financial sector in relation to the asset building of
households. Japan's household financial assets have increased steadily, reaching 1,860
trillion yen at the end of June 2019. In this situation, there have been changes in both the
household and financial sectors. Households' investment in financial assets other than
deposits has been gradually observed. The financial industry is one of the industries that
have been affected by the structural factor of a declining and aging population amid the
economic improvement. However, it has also seen steady progress in globalization and
technological innovation. Japanese financial institutions are increasingly extending their
overseas operations and making alliances with a wide variety of businesses, including
so-called FinTech firms, to offer new services to customers.
Conclusion
Today, I have talked about the positive changes in Japan's economy and future challenges
from a somewhat longer-term perspective. Hopefully you have gained the impression that
Japan's economy has continued to grow after the "lost two decades." Women and seniors'
labor participation as well as firms' initiatives to increase labor-saving investment have
offset the negative impact of the declining population. However, the declining and aging
population will continue to weigh on Japan's economy. For the economy to continue
growing under such circumstances, it is essential to further increase productivity. Japan still
has untapped potential and room to reform and improve in many fields. Once we unlock our
potential to the fullest extent, we can overcome the challenges.
Let me conclude my speech by sharing my thoughts on the links between monetary policy
and the enhancement of economic growth potential, as well as the role of central banks.
Economic growth potential is supposed to be enhanced mainly by changes in the behavior
of private entities with the support of the government's growth policy. Meanwhile, the Bank
of Japan's monetary policy aims at achieving the price stability target of 2 percent, and there
are synergy effects between the efforts of various economic entities and the Bank's
monetary policy. The expected growth rate of Japan's economy is likely to rise as private
firms actively undertake investment in capital and human resources as well as innovation. It
is also likely to rise as the government establishes a business environment that encourages
such investment and makes beneficial public spending, including on education and the
promotion of science and technology. As the expected growth rate rises, firms' investment
and households' consumption will be encouraged further, thereby ensuring the path toward
achieving the price stability target of 2 percent.
At the same time, I think that monetary easing itself can in turn contribute to enhancing the
growth potential in some ways.10 One way is that, as monetary easing has made clear the
problems of labor shortages and supply constraints resulting from demand increase, it has
consequently highlighted the issue of Japan's growth potential that lies behind these
problems. Although a decline in the growth potential has long been recognized as a
challenge of Japan's economy, it was not seen as an immediate issue when the economy
faced deficient demand. It was not until labor shortages and supply constraints materialized
due to the increase in demand that people actually started to take concrete action toward
enhancing the growth potential and increasing the economy's supply capacity. People
acquire skills through their daily work, thereby raising their productivity. In particular,
whether or not young people have opportunities to enhance their skills at work affects their
future careers, as well as the productivity of the overall economy. It is vital that the younger
generation is provided diverse and stable job opportunities. A decline in the long-term
unemployment rate also increases the economy's productivity, since skills could be lost as
unemployment becomes prolonged. Widespread improvements in the labor market are
likely to raise the growth potential of Japan's economy.
Another possible contribution of monetary easing is to encourage firms to become more
active. With the experience of prolonged deflation, Japanese firms have been cautious about
taking risks and have remained persistently prudent toward business investment and wage
increases. I believe that, if our monetary policy improves overall economic activity, it will
encourage firms to change their behavior premised on deflation and take positive initiatives
toward making active investment and raising productivity further.11
Japan has experienced stagnation and deflation for a long time. The Bank of Japan aims at
achieving price stability, thereby contributing to the sound development of the national
economy. From now on, when a children's book is written, I would prefer not to see a
phrase such as "it is a very difficult place to live because there has been a decades-long
stagnation."
Thank you for your attention.
11
There are arguments that the stabilization of the macroeconomy in the short term affects economic
growth in the long term. For details, see Bank of Japan, Research and Statistics Department,
"Minutes of the 7th Joint Conference Organized by the University of Tokyo Center for Advanced
Research in Finance and the Bank of Japan's Research and Statistics Department: New
Developments in Macroeconomic Analysis: Interaction between Business Cycles and Economic
Growth," BOJ Reports and Research Papers, 2018, http://www.boj.or.jp/research/brp/ron_2018
/ron180330a.htm/ (available only in Japanese); and Souhei Kaihatsu et al., "Interaction between
Business Cycles and Economic Growth," Bank of Japan Working Paper Series, no.18-E-12, 2018,
http://www.boj.or.jp/en/research/wps_rev/wps_2018/wp18e12.htm/.
Has Japan's Economy Changed?:
Challenges and Prospects
Speech at the Japan Society in New York
October 3, 2019
Masazumi Wakatabe
Deputy Governor of the Bank of Japan
Outline
Introduction
I. Achievements and Changes
II. Challenges Ahead
Conclusion
Chart 1
Introduction
Demographics
Working-Age Population
Total Population
(Aged 15-64)
y/y % chg.
y/y % chg.
2.0 2.0
United States
United States
1.5 1.5
Japan
Japan
1.0 1.0
0.5 0.5
0.0 0.0
-0.5 -0.5
-1.0 -1.0
-1.5 -1.5
-2.0 -2.0
CY CY
80 85 90 95 00 05 10 15 80 85 90 95 00 05 10 15
Source: OECD.
Chart 2
Introduction
Potential Growth Rate
Recent Develop