‘Why Didn’t It Happen in Japan?’ A Revisionist History of Japan’s Evolution

Abstract

Perhaps the main objection to Goodhart and Pradhan’s thesis, that a combination of an ageing population and growing protectionism would reinvigorate inflation, is that Japan has already aged and inflation has stayed rock bottom. The authors think that comparing Japan’s evolution in the past to the change in global demography we now face is like comparing apples to oranges because the global backdrop is completely different. Back then, Japan had a huge pool of global labour to utilise. Japanese companies took advantage of the global surge of labour availability to transfer capital and production abroad. Manufacturing employment dropped sharply, releasing more workers into the service sector, where their bargaining power was low. The service sector maintained competitiveness by holding down wages. Moreover, adjustment to hard times in Japan occurs primarily via hours, wages and the participation in the workforce of the elderly, not via higher unemployment. With the entire manufacturing complex of the global economy now ageing, there is no similar ‘release valve’ left for ageing economies—Japan is therefore not the correct blueprint for an ageing world.