The document discusses recent economic trends and anxieties in Japan from the perspective of a Japanese government official. It describes Prime Minister Koizumi's economic reforms in the early 2000s that aimed to reduce government spending and promote structural reform. However, these reforms failed to cure Japan's persistent deflation and economic stagnation. Younger generations in Japan feel anxious about their future financial security due to factors like declining wages, cuts to pensions, and concerns over supporting the aging population. Under these conditions of anxiety and uncertainty, Japanese consumers and businesses have become increasingly conservative with spending and hiring.

1. What happens in Japanese Economy and Society? -Recent Trends and Movements from the viewpoint of Anxiety- Toshio Yamauchi Third Secretary, Embassy of Japan May 17, 2006

2. 1. What’s "PM KOIZUMI's Reform"? 2. Deflation, anxiety and Japanese nationality 3. Where do anxieties come from?: Background of deflation spiral 4. For the future: What should Japan do under indelible anxieties? ＊ The views expressed herein are those of the presenter, not representing the official opinions of the Japanese government and the Embassy of Japan in Poland; all the responsibilities for this presentation attribute to the presenter.

3. 1. What's "PM KOIZUMI's Reform"?

4. Mr. Junichiro KOIZUMI appointed Prime Minister since 2001. He consistently insists that the government should be as much downsized as possible so that it could not impede the market competition as well as impose a heavy financial burden on the private economy. 1-1. What’s is “PM Koizumi’s Reform” ? (1/2) 2005 PMs in Tokyo: Mr. Belka and Mr. Koizumi (Right) (Source) Prime Minister of Japan and His Cabinet Webpage

5. Additionally, he requests the people and the private sector for the “Self-responsibility” and “Independence of the government,“ which might sometimes bring “Pain.” (cf. “ Yokkakari ” by Dr. Kenichi Omae, previous president of Mckinsey Japan) These principles are executed under the slogan “ Structural Reform without Sanctuary .” “ Sanctuary ” implies such sectors as construction, agriculture, defense, education, of which legislators work for the special interest. 1-1. What’s is “PM Koizumi’s Reform” ? (2/2)

6. His actions are: - Reorganizing governmental institutions to “Independent Administrative Organizations,” including the merger of governmental finance and banking companies, privatization of postal services, - Setting the limit of new issuance value of national bonds (30 trillion yen), - Establishment of “special zones for structural reform,” e.g. special zone for education, agriculture, etc. - Reduction of the governmental expenditure (medical care, education, infrastructure development, etc.) - “Trinity Reform” package: (1) the cut of a state subsidy to municipalities, (2) the shift from nation-oriented to municipality-oriented tax system, (3) the change of the system of tax money allocation to local governments. 1-2. Actions taken as the Reform

7. After “Koizumi Shock,” the economic recovery is modestly underway…. 1-3. Growth Rate, Nikkei 225, Inflation rate Unemployment rate Nikkei 225 Real GDP Growth Consumer Price Index (Source) Ministry of Labor, Health and Welfare, Ministry of Internal Affairs, Nikkei (%) (Yen)

8. 2. Deflation, anxiety and Japanese nationality

9. Economists say that the deflation is derived from…. - Accumulated bad loans - Huge amount of import of much less expensive goods from China - Diminishing “growth potential” of Japanese economy - Demand shortage 2-1. Why has the deflation existed persistently in Japan’s economy?

10. However, we should also focus on the mixture of “anxiety for the future.” People face the real market competition under the Self-responsibility principle. More concretely, they are anxious about: - decreasing (at lease not increasing) income, - higher risks of layoff; the collapse of life-time employment system, - increasing tax and fees for social security, medical and educational expenditure, - reduction of retirement pension and health care benefits. 2-2. Anxiety for the future (1/4)

11. Q) Do you have any anxiety for your daily life? 2-2. Anxiety for the future (2/4) (Source) Cabinet Office, “ Public Opinion Survey on National Life, ” June 2005 (%)

12. Q) How do you think your life will be in the future? 2-2. Anxiety for the future (3/4) (Source) Cabinet Office, “ Public Opinion Survey on National Life, ” June 2005 (%)

13. Q) Do you feel anxious about….? 2-2. Anxiety for the future (4/4) (Source) Public opinion polls by Mainichi Press, January 2005 Aging society Social security system

14. In addition, Japanese nationality tends to become relatively pessimistic, especially in the case that some worse symptom, if any trivia, appears. The stereotype (negative) images are exaggeratedly shown by media. Those mental factors aggravate such anxiousness. 2-3. Anxiety and Japanese nationality (1/2)

