I wonder: The whole article reads well-ish untill we reach the dogmatic part "Can Japan Reverse Course?" - why should they reverse course? Why is the demographic change such a apocalyptic scenario? They can - if they want to - go into more debt to fince this transition. The bank of japan and the yen has quite some autonomy here.
Second Point: I would even argue the housing in japan is so cheap because japan is losing roughly 800k citizens a year. Yes over-regulation seems to play a role, but for example the author completely misses the point that there is quite a high inheritance tax, making investments in housing way less profitable than in the western world. I had read somewhere that houses in Japan are considered an item similar to a car.
Third point: The author argues zombie firms are a bad thing per se. I think this can be argued with - they provide jobs, maybe bullshit jobs, but they keep people employed and these people do not have to rely on social welfare. Is that such a bad thing? One might even argue that such jobs are the future for the western world especially when we will lose jobs to AI, people will value e.g. an excellent customer service as provided in japan.
Finally the author does not really answer why fertility is in decline in japan, it might as well be due to bad conditions to raise a family, spoiling the utopian picture depicted here - i remember vaguely that for quite a while japan had the highest suicide rate in the world because of very demanding work-life culture and very rigid cultural norms.
On point two. It’s true that the Japanese consider housing like a car. A depreciating asset untethered from the outrageous land rents we Americans pay due to the authors points about housing scarcity and near omnipresent restrictive building codes. They replace most homes by gut renovating or rebuilding every 25 years or so. They do this without extreme markups in materials and builder contracts meant to extract the stored value of the land upon which the houses sit.
Why is demographic decline so bad? Well, for one, you may not want the Japanese people to decline in to oblivion (if you're Japanese or even if you're not). At a fertility rate of 1.0 (Japan is close to it and SKorea is already there), that means each new generation is half the size of the previous one. If a generation is about 30 years, in 90 years, the youngest generation would be an 1/8th the size of its great-grandparents.
You _really_ have to count on AI to be super-productive to support retirees at that point. But even then, how would a Japan that is a fraction of the size it is now and made up of mostly elderly fare against a much bigger and potentially belligerent neighoring power like China?
"you may not want the Japanese people to decline in to oblivion" --> I wonder if this horror scenario is really realistic, we might also see a future where the fertility rate indeed makes the population decline until a point. This point being somewhere where there is a SIGNIFICANT lack of workers in the workforce and then the remaining ones can charge much higher wages. Btw. this also solves the bullshit job situation for Japan automatically. Btw. we have seen this sharp decline also in the third world transitioning from 5-8 children per family to about two.
Indeed fighting against a a belligerent neighbour with a much smaller population is worth mentioning. But aren't the japanese already outnumbered 10:1 vs. china? So i guess what is keeping japan safe is the tech and the nukes.
Also, you fell for the lump of labor fallacy. Let's do a thought experiment: Suppose half of the population of Japan (half of every demographic) dies in their sleep tomorrow. Would wages go sky high because there would be the same amount of jobs but far fewer workers? No! Because people are not just workers but also consumers! So demand would fall drastically as well. What would happen is that Japan's economy will be roughly half as big. With aging and each generation being a fraction the size of the one before, you'll have not just that but a crazy high dependents to worker ratio. Now, it's possible that crazy productivity gains from AI and robotics could save a country where each new generation is half the size of the one before (though countries with better dependency ratios and young workers would still be better off), but I'm a bit more skeptical of AI (being for good; it may well destroy human society before that) than some of the more wild-eyed folks around here.
Interestingly there was a close proxy for this: the Black Death. 25-50% of the population died within a few years. Wages skyrocketed. It’s considered one of the reasons why feudalism disappeared
Feudalism was actually strengthened immediately after the Black Death, to rein in the ability of workers to claim higher wages. Also, the peasants were not heavy consumers, that was the upper classes and wars. The end of feudalism had many complex causes.
Slavery and indentured servitude also tend to be used when resources to be exploited outnumber workers to exploit them. Wage labour works when there are more than enough workers to exploit the relative resources.
Yes, it is realistic. In generally, I find most people to be pretty blindered and not consider possibilities that haven't occurred in the past even though the trend in fertility virtually everywhere in the world is downward and no first world country has been able to even stabilize yet.
And fewer babies means fewer young people working on technology. Though honestly, if Japan has to rely on tech, it's screwed. China isn't exactly a laggard in technology.
Israel didn't surprise me, settler colonial places are attractive to young people wanting to get out under debt (by taking someone else property. Will that last is a question?) However I was surprised and interested to see you list Georgia and will have to do some investigations. Thanks.
Re point 2: The total population of Japan is going down, but the population of Tokyo is increasing. And still, in Tokyo, housing prices have been flat.
Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company. Firms are not important because they provide jobs, they are what creates products and services that people need. If a zombie company (like retailer Daiei, which used to own the Fukuoka Hawks pro baseball team and its dome (it was named after Daiei originally, but then Yahoo! ( which may be a zombie company also) then SoftBank and now it’s PayPay Dome named after the QR code based digital payment service) loses bank support it will go out of business, sell its assets (to the benefit of other companies) and fire its employees, but they likely won’t go on welfare, but get new jobs in useful companies. The percentage of working age people in Japan on welfare of any kind is under 2%, compared to much higher rates in other developed economies.
"Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company." --> i think it sounds perfectly reasonable, yet i only seem to find this term in relation to japan - i wonder why that is. If we take Space X for example- which is a highly innovative dynamic company, we find that they make roughly 9 billion per year, yet out of these they have "won" roughly 3 billion in government contracts. Contracts which we might call subsidies, given that there is no real competition in this market. So is space X also a zombie firm? I am really not sure about the "destructive" creation that zombie firms are hindering, does it really exist - i guess there are myriads of examples i honestly just don't know them. Is it the same as breaking up monopolies and oligopolies? I guess its quite a rabit hole full of assumptions.
SpaceX’s gov contracts can be benchmarked against both existing gov contractors (NASA?), competitors, and other customers from SpaceX. In all 3 ways, SpaceX appears as an amazing deal for the gov.
Crucially, the customers include plenty of foreigners. That’s called export discipline: a company is considered intervened if it can only operate domestically. If it can sell in the international market, it’s a huge sign it’s in fact competitive.
Russia used to offer lifts of satellites to space for US$25 million a piece. Russia sanctions put an end to that and SpaceX is charging now US$75 million. Just another sanctions profiteer, as with Tesla in the US protected from Chinese imports.
SpaceX has also not met the NASA delivery milestones for the big rocket, even though they got paid the full amount. And we will leave out the free provision of all of NASA's IP.
Interesting idea to characterize those zombie companies e.g. if it can sell in an international market its a huge sign its competitive. I asked chatgpt to give me japans biggest zombie companies and asked it to tell me how much they are selling in an international market (see below) It seems that railway, retailer and energies are not doing well in an international market, but i would argue thats due to their nature. So I am still not sure how to define zombie companies, although the idea that the government has intervened with them is also nice, we find lots of internationational examples like general motors, chrysler, lufthansa, air france, gazprom, huawei, citygroup, aig and so on. It seems often that a lot of these companies are too strategically important to just let them go bankrupt. Can it be the case that the same is happening in japan too? In general i think that with the size of the company they more and more become dependent on a favorable political climate making sure that e.g. these contracts or subsidies are coming. I am not sure if there are good examples of huge companies that are totally indepentend of the government. We always pretend that this the case, but once you reach a certain size its impossible to escape this phenomenon.
---- I just pasted the output of chatgpt here ----
Japan Airlines (JAL): ~45-50% international
JAL derives roughly half its revenue from international routes and passengers, with domestic Japanese travel making up the remainder.
Sharp Corporation: ~70% international
After Foxconn's acquisition, Sharp significantly increased its international focus, with Asian markets outside Japan and North America contributing the majority of revenue.
Takata Corporation: ~80% international
Before bankruptcy, Takata conducted most of its business internationally, particularly with global automakers in North America, Europe, and Asia.
Olympus: ~80-85% international
Olympus generates over 80% of its revenue outside Japan, with medical equipment sales in North America and Europe representing the largest segments.
Seibu Railway: ~5-10% international
Primarily a domestic transportation and real estate company, with limited international revenue mainly from hotel operations and tourism.
Daiei: ~1-2% international
As a Japanese retailer, Daiei was overwhelmingly focused on the domestic market with minimal international operations.
Tokyo Electric Power Company (TEPCO): ~0-1% international
TEPCO's operations are almost entirely domestic, serving the Japanese electricity market with negligible international revenue.
Renesas Electronics: ~70% international
Renesas conducts approximately 70% of its business with international customers, primarily in automotive and industrial sectors across Asia (ex-Japan), Europe, and North America.
I don’t think many of those companies are considered zombies. Yes, Sharp, Daiei and Olympus, but JAL has no zero-zero loans, and is profitable and cash flow covers debt payments. TEPCO has a big loss from the Fukushima disaster but it is still paying its interest but with government backing, since it being the major electricity supplier in the north east, including Tokyo, it is considered too big to fail. Renesas had a bankruptcy in 2011 but is profitably making semiconductors for automobiles and other uses and its profits far exceeds its interest obligations.
In addition to their government contracts, they also have private contracts and StarLink alone is estimated at $7billion annually. I use StarLink and it’s the best internet service I’ve had. SpaceX is the antithesis of a zombie company, they produce lots of value and have no employees sitting around doing make work.
I agree: "Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company. Firms are not important because they provide jobs, they are what creates products and services that people need."
In addition to production, the benefit of jobs is wages. Imagine if the government, instead of subsidizing loans to zombies to pay employees wages for bullshit jobs that produce little of value, directly subsidized parenting so more people could produce children.
Japan has poor work-life balance, which is probably a major cause of their fertility problems. It feels miserable and tragic to not be able to stay with one's baby like humans are biologically wired to do. This is especially the case for mothers, but mothers also need significant support from fathers for the first six weeks at least. So most people choose to avoid getting themselves into that situation (or repeating it), i.e. having kids, unless they can afford to do it in a more wholesome manner by living on a single income for at least six months or ideally three or more years. If the government paid for a generous, use-it-or-lose-it parental leave, as well as child credits, it would go a long way toward improving work-life balance enough to make room for this high-investment life experience.
One aspect to explore is that all that social order probably owes something to the employment stability you get from refusing to let zombie firms fail. Japanese policy makers think explicitly in these terms: the resistance to tightening lending standards is usually couched in terms of protecting employment. They may be right: the extra economic vitality may not be worth imperilling the secret sauce of an orderly society: predictable and stable career paths for the broad middle class.
