Japan has received much attention recently for its GDP growth, especially in the second quarter of 2017. Why is the recent growth notable?

Japan was the first of the Asian economies to achieve a high level of sustained economic growth in the post-war period. From 1960 to the oil crisis in the mid-1970s, Japan sustained 8 to 10% rate of growth per year, which was quite extraordinary for a country whose infrastructure had been destroyed from the war and had to start from scratch. The oil crisis in the 1974-75 period slowed the economy down to about a 5% growth rate because the cost of oil quadrupled suddenly. Japan had to shift its economic structure, but then it maintained a robust rate of growth until 1990. From 1960 to 1990, Japan had an unprecedented rate of growth. This tsunami of growth swept across Taiwan, South Korea and then Southeast Asia. Now it has swept across China. China’s growth has exceeded even Japan’s growth, but this tsunami of growth and industrialization began in the 1960s in Japan.

That said, Japan went through a speculative bubble from 1985 until 1989. The bubble was generated by massive investments in speculative real estate. All of us thought that Japan would recover in a year or two--like cyclical recessions in other countries, but it has lasted for two-and-a-half decades.

From 1990 to 1998, Japan still managed to grow, but at a very low rate. It had huge zombie loans, which placed many banks at risk. Corporations had overextended themselves. It took a long time for that to unwind. Banks are now strong again with ample capital deposits, and corporations are enjoying handsome profits, but growth rates have remained sluggish. From 1990 to 2000, it was barely above 1% per year on average. From 1998 to 2001, it was non-existent.

From 1990 to today, Japan has suffered from the malaise of serious deflation. It is the longest period of deflation that an industrial economy has experience in postwar economic history.

Under Koizumi, it looked like Japan had finally wiggled out of its stagflation. But then the financial crisis hit the world in 2008, which sent the Japanese economy, and all economies around the world, plunging. The economy has only started to come back recently. Prime Minister Abe, who came to power in late 2012, had pledged to implement “Abenomics.” His goal was to generate steady growth rates, to defeat deflation, and to achieve an inflation rate of 2%. At the same time, Abe didn’t want to deepen Japan’s national debt, which had ballooned to about 250% of its GDP.

Japan continues to have a tough time digging its way out of a quarter-century of deflation. It didn’t help that in 2011 it had a major earthquake (9.0 on the Richter scale) in Fukushima. The calamity caused massive damage and blew out the country’s reliance on nuclear energy.

Japan at that point was relying on nuclear energy for about 30% of its total energy use. After Fukushima and the near nuclear meltdown, Japan shut down all 49 of its nuclear plants. Japan has now restarted 5 of them, but 44 are still idle. It’s not clear where Japan is going to be headed on energy. Because of the shutdown of nuclear energy, Japan has had to rely on imports of gas and oil in large quantities. Whether it will continue to do that, or to develop alternative energies, or to refire is nuclear plants, remains a big issue. Energy challenges prove another aspect of Japan’s difficulty in extricating itself from this economic stagnation.

All of this is to say that Japan may be finally getting out of two-and-a-half decades of deflation and sluggish growth.

Some attribute recent growth to “Abenomics.” What is Abenomics? Are there specific policies of Abenomics that have contributed to the growth?

Abenomics refers to the set of policies Prime Minister Abe implemented very soon after taking office. It consists of three arrows. The first arrow is quantitative easing of money supply. Prime Minister Abe appointed a new Governor of the Bank of Japan, who was the champion of quantitative easing of money supply--the printing of money and taking on large-scale debt.

The hope is that by printing money, Japan would defeat deflation. Presumably, the more money in circulation the more money that will be spent, and the greater the demand on resources—thus, generating inflation. However, the inflation target of 2% by 2020 is not going to be reached.

The second arrow of Abenomics is fiscal spending. This followed the traditional formula of lowering interest rates, expansion of money supply, and spending money through public investments.

Abe has implemented two infusions of fiscal spending to kickstart the economy—the most recent of which is a 275-billion-dollar package aimed mostly at infrastructure investments. The problem is that Japan is a small island archipelago. It has invested hundreds of billions of dollars in infrastructure over the post war period. In consequence, its overall infrastructure is already among the most advanced in the world. There isn’t a lot of room for new spending.

