Renewal Strategy and “Japan in 2050”
Keynote address on “Joint OECD and ESRI workshop:Long‐term prospects of the world economy up to 2060
and their policy implications31 January 2014Kazumasa Iwata
President, Japan Center for Economic Research
1.Renewal Strategy in Abenomics1. In launching the long‐term forecast on global economic development, it is common to adopt the convergence as a working hypothesis based on neoclassical growth model, where the rates of growth in labor force, net capital accumulation and total productivity play the role of fundamental determinants of growth. 2. It is anticipated that the emerging economies will catch up with the level of per capita GDP in advanced economies at some point of time.: Yet, there may be a trap in development process of emerging economies due to the political and institutional constraints.
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1.Renewal Strategy in Abenomics
3. Our approach in “Japan and global economy in 2050” is different from conventional neo‐classical growth model in focusing on the difference in levels of total productivity among different nations.4. Reforms of political, social and economic institutions can affect the difference of total factor productivity levels among different nations (Hall=Jones(1999), Acemoglu=Robinson(2012)) .
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2. Importance of Institutional Reforms
1. For instance, we can identify five categories of institutions such as (1)political system stability, (2)openness of economy, (3)gender gap, (4)easiness of start‐up business (5)flexible labor market.2. There is a missing link between the menu of policy measures in renewal strategy (the third arrow) and growth performance (improvement of total factor productivity). ‐ It is necessary to find out the missing link.
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3. Given the fact that both the labor force and net capital accumulation register negative growth rates, it is imperative to improve the Japanese institutions and achieve the “best practice” in the world, notably in the area of women’s participation in labor market and new entry of domestic and foreign firms into regulated markets as well as education.4. We employed the analysis of the evaluation function of institutional factors. Japan should give priority to improving the openness of our economy.
2. Importance of Institutional Reforms
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3.Abenomics and Mega‐Regionalism
1. Abenomics has a successful start in the first(2% price target) and the second arrows(fiscal stimulus) and engages in the third arrow(growth/renewal strategy) .2. A first important step of growth/renewal strategy was Japan’s participation in the TPP negotiations process which will trigger other bilateral and regional mega FTA/EPA (Japan‐EU,RCEP and FTAAP).3. Doha Round negotiations include three main issues on trade facilitation, international services, and agriculture.‐ The removal of barriers against “global value chains” works
to increase $2.6trillion world gains, while the removal of all the tariffs brings $0.4 trillion benefit(World Economic Forum(2013)).
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4.Three Potential Scenarios of Renewal Strategy
1.We have presented three scenarios for Japan in 2050. 2. In growth/reform scenario (“Japan is back” scenario) ,it is possible to achieve “88 thousand dollars of per capita GNI” in 2050 from 42 thousand dollars in 2010.3. In base/stagnation scenario, where Japan implements reform in the same speed as in the past, Japan will fail to improve the real consumption in the base/stagnation scenario.4. Further, there is a risk of fiscal bankruptcy scenario: It is needed to raise consumption tax rate to 25% if we want to stabilize the government debt/nominal GDP ratio at 200% in 2050.
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4.Three Potential Scenarios of Renewal Strategy
5. We need renewal strategy to achieve positive growth rate of the expected per capita consumption. 6. In addition, we should brake the declining tendency of population over coming decades in order to maintain the expected expansion on domestic market activity.7. We should maintain the level of the “natural interest rate”above the real long‐term market interest rate, : The natural interest rate is indicated by the equilibrium real interest rate which is the sum of per capita growth rate plus time preference rate in the neo‐classical growth model. : Japan can succeed in overcoming deflation over long‐term only in the case of growth/reform scenario, given the rising public burden on household sector.
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4.Three Potential Scenarios of Renewal Strategy
8. It is also desirable to set the national goal to stop the declining tendency of population at 90 million in 2050.: We can recover the total fertility rate from 1.4 to 1.8 by mobilizing all the policy measures for child care employed by the French government which cost about Yen 7‐8 trillion.: We can increase the number of foreign workers from 50 thousand to 200 thousand in 2050.
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5.Three Major Implications for Global Economy
1.In 2050, the US will remain as an economic hegemon.2.China will fall in the middle income trap.: Among Asian economies only Malaysia will escape from the middle income trap.3. It is important for the OECD countries to assist the process of Asian economies to avoid the middle income trap by enhancing the structural reform.
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(Note)5 factors which determine long-run productivity growth.(Unit)Standard deviations with the mean across 64 countries in 2010 as 50, and 1 standard deviation as 10.