I don’t think the social order has anything to do with zombie corporations employing middle age workers. Social disorder in general is due to a large number of idle, uneducated young men, or homeless mentally ill people. right now there is low youth unemployment (under 4%) and help wanted stickers for 900¥/hour jobs are common. As the post noted, housing is cheap and abundant so there is low homelessness, and the mentally ill homeless stay out of sight and don’t cause many problems. I don’t know if this is due to strict policing or better mental health treatment, but in large cities and subways I haven’t seen bad behavior worse than talking on a cellphone.
I think this is a reasonable overview, but one important dynamic that wasn't touched on here is that Tokyo is growing in population, while most cities outside of the top tier are shrinking. It probably positively biases the perceptions of foreign visitors, compared to the experience of the average Japanese person.
Not every city is shrinking. Fukuoka is growing almost as fast as Tokyo and is my favorite city to live in. Nearby Kumamoto is also growing because of semiconductor fabs from TSMC and Sony. Sapporo is also growing. Fukuoka is the southwestern most large city from Tokyo and Sapporo is the northern most large city, so distance from the gravitational force of Tokyo maybe helps them keep growing.
I am not sure if this argument stands up to more rigorous analysis, but on its face, it seems that part of Japan's success is due to its lack of diversity. It seems Japan is willing to trade off a lack of innovation coming from new-outside-immigrant ideas for social cohesion resulting in a high degree of social order and incredibly low rates of crime, and that this tradeoff is a net positive, at least for now.
I would be careful about the suggestion that propping up inefficient firms prevents other more efficient firms from succeeding. This is absolutely the case, but in this case most of the time the more efficient firms are not in Japan. I work in refining and petrochemicals, and the reason those companies need support in Japan has nothing to do with firm inefficiencies and everything to do with structurally lower costs to do the same things in China. The alternative to manufacturing industries receiving government support is letting those industries die in Japan - like what has happened to manufacturing in the US or UK - which is indeed more economically efficient because imported goods are lower cost but there are very real tradeoffs.
An important feature of Japan compared to the US is that they have National Health Insurance. Health care is available to nearly all and is affordable. In the US even with insurance you can become homeless due to crushing health care debt.
Japan's economic stagnation over the past 40 years has been a surprise to many, but the problems were front and center for long before they began to stagnte as early as the end of the 70's It has been a long and predictable slide.
As someone who has worked with the Japanese for over four decades, I've often heard CEOs express optimism over the last forty years that growth was imminent, only to be disappointed. A key factor contributing to this stagnation is Japan's aging population, which is one of the oldest in the world. The high cost of raising children in Japan has led to a decline in birth rates, making it challenging for the country to achieve sustainable growth.
Japan's demographic challenges is further complicated by its cultural homogeneity and reluctance to accept foreign immigrants. While this has contributed to the country's low crime rate and strong sense of community, it also limits the potential for influxes of new talent and ideas. Despite these challenges, they have excellent traits that focus more on the long term. Japanese people are renowned for their creativity, dedication to saving, and courtesy.
To revitalize its economy, Japan must consider greater innovative solutions to drive growth. One potential approach is to invest in government-sponsored initiatives aimed at promoting population growth. This could involve incentivizing families to have more children, as well as encouraging immigration from other countries. The United States, for example, has successfully used LEGAL immigration to drive growth and innovation (although some say not enough. Perhaps, Japan could look at immigration creatively and encourage citizens to help, which couuld help drive acceptance in their society.
Despite these challenges, the Japanese people are renowned for their creativity, dedication to saving, and courtesy, with Japan ranking highly in terms of innovation. Japan ranks second in the world in terms of innovation, and first in terms of research and development expenditure as a percentage of GDP. Even though this is really something other countries should be jealous of, it isn't enough. Not just me, but many others have suggested that to revitalize its economy, Japan must consider innovative solutions to drive growth, including investing in education with a much more progressive approach to promoting entrepreneurship, and fostering a culture of innovation.
One potential approach is to invest in government-sponsored initiatives aimed at promoting population growth, such as cash incentives for families, extended parental leave, and improved access to childcare. The Japanese government has already introduced some measures, such as the "children-rearing support" program, which provides financial assistance to families with young children. Additionally, Japan could consider expanding its immigration policies to attract more skilled workers, such as through the introduction of a points-based system, similar to those used in countries such as Canada and Australia.
As I have mentioned, other countries such as Italy and China, are also grappling with similar demographic challenges. Italy, for example, has a low fertility rate and a rapidly aging population, with 23% of the population aged 65 or older, according to the WHO. China, on the other hand, has a aging population due to the one-child policy, which has resulted in a significant decline in the working-age population, with seeing a working-age population decline of 10% by the end of the decade. Japan, by embracing a significant uptick in immigration and fostering a culture of innovation can break free from its stagnation and secure a more prosperous future. That may sound like a tall order for Japan, but by embracing change and promoting growth, Japan can regain its position as a global economic leader and ensure a bright future with significant growth potential for its people.
Immigration is no cure for an ageing society. Eg. Canada's median age is 42.5, Japan's 49.4, but Canada will catch up. On the other side, hyperimmigration makes housing problematic. And so forth, and so forth. In the end, lifestyles and per capita incomes will tank while immigration will become the major engine of economic growth. Essentially, it becomes a mere Ponzi scheme. Australia very much has similar issues.
Essentially, one has to completely revisit the immigration topic and have a completely new discussion about it without resorting to the usual b/s. Chances are fat, Buckley's and none.
Japan has increased immigration of workers in the last few years, the latest target for foreign workers last year was 800,000 immigrants. Immigrants are now over 3% of the workforce, and if you go to any combini in Tokyo it’s hard to see any native Japanese workers there. There are other programs in place to expand immigration, and it’s much more common now than a decade ago.
