Michael Roberts. Japan: caught between inflation and slump

 Japan: caught between inflation and slump

by Michael Roberts.

Back last February, I posted about the state of the Japanese economy when Sanai Takaichi, Japan’s first female prime minister called a snap general election, which she won in a landslide.  Takaichi, who models her views on Britain’s Margaret Thatcher of the 1980s and now on Trumpism, claimed she would be different from all past prime ministers.  She would cut taxes, in particular, the consumption tax which drives up prices in the shops, but at the same time increase government spending on social security and ‘defence’, even if it meant higher budget deficits. Takaichi was ‘going for growth’ in a not dissimilar way as the ill-fated, short-lived British Conservative prime minister, Liz Truss. Truss’s plans for big rises in the UK budget deficit led to a sharp rise in UK government bond yields and a run on the pound. She lasted just over a month before ‘the powers that be’ (the bond markets) got her ousted.

Last February, I forecast that something similar would happen in Japan, if at a slow burn. And now it has come to pass.  Japanese government bond yields have rocketed to highs

While the Japanese  yen has collapsed to near historic lows.

The problem for Japan is that economic expansion has increasingly depended on permanent government deficits, with government spending on construction and other projects; and yet Japan’s economy has continued to stagnate. With Japan’s corporate sector unwilling or unable to invest, Takaichi has been attempting to end Japan’s stagnation by yet more spending on projects to boost technology, while telling the Bank of Japan to not raise interest rates, as servicing existing government debt is already using up a quarter of all government spending! This Truss-Trump type policy has got the Bank of Japan and the financial institutions really worried, as well as foreign investors.

As I said last February, the Japanese economy has now morphed into stagflation, with rising prices, flat GDP and consumer spending and falling real wages.  Consumer prices have risen 12% since 2021. At the same time, real GDP is barely higher than it was in 2018. Real wages are down 7% from their 2018 level.  

Takaichi’s policies won’t end up crashing the Japanese government bond market as Liz Truss managed in the UK.  That’s because most Japanese government debt is held by Japanese (88%), unlike in the UK. The risk of capital flight only lies in that portion held by private investors, the net debt. And the latter is smaller than it’s been in decades, mainly because the BoJ has bought so much of the debt since 2013.

Instead, it is the currency that is diving. With a 50% depreciation of the yen since 2021 to its lowest rate for 40 years.  Far from delivering a kick-start to economic growth and exports, the fall in the yen has just accelerated inflation. The inflation rate is heading to 3% a year, unheard before of in Japan.

In the last week, the fall in the yen eventually prompted the Bank of Japan to intervene and start buying yen with its dollar reserves. But the new development was that US Treasury also came to the aid of the BoJ and Takaichi by starting to buy yen.  This has helped to stop the depreciation of the currency, at least for now. 

The US entered the fray for two reasons.  First, the US Treasury Secretary Scott Bessent was concerned that the fast rise in Japanese government bond yields (2.86% in July, its highest level in some 30 years) would also lead a further rise in US government bond yields, already at highs.  The cost of servicing US government debt would rise and other interest rates in the US, like mortgage rates would move up.  US government borrowing costs are now at around 4.6 per cent, and 30-year bond rates are north of 5 per cent for the first time since the great financial crisis.

Rising interest rates are not popular with American households, where inflation is also on the rise, the jobs market is stalling and real incomes are stagnating at best.

The other reason for the US intervention was that a weak yen would lead to an accelerated flow out of yen by financial investors and into buying US dollars. This would strengthen the dollar and so make US exports even more difficult to compete in world markets. But what was odd about the US intervention was the US treasury used euros to buy yen, not dollars. This suggests that the US government is now reluctant to print more dollars because foreign investors have to some extent lost their enthusiasm for dollar assets, at least for US government bonds. It’s a sign of a weakening of US dollar’s ‘exorbitant privilege’ in world financial markets.

