Transcription
Uh, thank you. I'm Kong Pak from Jan University. Um, first of all, I'm grateful for the uh, Mayor Gangj and MBN for organizing this great forum. And Shakawasang, thank you so much for your time in visiting Seoul and for attending uh, this great forum. In this session of the 50 minutes, uh, Shira Kawasang, the former governor of the Bank of Japan, will share his own experience and and and insight about Japan's economy, and and which should be very relevant to the current state of the Korean economy. Me. Uh, please join me in welcoming Shira Kosan.
Okay. First of all, thank you very much uh for having me in this u meeting. Uh, it is my great uh honor and pleasure to speak before this distinguished audience today. Uh, I would like to reflect on the Japanese economy in the past four decades and hope to draw some implications and lessons for Korea. Last year, the Korean translation of my book, uh, which is a memoir of my five years as governor of the Bank of Japan during a turbulent period between 2008 and 2013, was published. Subsequently, I was interviewed by reporters of three Korean newspapers. Uh, what they asked had some commonalities. Will the Korean economy follow the same economic path as that of the Japanese economy in the past four decades? I don't know whether I could provide convincing answers at that time, given the short newspaper space. Today, I have 30 minutes to speak. So, I have decided on elaborating on answering the same question.
Uh, this graph shows the the long trends of the Japanese economy from the mid-1950s to 2012. The Japanese economy recorded a high growth period from the mid-1950s to early 1970s. The average growth rate was about 10%. Since then, the growth declined but was slightly high. And in the late 1980s, Japan experienced an extraordinary economic boom called the bubble economy. Then we suffered from the burst of the bubble, severe financial crisis, and low growth. The period from the early 1990s to today is often called the lost decades or lost three decades. Although I do not like this, I don't think this is the right way of characterizing the Japanese economy in this period.
As you know, there are several similarities between Japan and Korea. First, uh, both countries recorded enviably high economic growth in the past. Japan four decades ago was today's China. Harvard professor Ken Rogoff wrote the following in his recent book, "The Age of Debt": "But from the late 1970s to the early 1990s, there was a widespread view and wide view and fear that Japan would eventually overtake the United States as the world's predominant trading and economic power." Second, both countries have long depended on an export-oriented manufacturing sector. Looking at Japan, they are quite influential in the economic uh policy debate. They were sometimes more influential in the economic debate than is implied by their share of the economy. Viewed from central banks, their call for preventing yen appreciation often became a headache. Third, and more importantly, both countries are faced with severe demographic changes. In Japan, the working-age population peaked in 1995, and the cumulative decline ever since is 15%. And the total population peaked in 2009. In Korea, uh, the peak year of the working-age population and total population are 2012 and 2020, respectively.
[clears throat] Roughly speaking, in terms of demographic change, Korea is following Japan with a lag, with a time lag of about 20 years. The parameter which determines the future path of population is, of course, the fertility rate, uh, which is astonishingly low at 0.6 in Korea compared with 1.2 in Japan. In any event, the fertility rate in both countries is far below the replacement level of 2.1. Given these similarities in general, and demographic change in particular, I can understand why the Korean reporters asked the aforementioned questions.
To begin, I would like to explain the main causes behind Japan's declining economic growth rate. In my view, there are essentially three. First, the burst of the bubble economy. The collapse of Japan's asset bubble dealt a severe blow to the economy. The scale of both the bubble and its subsequent burst was unprecedented in modern global economic history. For example, uh, commercial property prices in Osaka fell to nearly 10% of their peak value. While the immediate economic impact is well understood, what is less recognized, especially by external observers, is the long-lasting legacy of the bubble's collapse. Japanese companies sharply reduced the hiring of regular employees and instead increased reliance on so-called non-regular workers who received lower wages and had limited job security. This shift contributed to the widening income inequality and a sharp decline in the marriage rate, uh, which in turn led to a lower fertility rate. In this sense, the burst of the bubble is partly responsible for Japan's current demographic changes. Its imprint on society has proven to be enduring.