I live in Hong Kong and frequently go to Japan to do Consulting Engineering work, so the following comes from that background, and given in the hopes that it might stimulate future writings.
Employment life in Japan is still pretty horrible, very long hours both for men and now even for women who use to be able to leave earlier. This also helps explain the fertility rate too. The government has (rather tepidly) tried to promote less overtime and better working conditions, but bad habits die slowly. A lot of this work is empty of content, particularly white-collar work. Manufacturing has fairly good tools for managing worker productive thanks to years of TPM, etc, but it's god awful in management of creative and paper pushing in large corporations. Sadly some of the smartest and brightest in Japan are now shoving off to Australia, USA, EU, or even South East Asia looking for more humane work conditions.
The stagnation has some very positive effects, while homelessness was never insanely high and kept nearly invisible to outsiders, it's gone down a great deal thanks to dramatic reductions in cost of housing. This in turn is helped by banking and accounting regulations which make it unattractive for Blackstone type vulture capital firms or organized crime to buy up property, and is why the property bubble burst so utterly.
Capital per worker has a lot of zombie infrastructure. Many middle and small size businesses own their production facilities, and it's common to see infrastructure that supported 100 or 200 workers now used by staff below 20 or more, which much of the machinery left sitting idle. Further, it's almost impossible to have these machines reused, since many of them are old tech and require skills to operate that are no longer being passed down. I was shocked to see an 78 year old man machining parts for a Japanese satellite. Even the re-use of these factories when the owners finally pass on is questionable as they often are contaminated with decades of accumulated asbestos, BTX, etc.
This is really interesting and informative. From a slightly different perspective, as "limits to growth" concerns become more pressing, these lessons from Japan can inform the rest of the world. Reducing zombie firms would be a good thing, of course. The benefits of a culture of high trustworthiness, cleanliness, order, and peace should not be underestimated. Thank you!
Beyond immigration and fertility, how about encouraging greater workforce participation by women? Culturally, Japan is categorized as "masculine", and traditionally limits career options for women. Beyond sheer numbers, welcoming more women into male-dominated roles would bring valuable new energy and diversity.
Thanks for this article . Glad you gave us plenty of graphics comparing Japan Not only with USA but also with countries like GER (where I live). Lowering Bureaucratic hurdles for Building housing in business areas would also help to lower the housing problems here ( low ratio of house-owning is another problem to solve.
Setting aside for the moment the witless repetition of the loanable funds fallacy (banks do not lend deposits — loans create deposits) this entire exercise misses the point: Japan is successful because economic growth isn’t the goal — having a pleasant place to work and live is the goal!
Somewhere in there should be included their debt to GDP ratio of 263%, about 8.85 trillion on a GDP of 4.2 trillion. 5% of GDP for debt service alone is pretty stiff headwinds. They have got to get a handle on this, just as most western countries do, if they want not just debt financed prosperity. Most of us western societies are skating along like a family living high on credit cards. What a reckoning it shall be.
MMT only works when inflation stays low. Which means it really isn't a viable framework for anything (you can not guarantee that inflation will always stay low at all times).
Thomas, great stuff as usual. Yet I feel that while the observations are correct, they are not the “whole story”. My overall impression is that “Japan masterfully managed to remain a rich and orderly country” despite being plagued by shrinking population, AND being near a phenomenally competitive and growing China. How? First of all Japan is an island. Second, try to sell something in Japan. You need a local reseller and other complications. I would say (as an addition to your points) that they managed to add enough “barriers to entry” to avoid being crippled by China. Fourth, by some tricks not fully clear to me, they managed to take on a massive amount of debt (which pays for the order, the zombie companies, etc…) without triggering problems. The reason for their “lighter” approach to housing is that their houses used to be made of wood and easily rebuilt after fire and earthquakes. These are just some add-ons that might give some more food for though.
Very good, it’s refreshing to read an article like this that includes the esp and relevant data. It looks to me like cultural issues are paramount…and Japan should NOT increase immigration if it waters down their excellent culture
I wonder: The whole article reads well-ish untill we reach the dogmatic part "Can Japan Reverse Course?" - why should they reverse course? Why is the demographic change such a apocalyptic scenario? They can - if they want to - go into more debt to fince this transition. The bank of japan and the yen has quite some autonomy here.
Second Point: I would even argue the housing in japan is so cheap because japan is losing roughly 800k citizens a year. Yes over-regulation seems to play a role, but for example the author completely misses the point that there is quite a high inheritance tax, making investments in housing way less profitable than in the western world. I had read somewhere that houses in Japan are considered an item similar to a car.
Third point: The author argues zombie firms are a bad thing per se. I think this can be argued with - they provide jobs, maybe bullshit jobs, but they keep people employed and these people do not have to rely on social welfare. Is that such a bad thing? One might even argue that such jobs are the future for the western world especially when we will lose jobs to AI, people will value e.g. an excellent customer service as provided in japan.
Finally the author does not really answer why fertility is in decline in japan, it might as well be due to bad conditions to raise a family, spoiling the utopian picture depicted here - i remember vaguely that for quite a while japan had the highest suicide rate in the world because of very demanding work-life culture and very rigid cultural norms.