What can we learn from these currency events? First and foremost, that all roads are now leading to ‘stagflation’, where inflation rises, but economies do not expand.  This is the story for Japan, Europe and even the US.  Second, that pro-business governments cannot stimulate growth through currency depreciation or through trying to keep interest rates low if capitalist companies won’t invest. Japan’s corporations may have increased profits at the expense of wages, but they are not investing that extra capital in new technology and productivity-enhancing equipment.  

The current yen crisis could only be resolved by a sharp rise in Japanese interest rates to encourage investors to hold Japanese financial assets. But this would ensure an outright recession in the Japanese economy. Takaichi is caught in a trap between inflation and slump.

Japan election: from stagnation to stagflation

by Michael Roberts

In Japan, a general election is taking place tomorrow, just months after Sanae Takaichi became the nation’s first female prime minister.  Takaichi is an arch-conservative, ultra nationalist and a devotee of Margaret Thatcher. She became prime minister last October by winning an internal party race for the presidency of the beleaguered governing Liberal Democrat Party (LDP), battered by two disastrous elections in as many years and currently without a majority in either house of the Japanese parliament. 

However,it seems that the LDP and its new coalition partner, the Japan Innovation Party (JIP), are on track to secure a landslide victory tomorrow, with the main opposition Centrist Reform Alliance (CRA), a new party formed by the Constitutional Democratic Party of Japan (CDP) and the former ally of the LDP, Komeito, projected to lose more than half of the 106 single-seat districts it held previously and retain only 32.  The LDP could take 243 seats, and combined with the JIP, get 261 seats, a comfortable majority in the Lower House of parliament.

Takaichi seems to have broad appeal, polling consistently well with women, young and old. She claims that she will be different from all past LDP leaders.  She wants to cut taxes for most people, in particular, the consumption tax which drives up prices in the shops.  And she seeks to increase government spending on social security and ‘defence’, even if it means higher budget deficits. Takaichi says she is going for growth – not dissimilar to the slogans of the ill-fated, short-lived British Tory prime minister, Liz Truss. Truss’s plans for big rises in the UK budget deficit led to a sharp rise in UK government bond yields and a run on the pound. Something similar is happening in Japan, if at a slow burn.  Japanese government bond yields are up significantly and the yen is near historic lows.

Does this mean that Takaichi will go down in flames like Liz Truss?  Probably not, but it does mean that all her talk of ‘being different’ will lead nowhere. As in all G7 economies, over the decades, Japanese governments adopted neoliberal economic policies aimed at reducing pensions and welfare benefits.  Richard Katz has pointed out that the LDP coalition lowered social security benefits for seniors from ¥2.9 million ($20,000 at today’s exchange rates) in 1995 to just ¥2.1 million ($14,500) now, a 30% decrease in price-adjusted terms.  In addition, government spending on healthcare for each person over the age of 65 has been reduced by almost a fifth over the past 30 years. At the same time, the corporate profits tax has been slashed from 50% to just 15%.  Profits have doubled from 8% of GDP to 16%, while corporate tax revenue for the government has tumbled from 4% of GDP to 2.5%. 

But those cuts in corporate profits tax have not led to improved business investment growth. Instead, companies have hoarded the cash or invested in government bonds and the stock market, with nearly 1 quadrillion yen in liquid assets, of which ¥270 trillion were in cash and deposits, ¥233 trillion in bills and accounts receivable, and ¥460 trillion in investment securities. Net of debt liabilities, nonfinancial corporations’ overall financial asset position relative to their total sales has shifted by more than 30 percentage points since the mid-1990s (or about ¥460 trillion). Put another way, the cumulative net saving of the Japanese nonfinancial corporate sector over the past 30 years is now worth about 80% of Japanese GDP.

The key to the failure of neo-liberal measures to boost corporate investment and so end the stagnation of the Japanese economy since the 1990s has been the decline in the profitability of capital investment.  Japan’s profitability of capital has fallen more than in any other G7 economy.

