Asia Economics

Buy Buy Baby: Why China and Japan Need Consumers to Combat Secular Stagnation

Most developed nations are currently facing post-Great Recession economic sluggishness that has responded inadequately to both traditional fiscal and monetary policy tools. While the sources of this crisis lie in a vast array of social, political, demographic, and economic problems, one key issue for East Asia, in particular, is consumer spending.

written by Lucy Massey

Most developed nations are currently facing post-Great Recession economic sluggishness that has responded inadequately to both traditional fiscal and monetary policy tools. While the sources of this crisis lie in a vast array of social, political, demographic, and economic problems, one key issue for East Asia, in particular, is consumer spending. The potential for consumer spending to reinvigorate an economy is apparent in a careful analysis of the policies currently in place, those being proposed, and other solutions to this persistent East Asian stagnation. On the other hand, mishandling of consumer spending policy could lead down a slippery, economically stagnant slope. This paper will focus on China and Japan, charting the economic and fiscal policies which have led to and arguably perpetuated this crisis and analyzing the leading policy options to buck the downward trend.
Economists and policymakers alike have identified consumer spending as a potentially powerful tool for solving the crisis of long-term stagnation in East Asia. Consumer spending as defined by the Organization for Economic Co-operation and Development includes “final purchases by resident households to meet their everyday needs.”1 According to mainstream macroeconomic theories, consumer spending is one of the single greatest drivers of economic activity, usually accounting for over 50% of GDP. The relationship is simple enough that policies intended to increase consumer spending are frequently trusted and implemented as useful policy tools when touted by economists. Japan and China are nonetheless handling the economic slowdown differently due to their disparate situations: they are in effect facing the same basic problem, but their respective economic and political structures have key differences which tend to produce markedly different policy approaches. On the one hand, Japan is more or less a liberal democracy, with high rates of consumer spending (Chart A) and saving rates that are comparable to the United States (Chart B). On the other, China is an authoritarian, communist regime with low rates of consumer spending (Chart A) and rates of consumer saving that are substantially higher than those of other OECD countries (Chart B). In addition, China is significantly more reliant on agriculture and heavy industry than Japan, with less investment in the service sector (Table 1).

 

Table 1

GDP Composition China Japan
Agriculture 8.6% 1.1%
Industry 39.8% 29.6%
Services 51.6% 69.4%
Central Intelligence Agency. “The World Factbook.” CIA World Factbook. Accessed November 15, 2017. https://www.cia.gov/library/publications/resources/the-world-factbook.

 

Downward Spiral

The puzzle of economic revitalization in China and Japan has produced a robust body of economic analyses and policy recommendations from scholars and bureaucrats alike. Although issues of demographic change, immigration policy, and political reform are also pressing concerns, the necessity of economic revitalization arguably encompasses and eclipses these related concerns. For the governments of both China and Japan, the economic slowdown seen over the past ten years poses a direct existential threat. The increasingly authoritarian rule of the Chinese Communist Party (CCP) has, since the era of Mao Zedong a generation ago, legitimized its control directly through breathtaking economic growth. The current trend of decreased economic growth may not be as numerically stark as the Japanese downturn, and the trend is much more recent, but any decrease in growth that could spark concerns among Chinese consumers is sufficient to threaten the political dominance of Xi Jinping and the CCP. As for Japan, Prime Minister Shinzo Abe has gambled his tenure, one of the longest ever for a Japanese Prime Minister, on the success of his “Abenomics” fiscal policy program. He has so far retained political power despite continuing economic sluggishness, but the question of economic revitalization becomes more pressing with each day as Japan’s population ages and shrinks. Unless the Japanese economy can quickly find a workable solution to its economic slowdown, the economy will only slide deeper into stagnation and return to deflation.

Chinese Needs

China is currently pursuing tighter monetary policy by raising short-term interest rates to downsize government debt and institute economic reforms, but this policy could cause a decrease in household consumption and further economic slowdown. In the next few years, the Economist Intelligence Unit forecasts a drop in domestic demand, which is in large part a function of household consumption.2 Here the nature of China’s government plays a vital role in explaining tighter monetary policy, which ceteris paribus would exacerbate the economic slowdown. Raising short-term interest rates is primarily intended to help the government finance its growing debts, a problem which the CCP has deemed serious enough to risk deeper economic slowing to solve. Because the CCP and People’s Bank of China (PBC) hold immense and virtually uncontested power over the economy, these decisions will inevitably shape the overall Chinese response to its slowing economy.