On point two. It’s true that the Japanese consider housing like a car. A depreciating asset untethered from the outrageous land rents we Americans pay due to the authors points about housing scarcity and near omnipresent restrictive building codes. They replace most homes by gut renovating or rebuilding every 25 years or so. They do this without extreme markups in materials and builder contracts meant to extract the stored value of the land upon which the houses sit.
Why is demographic decline so bad? Well, for one, you may not want the Japanese people to decline in to oblivion (if you're Japanese or even if you're not). At a fertility rate of 1.0 (Japan is close to it and SKorea is already there), that means each new generation is half the size of the previous one. If a generation is about 30 years, in 90 years, the youngest generation would be an 1/8th the size of its great-grandparents.
You _really_ have to count on AI to be super-productive to support retirees at that point. But even then, how would a Japan that is a fraction of the size it is now and made up of mostly elderly fare against a much bigger and potentially belligerent neighoring power like China?
"you may not want the Japanese people to decline in to oblivion" --> I wonder if this horror scenario is really realistic, we might also see a future where the fertility rate indeed makes the population decline until a point. This point being somewhere where there is a SIGNIFICANT lack of workers in the workforce and then the remaining ones can charge much higher wages. Btw. this also solves the bullshit job situation for Japan automatically. Btw. we have seen this sharp decline also in the third world transitioning from 5-8 children per family to about two.
Indeed fighting against a a belligerent neighbour with a much smaller population is worth mentioning. But aren't the japanese already outnumbered 10:1 vs. china? So i guess what is keeping japan safe is the tech and the nukes.
Also, you fell for the lump of labor fallacy. Let's do a thought experiment: Suppose half of the population of Japan (half of every demographic) dies in their sleep tomorrow. Would wages go sky high because there would be the same amount of jobs but far fewer workers? No! Because people are not just workers but also consumers! So demand would fall drastically as well. What would happen is that Japan's economy will be roughly half as big. With aging and each generation being a fraction the size of the one before, you'll have not just that but a crazy high dependents to worker ratio. Now, it's possible that crazy productivity gains from AI and robotics could save a country where each new generation is half the size of the one before (though countries with better dependency ratios and young workers would still be better off), but I'm a bit more skeptical of AI (being for good; it may well destroy human society before that) than some of the more wild-eyed folks around here.
Interestingly there was a close proxy for this: the Black Death. 25-50% of the population died within a few years. Wages skyrocketed. It’s considered one of the reasons why feudalism disappeared
Feudalism was actually strengthened immediately after the Black Death, to rein in the ability of workers to claim higher wages. Also, the peasants were not heavy consumers, that was the upper classes and wars. The end of feudalism had many complex causes.
Slavery and indentured servitude also tend to be used when resources to be exploited outnumber workers to exploit them. Wage labour works when there are more than enough workers to exploit the relative resources.
Have you looked at Japan's fertility rate?
Yes, it is realistic. In generally, I find most people to be pretty blindered and not consider possibilities that haven't occurred in the past even though the trend in fertility virtually everywhere in the world is downward and no first world country has been able to even stabilize yet.
And fewer babies means fewer young people working on technology. Though honestly, if Japan has to rely on tech, it's screwed. China isn't exactly a laggard in technology.
Israel, Georgia
That's why I qualified with "virtually". A few small nations bucking the trend isn't going to do much.
Israel didn't surprise me, settler colonial places are attractive to young people wanting to get out under debt (by taking someone else property. Will that last is a question?) However I was surprised and interested to see you list Georgia and will have to do some investigations. Thanks.
Decline into oblivion? That is very, very far fetched.
https://www.statista.com/statistics/1066956/population-japan-historical/
In 1800, the population of |japan was maybe a fifth of what is now and likely nobody was complaining.
Different densities will maybe engender different social mores. We see how fast the things can be accelerated.
And if not, there will be less pressure on whales and dolphins...
Exactly. We could also do with a lot less people consuming and emitting at Western levels.
Re point 2: The total population of Japan is going down, but the population of Tokyo is increasing. And still, in Tokyo, housing prices have been flat.
Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company. Firms are not important because they provide jobs, they are what creates products and services that people need. If a zombie company (like retailer Daiei, which used to own the Fukuoka Hawks pro baseball team and its dome (it was named after Daiei originally, but then Yahoo! ( which may be a zombie company also) then SoftBank and now it’s PayPay Dome named after the QR code based digital payment service) loses bank support it will go out of business, sell its assets (to the benefit of other companies) and fire its employees, but they likely won’t go on welfare, but get new jobs in useful companies. The percentage of working age people in Japan on welfare of any kind is under 2%, compared to much higher rates in other developed economies.
"Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company." --> i think it sounds perfectly reasonable, yet i only seem to find this term in relation to japan - i wonder why that is. If we take Space X for example- which is a highly innovative dynamic company, we find that they make roughly 9 billion per year, yet out of these they have "won" roughly 3 billion in government contracts. Contracts which we might call subsidies, given that there is no real competition in this market. So is space X also a zombie firm? I am really not sure about the "destructive" creation that zombie firms are hindering, does it really exist - i guess there are myriads of examples i honestly just don't know them. Is it the same as breaking up monopolies and oligopolies? I guess its quite a rabit hole full of assumptions.
SpaceX’s gov contracts can be benchmarked against both existing gov contractors (NASA?), competitors, and other customers from SpaceX. In all 3 ways, SpaceX appears as an amazing deal for the gov.
Crucially, the customers include plenty of foreigners. That’s called export discipline: a company is considered intervened if it can only operate domestically. If it can sell in the international market, it’s a huge sign it’s in fact competitive.
