At a trend rate of 2%, Japan is the slowest growing economy in Asia, and the country is getting poorer. In 1992 Japan was fifth in the OECD in per capita income, but by 2002 had dropped to 19th, while government debt levels are the highest in OECD history.
The domestic component of the economy is essentially stagnant, with GDP growth coming almost solely from capital expenditure and exports. With half of all exports now going to Asia, it is less directly vulnerable to a US slowdown than five or 10 years ago.
But the lack of domestic dynamism is not acceptable û and the irony is that the economy could foster stronger growth by giving more scope to its capital markets. JapanÆs markets are small by developed world standards in terms of total issuance to GDP, and even smaller in terms of a capital markets æmindsetÆ.
Capital markets are required to stimulate growth in Japan, not solely serve as a bevy of ageing blue-chips. That means a high-yield bond market and a venture capital industry need to be developed to support young companies. Tax needs to be reformed to attract powerful investors such as hedge funds from Singapore back to Japan, and investors need to be given decent dividend pay-outs and the prospect of being taken over in stock-price-boosting M&A transactions. Privileges such as the ability for companies to issue unlimited shares to third parties need to be abolished.
Finally, interest rates have been too low for too long, dampening growth and lowering hurdles for businesses, putting many Japanese companies far behind the curve in productivity terms (the OECD estimates the labour productivity gap with the US was 30% in 2006).
Japan still has the capacity to generate enormous wealth (and hopefully distribute that wealth to shareholders), but it needs to stop relying so much on its international manufacturing prowess and introduce capital markets-inspired dynamism to its sclerotic non-export sector.