Economic scholars have frequently made suggestions in opposition to China’s dominant policies. Although economic data on the Chinese economy is historically difficult to obtain and verify, scholars have successfully applied principles that hold sway in other OECD countries to Chinese economics, especially since China has become more developed. Major trends are visible despite obscured data, such as the downward trend in household consumption since Deng Xiaoping’s economic reforms began in the 1970s and further reforms continued in the 1990s (Chart A). In addition, the substantial influx of migrant workers to Chinese cities results in inevitable economic repercussions, which could be positive given effective policy measures. Chinese economists Meiyan Wang and Cai Fang posit that migrants represent a major new engine of consumer spending, with younger migrants even more likely to consume than older migrants and both groups consuming more than non-migrants.3 However, these scholars warn that migrants’ consumption is restricted by unstable jobs and limited access to welfare resources. Their consumption would be a more effective support to the Chinese economy if it could be fully realized if the migrants themselves were supported. So far, the Chinese government has resisted the expansion of its welfare programs, but with a rapidly aging population, a more robust social welfare program is nearly inevitable. This dangerous demographic shift is particularly problematic when it comes to consumer spending – older people tend to spend less.4 For both China and Japan, the numbers are stacked against rapid economic growth: effective fiscal policy is essential to revitalize these flagging economies.

Japan’s Plans

Japan’s attention to consumer spending has taken on an altogether different character. Rather than trying to spur economic growth by boosting consumer spending, Japan has actually increased its consumption tax to alleviate astronomical public debt.5 But while this tax has increased regularly since its inception in the 1990s, the tax hike planned for early 2019 is in danger of being delayed due to concerns that it would further slow the economy, among other reasons.6 The Japanese economy has shown stronger growth in 2017 than in the past decade,7 but the gains are not so solid as to inspire lasting confidence.8 Consumer confidence is directly related to consumer spending, as consumers worried about economic stagnation turn to saving more money, but not in risky corporate bonds. Prime Minister Abe must convince the public that additional tax revenue would be used to support public services, or at least not crony capitalism, in the face of corruption allegations. Unlike the semi-authoritarian regime centered around Xi Jinping, Shinzo Abe’s administration faces closer public scrutiny and his tenure is less certain.9 Whereas the centralized Chinese government has the opportunity to develop long-term policies with a strong likelihood of such policies being implemented over decades, the Japanese government must adjust its economic policies in response to political pressures.

Politics aside, not all analysts agree that the consumption tax increase is the least economically-harmful way to lower government debt. Political scientist Gene Park instead proposes an expansion of the progressive income tax, which would alleviate the growing problem of income inequality in Japan without provoking any shock to consumer spending.10 An increase in the consumption tax, he argues, would have to be massive to finance the debt, and it would rely on foreign consumers buying Japanese exports to generate enough revenue. Neither outcome seems likely, whereas convincing those who earn the most to help shore up the economy is much more realistic. As for policies that would reliably boost the Japanese economy, scholars, and to some extent even policymakers, tend to focus on increasing inflation and possibly interest rates to safeguard against deflation and the dangers of negative interest rates; however, these main goals are not always easily pursued in tandem – increasing interest rates could further stymie the economy by encouraging consumers to save more and spend less, while upward inflationary pressures could negatively impact consumer confidence if individuals’ real wages and purchasing power are harmed. But operating close to zero for either macroeconomic variable leaves the Bank of Japan and Prime Minister Abe with limited options, which could be especially problematic if they want to stimulate the economy by lowering interest rates later.

Methodology

To track the similarities and differences between China and Japan, and where they fall among other OECD countries, I utilized the comparison charts available from the OECD database. For household spending, I included a bar graph that directly compares the total levels of spending in each country, clearly showing how Japan is eclipsed by most of the other large economies. China’s total household spending level is somewhat misleading, as it fails to compare the significantly larger population of China; the per capita and percent of GDP figures are much lower than those for the U.S. I chose to represent the data for household savings among OECD countries over time to show the important trend of Chinese savings increasing over time. One difficulty with this data is that the figures for China are not available before 1992, so only the more recent iterations of economic reform are visible on the graph. The figures for Japan start even later, but that trendline is relatively flat and clearly comparable with the U.S. The data on short-term interest rates is significantly more volatile, and Chinese data is again somewhat unreliable, but the gradual decrease of Japanese interest rates supports assertions about trends in Japanese monetary policy. The graph also clearly shows how China and the U.S. had room to loosen short-term interest rates sharply for stimulus in response to the economic downturn in 2008, while Japan did not have much room to lower rates. I also compiled a table of GDP by sector of origin for China and Japan with data from the Central Intelligence Agency. The discrepancies in how much of each economy is devoted to industry versus agriculture or services sectors is a significant insight into the makeup of the economy.

What about Consumers?