Hence, fiscal spending has not had its desired impact. Also, because Japan’s national debt is 2.5 times the GDP, the government cannot go out and spend wildly. Fiscal spending has had a positive impact on overall economic growth, but only a modulated one.

The third arrow of Abenomics is deregulation. It is based on the “supply-side” concept that Japan’s economy isn’t growing because it is overregulated. The government has put too many rules put in place, played too intrusive a role, and if the government merely cut back the thicket of regulation, the private sector would have the leeway to invest and grow on a scale that has not been possible.

The Abe Cabinet has sought to deregulate Japan’s regulatory thicket. They’ve tried to deregulate the labor market and corporate governance. This effort focuses on streamlining labor markets, so corporations can fire employees for example. But this has proven to be difficult, given the practice of lifetime employment. Reforms in corporate governance have made some headway. For example, some changes include making boards of directors stronger and making management more accountable to shareholders. Bringing women into the workforce and onto corporate boards has had some posivit impact. But much remains to be done.

One of the great triumphs of Abenomics has been the revival in the Japanese stock market. It has achieved record levels over the past 20 years. While it still falls short of the record level reached in 1989—39,000, the Nikkei stock market has risen robustly under Abenomics. That has been the most dramatic and important success of Abenomics.

Japan has abundant capital. If it had put the capital to productive use, that could have made a substantial difference. Because Japanese households and corporations are so risk averse and afraid of putting their money into risky investments, money has just sat on the sidelines. This is such a dramatic contrast to China, where capital has been put to use in very productive ways and on a massive scale.

The IMF recently wrote a report which praised Abenomics and dubbed it successful. It was successful not necessarily in achieving its targeted goals of inflation and the growth rate, but in terms of raising the equities market and keeping Japan on track to steady growth.

Another way of looking at it is to ask yourself where would Japan be today without Abenomics. If Abenomics had not been implemented, Japan would still be knee-deep in the doldrums of economic stagnation and despair. In that sense, even though Abenomics failed to reach its stated targets, it has stimulated the Japanese economy in ways that have allowed it to revive itself.

What other factors may be contributing to the economy’s recent growth? Are there important domestic factors contributing to the strong performance by the Japanese economy in 2017?

Domestic spending has increased in Japan. One of the goals of quantitative easing is to encourage consumer spending, but when you’re in a deflationary economy, consumers are reluctant to spend because prices are going down. If prices are going down, consumers would rather wait for prices to further decrease before purchasing goods.

Japan has had an incredible amount of capital savings by households and by corporations. Today, it is estimated that Japan has 22 trillion dollars of capital savings. That is more than 4 times Japan’s GDP. So why isn’t there more domestic consumption?

Roughly 11 trillion is held in cash by households and corporations. It is not being put to use. If that money were generating consumer demand or placed into productive investments, capital productivity would increase on a significant scale. But that hasn’t happened. Much of the rest has been put into low-yielding, very safe bonds of various kinds. Japanese households tend not to invest heavily in the stock market.

Is this growth sustainable?

A key issue for Japan is increasing capital productivity, the use of money to grow the economy. Another key issue is labor productivity, greater efficiency in the use of labor through labor market reforms. The third key is technological productivity--innovations increasing output and economic growth. These are the three keys for Japan to sustain its growth rate.

It is sustainable at 1 to 2% if there are no black swans or global crises. In 2005-2006, it looked like Japan had wriggled free from more than two decades of recession and deflation. But then the global financial crisis hit, and that plunged the whole world into the depth of what was almost a depression.

This is the cycle of the global economy: every 8-12 years there is some kind of financial crisis, and this has happened with uncanny regularity in the post-war period. It’s been nine years since the last crisis, and so we may be on track cyclically for another major upheaval.

In the last financial crisis, the black swans were all huddled in the United States. Today, the black swans are all over the world. And they’re not just economic. There are political black swans. In the midst of an unpredictable administration, we have the possibility of disastrous war in Northeast Asia. We have searing civil wars in the Middle East. We have a growing number of failing states around the world.

It’s possible that a political or military event could trigger another massive recession. Since central banks around the world had I intervened massively with monetary easing to lift the global economy out of the precipice of a depression since 2008, the question is whether the central banks will have the tools to deal with another major financial, political, or military upheaval. If a crisis occurs, all economies, not only Japan’s, could find themselves in deep difficulty.