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30
40
50
60
70Politics
OpenMarket
GenderStartingBusiness
FlexLabor
2010
2050
KOREA
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30
40
50
60
70Politics
OpenMarket
GenderStartingBusiness
FlexLabor
2010
2050
中国CHINA
2030
40
50
60
70Politics
OpenMarket
GenderStartingBusiness
FlexLabor
2010
2050
USA
Fig.1 Institutional Factors
10(Source) JCER Long-Term World Forecast
Table 1 Per Capita Gross National Income in 2050
(Source) JCER Long-Term World Forecast based on World Bank statistics 11
1990 2010 2050Rank
1 Switzerland 3.5 Norway 8.7 Norway 14.22 Japan 2 .8 Switzerland 7.5 Switzerland 11.43 Sweden 2.6 Denmark 6.0 Japan(Growth scenar io) 8 .84 Norway 2.6 Sweden 5.1 Sweden 8.75 Finland 2.5 Netherlands 4.9 Denmark 8.16 Denmark 2.4 United States 4.7 Canada 8.07 United States 2.3 Finland 4.7 Australia 7.98 Germany 2.1 Austria 4.7 United States 7.79 France 2.1 Belgium 4.7 Belgium 7.5
10 Canada 2.0 Australia 4.6 Finland 7.411 Austria 2.0 France 4.4 Ireland 7.412 Belgium 1.9 Canada 4.3 Netherlands 7.313 Netherlands 1.9 Germany 4.3 France 7.114 Italy 1.8 Ireland 4.2 Austria 7.015 Australia 1.7 Japan 4 .2 United Kingdom 6.616 ・ Singapore 3.9 Singapore 6.5
17 ・ ・ Japan(Stagnat ion scenar io) 5 .4
20 ・ ・ Korea 4.5
26 Korea 0.6 Korea 2.0
29 ・ ・ Japan(Bankrupt scenar io) 3 .9
45 ・ ・ China 1.2
47 ・ China 0.4
50 India 0.04 ・52 China 0.03 ・ India 0.655 India 0.1
(Nominal, 10 thousand US$)
Fig.2 World Economic Changes from 2010 to 2050
(Note) Constant GDP in 2005 (market exchange rate), size of circles reflects their economic scale.
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(Source) JCER Long-Term World Forecast
Fig.3 Japan's FDI biased outbound
0
10
20
30
40
50
60
70
0 10 20 30 40 50 60 70
JapanKoreaChinaUnited StatesUnited Kingdom45 degree line
More inboundinvestment
(Note) The data for 1990, 1995, 2000, 2005 and 2011 from the origin. (Source) Based on "White Paper on International Trade" 2012, and International Institute for Trade and Invesment. The UK figures are:outbound=71.3, inbound=49.3.
（Inbound and outbound investment, ratio to GDP, %）
More outboundinvestment
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Fig.4 Difference between base scenario and growth/reform scenario
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(Note) Numbers in brackets are average contribution share in the gap between Base scenario and Growth/Reform Scenario in percent
(Source) JCER Long-Term World Forecast
Fig.5 Female Workforce Participation: Japan Lags Holland, Northern Europe
（Source）OECD, JCER Long-Term World Forecast
30
40
50
60
70
80
90
1985 1990 1995 2000 2005 2010
（％）
(Year）
Sweden
Japan
Holland
Female workforce participation
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Fig.6 Potential of women is not fully exploited
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Total
Eco
nom
ics
Labo
r pa
rtic
ipa
tion
Inco
me d
ispa
rit
y
Equa
l co
mpen
sat
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Mana
geme
nt p
osi
tion
Prof
essi
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Pol
iti
cs
Parl
iame
nt
Mini
ster
Lead
er's
inc
umb
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Japan (rank 101) Netherland (rank 11) Finland (rank 2)
（Men＝１）
Components of Gender Gap Index (2012)
(Source) The World Economic Forum, "The Global Gender Gap Report 2012". The top is Iceland.
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5
10
15
20
25
30
35
40
45
50
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
（Source） White Paper on Gender Equality (2011), International Parliamentary Union
Percentage of women MPs― Delayed compared to Norway by 45 years.
