Japan: Structural low growth and the way out - Nomura

Research Team at Nomura, notes that the secular stagnation theory has been attracting attention recently as the dissatisfaction has been spreading over the performance of the global economy, which appears to have played a role in the Brexit vote and the choice of Donald Trump as US president.

Key Quotes

“For Japan, which has long faced a declining population growth rate, however, we think it is more useful to view the global economy as being in a state of "low growth." In other words, growth is low as a result of a lull in the investment booms of emerging economies but at the same time labor-market tightening appears to be preventing a self-perpetuating deterioration in the economy and supporting some level of growth. We think these conditions are unlikely to change for some time and expect the global economy, including the Japanese economy, to remain in a stage of "low growth" for the time being.” 

“What "low growth" actually means 

In a world of low growth, the following conditions can be expected to prevail. First, the price of goods tends not to rise while the price of people (wages) tends not to fall. It is difficult to pin down the direction of inflation and monetary policy. Second, to the extent that wages are resistant to declines, household budgets are well-placed to benefit. Population decline is also unlikely to be sufficient to cause consumer spending to start to fall. Third, the US dollar is unlikely to appreciate sharply, which could present opportunities to invest in emerging economies having problems with dollar-denominated debt. Fourth, companies tend to hold back on business expansion, and shareholder returns and M&A become important themes. Fifth, income redistribution policies including a tax on undistributed profits could be adopted to fend off pressure for helicopter money.” 

“Scenario of collapse of emerging economy bubble 

As a downside risk, one possible scenario is a fading in the investment boom in China leading to the bursting of the country's asset bubble. Although that might not spark an international financial crisis, a stalling in the Chinese economy—the world's second largest—could in itself be expected to lead to slowing global demand. We think caution is needed regarding the possibility that in Japan, which could be expected to slip back into deflation, we might see growing calls for the injection of helicopter money. Even if it were possible to stimulate the economy without major disruption to financial markets, we see only a narrow path to success with helicopter money from the perspective of improving economic welfare considering the difficulties posed by exit policies.” 

“Scenario of overcoming secular stagnation 

In the context of a low-growth economy, one might expect—as an upside scenario— improvement in productivity through technological innovations and systemic reforms to help resolve issues with population decline and labor shortages, as well as more proactive investment. Against the backdrop of the growing possibility the Abe administration will be prolonged, steady progress is being made in pushing through growth strategies in such areas as infrastructure exports. In our view, key issues from here on include eliminating bottlenecks facing the fourth industrial revolution. Efforts being promoted by the Financial Services Agency (FSA) to reform lending by regional financial institutions could, through easing population concentration in Tokyo, stimulate regional economies and thus bolster Japan's economic growth.”