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News | Question of the Week, WC 6th May
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Question of the Week, WC 6th May

Q: After our pair of Monitors on Modern Money Theory in the Japanese context, we received the question, what is needed for Japan to get out of slow growth?

A: I think, primarily it’s about redirecting income sustainably to the household sector. Full employment has failed to do that so there must be some kind of structural problem in the labour market. The negative interaction between demographics and seniority wage that we described in the Monitor is pretty hard to overcome, but bold policymakers they could have a stab at seniority wages. Similarly, policymakers could legislate over time to help increase gradually the share of wages offered through regular contracts rather than bonuses. Then companies wouldn’t be able to reduce overall pay packets so easily when the cycle turns back down. We see a similar compensation packet in other export-led economies such as Germany, where cost-compression is very important. 

The big deficiency in household income, however, is in the flow of returns of wealth. Ending financial repression policies would help. Dismantling cross shareholdings also, so that dividends aren’t short circuiting in the non-financial corporate sector. 

Are things really so bad in Japan? Not in the grad scheme of things! I think it’s a question of the counterfactual. And the process of aging is not over yet. From an investment perspective, if these imbalances remain, it effectively means that Japan ultimately will remain in a low rate environment with an equity market that goes in the opposite direct of the yen in the short term. The yen itself will continue on a depreciation trend in real effective terms. 

Freya Beamish, Chief Asia Economist

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Posted: 13th May 2019

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