JAPAN（The x-axis label is shifted by 45 years)
Norway
2010
（year）
（％）
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Fig.7 Raise birthrate through French‐style policies
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1960 1980 2000 2020 2040 2060 2080 2100
Japan, Base scenario (if no action taken)
Japan, French-style childrearing policies
France (reference)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1960 1980 2000 2020 2040 2060 2080 2100
Japan, Base scenario (if no
action taken)
Japan, French-style childrearing
policies
（Ratio to GDP, %）
Payments for childrearing
（Year）
Birthrateup to 1.8
（TFR）
(Source) JCER Long-Term World Forecast 17
Fig.8 Increase intake of immigrants to 200,000 per year
(Note) In the base scenario, the path until 2030 is the 2012 projection by National Institute of Population and Social Security Research, Japan. After 2031, a projection by JCER. In the accepting immigrants scenario, immigrants are assumed to increase to 200,000, which correspond to half of immigrants accepted by the United Kingdom in recent years after adjusting population size.(Source) JCER Long-Term World Forecast
-100
-50
0
50
100
150
200
250
300
1980 2000 2020 2040 2060 2080 2100
Base scenario (if no action taken)Accepting immigrants
（thousand persons）
（Year）
Net Inflow
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Fig.9 Public burden will decline due to population stability
(Note) Both cases are based on the scenario where growth accelerates as a result of system reforms. In the Stagnation Scenario, the burden would be higher. The fiscal burden to increase the birth rate (family allowance) is taken into account. Assumes that toward 2030, consumption tax is raised to 25%. (Source) JCER Long-Term World Forecast
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30
35
40
45
50
55
60
1980 2000 2020 2040 2060 2080 2100
No action is taken to prevent population decline.Population stabilization (birth rate up 1.8% + 200,000 immigrants per year)
Public burden
(%)
(Year)
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Fig.10 Difference in venture investment between US and Japan
0
200
400
600
800
2006 2007 2008 2009 2010 2011 2012
(Fiscal year)
Japan United States
(Source) “FY2011 Status of Academia-Industry Cooperation at Universities" prepared by the MEXTAUTM U.S. Licensing Activity Survey
(For Japan, data is published up to FY2011)
0
1
2
3
4
2007 2008 2009 2010 2011 2012
(Year)
Japan
United States
(Source) "FY2013 Survey of Venture Capital Investment Trends" prepared by Survey Venture Enterprise Centre
Amount
(Trillion yen)
Number of start‐ups
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(Note 1) Abenomics and An Open Letter to President Roosevelt by Keynes
1. Abenomics is the integrated policy package measures consisting of (1)expansionary monetary policy, (2)flexible fiscal policy and (3)revival strategy.2. On 31 December 1933 in the New York Times, Keynes wrote an open letter to President Roosevelt who engaged in recovery and reform(Keynes(1933)). He recommended three points:(1)‟wise spending” to mature quickly financed by loans(2)‟cheap money”(massive purchase of long‐term government bonds aimed at reducing long‐term interest rates below 2.5%).
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(Note 1) Abenomics and An Open Letter to President Roosevelt by Keynes
(3) Keynes (1934) described the common policy of exchange rate stabilization with the Great Britain aimed at achieving stable price levels as follows. 3. Keynes was not much concerned about institutional reforms under the New Deal as growth strategy.
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(Note 2) “Fiscal Dominance”1. Japan faces a risk of “ the Day of Reckoning ” in FY 2018‐FY2028 . It is needed to introduce the fourth arrow in the Abenomics on the growth‐friendly fiscal consolidation over the medium term.: There is a risk of “fiscal dominance” (Sargent=Wallace(1981)) over the medium term :‐ There is a limit on domestic private absorption capacity of newly issued bonds.
‐ Fiscal policy or “unpleasant debt dynamics” dominates monetary policy in affecting long‐term interest rates and inflation rate.
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(Note 2) “Fiscal Dominance”
2. In Japan “the Day of Reckoning” could arrive between in FY2018 and FY2028, given certain assumptions on future development on nominal GDP(1% or 2%), debt outstanding and private asset holdings:3. In order to avoid fiscal dominance, it is needed to implement fiscal consolidation over the medium term, while at the same time achieving sound growth.
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Reference
[1]Acemoglu, Daron, and Robinson, James A.(2012), “Why Nations Fail? The Origin of Power, Prosperity, and Poverty”, Crown Business[2]Hall, Robert and Jones, Charles,I.(1999), “Why Do Some Countries Produce So Much More Output per Worker than Others?”, Quarterly Journal of Economics, 114(3)[3]Iwata, Kazumasa, and Takenaka, Shinji(2012), “Central Bank Balance Sheet Expansion: Japan’s Experience”, BIS paper, No.66[4] Japan Center for Economic Research(2013), “Stabilize Foreign Exchange Rates to Counter a Sovereign Debt Crisis‐Currency Reform to End the Deflationary Economy,” March 8
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Reference[5]Keynes, J., Maynard(1933),‟An Open Letter to the President Roosevelt,” The Collected Writings of John Maynard Keynes, Volume XXI Activities 1931‐39, Chapter 4 The New Deal, pp.289‐297, Macmillan,1982 [6]Keynes, J., Maynard (1934),‟President Roosevelt’s Gold Policy”, The Collected Writings of John Maynard Keynes, Volume XXI Activities 1931‐39, Chapter 4 The New Deal ,pp.309‐317, Macmillan,1982[7]Sargent, Thomas and Wallace, Neil.(1981), “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis, Quarterly Review, 5[8]World Economic Forum in collaboration with Bain & Company and the World Bank(2013), “Enabling Trade Valuing Growth Opportunities,” 2013,World Economic Forum
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