The big long-term issue is Japan’s population. It has been falling and ageing. That allows per capita income growth to grow more than total GDP growth; per capita Japan’s real GDP is up 10.8% since 2010, while real GDP is up 9.6%.  But even per capita real GDP growth has been slowing. Those in work are overworked.  Japan invented the term karoshi — death from overwork — 50 years ago, following a string of employee tragedies.  The large corporates are promoting the idea of a four-day week to relieve this pressure and increase productivity. But there is little sign that this or any other measure is working to raise productivity.  Productivity growth is now non-existent.

Japan’s corporations may have increased profits at the expense of wages, but they are not investing that extra capital in new technology and productivity-enhancing equipment.  Real investment is no higher than in 2007. Public investment (about one-quarter of business investment) is static.  Japanese capital’s image of innovating technology appears to be long gone.  The mainstream measure of ‘innovation’ , total factor productivity (TFP) has faded from over 1% growth a year in the 1990s to near zero now, while the huge capital investment of the 1980s and 1990s is nowhere to be seen. So Japan’s ‘potential’ real GDP growth rate is close to zero.

Prime ministers come and go: from Abe to Kishida to Ishiba, but nothing changes. Japan has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has continued to stagnate. With Japan’s corporate sector unwilling or unable to invest, Takaichi is now attempting to end Japan’s stagnation by fiscal spending, cutting interest rates and allowing the yen to depreciate in order to boost exports.  It’s a Truss-Trump type policy that has got the Bank of Japan and the financial institutions really worried, as well as foreign investors.

Instead of stagnation, the Japanese economy has now morphed into stagflation, with rising prices, flat GDP and consumer spending and falling real wages.  Consumer prices have risen 12% since 2021. At the same time, GDP is barely higher than it was in 2018. Spending, in turn, is stagnant because real wages are down 7% from their 2018 level.

Takaichi wants to boost growth with fiscal spending and monetary easing and ignore the resulting rising bond yields and falling yen.  In contrast, the BoJ wants to cap bond yield rises and keep fiscal spending down to cap inflation and stop the yen falling.  But here is the dilemma. The BoJ’s aim to reduce inflation via higher interest rates will worsen the stagnation, but Takaichi’s aim to boost fiscal spending and fund it by BoJ purchases will only exacerbate inflation. 

Takaichi correctly insists that Japan’s inflation is mostly supply-driven, but she thinks that is a transitory problem and so reckons restoring growth is more important than suppressing inflation. A year ago, she called the BOJ “stupid” (similar to Trump’s attack on the US Fed for not cutting rates) for raising its interest rate from zero to 0.25% (it is now at 0.75%).  Takaichi opposes interest rate hikes because she wants to help automakers and other exporters “at all costs”, particularly in light of the Trump trade tariffs on Japanese exports. 

Will Takaichi’s policies end up crashing the Japanese government bond market as Liz Truss managed in the UK?  I think not.  Most Japanese government debt is held by Japanese (88%), unlike in the UK. The risk of capital flight only lies in that portion held by private investors, the net debt. And the latter is smaller than it’s been in decades, mainly because the BOJ has bought so much of the debt since 2013. In early 2013, net government debt held by private creditors peaked at 144% of GDP. Today, it equals just 96% (see chart below).

Yes bond yields are up, but reduced net debt and previous ultra-low interest rates have lowered net interest payments at all levels of government to a trivial 0.03% of GDP in 2024, down from nearly 1% in 2012). This is easily manageable.

But what rising yields and a falling yen do show is that, as Richard Katz has put it: “the slow corrosion of the economy. Decades of submarket interest rates have kept zombies on life support at the expense of healthier companies. A stunning half of Japan’s GDP is produced in business sectors where (total factor) productivity is actually falling, not just decelerating.The chronic deficits are more the symptom of economic weakness than its cause.”

Letting the yen depreciate will not work. The 43% depreciation of the yen since 2021 has not boosted Japan’s exports. Exports in real terms are up just 5% in the last three years. That suggests Japanese exports are just less competitive in world markets. Indeed, Japan’s real trade surplus in goods and services is currently falling at a 15% annual rate. So Takaichi’s hope that allowing the yen to fall will somehow boost Japanese exports and kick-start economic growth is so much wishful thinking.