Russia used to offer lifts of satellites to space for US$25 million a piece. Russia sanctions put an end to that and SpaceX is charging now US$75 million. Just another sanctions profiteer, as with Tesla in the US protected from Chinese imports.
SpaceX has also not met the NASA delivery milestones for the big rocket, even though they got paid the full amount. And we will leave out the free provision of all of NASA's IP.
Depends on the size of the satellite, for a ride share lift to LEO of a small satellite SpaceX charges only $1 million.
If NASA depended on SLS, the ISS would be vacant now.
Interesting idea to characterize those zombie companies e.g. if it can sell in an international market its a huge sign its competitive. I asked chatgpt to give me japans biggest zombie companies and asked it to tell me how much they are selling in an international market (see below) It seems that railway, retailer and energies are not doing well in an international market, but i would argue thats due to their nature. So I am still not sure how to define zombie companies, although the idea that the government has intervened with them is also nice, we find lots of internationational examples like general motors, chrysler, lufthansa, air france, gazprom, huawei, citygroup, aig and so on. It seems often that a lot of these companies are too strategically important to just let them go bankrupt. Can it be the case that the same is happening in japan too? In general i think that with the size of the company they more and more become dependent on a favorable political climate making sure that e.g. these contracts or subsidies are coming. I am not sure if there are good examples of huge companies that are totally indepentend of the government. We always pretend that this the case, but once you reach a certain size its impossible to escape this phenomenon.
---- I just pasted the output of chatgpt here ----
Japan Airlines (JAL): ~45-50% international
JAL derives roughly half its revenue from international routes and passengers, with domestic Japanese travel making up the remainder.
Sharp Corporation: ~70% international
After Foxconn's acquisition, Sharp significantly increased its international focus, with Asian markets outside Japan and North America contributing the majority of revenue.
Takata Corporation: ~80% international
Before bankruptcy, Takata conducted most of its business internationally, particularly with global automakers in North America, Europe, and Asia.
Olympus: ~80-85% international
Olympus generates over 80% of its revenue outside Japan, with medical equipment sales in North America and Europe representing the largest segments.
Seibu Railway: ~5-10% international
Primarily a domestic transportation and real estate company, with limited international revenue mainly from hotel operations and tourism.
Daiei: ~1-2% international
As a Japanese retailer, Daiei was overwhelmingly focused on the domestic market with minimal international operations.
Tokyo Electric Power Company (TEPCO): ~0-1% international
TEPCO's operations are almost entirely domestic, serving the Japanese electricity market with negligible international revenue.
Renesas Electronics: ~70% international
Renesas conducts approximately 70% of its business with international customers, primarily in automotive and industrial sectors across Asia (ex-Japan), Europe, and North America.
I don’t think many of those companies are considered zombies. Yes, Sharp, Daiei and Olympus, but JAL has no zero-zero loans, and is profitable and cash flow covers debt payments. TEPCO has a big loss from the Fukushima disaster but it is still paying its interest but with government backing, since it being the major electricity supplier in the north east, including Tokyo, it is considered too big to fail. Renesas had a bankruptcy in 2011 but is profitably making semiconductors for automobiles and other uses and its profits far exceeds its interest obligations.
In addition to their government contracts, they also have private contracts and StarLink alone is estimated at $7billion annually. I use StarLink and it’s the best internet service I’ve had. SpaceX is the antithesis of a zombie company, they produce lots of value and have no employees sitting around doing make work.
https://spacenews.com/starlink-soars-spacexs-satellite-internet-surprises-analysts-with-6-6-billion-revenue-projection/
I agree: "Zombie firms are bad in that they don’t produce anything valuable, and waste the value that their idle employees could be creating in a dynamic company. Firms are not important because they provide jobs, they are what creates products and services that people need."
In addition to production, the benefit of jobs is wages. Imagine if the government, instead of subsidizing loans to zombies to pay employees wages for bullshit jobs that produce little of value, directly subsidized parenting so more people could produce children.
Japan has poor work-life balance, which is probably a major cause of their fertility problems. It feels miserable and tragic to not be able to stay with one's baby like humans are biologically wired to do. This is especially the case for mothers, but mothers also need significant support from fathers for the first six weeks at least. So most people choose to avoid getting themselves into that situation (or repeating it), i.e. having kids, unless they can afford to do it in a more wholesome manner by living on a single income for at least six months or ideally three or more years. If the government paid for a generous, use-it-or-lose-it parental leave, as well as child credits, it would go a long way toward improving work-life balance enough to make room for this high-investment life experience.
Great piece Dr. Tabarrok.
One aspect to explore is that all that social order probably owes something to the employment stability you get from refusing to let zombie firms fail. Japanese policy makers think explicitly in these terms: the resistance to tightening lending standards is usually couched in terms of protecting employment. They may be right: the extra economic vitality may not be worth imperilling the secret sauce of an orderly society: predictable and stable career paths for the broad middle class.
I don’t think the social order has anything to do with zombie corporations employing middle age workers. Social disorder in general is due to a large number of idle, uneducated young men, or homeless mentally ill people. right now there is low youth unemployment (under 4%) and help wanted stickers for 900¥/hour jobs are common. As the post noted, housing is cheap and abundant so there is low homelessness, and the mentally ill homeless stay out of sight and don’t cause many problems. I don’t know if this is due to strict policing or better mental health treatment, but in large cities and subways I haven’t seen bad behavior worse than talking on a cellphone.
