Japan’s $250 Billion Plan to Restart its Economy

this video is brought to you by brilliant economists sometimes say there are four types of economy in the world Advanced developing Argentina and Japan this isn't a compliment though Argentina is renowned for its super high inflation rates while Japan has now been stuck in a deflationary funk for more than three decades despite the fact that the Japanese Central Bank has effectively printed trillions of Yen trying to get it moving again however all of a sudden Japan's economy has started looking suspiciously normal inflation is hovering stubbornly above % and earlier this year the Japanese Trade union Confederation announced that unionized workers had negotiated an average pay rise of over 5% this year the highest since Japan's economic crash in the 1990s to keep this momentum going last week Japan's prime minister shigo ishiba announced his plans for a new stimulus package so in this video we're going to look at ishi's radical plan to finally get Japanese wages growing and whether he might have overshot it before we start if you haven't already please consider subscribing and ringing the bell to stay in the loop and be notified when we release new videos so to understand this story you need a bit of context after World War II Japan experienced Decades of Rapid economic growth with the Japanese economy growing by an average of 7% every year from 1955 to 1990 however in the 1990s Japan suffered from a series of economic shocks in quick succession after a massive boom in the 80s in the decade after 1990 residential house prices fell by more than 50% commercial property prices fell by something like 85% and Japan's main stock index the Nick a225 fell by about 75% Japan's economy never really recovered and growth in inflation both remained close to zero for the next few decades unsurprisingly fixing the economy has been the big issue in Japanese politics ever since and successive governments have been forced to resort to increasingly drastic fiscal and monetary policies in his second as prime minister from 2012 to 2020 Shinzo AB got the central bank to buy up essentially unlimited amounts of government debt to allow the government to spend as much as it wanted to get Japan out of its deflationary Funk AR's economic agenda known as ARB nomics was partly successful in so far as it did temporarily push up inflation which rose from a low of minus 0. 7% in February 2013 to a high of 3. 4% in April 2014 however it failed to significantly increase growth in part because it failed to increase wages and real wages I.

E wages adjusted for inflation actually fell between 2013 and 2019 in 20121 AR was succeeded by fumio kishida recognizing the weakness of ARB nomics kisha's economic agenda which he termed new capitalism focused more directly on increasing wages largely by re jiggling Japan's tax system to make it more redistributive and reforming the labor market to get more Japanese workers in high growth industries but unfortunately kisha's new capitalism is essentially failed wages remained stagnant and the supply side inflationary shock that swept across the world meant that real wages actually declined in 20122 and 2023 the exact opposite of what kishida had intended this was one of the reasons that kisha's approval rating plummeted throughout 2023 culminating in his resignation a few months ago kishida was then succeeded by shigu ishiba another politician from the same party Japan's ruling liberal Democrats or ldp ishiba then called a snap election where his ldp and their Coalition partner K lost their parliamentary majority ishiba nonetheless stayed on as prime minister but now runs a minority government and so relies on the support of opposition parties the biggest of which is the Democratic people's party or DPP interestingly this Arrangement has worked surprisingly well so far last week ishua endorsed a signature DPP proposal to raise the Threshold at which point you can pay income tax from the current level of just over 1 million yen where it's been for the past 29 years to about 1. 8 million yen telling reporters that the most important thing is to raise wages for all generations this would reduce government revenues by about 7 trillion yen or $45 billion but proponents argue that it will encourage part-time workers to work more pushing up incomes on top of this ishar announced direct fiscal support for key Industries like Ai and semiconductors direct transfers to poorer households and further energy subsidies costing the government a total of about 39 trillion yen this is an absurd amount of money for Contex 39 trillion yen amounts to $250 billion now again ishal would say that this is what Japan needs to get wages and GDP growing again but there are risks associated with such a massive stimulus first of all it will put strain on Japan's public finances Japan already has the highest debt to GDP ratio in the developed world at over 250% largely thanks to the fact that its Central Bank has been buying up excess debt for more than a decade now while recent history suggests that Japan isn't at risk of an accuse debt crisis given the central bank's willingness to buy up excess debt there are two caveats worth mentioning here first Japan is becoming increasingly reliant on the central bank which now owns more than 50% of all government bonds a record high second because inflation is still running relatively high in Japan the bank of Japan will probably hike their interest rates in December which will increase the cost of servicing Japan's pre-existing debt this could push Japan's finances into a vicious cycle where higher servicing costs Force Japan to take out more debt which means more servicing costs Etc the second risk is that it triggers a wage price spiral unlike the rest of the world where wage price spirals are a central Banker nightmare Japan has actually been trying to manufacture a soft wage price spiral for years with the idea being that wage growth would fuel inflation which would in turn fuel wage growth thereby keeping Japan out of its deflationary Funk but there's now a risk that Japan could enter a proper wage spiral that not only keeps Japan out of its deflationary Funk but pushes up inflation to unpalatable highs this might sound unlikely given Japan's long-standing deflationary wo but wages are already Rising on average unionized workers negotiated a 5. 1 pay increase at the end of last year the highest increase in more than 30 years and well above Japan's current inflation rate of 2.