Secret of Japanese Economy - Macroeconomic Issues in Japan & Vietnam –

March 2015

Hiroyuki Taguchi

Issues to be discussed Where is Japanese economy going by “Abenomics”?

How to avoid “middle income trap” in Vietnam

Economic Position of Japan

in the World Ranking (189 countries)

Population (million, share%, 2013)

GDP per capita (US$, 2013)

GDP (trillion US$, share%, 2013)

No.1 China

1,360 (19.4) No.2 India

1,243 (17.7)

No.3 United States

316 (4.5)

No.10 Japan

127 (1.8)

No.1 Luxembourg

112,473 No.2 Norway

100,579

No.3 Qatar

98,986

No.24 Japan

38.468

No.1 United States

16.8 (22.4) No.2 China

9.5 (12.7)

No.3 Japan

4.9 (6.6)

IMF World Economic Outlook Database, October 2014

-6

-4

-2

0

2

4

6

8

10

12

14

FY

195

2

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

2000 2 4 6 8

10

Growth rate of real GDP

Average growth rate during the period

Reconstruction High-growth Stable-growth Lost two decades

World financial crisis

Plaza Accord

3

Challenges to Japanese Economy (1):

Persistent Low Growth in its History

3 National Account Statistics

1st oil crisis

Collapse of

the bubble

economy

2ndoil crisis

Asset bubble

Earthquake

0.8% 1994-2013

Average annual Growth Rate, %

1981-1990 1991-2000 2001-2010

4.0

3.0

2.0

1.0

0.00.6

2.0

1.8

-0.3

0.5

1.8

-0.3

0.6

0.5

4.4

1.6

0.8

Growth Accounting in Japan

[Growth Labor, Capital, TFP (total factor productivity)]

Cabinet Office

Capital Contribution declining savings under aging

Expected TFP Contribution

GDP Growth Rate

Labor Contribution declining labor under depopulation

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

2110

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

19

20

19

30

19

40

19

50

19

60

19

70

19

80

19

90

20

00

20

10

20

20

20

30

20

40

20

50

20

60

20

70

20

80

20

90

21

00

21

10

Aging Rate (actual, right, %) Aging Rate (projection, right, %)

Population (actual, left, mil.) Population (projection, left, mil.)

2013

127.3 mil

25.1%

2110

42.9 mil

41.3%

5

Note: The Figure is based on the medium variant projections in "Population Projections for Japan (January 2012)" by the

National Institute of Population and Social Security Research in Japan. Until 2014, the total fertility rate shifted around

1.39, and afterwards, it is expected to drop to 1.33 by 2024 and hover at around 1.35. Aging means over 65 years old.

Depopulation & Aging in Japan

6

Challenges to Japanese Economy (2): Deflation

Fisher Equation: 𝑟 = 𝑖 − 𝜋𝑒

real interest rate nominal interest rate expected inflation

Rate

0

negative

Nominal

Interest

Rate

Expected

Inflation

Real

Interest

Rate

7

Deflation “Liquidity Trap”, Increase in Real

Interest Rate, Deflation Spiral

Abenomics (Dec. 2012 –): Three Arrows

Time

GDP

Growth Strategy for revitalizing economy:

towards 2% growth trend over the upcoming decade

Fiscal & Monetary Policy for ending “Deflation”: towards 2% inflation within 2 years

Fiscal & Monetary Policies

Fiscal Policy:

- Economic Stimulus Packages on Jan. & Dec. 2013 and

Dec. 2014 for revitalizing SMEs and regions

Monetary Policy (Unconventional):

- Quantitative Easing – more than double “monetary

base” raising inflationary expectations

- Qualitative Easing – portfolio rebalances

Progress:

- Yen depreciation, upturn in stock prices & firm profits

- Inflation: around 1% (FY2014, est., excluding consumption-tax effect)

- GDP growth: -0.5% (FY2014, est.) consumption-tax effect

Fiscal Problem in Japan

Ministry of Finance

Japan

Greece

Portugal

Spain

Huge Government Gross Debt

relative to GDP in 2014 (%)

Government Bond Holders

Domestic Share (%)

231.9

191.6

137.9

104.8

95

29

14

57

Fiscal Consolidation Plan: To Make Primary Balance Surplus by 2020

Growth Strategy

To Enhance Productivity in Domestic Market

- Create “National Strategic Special Zones” for Deregulation

- Reduce Effective Corporate Tax (34.6% 2X%)

- Reform Agricultural Sector by Farmland Consolidation and

Deregulating Agricultural business

- Reform Electricity System by Unbundling Generators and

Distributors

- Reform Health Care System by Promoting the Use of

Generic Medicine, etc.

To Earn in Overseas Markets

- Raise FTA Trade Ratio from 19% to 70% by 2018 through

Facilitating TPP, RCEP, etc.

- Supporting Overseas Activities of Japanese Companies

International Comparison of Effective Corporate Tax

34.6%

Japan California France Germany China Korea U.K. Singapore

(U.S.)