I think this is a reasonable overview, but one important dynamic that wasn't touched on here is that Tokyo is growing in population, while most cities outside of the top tier are shrinking. It probably positively biases the perceptions of foreign visitors, compared to the experience of the average Japanese person.
Everything is shrinking but Tokyo!
Not every city is shrinking. Fukuoka is growing almost as fast as Tokyo and is my favorite city to live in. Nearby Kumamoto is also growing because of semiconductor fabs from TSMC and Sony. Sapporo is also growing. Fukuoka is the southwestern most large city from Tokyo and Sapporo is the northern most large city, so distance from the gravitational force of Tokyo maybe helps them keep growing.
I am not sure if this argument stands up to more rigorous analysis, but on its face, it seems that part of Japan's success is due to its lack of diversity. It seems Japan is willing to trade off a lack of innovation coming from new-outside-immigrant ideas for social cohesion resulting in a high degree of social order and incredibly low rates of crime, and that this tradeoff is a net positive, at least for now.
I would be careful about the suggestion that propping up inefficient firms prevents other more efficient firms from succeeding. This is absolutely the case, but in this case most of the time the more efficient firms are not in Japan. I work in refining and petrochemicals, and the reason those companies need support in Japan has nothing to do with firm inefficiencies and everything to do with structurally lower costs to do the same things in China. The alternative to manufacturing industries receiving government support is letting those industries die in Japan - like what has happened to manufacturing in the US or UK - which is indeed more economically efficient because imported goods are lower cost but there are very real tradeoffs.
I have an upcoming article on that!
An important feature of Japan compared to the US is that they have National Health Insurance. Health care is available to nearly all and is affordable. In the US even with insurance you can become homeless due to crushing health care debt.
Japan's economic stagnation over the past 40 years has been a surprise to many, but the problems were front and center for long before they began to stagnte as early as the end of the 70's It has been a long and predictable slide.
As someone who has worked with the Japanese for over four decades, I've often heard CEOs express optimism over the last forty years that growth was imminent, only to be disappointed. A key factor contributing to this stagnation is Japan's aging population, which is one of the oldest in the world. The high cost of raising children in Japan has led to a decline in birth rates, making it challenging for the country to achieve sustainable growth.
Japan's demographic challenges is further complicated by its cultural homogeneity and reluctance to accept foreign immigrants. While this has contributed to the country's low crime rate and strong sense of community, it also limits the potential for influxes of new talent and ideas. Despite these challenges, they have excellent traits that focus more on the long term. Japanese people are renowned for their creativity, dedication to saving, and courtesy.
To revitalize its economy, Japan must consider greater innovative solutions to drive growth. One potential approach is to invest in government-sponsored initiatives aimed at promoting population growth. This could involve incentivizing families to have more children, as well as encouraging immigration from other countries. The United States, for example, has successfully used LEGAL immigration to drive growth and innovation (although some say not enough. Perhaps, Japan could look at immigration creatively and encourage citizens to help, which couuld help drive acceptance in their society.
Despite these challenges, the Japanese people are renowned for their creativity, dedication to saving, and courtesy, with Japan ranking highly in terms of innovation. Japan ranks second in the world in terms of innovation, and first in terms of research and development expenditure as a percentage of GDP. Even though this is really something other countries should be jealous of, it isn't enough. Not just me, but many others have suggested that to revitalize its economy, Japan must consider innovative solutions to drive growth, including investing in education with a much more progressive approach to promoting entrepreneurship, and fostering a culture of innovation.
One potential approach is to invest in government-sponsored initiatives aimed at promoting population growth, such as cash incentives for families, extended parental leave, and improved access to childcare. The Japanese government has already introduced some measures, such as the "children-rearing support" program, which provides financial assistance to families with young children. Additionally, Japan could consider expanding its immigration policies to attract more skilled workers, such as through the introduction of a points-based system, similar to those used in countries such as Canada and Australia.
As I have mentioned, other countries such as Italy and China, are also grappling with similar demographic challenges. Italy, for example, has a low fertility rate and a rapidly aging population, with 23% of the population aged 65 or older, according to the WHO. China, on the other hand, has a aging population due to the one-child policy, which has resulted in a significant decline in the working-age population, with seeing a working-age population decline of 10% by the end of the decade. Japan, by embracing a significant uptick in immigration and fostering a culture of innovation can break free from its stagnation and secure a more prosperous future. That may sound like a tall order for Japan, but by embracing change and promoting growth, Japan can regain its position as a global economic leader and ensure a bright future with significant growth potential for its people.
Immigration is no cure for an ageing society. Eg. Canada's median age is 42.5, Japan's 49.4, but Canada will catch up. On the other side, hyperimmigration makes housing problematic. And so forth, and so forth. In the end, lifestyles and per capita incomes will tank while immigration will become the major engine of economic growth. Essentially, it becomes a mere Ponzi scheme. Australia very much has similar issues.
Essentially, one has to completely revisit the immigration topic and have a completely new discussion about it without resorting to the usual b/s. Chances are fat, Buckley's and none.
From the state Canadian Broadcasting Corporation:
"Why Canada’s making massive cuts to immigration" - https://youtu.be/PqNF7hF5u3E
From TV Ontario:
"Are We Headed Towards a Population Collapse?" - https://youtu.be/UfyrXTndj9w
Or more positive write-up from Sweden:
Åsa Olli Segendorf and Emelie Theobald: "Can immigration solve the problem of an aging population?" (PDF)
I would add material from Australia, where the issues are the same, but any discussion about immigration is verboten.