Second, rapid aging and declining population have had a profound impact on Japan's economic growth. Since peaking in 1995, the working-age population has declined by approximately 50%. As I said before, this effect is clearly visible when comparing growth rates across G7 countries. In terms of GDP per working-age individual, Japan ranked highest. However, in terms of overall GDP growth itself, it ranks among the lowest. This uh contrast best underscores the significant drag that a shrinking labor force exerts on aggregate economic performance.
Third, slowing labor productivity growth, uh, which is one of the two fundamental drivers of economic expansion alongside population growth. Although Japan's productivity growth is not dramatically different from that of the United States or Germany, it has nonetheless slowed over time. There are many contributing factors, but if I were to highlight just one, it would be Japan's longstanding system of lifetime or long-term employment. This system functioned effectively as a social safety net during the high-growth post-war period. However, by the late 1990s, the economic landscape had changed dramatically. The bubble had burst, the yen had fallen, and the IT revolution had begun. While Japan's unemployment rate remained relatively low, thanks in part to lifetime employment, the downside was a delay in reallocating labor across firms and industries. Moreover, a lack of diversity in corporate management, a hallmark of traditional Japanese companies, proved ill-suited to the demands of globalization and rapid technical change. I will come back to the issue of the lifetime employment system later.
Among the three causes I just mentioned earlier, I believe the one that draws the most interest from the Korean audience is the second, demographic change. What I would like to emphasize here is that surprisingly, it often takes many years for people to fully grasp the severity of this issue. In the early stage of demographic transition, people tend to remain rather sanguine, even as they casually discuss the topic in everyday conversation. In Japan, it is only relatively recently that people have begun to truly recognize the gravity of the situation. Even today, however, there is no broad consensus on the implications of population decline. Public discourse tends to fall into two camps. One says, "Don't worry, technology such as robotics and AI will solve the problem." The other says, "We don't know how to raise the fertility rate, and there may be no effective measures. It may be already too late to change course." Personally, I subscribe to neither view, as I will explain shortly.
When discussing demographic change, it is essential to distinguish between aging and population decline. For most citizens, the impact of aging is relatively easy to recognize, often through personal experience, such as caring for elderly [clears throat] parents. The consequences of population decline, however, are more subtle. Despite the fact that retirees' pension income outly depends on what the working-age population produces, population decline is like a slow-moving picture, and its severity is not easily understood, especially in its early stage.
Have economists responded? Economists, for the most part, have been relatively optimistic. As I said before, their typical argument goes something like this: "What matters is per capita income, which determines the well-being of individuals. As long as we maintain productivity growth, we do not have to worry about declining population." This argument is technically correct, but only as a definitional point about economic growth. The real question is whether productivity growth can be sustained in a society with a shrinking population. There are two issues that many economists tend to overlook. One is the complex interplay between demographics and productivity. The other is the role of structural factors, which might be termed as social norms or implicit social contracts. Both are equally important. Yet, for those who do not live in a society experiencing population decline, it is difficult to imagine the situation vividly. So, let me elaborate on these two points.
Based on Japan's experience, I would like to highlight three mechanisms through which population decline can lead to slower economic, slower productivity growth. Uh, first, aging influences productivity growth through changes in voter preferences. As the population ages, political pressure tends to shift government spending away from basic research and education and toward social welfare programs. This reallocation reduces public investment in areas that drive long-term productivity. This phenomenon is often referred to as "gray hair democracy."
Second, slow adoption of new technology. Economy-wide productivity growth depends heavily on society's ability to embrace new technologies. While technological innovation has the potential to raise productivity, older generations are generally slower to adopt it. I often find myself asking my daughters to help me install new IT devices. Uh, this is a personal example, but it reflects a broader societal trend.
Third, delayed resource reallocation across regions. Population decline also hampers productivity by delaying the reallocation of resources across regions. As this map illustrates, many municipalities are losing population, while growth is concentrated in a few areas such as Tokyo. The blue line shows municipalities which are losing population, and the red area shows the area in which population is increasing. As you can identify, there are only a few municipalities which are seeing an increase in population. When a municipality's population falls below a certain threshold, it becomes increasingly costly to maintain public infrastructure: roads, hospitals, elementary schools, and so on. The economic scale of a location is a key determinant for productivity. Yet, political and social constraints often delay necessary adjustments.