40.8

%

33.3

% 29.6

% 25.0

% 24.2

% 23.0

% 17.0

%

Ministry of Finance

2X %

12

Example: Reduction of Effective Corporate Tax

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

tril. yenGoods & Services Balance Income Balance Current Balance

181 215

250 226 268 256 265 296 325

0

100

200

300

400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

tril. yen Net Foreign Assets

Earning in Overseas Markets

External Balance in Japan Income Balance is in Surplus though Trade balance is in deficit

Ministry of Finance 13

Asian Economies

Branch

Factories in

B Country

Headquarter of

Japanese Firm in Japan

Factories in A

Country

14

Repatriation of Profits

remitted earnings of

subsidiary

Earning though Global Value Chains

Win-win Relationship

Economic Integration of Japan with ASEAN

Intra-Trade Ratio in 2010

= Intra-Trade / Trade with the World

Japan-ASEAN

27%

ASEAN+6 (Japan, China, Korea, Australia, New Zealand, India)

45%

Japan-US

8% UN Comtrade

1820 1950 2010 2050 2050

Asian CenturyMiddle

Income Trap

ADB Scenarios

Asia59%

Europe

32%

Others

Asia

15%

North America

23%

Europe

52%

Others

Asia31%

North

America

25%

Europe

34%

Others

Asia51%

China 22%

India 14%

N.America15%

Europe

18%

Others

Asia32%

North America

23%

Europe

26%

Others

16

Asian Century or Middle Income Trap?

% Share to the World GDP

Scenarios: ADB (2011), Actual data: Suehiro (2014)

1960s 1970s 1980s 1990s 2000s 2010s

High Income

Upper Middle Income

Lower Middle Income

Low Income

$ 12,746

$ 4,125

$ 1,045

Japan 1967 Korea 1994

Argentina

Malaysia 1991 → 2020

Thailand 1966 → 2010 → 2031

China 1998 → 2010 → 2026

Vietnam 2008 → 2058

17

Where are Middle-Income Economies going?

Income Classifications are based on World Bank (2014a) and Suehiro (2014).

The year in red shows the year when an economy will reach “High Income”, estimated by OECD (2013).

$1,740 (2013)

“Aged” means “over 65 years old”. When the ratio of the aged persons exceed 7%, 14% and 21%, the

society is called “Aging Society”, “Aged Society” and “Ultra-Aged Society”, respectively. UN (2010).

Japan

Korea

China

Thailand

Vietnam

Malaysia

India

Projections

1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s 2050s 2060s-

1970 1995 2008

1999 2017 2027

2000 2025 2037

2001 2024 2038

2018 2033 2047

2020 2046 2073

2024 2052 2076

Aging Society>7% Aged Society>14% Ultra-Aged Society>21%

Aging & Aged in Asia

19

Period of Demographic Dividend in Asia

Japan

Korea

China

Thailand

Vietnam

Malaysia

India

Projections

1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s

1932 <60> 1992

1965 <48> 2013

1966 <48> 2014

1969 <46> 2015

1967 <46> 2014

1964 <57> 2021

1964 <74> 2040

The “Demographic Dividend” is defined as the period in which the year-on-year change rate of the ratio of

working-age population (15-64 years old) is positive. The figures in the arrow show starting year, period,

ending year respectively. Suehiro (2014).

20

How to Avoid “Middle Income Trap”

Middle Income Trap:

Factor (Labor & Capital) -driven Growth

Diminishing Returns Inability to Compete with

Low-Income and High-Income Economies

How to Avoid Middle Income Trap:

Productivity (TFP) -driven Growth

Technology & Innovation; Industrial Upgrading;

Human Resource Development; Infrastructure;

Institution, etc. --- Global Value Chains through FDI

Gill & Kharas (2007), ADB (2011), OECD (2013), Suehiro (2014)

Aging Society in Asian Economies

Growth Accounting in Asian Economies

China

Korea

Malaysia

Vietnam

Thailand

India

Japan

TFP ContributionCapital

Contribution

Labor

Contribution

3.1 4.5 1.0 8.7

Annual Growth Rate

in 1970-2012

1.6 4.1 1.0 6.7

0.5 4.4 1.4 6.3

1.7 2.3 1.7 5.7

1.9 2.4 1.3 5.6

1.4 2.4 1.5 5.3

0.7 2.0 2.7

APO (2014)

22

For Participating in Global Value Chains ---

“Fragmentation” Theory:

Lower Factor Prices (e.g. Lower wages) + Lower Service-link

Costs (e.g. Logistics) Accept GVCs

Jones and Kierzkowski (2005), World Bank (2014b), and World Bank (2014c).

