By Carlton Vann '08
The Center on Japanese Economy and Business (CJEB) of Columbia Business School hosted a zadankai (informal discussion) entitled "Japan’s Economic Prospects: How Good Are They?" on Thursday, March 20, 2008. Moderated by Professor Hugh Patrick, the director of CJEB, the session featured presentations by Professor Charles Horioka from the Institute of Social and Economic Research at Osaka University and Professor Tsutomu Watanabe from the Institute of Economic Research at Hitotsubashi University. The lunchtime discussion was attended by over thirty graduate students, visiting scholars, and faculty members.
Professor Horioka began the session with a presentation on the impact of an aging population on the Japanese economy. Although most industrialized countries are experiencing a graying of their populations, the speed of the aging has been faster in Japan than in any other country, and Japan is now the most aged society in the world. Professor Horioka explained that this trend will impact the Japanese economy in a variety ways including a decline in the savings rate, an increase in government deficits, and a labor shortage. In 1985, Japan had one of the highest savings rates in the world, but by 2005 its ranking had dropped to 17 among OECD countries. The savings rate will probably continue to decline, but the trend is not necessarily a problem for the Japanese economy. As Professor Horioka notes, an increase in the saving rate in other sectors of the economy (such as the corporate sector) may offset the declining household savings rate. Moreover, as the overall population declines, there will be less need to expand the productive capacity of the economy, and the need for capital investment will lessen. Finally, Professor Horioka suggests that even if Japan needs additional capital for investment, it can borrow from other high-saving countries such as China. The U.S. has been following this strategy for a number of years. The aging of the population will also place a burden on the Japanese public pension system. The national medical insurance system and the long-term care insurance system are also likely to see deficits in the coming years.
To deal with the looming deficits, Professor Horioka suggests transitioning from the current pay-as-you-go system to a fully funded system, although he admits that the transition will take time, a great deal of funds, and political will on the part of Japanese government leaders. In order to deal with the pending labor shortage due to the retirement of the baby boomers, Professor Horioka recommends raising the retirement age and taking advantage of female workers and foreign workers, two groups that are not fully utilized in Japan. Despite the challenges presented by an aging society, Professor Horioka remains optimistic about the long-term prospects for the Japanese economy as long as the government takes the necessary steps to deal with the changing demographics of the Japanese population.
Professor Tsutomu Watanabe followed Professor Horioka’s presentation with a discussion of Japanese inflation dynamics over the past 25 years. Professor Watanabe is a member of the Japanese Cabinet Office’s study group that is examining the so-called "lost decade," the period of low growth following the collapse of the bubble economy. Professor Watanabe focuses his research on the impact of deflation, and he hopes his findings will have an impact on how the Consumer Price Index (CPI) is calculated in Japan.
For most of the post-war period, prices in Japan increased at a steady rate of about 6 per year. This rate began to level off during the late 1980’s and early 1990’s as the economy entered a period of deflation. Professor Watanabe asks, "Why did prices not rise more than 6 during the bubble period and why didn’t they decline significantly during the post-bubble period?" He focuses his analysis on housing rents because housing costs are a big part of the CPI. Through an analysis of housing costs, Professor Watanabe finds a significant difference between the price increases in renewal housing contracts and the increases of new housing contracts. As he notes, "marking to market" occurs only when there is a change in tenants, so overall housing prices may not increase significantly if there is limited tenant turnover. He suggests that in order to obtain a clearer picture of inflation, economic forecasters should pay more attention to the housing rents for new contracts and not consider the rents for renewal contracts.
Following the presentations, Professors Horioka and Watanabe answered a number of questions from the audience on the Japanese economy and its prospects for the future.