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Larry Summers, formerly US Treasury secretary, chief economic adviser to President Obama and president of Harvard, is best known for his blunt manner and his first-class brain. He is an early and outspoken proponent of “secular stagnation theory” which says advanced economies are stuck in a new era of sluggish growth.
The leading economist has described Japan both as the first modern example of secular stagnation and a laboratory for plotting an escape route. Mr Summers serves as an ideal interlocutor for this special FT-Nikkei report on Japan and the world.
A little before New Year, I asked him to dig into his theories about a world marked by deflation (“lowflation”, as he calls it) and deliver an unvarnished verdict on the Japanese government’s response. I also asked him to imagine what Japan might look like in 2025.
Our conversation began with “Abenomics”, namely the monetary, fiscal and structural measures adopted by prime minister Shinzo Abe’s government to tackle deflation. After three years of what some would say is one of the great monetary experiments in recent history, what is his verdict?
“I would give the classic professor’s grade of ‘Incomplete’.” Japan is “in a better place”, he adds, “but I have no basis of confidence that steady, appropriate, inflationary growth is firmly established”. The Bank of Japan’s easing of monetary policy has been “broadly appropriate” and contributed to higher inflationary expectations. He sees no reason not to continue quantitative easing though he suspects “diminishing returns may have set in”.
Mr Summers is uncharacteristically diplomatic about Japan’s fiscal policy: “a bit inconsistent”. He warned that raising the rate of consumption tax in April 2014 was a mistake. “Nothing that has happened since has changed my mind.”
Abenomics’ so-called “third arrow” is a range of structural reforms tackling entrenched interests via tax reform, market liberalisation in agriculture and electricity and improving corporate governance. While useful, the measures have not been pursued aggressively enough, he says.
How vulnerable is Japan to the slowdown in the Chinese economy as it struggles with the transition from an investment-driven exporting machine to one more reliant on services and domestic consumer demand? “My guess is that China will grow less rapidly than many now expect,” he says, “but Japan will be less vulnerable to China than commodity producers. Japan is not a commodity producer and it stands to benefit from lower commodity prices.”
One issue that does weigh on Mr Summers’ mind is Japan’s demographic profile. Beyond its lower levels of business and residential investment, the ageing population is a “significant” factor in reducing the dynamism of the Japanese economy as a whole.
What does that mean practically? “I think that the way Japan has lost an edge in consumer electronics or the automotive sector is not entirely unrelated to an ageing population,” he says, adding: “It seems to me that the more Japan ages, the more important it is to find ways to be open.”
On immigration, Mr Summers treads carefully but leaves little room for doubt that foreign workers — whether from lower wage economies or temporary expatriate workers — would lend dynamism to the Japanese economy. “I worry that an isolated Japan is going to be a Japan that falls further behind.”
This last statement — issued as a stentorian warning — is the perfect segue to his view of Japan in 2025. After customary caveats that much depends on the global economy, global security and Japan’s policy responses, he offers two plausible scenarios.
The first is relatively optimistic: Japanese GDP grows about 1 per cent a year, which he equates to per capita growth of 2 per cent. And Japan takes advantage of its remarkably skilled and disciplined workforce to remain a major exporting power. “I could also imagine Japan would play a crucial role in a reinvented Pacific community where Korean unification was successfully managed and a broader detente established with China.
“I could imagine that, as biotechnology becomes increasingly focused on extending life, that Japan’s ageing population ultimately proves to be a national asset.”
The alternative view for 2025 is far less appealing: a continuation of trends where Japan is a laggard in the global economy, which diminishes its economic and political influence. North Asia’s geopolitics would become less stable, amid a hardening of nationalism in China and Japan.
“The next decade will be particularly pivotal for Japan,” he says. “We all hope that Abenomics — to borrow from Winston Churchill — will not even be the beginning of the end but the end of the beginning of Japanese renewal in the 21st century.”