15. Q) Do you expect….? (Source) Chugoku Press and Gallup, “ Comparative Opinion Survey on the World in the 21 st century, ” January 2000 2-3. Anxiety and Japanese nationality (2/2) (%)

16. The anxieties have driven Japanese save more expenses. What is worse, the younger generations (20s and 30s; generally with the higher propensity to savings) has lost the positive attitude towards consumption and hold the intentions to curtail the expenses. “ Public Opinion Survey on Financial Assets of the Household ” by Central Council for Financial Services Information shows about 90% of the younger generations feel anxious about the life in their old age. Indeed, they don’t believe their income growth, social security system, while they are afraid of tax and premiums increases. 2-4. Anxiety and expenses cutting (1/5)

17. The population ratio of the younger generations to the aged (with the lower propensity to savings) has declined. In short terms, the aged could boost up the economy; but in long terms, the source for expenses could be exhausted. Actually, Japanese savings rate is declining year-by-year (14.6% in 1991->6.9% in 2001; the Annual Report on the Japanese Economy and Public Finance 2003 ) This trend could erode the Japanese economy as much as irreparable. 2-4. Anxiety and expenses cutting (2/5)

18. 2-4. Anxiety and expenses cutting (3/5) (Source) Bank of Japan, “ Opinion survey on the General Public’s Mindset and Behavior, ” August 2005 Q) Has your income increased or decreased, compared in the last year? Q) Do you think your income will increase or decrease in a year?

19. Q) Have you increased or decreased the daily expenses, compared to those in the last year? Q) Will you increase or decrease the daily expenses in a year? 2-4. Anxiety and expenses cutting (4/5) (Source) Bank of Japan, “ Opinion survey on the General Public’s Mindset and Behavior, ” August 2005

20. Q) Why will you decrease the daily expenses? 2-4. Anxiety and expenses cutting (5/5) [Note] Multiple-choice question. (Source) Bank of Japan, “ Opinion survey on the General Public’s Mindset and Behavior, ” August 2005 Cabinet Office, “ Public Opinion Survey on Attitude of Younger Generation , ” January 2003

21. 3. Where do anxieties come from?: Background of deflation spiral

22. 3-1. Image of “Deflation Spiral” Less expense Lower Price Less income Less disposable income Less sales More cost cuts Less assets value Bursting “Bubble” in 1991 Stock market slump in 2001 More Intensive retail competition during late 1990s More shift to China during late 1990s Lowering base wage, life-time employment collapsed, increasing no. of layoff after 2000s Tax, insurance premiums, medical costs recently up

23. “ Plaza Accord” of 1985 led JPY to highly appreciation against USD. Money influx to Japan drove up the prices of stocks and real estates which were at that time viewed as attractive price level, compared with those of other markets. In 1989, the most famous stock index, Nikkei 225, recorded its highest value, 38,915 JPY. In 1990, officially published land prices reached the peak. Those higher prices brought the companies so called “latent gains,” on which they relied to borrow (the banks drove them to borrow) money. 3-2. “Bubble” and its burst-out (1/4)

24. Recognizing this situation as “bubble,” the government introduced the regulation on the total lending volume for the real estates in April 1990. Banks were forced to strictly limit their new lending, which resulted in tightening cash flow of the borrowers and shrinking the prospect of the higher prices. It is the starting point of “bubble bursting.” Bank of Japan raised the interest rate five times during 1989 to 1990. Oil prices skyrocketed, due to Gulf War in Iraq in August 1990. It urged massive decline of the asset prices. 3-2. “Bubble” and its burst-out (2/4)

25. The government lifted the regulation mentioned above in 1992, but the falling of the real estate prices couldn’t be stopped. Only a year after, Nikkei 225 went down to the half of the peak in value . However, these market collapse didn’t soon affect all the company performance, much less the general consumer. First symptoms of the performance worsening were found in real estate companies, developers and non-bank lenders. These sectors experienced the bankruptcies at the earliest in 1992. In 1997, Asian Currency Crisis befell Japanese companies which actively operated in those countries. 3-2. “Bubble” and its burst-out (3/4)

26. In addition to these deteriorating environment, defaulted loans reached the unmanageably high level to damage the financial institutions. Some of them failed; Yamaichi Securities and Hokkaido Takushoku Bank in 1997; Long-Term Credit Bank of Japan and Nippon Credit Bank in 1998. What is worse, owing to the possible introduction of “International Accounting Standards” and the appliance of “BIS ROE rule, ” Japan’s largest banks restrained themselves from their business; it caused the operating companies, especially small- and medium-sized companies to suffer from money shortage. 3-2. “Bubble” and its burst-out (4/4)