In September, Prime Minister Shinzo Abe announced a 17.8-billion-dollar stimulus package in the run up to Japan’s parliamentary election. How important is this stimulus package for the Japanese economy, and is it compatible with Abenomics?

The stimulus package is an extension of Abenomics. However, it’s limited by the advanced state of Japan’s infrastructure and the cumulative national debt. The spending will hopefully have a positive impact. The greater hope rests in consumer spending because so much money is sitting on the sidelines.

Moreover, Japan’s demographics are characterized by an aging population and declining fertility rates. How do these demographic factors shape Abe’s economic policy and how are they related to Japan’s recent economic growth, if at all?

The biggest difficulty in getting out of the economic slump is the demographic profile of Japan. In the 1950s, Japan was one of the world’s youngest populations. The workforce was young, energetic and hardworking. Today, the profile is completely reversed. In one generation, Japan has gone from being one of the youngest to the oldest population in the world. Indeed, 27% of the population is 65 years or older. By 2050, that figure will be closer to 40%. If 40% of your population is at the senior citizen level, it imposes a burden on a small percentage of younger workers who probably won’t be able to generate enough growth to support that older, largely retired population.

Japan’s population is not only the oldest in the world, but it is also declining. The birth rate is below sustenance. Every year, Japan’s population shrinks by around 600,000 people. If there are no changes, the Japanese population of 126 million will soon be whittled down to 100 million or lower.

The workforce will be dramatically reduced. Freer immigration could provide a solution, but as an insular island archipelago that is homogenous and has seen problems of integrating immigrants in Europe and the U.S., Japan has been reluctant to allow large-scale immigration.

Abenomics should have addressed more systematically the demographic issue. It is trying to address it by integrating more women in the workforce and by deploying more childcare centers throughout Japan. It has also introduced tax policies that give better incentives for families to have children.

In France and Scandinavia, there were sharply declining birth rates, which the government managed to lift up through a combination in infrastructure investments, tax policies, and labor market reforms. Japan needs to improve on all of these fronts. If they can do this, they can at least stem the decline of the population. Perhaps with the opening of the immigration gates, they can get back on a sustainable growth trajectory.

“Yurinomics” has been proposed as an alternative to Abenomics. What does Yurinomics entail? Would it be a better approach to economic policymaking given Japanese economic conditions?

Yurinomics refers to the public policy preferences of Tokyo Governor Yuriko Koike, who has formed a new political party called the Party of Hope. This new party has established the hope of dislodging the Liberal Democratic Party and Prime Minister Abe from power. Koike was a member of the first Abe cabinet in 2006, and Koike and Abe have been long-time colleagues within the LDP before Koike ran for governor. They’re not all that different in terms of policy positions and their political propensities, but there are some significant differences.

Abe is in favor of bringing back nuclear power on a large scale. He believes the economy would be given a big boost by allowing 20 of the 43 idle nuclear plants to be fired up again. This would reduce Japan’s dependence on imported gas and oil and would provide steady energy for Japanese manufacturing plants. Koike is against a reliance on nuclear power.

Koike is more of a supply-side political leader. She favors more extensive use of regulatory “free zones”, which would establish certain areas to be set up that are insulated from regulatory control.

What can other late-stage capitalist economies learn from the example of Japan’s record of growth over the past two decades?

It’s difficult to disentangle all the factors that have come together to bring about Japan’s problems and solutions. But, the most advanced industrial economies can benefit from understanding what happened in Japan from 1990 to 2017. Most advanced economies will be aging—though probably not as rapidly as Japan and probably not simultaneously shrinking. Indeed, China is aging very rapidly. It won’t be long until China is a senior citizen type of economy like Japan today.

The second issue is how to deal with debt when there is a strong need for government spending. Japan is an prime example because it’s trying to keep the debt from ballooning. Prime Minister Abe has instituted a tax hike in 2014. Consumer spending plummeted, and the momentum that had been generated through Abenomics suddenly fell into reverse. Although the tax hike was trying to keep the debt from ballooning, it had the negative impact of plummeting consumer demand.

Japan must be careful about raising the consumption tax in 2019 because it may have the same effect of depressing consumer demand.