When discussing how to boost productivity, we often focus on technology and innovation, such as increasing digital investment. While this is undoubtedly important, it is only half the story. We must also consider whether society is capable of embracing flexible resource reallocation and adapting to new technology and innovations. This is the second issue I mentioned earlier: the importance of social norms, institutions, and structural adaptability in shaping economic outcomes. I will illustrate this with two examples showing this point.
First, social factors affecting birth rates. A significant portion of the cost of raising children stems from the foregone income of mothers who must interrupt or abandon their careers. One striking observation is the strong positive correlation across countries between birth rate and the share of housework and childcare undertaken by men. Unfortunately, as this slide shows, Japan and Korea rank at the very low end in both birth rate and men's participation in domestic responsibilities. Interestingly, a noteworthy pattern is that many Asian countries with low birth rates, such as China, Hong Kong, Korea, and Japan, share a Confucian cultural heritage and intense competition for entry into elite universities. These facts may suggest that birth rates are shaped not only by economic incentives but also by deeply embedded social norms.
Second, Japan's long-term employment practice, which I referred to earlier. Although the influence of Japan's lifetime employment system is waning, it remained dominant among large traditional firms until relatively recently. Workers under this system are often referred to as "salarymen," a term that is difficult to translate precisely into English. I often define [clears throat] salaryman as someone who makes an unlimited commitment to work anytime, anywhere, and accepts any role within the company. This system functioned well during Japan's high-growth years, but today it tends to hinder economic dynamism for several reasons. It delays the smooth reallocation of labor across firms and industries. As mentioned earlier, it also discourages open innovation since both the workforce and corporate culture tend to become homogeneous. Most importantly, it is unfriendly to female workers. The old system implicitly assumes the presence of someone, typically a spouse, who supports the worker's unlimited commitment. Declining birth rates and the underrepresentation of women in manager roles in Japan are in part consequences of this outdated employment model.
Given everything I have said so far, it's natural to ask why reform has been so slow in Japan despite the clarity of the underlying problem. I believe there are three main reasons. First, misdiagnosis of the problem. For many years, the issue was framed as one of low inflation or deflation. The narrative went: "Low growth is caused by deflation. Deflation is a monetary phenomenon. Therefore, the solution is simply to print more money." This explanation was strongly supported by mainstream US academics. People found it appealing first because it was easy to understand, and second because the proposed solution involved no real pain or sacrifice. But even if the inflation rate is increased to positive territory, the underlying problems of demographic change and productivity growth due to structural factors are not solved.
Second, resistance to changing social norms. Social norms and practices are deeply embedded in society [clears throat] and take a long time to change. People naturally resist altering longstanding habits. While many companies recognize the need for reform, they remain constrained by legacy employment systems. Efforts are underway to shift strategies, but meaningful change takes time.
Third, absence of a sovereign foreign currency crisis. For better or worse, countries that have faced a sovereign foreign currency funding crisis have often been forced to implement sweeping reforms. This may be familiar to Koreans who experienced the Asian financial crisis of 1997 and 1998. Other examples include the Nordic banking crisis and Greece during the European debt crisis. Japan, by contrast, has not faced such external pressure. In fact, until very recently, Japan held the world's largest net international investment position.
Now, I have outlined the causes of Japan's declining growth rate and the reasons behind delayed reform. I would like to spend my remaining time reflecting on possible implications and lessons for Korea. Let me begin by saying that I do not intend to offer any concrete policy proposals. This is partly because my understanding of the Korean economy and society is limited, but more importantly, because outsiders cannot fully grasp the subtle dynamics of a country's institutions, culture, and social fabric—elements that are so essential in designing effective policy responses. Like any other country, Korea faces complex challenges. But the solutions must come from within, from those who best understand the nuances of Korean society and its economic interactions. My hope is simply to offer some food for thought that may help stimulate discussion.