27. Diminishing of disposal income rendered the Japanese become gradually conservative in expenditure (as shown in Section 2). Under this consumption conservatism, the competition among retailers grew too intensified. The wholesalers, convenience stores and “Category Killers” which succeeded in grasping the consumers’ needs and cutting total costs gained larger market share (e.g. Seven Eleven Japan, Yamada Denki). In contrast, traditional departments, merchandizes and small-sized retailers lost their position, some of which eventuated to be bankrupt or totally rehabilitated (e.g. Sogo in 2000, Daiei in 2004) 3-3. Conservative consumers and cost cutting (1/5)

28. Successful retailers, holding buying power, insistently asked makers to lower the prices. At the same time, they also made every effort to cut their own manageable costs. Indeed, makers must drastically reduce the costs if they can’t produce anything with higher value addition. Their targeted cost to cut is personnel expenditure. 3-3. Conservative consumers and cost cutting (2/5)

29. Japanese wages are incomparably higher than those of other Asian countries. Manufacturers shifted their production site from Japan to those countries, specially to China. 3-3. Conservative consumers and cost cutting (3/5) [Note] Figures show the wage index in a case when that in Yokohama is evaluated as 100. (Source) Japan External Trade Organization, “JETRO sensor,” April 2004. Comparison of Personnel Costs

30. Japanese have enjoyed the growing income, even if the pace has been slowdown after Bursting of Bubble. However, the wage showed gradual decline during the late 1990s and 2000s; the growth rate has remained below CPI until 2004. 3-3. Conservative consumers and cost cutting (4/5) (Source) Japan External Trade Organization, “JETRO sensor,” April 2004. Ministry of Health, Labour and Welfare, “ Monthly Labour Survey” Consumer Price Index Wage Growth Rate (%)

31. For further cost cut, the employers prefer part-time to full-time jobs, while they take into consideration the possibility to execute the layoffs. Hourly earnings of part-time jobs are much less (about the quarter to half of the earnings of full-time jobs). 3-3. Conservative consumers and cost cutting (5/5) (Source) Ministry of Health, Labour and Welfare, “ Labour Force Survey” (%) Share of Part-time Jobs

32. 3-4. Dynamic change of personnel management system (1/4) Japanese companies had adopted two employment principles: “Life-time Employment” and “Seniority Order Wage”. The principles secured the stability of the employee’s daily life, so that they could concentrate on his/her own business. This system effectively and efficiently supported the growth of the welfare of employees, companies and the nation. However, as the aging has advanced, this inflexible system could rather discourage the youth, add much to the personnel cost, and finally weaken the companies’ and national economic competitiveness.

33. 3-4. Dynamic change of personnel management system (2/4) Japanese companies have started adopting two new employment principles: “Diversification of employment and work-style” and “Results-based Wage” since the late 1990s. The principles are introduced to encourage the employees with greater motivation, especially the youth. In practice, these principles are generally accepted in favor.

34. 3-4. Dynamic change of personnel management system (3/4) But the system often urges the people to focus only on the results; it means that it could raise such problems as struggle for profit share, fraudulent practices (sometimes with the order of his/her boss) etc. Some point out as if the traditional Japanese “Wa” spirit (harmony among people), which is the source of competitiveness of Japanese economy, past away. What is worse, such “relentless” system might increase the number of depressives and suicides.

35. 3-4. Dynamic change of personnel management system (4/4) Number of Suicide (Source) National Police Agency Jobless Employee Self-Employed Employer (person)

36. 3-5. Heavier burden of social security (1/5) The aging of population advancing; the birthrate dwindling. The share of the aged people (over 65 years old) to the total population has been increasing. Birthrate recorded all-time low, 1.29 in 2004. The youth don’t hope to have any / more children. The reasons are various, but the anxieties for the future have remained a major factor. National population survey in 2005 shows the total population turns the first decrease after the Word War II.

37. 3-5. Heavier burden of social security (2/5) Share of the aged people (over 65 years old) to the total population (Source) Ministry of Internal Affairs, “Monthly Report on Current Population Estimates”

38. 3-5. Heavier burden of social security (3/5) Ratio of the people at the age of 20 to 49 who want to have more children (%) (Source) Cabinet Office, “International Public Opinion Survey on Children Decrease,” December 2005

39. 3-5. Heavier burden of social security (4/5) The aging has made heavier the burden of social security on the people. The ratio of national medical expense to national income grew double during 30 years (about 4% in 1970s, 6% in 1980-90s to 8.5% in 2003 (31 trillion yen)). Pension system exposes the serious generation gap of the payable and receivable between the younger and the senior. As to the Employee Pension Insurance, although those at the age of 50 in 1999 pay 38 mil. yen to receive 57 mil. yen (19 mil. yen is surplus), those at the age of 20 in 1999 pay 61 mil. yen to receive 49 mil. yen (12 mil. yen is deficit). Repeated changes of the estimates by the government on birthrate, premiums and benefits, with less transparent and inconsistent explanation, causes the people to have an embedded distrust.