Nevertheless, Takaichi appears to be riding high for now on ‘making a difference’ as a ‘Thatcherite’ prime minister. And she has not wasted the opportunity to play the immigration card.  The number of foreigners working in Japan reached a record 2.57mn last year.  Immigrants have really helped to keep the economy going, as Japanese citizens age and the population falls.  But not for Takaichi.  She has called for immigration controls to stop any change in Japanese ‘culture’ and ‘way of life’.  Again, here she follows the Trumpist message.

Michael Roberts: Japan: stagnation and confusion

Japan: stagnation and confusion

by Michael Roberts

Tomorrow, a key election takes in the G7 economy, Japan.  The focus is on whether the ruling coalition of the Liberal Democratic Party (LDP) and its junior partner Komeito, which together suffered a major defeat in last autumn’s lower House of Representatives election, can maintain a majority in the upper House of Councillors. The coalition government must win 50 of the 125 seats (half of the House seats) that are up for grabs.  The latest opinion polls suggest that various minority opposition parties are taking around two-thirds of the potential vote among them, while the governing parties are getting only 32%. 

Prime Minister Shigeru Ishiba, who heads the LDP, has intensified his rhetoric on issues appealing to conservatives, the core LDP base.  He has emphasized the necessity of revising Japan’s pacifist constitution, a long-held goal of the LDP to remilitarise Japan, and has talked tough on opposing Trump’s proposed 25% tariff on Japanese exports to the US: “Do not underestimate us. Even if it is an ally that we are negotiating with, we must say what needs to be said without hesitation.”  Ishiba is appealing to the ‘populist’ right, just as all ‘mainstream’ politicians in the G7 economies now do.  In Japan, the ‘populist’ right is represented by the Sanseito party, which is against immigration and foreigners under the slogan “Japanese First” and has gained support among younger voters.

But those are not the main issues concerning voters. Instead, it is dissatisfaction with rising inflation, low wage growth and high taxes, leading to a wave of support for previously marginal parties that have pledged more government spending and cuts to the sales tax on all goods. The LDP has promised cash handouts and other measures to lower energy prices.

But these promised handouts can only increase the government’s budget deficits and the humongous public sector debt that Japan has.  As a result, financial investors have been selling off government bonds: the yield on ten-year bonds has hit its highest level since the global financial crash of 2008.

The opposition parties are running their campaigns on attacking the rising inflation rates and calling for a cut in the 10% sales tax and the 8% food items tax to reduce the cost of living.  But the sales tax is the biggest source of government revenue. In fiscal 2025, it collected 25 trillion yen ($160bn), or 21.6% of total revenues. Halving the tax rate would cut revenues by over 10 trillion yen.

Japan used to have a near zero rate of inflation but in an attempt to revive the economy, the government and the Bank of Japan deliberately tried to boost inflation to encourage companies to invest and reduce the real burden of debt.  But all that has done is eat into the living standards of Japanese households.

According to the polls, 48% of the public says combating inflation is the top issue, followed by social security at 33% and economic growth at 30%.  Voters want a cut in the sales tax but do not want the revenue loss to be compensated for by reductions in social security benefits as the government has suggested would be necessary.

Source: Katz

As in all G7 economies, over the decades, Japanese governments have adopted neoliberal economic policies aimed at reducing pensions and welfare benefits.  Richard Katz has pointed out that the LDP coalition has lowered social security benefits for seniors from ¥2.9 million ($20,000 at today’s exchange rates) in 1995 to just ¥2.1 million ($14,500) now, a 30% decrease in price-adjusted terms.  In addition, government spending on healthcare for each person over the age of 65 has been reduced by almost a fifth over the past 30 years.

