The economic lessons Japan can teach the West

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It’s been almost five years since Shinzo Abe took office as Japan’s prime minister for the second time.

Mr. Abe promised to crush deflation, and break the country from a decade of decline. The results have been mixed.

The three arrows of Abenomics the expenses of the government, the relaxation of monetary policy, and widespread reform – have been launched with varied firearms.

While the value in the stock market continues to climb, and the economic outlook looks bright, years of stagnating wage growth, and the country’s rapidly ageing population are providing a lot of lessons to other developed economies. Here are three of them:Low unemployment

The low levels of unemployment does not always lead to higher pay, which is what conventional economic theory would suggest.

A decrease in the number of people without jobs is pushing to pay, as the shortage of workers forces companies to offer more generous packages to attract the right staff. This, in turn, could push up prices as households spend more.

But, in reality, pay growth remains weak across the world – even while unemployment has fallen to rates seen before the financial crisis of 2008.

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Japan is an example of how low unemployment can go without triggering the flight response of pay growth.

On paper, the country is near full employment. Businesses are facing the most severe shortage of staff since the beginning of the 1990s, while unemployment is at a two decade low of 2.8%.

However, the emergence of occasional and part-time contracts has led to a dual labour market, where “non-regular” workers are paid much less than their permanent counterparts.

In Japan, the proportion of workers on fixed-term or part-time contracts increased to 37.5% of the total employment in the year 2016, 20.3% in 1994, according to the Organization for Economic Cooperation and Development (OECD).

“A job for life” mentality also remains rooted in the Japanese society – which also limits the growth of earnings, as a smaller number of workers will threaten to quit unless they get a higher salary increase.

Koichi Hamada, a special adviser to Mr. Abe, said that the increase of the automation poses a threat to millions of Japanese jobs, and has a stark warning to pay.

“For those who are replaced by artificial intelligence, the world is very difficult, and I don’t think that wages and prices in Japan, at least, will increase as [they did] 20 years before.”

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He adds that creativity and experimentation are vital to ensure that workers are not left on the scrap heap.

“In Japan, the loyalty stands out too much and the idea that young people must obey. We need a new experiment, which allows for the possibility of failure.

“In order to take the Japanese forward in the society to younger people, or those who experienced a foreign company or the intellectual world, [should be able] to the voice more freely to the elderly.”The aging of the work force

The population of japan is ageing fast, and an elderly population puts enormous pressure on the public purse. The OECD recently warned that the country’s future economic prosperity is dependent on how it manages its demographic decline.

Live is not a reason to celebrate, but it also has to be paid. Families in the developed economies are having fewer children than in the past, which means that there are not as many workers to pay the pensions of retirees.

The aging of the population projected to increase elderly-related social spending in Japan for another 7% of the gross domestic product (GDP) in the next 40 years.

A solution is to get people to work more.

Yoshihiko Kunihiro, president of Tokyo-based technology firm Fullheart Japan, says that 10% of its workforce is over 60. Your former employee is 78 and still works full time.

In the uk, the government has already linked the state pension age to longevity.

Britain’s fiscal watchdog has warned that the demographic changes which will see spending on state pensions to balloon in the next 50 years, at which time a quarter of the uk population will be older than 65 years.

According to the Office for Budget Responsibility (OBR), long-term spending in the uk the state pension is expected to rise from 5% of GDP in 2021-22, to 7.1% of GDP in 2066-67 – or around £100 billion to £ 140bn in today’s prices.

If governments still want to balance their books, this means that you will have to increase taxes or reduce spending in the areas of the economy to foot the bill.The danger of deflation

Who doesn’t like falling prices? It may seem a blessing, but long periods of deflation that may push the economies into stagnation.

A prolonged period of falling prices, can weigh on the minds of the workers and the companies.

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Stagnant wage growth is entrenched, the trust is lost, payment arrangements stay mediocre, companies become more reluctant to hire, the process is repeated.

Deflation is also bad for the debt. This is because, while the total spending in an economy fluctuates, the amounts owed do not fall.

So when the effective size of an economy shrinks, the debt burden become larger in relation to its size.

After years of deflation, Japan’s gross debt pile has soared to over 200% of GDP, and is on the way to the height of a eye-watering 600% in 2060, if the government does not raise more revenue.

Abenomics has helped to reflate the economy, with the total spending, helping to limit the growth of your debt burden. The jury is out on whether it will last.