Overall, China and Japan are navigating a complex political and economic situation under duress. The success of each government depends, to a greater or lesser extent, on the success of each economy. But the way forward is not necessarily clear: economists and policymakers agree that there are multiple interrelated concerns which make addressing the economic crisis a delicate balance of forceful policy and careful restraint. Since the economy of a large country is a multi-faceted leviathan yielding endless opportunities for analysis and debate, the policies currently being proposed and implemented do not all center on consumer spending. Some of the major non-spending policies in China and Japan include China’s reduction of steel and aluminum production and openness to foreign direct investment, as well as Japan’s ultra-loose monetary policy and unofficial acceptance of illegal migrant labor. Yet consumer spending remains a central problem to solve, a useful tool to master, for the governments of China and Japan: the current political order may hang in the balance. These aging, stagnating economies need to find some way to revitalize, and consumer spending certainly could be the key. Policies in China should include social welfare and employment support for migrant workers, allowing them to assuage both demographic and consumption problems. In Japan, the political resources currently being employed to push forward a consumption tax increase should instead be applied to an increase in the progressive income tax. Future research should seek to deepen our understanding of the role of consumer spending on modern economies so that policy proposals can better target the proper mechanisms for spending-based economic growth.

REFERENCES

  1. “National Accounts at a Glance 2009.” OECD iLibrary. 2009. Accessed November 15, 2017. http://www.oecd-ilibrary.org/.
  2. “Country Report: China.” Economist Intelligence Unit Country Briefs. November 15, 2017. Accessed November 15, 2017. http://www.eiu.com/FileHandler.ashx?issue_id=626106446&mode=pdf.
  3. Meiyan Wang, and Cai Fang. “Destination Consumption: Enabling Migrants’ Propensity to Consume.” In China’s Domestic Transformation in a Global Context, edited by LIGANG SONG, GARNAUT ROSS, CAI FANG, and JOHNSTON LAUREN, 91-110. ANU Press, 2015. http://www.jstor.org/stable/j.ctt16wd0dw.10.
  4. Du, Yang, and Meiyan Wang. “Population Ageing, Domestic Consumption and Future Economic Growth in China.” In Rising China: Global Challenges and Opportunities, edited by Golley Jane and Song Ligang, 301-14. ANU Press, 2011. http://www.jstor.org/stable/j.ctt24hbk1.24.
  5. Park, Gene. “Sharing the Burden: Rethinking Japan’s Approach to Raising Revenue.” Challenges Facing Japan: Perspectives from the U.S.-Japan Network for the Future, 2014, 115-21. 2014. Accessed November 15, 2017.
  6. “Revised use for tax hike revenue a tactic by Finance Ministry to prevent third delay.” The Japan Times. November 10, 2017. Accessed November 15, 2017. https://www.japantimes.co.jp/news/2017/11/10/business/revised-use-tax-hike-revenue-tactic-finance-ministry-prevent-third-delay/.
  7. Partington, Richard. “Japanese economy posts longest expansion in more than a decade.” The Guardian. August 14, 2017. Accessed November 15, 2017. https://www.theguardian.com/world/2017/aug/14/japanese-economy-posts-longest-expansion-in-more-than-a-decade.
  8. Stokes, Bruce. “Japanese more satisfied with economy, but doubts about future persist.” Pew Research Center’s Global Attitudes Project. October 17, 2017. Accessed November 15, 2017. http://www.pewglobal.org/2017/10/17/japanese-more-satisfied-with-economy-but-doubts-about-future-persist/.
  9. “Country Report: Japan.” Economist Intelligence Unit Country Briefs. November 15, 2017. Accessed November 15, 2017. http://www.eiu.com/FileHandler.ashx?issue_id=626106446&mode=pdf.
  10. Park.

APPENDIX

Chart A

(jpeg)

OECD (2017), Household spending (indicator). doi: 10.1787/b5f46047-en (Accessed on 15 November 2017) (Accessed on 17 November 2017)

Link for easier viewing: https://data.oecd.org/hha/household-spending.htm

 

Chart B

(jpeg)

OECD (2017), Household savings (indicator). doi: 10.1787/cfc6f499-en (Accessed on 15 November 2017)

Link for easier viewing: https://data.oecd.org/hha/household-savings.htm#indicator-chart

 

Chart C

(jpeg)

OECD (2017), Short-term interest rates (indicator). doi: 10.1787/2cc37d77-en (Accessed on 15 November 2017)

Link for easier viewing: https://data.oecd.org/interest/short-term-interest-rates.htm

Table 1

GDP Composition China Japan
Agriculture 8.6% 1.1%
Industry 39.8% 29.6%
Services 51.6% 69.4%

Central Intelligence Agency. “The World Factbook.” CIA World Factbook. Accessed November 15, 2017. https://www.cia.gov/library/publications/resources/the-world-factbook.

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