First, demographics will undoubtedly and increasingly have a profound impact on the economy. Although people tend to underestimate its full implication in the early stages, based on my experience in Japan, when it comes to action, especially efforts to prevent a decline in fertility rate, my advice is: the sooner, the better. Once "gray hair democracy" takes hold, it becomes extremely difficult to shift the prevailing present-oriented mindset, or what might be called "intergenerational irresponsibility." A Japanese demographer recently shared some interesting figures with me. He calculated the proportion of people who do not have grandchildren, rather than just children. For those [clears throat] born in 1940 and now age 84, the figure is 15%. For those born in the 1970s and 2000s, the figures rise to 39% and 45%, respectively. We are entering an era in which nearly half of the population may not have grandchildren. The implication is sobering. Human beings are both egoistic and altruistic. But as this demographic trend continues, it may become increasingly difficult for people to imagine and empathize with future generations. This erosion of intergenerational bonds is deeply concerning not only for economic growth but also for fiscal sustainability.
Second, the long-term trajectory of an economy is not predetermined by natural law. It is shaped by the will and determination of society. What matters most is society's ability to set the right agenda and confront its fundamental challenges. In this regard, economists often focus narrowly on financial incentives. But I have come to believe that social factors play a far greater role than is acknowledged in standard economics textbooks. Earlier, I mentioned the low share of housework and childcare undertaken by men in both Japan and Korea, a factor that contributes to low fertility rates. This may point to deeper cultural patterns that both societies will need to address going forward.
Even if Korea experiences low inflation or mild deflation in the future, it should not be a cause for alarm, provided that the financial system remains stable. The truly dangerous episodes of deflation are confined to the interval period, such as the Great Depression in the 1930s, in which the financial system collapsed. After I left the Bank of Japan in 2013, its balance sheet expanded hugely, but the inflation rate did not respond until recently. And the 10-year average growth rate before and after the start of the huge increase in the central bank's balance sheet is the same at 0.6%.
Human beings are complex. We sometimes become overly optimistic, but at other times, we are overly pessimistic, especially about the future of our own country or society. This has certainly been my observation in Japan, though I cannot speak for Korea. I do not align myself with either the optimist or the pessimist. As for the basic philosophy of the future, the future direction for the Japanese economy should head. We are constantly torn between two swords. On one hand, we aspire to build an innovation ecosystem like Silicon Valley. On the other hand, we worry about the [clears throat] social fragmentation caused by extreme inequality in the United States. Each country must find its own model of development. What is needed is a reasonable consensus on the kind of society and economy we wish to build, one that acknowledges both our strengths and our weaknesses.
Earlier, I spoke about the weakness that few pessimist narratives in Japan. But we must also recognize the strengths of our own economy and society. These strengths are often overlooked precisely because they are embedded in our daily lives. Aside from the strengths of Japanese society, what is the strength of Japan as a country? It used to be technology, but nowadays the US and China are leading in this field. In this respect, a recent survey targeting Asian countries, which I happened to read, has made me aware of Japan's strengths. Japan is perceived as the most trusted country, even though China and the US are perceived as the most influential countries. This trust is a valuable asset for Japan as a whole. And this means there seem to be potential room for Japan to play an important role in certain areas.
The same is true for Korea. You may or may not be aware of how the Korean economy is currently viewed in Japan. Of course, Korea's extremely low birth rate has received wide coverage in Japanese media, but more often, Korea is discussed in a positive light. For example, the fact that Korea's per capita income has surpassed that of Japan is frequently noted. Korean companies are seen as most globalized. The most commonly cited example is Samsung, often compared to Japan's once mighty economic firms. A typical explanation I hear in Japan is that Korean corporate leaders possess a global mindset from the outset, perhaps because Korea's domestic market is similar compared with that of Japan. In this context, the global success of K-pop is also frequently mentioned. I cannot say for certain how accurate these explanations are. But the key point is this: forming a reasonable consensus about the future begins with a clear understanding of both our strengths and our weaknesses.
In this respect, the recent statement of the Japan-Republic of Korea summit meeting in Tokyo says the following: "The two leaders agreed to establish a framework for consultation between the two governments to share knowledge and work together with a view to finding solutions for common social and economic issues facing both countries, such as regional revitalization, declining birth rate and aging population, rapid population decline, agriculture, and ensuring resilience against disasters." I completely agree with this. I hope the dialogue between the two countries will be strengthened. Thank you so much for your kind attention.
[applause]