40. 3-5. Heavier burden of social security (5/5) The government has taken various countermeasures: - Reduction of the aid to medical expense from national budget, - Lowering pharmaceutical prices, - Reduction of the benefits of the pension, - Raising the starting age of providing the pension, - Promoting the employment of the elderly. It also tries to work out the solutions to children decreasing problems….

41. 4. For the future: What should Japan do under indelible anxieties?

42. 4-1. Economic recovery? (1/2) Recent statistics depict Japan’s economy has been undergoing a revival. Nikkei 225 had jumped up to expect the future growth. Real estate prices also turn upward, esp. those in the center of Tokyo. Nikkei 225 during 1995 to 2006

43. 4-1. Economic recovery? (2/2) But it may be long before the general perception on the economic trend become stable….. Economic Conditions Diffusion Index (D.I.) [Note] D.I. is calculated in the way to subtract the share of the answer WORSE from that of BETTER. (Source) Bank of Japan, “ Opinion survey on the General Public’s Mindset and Behavior, ” April 2006 Next year the conditions will be... Compared with last year, this year’s conditions is… Better Worse ?

44. 4-2. Widening income gap? (1/5) Recent Japanese mass media often refer to widening income gap (with half-jokingly citing the remarks, lifestyle or behaviors of “Celebrities”). The books writing about income gap and social strata remain sold well. It is certain that the income gap has expanded (Gini coefficient changed from 0.4049 in 1987 to 0.4983 in 2002 (source: MLHW)).

45. 4-2. Widening income gap? (2/5) But income redistribution effects through tax and social security system curve the gap (0.3546 in 1987; 0.3812 in 2002). Additionally, the gap expansion can mostly attribute to that in the elder. The senior generation embraces both those receiving high salary and those doing only public pension. A growing number of the aged generation appears to quicken the pace of expansion. Moreover, in 2003, Dr. Isagami, Japan Institute of Labor, revealed the facts that the past OECD statistics on household income, which described Japanese society as with high equality in income, didn’t take into the consideration the household without families and of farmers. International comparison on Gini Coefficient also testifies that the income gap in Japan stays relatively smaller.

46. 4-2. Widening income gap? (3/5) Changing Trend of Gini Coefficient (Source) Ministry of Health, Labor and Welfare, “Survey on Income Redistribution,” 1999 and 2002 Original Income Income after redistribution (tax and social security payment)

47. 4-2. Widening income gap? (4/5) International Comparison on Gini Coefficient (Source) Ministry of Internal Affairs, Website Australia USA Belgium Japan Canada Sweden France Germany

48. 4-2. Widening income gap? (5/5) Despite these studies, the image of greater income gap is built in the mass mind…. Prof. Otake of Osaka Univ. and Mr. Tomioka of Japan Center for Economic Research indicated in the report “ Who feels the income gap? ” (2005) that: - 75% of the 1928 respondents foresaw that income gap would widen in the next five years. - Those (1) with higher academic background, (2) without job, (3) female with job or (4) risk-averse show the tendency to expect the expansion. - Those at the age of sixties more recognize the expansion than of twenties.

49. 4-3. What should Japan do? (1/2) The basic causes of anxieties should be minimized and cleared away, while the anxieties-resistant mindset should be built in the people’s mind. The government / statespersons should….. - Take steps to deal with the basic causes, above all, reforming social security system, - Keep the policy and its explanation more transparent and consistent. Japanese people should….. - Recognize the reality and control the risks better, - Focus on self-reliance to improve their own lives, - Think more of the improvement of quality of life under the limited resources (c.f. LOHAS), - Accept diversified ways of life, life-cycle, - Have a mindset of straightforward communication.

50. 4-3. What should Japan do? (2/2) Nationality couldn’t be changed easily; the proverb says “The child is the father to the man.” However, unless the conventional code of conduct could be altered, the anxieties will not decrease at all. The future recovery of Japanese economy depends on to what extent Japanese “adjust” their mindset as mentioned before.

51. Please contact: Toshio Yamauchi, Third Secretary of Embassy of Japan in Poland ul. Szwolezerow 8, Warszawa 00-464, Poland Tel: 022-696-5033 / E-mail: [email_address] or yamautty@hotmail.com