Source: Katz

At the same time, the corporate profits tax has been slashed from 50% to just 15%.  Profits have doubled from 8% of GDP to 16% but corporate tax revenue for the government has tumbled from 4% of GDP to 2.5%. These cuts in corporate profits tax have not led to improved business investment growth. Instead, companies hoarded the cash or invested in government bonds and the stock market.

Source: Katz

The key to the failure of these neo-liberal measures to boost corporate investment and end the stagnation of the Japanese economy since the 1990s is the decline in the profitability of capital investment.  Japan’s profitability of capital has fallen more than in any other G7 economy.

Source: EWPT and AMECO series, author’s calculations

The Japanese economy has stagnated (in real GDP), continually teetering on outright recession.  So investment and consumer demand has been weak. This is particularly the case with wages. Indeed, it has been a feature of the last 25 years that wages have remained stagnant, while profits have risen. This is the product of the neo-liberal policies adopted by successive governments in trying to reverse the long-term decline in the profitability of Japanese capital, with only limited success. 

Even though the official unemployment rate is near all-time lows, as in other major economies, there is more ‘slack’ in the labour market than the 2.5% unemployment rate would otherwise indicate. The aggregate number of hours worked is still 2.8% below the pre-pandemic level. Companies are filling gaps in the ranks of their workforces with part-time workers at lower wages.  Unemployment is low because of the massive shrinkage in the working-age population, now declining at about 550,000 per year. 

The impact on the labour market has been compensated for by a rise in female employment, but female employees work in lower wage areas and receive lower wages than males. This keeps wage share down and profit share up. Indeed, labour’s share of Japan’s national income has been falling since the end of the Japanese boom period of the 1980s; from 60% to 55% now. The median hourly pay of a full-time worker in Japan is no higher than in 1993. And the average real hourly wage of all Japanese workers—not just full-timers—is down 10% from its 1997 peak.

Source: Katz

The big long-term issue is Japan’s population. It has been falling and ageing. That allows per capita income growth to grow more than total GDP growth; per capita Japan’s real GDP is up 10.8% since 2010, while real GDP is up 9.6%.  But per capita real GDP growth is also slowing.

Source: IMF

Those in work are overworked.  Japan invented the term karoshi — death from overwork — 50 years ago, following a string of employee tragedies.  The large corporates are promoting the idea of a four-day week to relieve this pressure and increase productivity. But there is little sign that this or any other measure is working to raise productivity.  Productivity growth is non-existent.

The reason is clear.  Business investment growth is very weak.  Japan’s corporations may have increased profits at the expense of wages, but they are not investing that capital in new technology and productivity-enhancing equipment.  Real investment is no higher than in 2007. Public investment (about one-quarter of business investment) is static.  Japanese capital’s image of innovating technology appears to be long gone.  The mainstream measure of ‘innovation’ , total factor productivity (TFP) has faded from over 1% growth a year in the 1990s to near zero now, while the huge capital investment of the 1980s and 1990s is nowhere to be seen. So Japan’s ‘potential’ real GDP growth rate is close to zero.

Prime ministers come and go: from Abe to Kishida to Ishiba, but nothing changes. Japan has run permanent government deficits, spending it on construction and other projects and yet Japan’s economy has continued to stagnate. Japan’s huge public debt ratio will not lead to a financial crisis, as the bulk of this debt is owned by the Bank of Japan and the major banks, but it still expresses the failure of the private sector to invest.

Source: IMF

The Upper House election takes place as Japan’s export engine is spluttering and just as US President Donald Trump’s tariffs will start to hit key sectors such as automobiles and steel from 1 August. Tokyo has so far failed to reach a trade agreement with the US, despite seven trips to Washington by Japan’s trade envoy Ryosei Akazawa.

Japan’s economy contracted in the first quarter and the latest trade figures suggest that a second consecutive contraction in Q2 is increasingly likely, meeting the definition of a ‘technical recession’.  If the LDP-led coalition loses its majority in the Upper House, then it may be forced to hold a general election, with the economy stagnating and the government in disarray.