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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends :
Why can the longest postwar recovery not be felt?

NRI JOURNAL

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Takahide Kiuchi's View - Insight into World Economic Trends :
Why can the longest postwar recovery not be felt?

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

Mar. 11, 2019

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In January, the government announced that Japan may log its longest postwar recovery. Why then are many people saying there is no feeling of recovery?

Exceptionally prolonged economic recovery is a global phenomenon

The Industrial Production Statistics and the Economic Trend Index show that Japan had already fallen into an economic recession at the end of last year. However, even if it is so, the fact that Japan has made the longest postwar recovery remains unchanged.
With the U.S. completing 10 years of recovery in the middle of this year, it will be the country’s longest recovery period since World War II. Such unprecedented and prolonged economic recovery is a global phenomenon and not unique to Japan. It does not indicate economic strength, but rather reflects weakness.
After the collapse of the economic bubble in Japan in the 1980s, and the economic downturn in the West precipitated by the Lehman Brothers bankruptcy 10 years ago, there was a striking decline in productivity growth rate and the potential growth rate, or the economic potential. As a result, the mid-to-long-term growth expectations of the companies have reduced, which has resulted in lower capital investment and lower labor costs. Given the low mid-to-long-term growth prospects, companies will be cautious about raising wages, especially the basic salary of regular employees, even if the labor shortage problem becomes severe. That is because an increase in fixed costs leads to pressure on future earnings.
Since such wage constraints prevent inflation, such risks are low even if economic recovery continues for a long time, making the overheating of the economy difficult. Moreover, such circumstances are more likely to result in a relatively slow economic recovery with no aggressive monetary tightening measures taken.

Future uncertainties and the rise of populism

However, when the productivity growth rate declines, people cannot expect an improvement in their lifestyles in the future. An important economic factor that influences the standard of living is purchasing power. It is determined based on real wages calculated by discounting nominal wages with price, and the rate of increase in real wages is mainly determined by the rate of increase in labor productivity.
Actually, the rate of increase of labor productivity tends to decline in Japan; hence, under such circumstances, most people cannot expect their standard of living to steadily improve in the future. Economic weaknesses such as a decline in the rate of increase of productivity cause an extraordinarily prolonged recovery, due to which many people do not actually feel that recovery is happening.
This is why when the economic environment is severe, it is easy for one to think that "others are unfairly taking our share of income". Actually, despite the fact that the economic potential is falling, it is likely to be passed on to the issue of disparity. If we take this into account and emphasize the issue of disparity more than necessary, populist governments and populist political parties will emerge to try to increase political cohesion. Due to this, the tendency of a country-first approach, including anti-globalism and anti-international cooperation, has strengthened in all countries, and as for domestic policy, fiscal expansion measures are being implemented.
However, the protectionist policies and fiscal expansion measures could reduce the stability of the global economy and financial markets, while on the other hand, structural reforms that are actually required to increase the economic potential will be postponed. The greatest risk is probably that such a mistaken policy response will trigger an end to the exceptionally prolonged economic recovery.

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Nomura Research Institute, Ltd.
Corporate Communications Department
E-mail: kouhou@nri.co.jp

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