The Japan That Can't Save

Japanese seniors do exercises and draw down savings.

Modern Japanese have a reputation for being polite to a fault. Despite being eliminated from the group stages of this year's World Cup, Japanese football astounded the world by cleaning up after the national team's (rather disastrous) matches. Yet always apologizing for slights the rest of us hardly notice and very rarely saying "no" to anyone has its drawbacks. In 1989, LDP bigwig Shintaro Ishihara and Sony chairman Akio Morita dropped a political-economic bombshell on this image of a reticent Japan with their book The Japan That Can Say No. Calling for equality with the US on the world stage, it certainly recalls Chinese political and business leaders now calling for the same.

At the end of the 2014, we are now being bombarded with yet another astounding blow to the global image of Japan. For decades and decades, they were a nation of savers. In turn, all these savings were plowed into investing into the nation's gargantuan export machine. In recent years, of course, Japan has run chronic trade deficits chiefly due to its ban on nuclear power forcing it to import much energy. It has also shifted much production from high-cost Japan to lower-cost manufacturing sites in the Asia-Pacific via "Factory Asia." Chronic trade deficits have thus led to a sizable current account deficit. Moreover, personal savings have been on the wane as aging Japanese draw down on their savings to sustain them during their retirement years. Add in the super-sized budget deficits the government is deliberately running via Abenomics and what you have is Japan's first-ever negative savings rate:

Japanese drew down savings for the first time on record while wages adjusted for inflation dropped the most in almost five years, highlighting challenges for Prime Minister Shinzo Abe as he tries to revive the world’s third-largest economy. The savings rate in the year through March was minus 1.3 percent, the first negative reading in data back to 1955, the Cabinet Office said. Real earnings fell 4.3 percent in November from a year earlier, a 17th straight decline and the steepest tumble since December 2009, the labor ministry said today.

The dissaving Japan...the dissolute Japanese?! If we were talking about the US then nobody would raise an eyebrow, but Japanese is a whole 'nother ballgame. Contrast Japan's current situation with that in the mid-Seventies:

The savings rate, which the Cabinet Office calculates by dividing savings by the sum of disposable income and pension payments, peaked at 23.1 percent in fiscal 1975. As Japan’s population ages, its growing ranks of elderly are tapping their savings, according to the Cabinet Office. Consumers also ran down savings to make purchases ahead of a sales tax-increase in April, the first since 1997.

The report offers perspective on a debate of decades ago over Japan’s trade surplus with the U.S., which caused periodic bouts of tension between the military allies. While respective savings rates have moved in opposite directions, the U.S. still had a $56 billion deficit with Japan in the first 10 months of 2014, U.S. government data show.

The export-led Japan we knew of massive trade surpluses, high savings and high investment has truly bitten the dust. As its population dwindles due to depopulation, so does the image we hold of it from long ago. Japan Inc, we hardly knew ye:

Japan had the highest household saving rate in the OECD in the 1960s until it fell to the lowest. After all, an aging population draws down savings and Japan is the fastest-aging country in the world; its population has been shrinking for a decade...

Since their debt crisis in the early 1990s, the Japanese have been reluctant to borrow on a large scale. So, unless wages rise sustainably, it's hard to see how household spending can. Without more domestic demand, firms are reluctant to raise wages and invest, which is why they still hold substantial cash. 

As the saying goes, be careful what you ask for.