uploads///Japan productivity growth

Why Does Japan Need to Focus on Productivity Growth?


Oct. 1 2015, Updated 12:06 a.m. ET

Productivity growth matters most in the long run

We’ve been analyzing Ray Dalio’s economic principles in order to access Japan’s case. Ray Dalio is the founder of Bridgewater Associates—a $160 billion hedge fund. Dalio counts productivity growth among the three main forces of an economy. The other two forces are the short-term debt cycle and the long-term debt cycle.

Article continues below advertisement

Productivity growth is sustainable

According to Dalio, productivity growth doesn’t fluctuate much. Credit and spending can be affected immediately by monetary measures like easing and tightening or lowering and raising of interest rates. In contrast, productivity is a direct result of the amount of work and labor put in. It’s this characteristic of productivity that shields it from being responsible for any economic swings. A rise in productivity leads to more economic output. It contributes directly to the overall welfare of an economy. A rise in productivity is mostly sustainable.

In contrast, a rise in credit leads to an artificially induced rise in spending that may or may not be sustainable in the future. We can see this in Japan’s case. Consumer spending did rise until 2014. Then, it reversed and fell to its 2012 levels. Its competitiveness is also falling despite the depreciating yen.

Can structural reforms help increase productivity?

For Japan, a major obstacle to the productivity growth in the economy is still its demographics. The median age in Japan is 46 years. An aging population leads to higher fiscal expenditure because the number of dependents on social schemes like pensions increases. The workforce is shrinking and productivity is falling. The current situation does call out to Prime Minister Shinzo Abe to shoot his ‘”third arrow.” The third arrow, or structural reforms, seeks to:

  • break government monopolies
  • reform hiring and firing policies for companies in order to enhance labor productivity
  • reform Japan’s overly restrictive healthcare sector
  • increase female workforce participation
  • deregulate markets in order to boost competitiveness

The female labor force participation rate in Japan was at 48.80%—of the female population of age 15 years and over—in 2013. Mitsubishi UFJ Financial (MTU), Sumitomo Mitsui Financial (SMFG), and Nippon Telegraph and Telephone (NTT) are counted among the largest employers in Japan (EWJ) (DXJ).

Japan’s population is aging. Without the above-mentioned structural reforms, the debt will continue to rise on the country’s balance sheet.

If it isn’t productivity, what drives economic swings? We’ll analyze this next.


More From Market Realist

    • CONNECT with Market Realist
    • Link to Facebook
    • Link to Twitter
    • Link to Instagram
    • Link to Email Subscribe
    Market Realist Logo
    Do Not Sell My Personal Information

    © Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.