GNI per capita 2013

<USD>

Logistics Performance Index 2014

<Ranking among 160 Countries>

Singapore 54,040 5Malaysia 10,430 25China 6,560 28Thailand 5,340 35Indonesia 3,580 53Philippines 3,270 57Vietnam 1,740 48India 1,570 54Lao PDR 1,450 131Myanmar 1,113 145Cambodia 950 83

Participating in GVCs --- Successful

FDI Promotes Export-Oriented Growth Export Share to GDP (%)

Source: UNCTADSTAT Source: ADB Key Indicators

Inward FDI Stock to GDP (%)

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Thailand Vietnam

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Thailand Vietnam

Issues: Industrial Upgrading in GVCs Need to Foster “Supporting” Industries

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2000

2001

2002

2003

2004

2005

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Export of Machinery

Import of Machinery Intermediates

0

20

40

60

80

100

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

20

13

Export of Machinery

Import of Machinery Intermediates

Vietnam Thailand

bill. $ bill. $

Source: RIETI-TID 2013

25

Issues: Industrial Upgrading in GVCs Need to Raise Local Value Embedded in Exports

Source: OECD-WTO TiVA Database and IMF WEO Data for per capita GDP, Taguchi (2014)

26

GVCs along with “Economic Corridors”

Three Economic Corridors in

Greater Mekong Sub-region

North-South Corridor

East-West Corridor

Southern Corridor

27

Income Distribution among Asian Economies Convergence: Less Developed Countries Grow Faster

IMF World Economic Outlook Database, October 2014

GDP per capita

2000, $

Japan 37,304

Singapore 23,793

Brunei 18,477

Korea 11,948

Malaysia 3,992

Thailand 1,983

Philippines 1,055

China 941

Indonesia 800

India 463

Vietnam 402

Cambodia 299

Lao PDR 292

Myanmar 222

Real GDP Growth Rate in 2000-2013, Annual %

0.8

5.4

1.2

4.1

4.7

4.0

5.0

10.0

5.4

6.5

7.8

7.3

9.6

7.0

28

Is the Kuznets Curve still Valid?

Industrial transition from agriculture to manufacturing / urban

sector increases inequality Shrinking agriculture sector reduces

inequality, trickle-down effect (Kuznets 1955) Evidence by

Barro (2008) with a turning point being 3,050 US$

Technical progress and globalization has recently increased

inequality based on skill & knowledge (ADB 2012; Palma 2011;

Piketty 2013)

?

Income Distribution among Asian People

Inequality has enlarged recently

29

Poverty Headcount Ratio --- Decline

<at $2 a day (PPP) (% of population)>

World Bank Indicators

0

20

40

60

80

100

120

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Malaysia Thailand China Vietnam Philippines Indonesia India

30

Quintile Ratios --- Mixed Outcomes <the ratio of the per capita expenditure of the top 20% to that of the bottom 20%>

0

2

4

6

8

10

12

Malaysia China Thailand Indonesia Philippines Vietnam India

11.4

5.1

8.8

4.1

8.6

5.6

4.8

11.3

9.6

7.16.6

8.3

5.9 5.7

1990s 2000s

ADB (2012)

31

Role of Japan for Asian Economies

Asian Economies

Productivity

Aging

Society

Income

Inequality

Middle

Classes

Environment

Depopulation

Japan’s Role

Strengthen GVCs =

Technological Transfer

Export Infrastructure

Sharing Lessons of Aging,

Environment, etc.

Invest in Soft Industries

such as “Contents”

References ADB 2011. ASIA 2050: Realizing the Asian Century.

ADB 2012. Asian Development Outlook 2012: Confronting Rising Inequality in Asia.

APO (Asian Productivity Organization) 2014. APO Productivity Databook 2014.

Barro, R. 2008. Inequality and Growth Revisited. Working Paper Series on Regional Economic Integration No.11, ADB.

Gill, I. & Kharas, H. 2007. An East Asian Renaissance: Ideas for Economic Growth, World Bank.

Jones, R.W. and Kierzkowski, H. 2005. International Trade and Agglomeration: An Alternative Framework. Journal of Economics, 10(S1), 1-16.

Kuznets, S. 1955. Economic Growth and Income Inequality, American Economic Review, 65:1-29.

OECD 2013. Economic Outlook for Southeast Asia, China and India 2014: Beyond the Middle-Income Trap, OECD Publishing.

Palma, J.G. 2011. Homogeneous Middles vs. Heterogeneous Tails, and the End of the ‘Inverted-U’: The Share of the Rich is What It’s All About. Cambridge Working Papers in Economics (CWPE) No.1111.

Piketty, T. 2013. Capital in the Twenty-First Century. Éditions du Seuil, Harvard University Press .

Suehiro, A. 2014. Emerging Asian Economy, Iwanami (Japanese).

Taguchi, H. 2014. Dynamic Impacts of Global Value Chains Participation on Asian Developing Economies, Foreign Trade Review, 2014, 49(4):1-14.

UN (United Nations) 2010. World Population Prospects: The 2010 Revision.

World Bank 2014a. Updated Income Classifications. See the site below.

http://data.worldbank.org/news/2015-country-classifications.

World Bank 2014b. Indicators. See http://data.worldbank.org/indicator.

World Bank 2014c. Connecting to Compete 2014 - Trade Logistics in the Global Economy - The Logistics Performance Index and Its Indicators.

For “Abenomics”, see http://japan.kantei.go.jp/ongoingtopics/abenomics.html. 32