Immigration can be done well!
Japan has increased immigration of workers in the last few years, the latest target for foreign workers last year was 800,000 immigrants. Immigrants are now over 3% of the workforce, and if you go to any combini in Tokyo it’s hard to see any native Japanese workers there. There are other programs in place to expand immigration, and it’s much more common now than a decade ago.
Canada and australias immigration policy has been a total disaster.
Japan for the Japanese is fine. They just need to pay people to have more kids.
It's one option for sure.
Also immigration can be done well. The US has 250 years of history of immigration done reasonably well
Very interesting article, which is appreciated.
I live in Hong Kong and frequently go to Japan to do Consulting Engineering work, so the following comes from that background, and given in the hopes that it might stimulate future writings.
Employment life in Japan is still pretty horrible, very long hours both for men and now even for women who use to be able to leave earlier. This also helps explain the fertility rate too. The government has (rather tepidly) tried to promote less overtime and better working conditions, but bad habits die slowly. A lot of this work is empty of content, particularly white-collar work. Manufacturing has fairly good tools for managing worker productive thanks to years of TPM, etc, but it's god awful in management of creative and paper pushing in large corporations. Sadly some of the smartest and brightest in Japan are now shoving off to Australia, USA, EU, or even South East Asia looking for more humane work conditions.
The stagnation has some very positive effects, while homelessness was never insanely high and kept nearly invisible to outsiders, it's gone down a great deal thanks to dramatic reductions in cost of housing. This in turn is helped by banking and accounting regulations which make it unattractive for Blackstone type vulture capital firms or organized crime to buy up property, and is why the property bubble burst so utterly.
Capital per worker has a lot of zombie infrastructure. Many middle and small size businesses own their production facilities, and it's common to see infrastructure that supported 100 or 200 workers now used by staff below 20 or more, which much of the machinery left sitting idle. Further, it's almost impossible to have these machines reused, since many of them are old tech and require skills to operate that are no longer being passed down. I was shocked to see an 78 year old man machining parts for a Japanese satellite. Even the re-use of these factories when the owners finally pass on is questionable as they often are contaminated with decades of accumulated asbestos, BTX, etc.
Wow thx for sharing!
This is really interesting and informative. From a slightly different perspective, as "limits to growth" concerns become more pressing, these lessons from Japan can inform the rest of the world. Reducing zombie firms would be a good thing, of course. The benefits of a culture of high trustworthiness, cleanliness, order, and peace should not be underestimated. Thank you!
Beyond immigration and fertility, how about encouraging greater workforce participation by women? Culturally, Japan is categorized as "masculine", and traditionally limits career options for women. Beyond sheer numbers, welcoming more women into male-dominated roles would bring valuable new energy and diversity.
That reduces births. They might try to de-mechanize their agriculture, which makes children a productive asset.
Thanks for this article . Glad you gave us plenty of graphics comparing Japan Not only with USA but also with countries like GER (where I live). Lowering Bureaucratic hurdles for Building housing in business areas would also help to lower the housing problems here ( low ratio of house-owning is another problem to solve.
Setting aside for the moment the witless repetition of the loanable funds fallacy (banks do not lend deposits — loans create deposits) this entire exercise misses the point: Japan is successful because economic growth isn’t the goal — having a pleasant place to work and live is the goal!
Banks loan a multiple of deposits, debt, and equity. If you don’t have those you can’t lend.
Somewhere in there should be included their debt to GDP ratio of 263%, about 8.85 trillion on a GDP of 4.2 trillion. 5% of GDP for debt service alone is pretty stiff headwinds. They have got to get a handle on this, just as most western countries do, if they want not just debt financed prosperity. Most of us western societies are skating along like a family living high on credit cards. What a reckoning it shall be.
More than half of that debt is in the hands of the BoJ, so it can be safely ignored or even considered as non-existent.
indeed mr parker might want to read up on https://de.wikipedia.org/wiki/Modern_Monetary_Theory which explains that high debt is not necessary a bad thing.
Which btw is reasonable to do when your inflation is zero or negative for 30 years.
MMT only works when inflation stays low. Which means it really isn't a viable framework for anything (you can not guarantee that inflation will always stay low at all times).
I mean, 30 years of deflation is a pretty good sign that you’ll be ok with some inflation
You probably ought to read Warren Mosler’s white paper …
https://docs.google.com/document/u/0/d/1gvDcMU_ko1h5TeVjQL8UMJW9gmKY1x0zcqKIRTZQDAQ/mobilebasic?pli=1
Thomas, great stuff as usual. Yet I feel that while the observations are correct, they are not the “whole story”. My overall impression is that “Japan masterfully managed to remain a rich and orderly country” despite being plagued by shrinking population, AND being near a phenomenally competitive and growing China. How? First of all Japan is an island. Second, try to sell something in Japan. You need a local reseller and other complications. I would say (as an addition to your points) that they managed to add enough “barriers to entry” to avoid being crippled by China. Fourth, by some tricks not fully clear to me, they managed to take on a massive amount of debt (which pays for the order, the zombie companies, etc…) without triggering problems. The reason for their “lighter” approach to housing is that their houses used to be made of wood and easily rebuilt after fire and earthquakes. These are just some add-ons that might give some more food for though.
Very good, it’s refreshing to read an article like this that includes the esp and relevant data. It looks to me like cultural issues are paramount…and Japan should NOT increase immigration if it waters down their excellent culture