Shrinking Hasn't Stopped Japan From Growing

(Bloomberg Opinion) -- Prime Minister Shinzo Abe's steps to increase immigration and raise the consumption tax are both signs that Japan's shrinking population is as much opportunity as challenge.

With an unemployment rate of 2.4 percent and a job market that by other measures is the tightest since the 1970s, something has to give. Robots will play a greater role, as will foreign-born employees under new guidelines announced last week.

The immigration changes, aimed at ensuring the supply of blue-collar labor, create two new categories of workers from abroad. Those with fewer skills can reside in Japan for five years, and people with more skills are permitted to stay longer and bring their families. A new type of visa will essentially confer permanent residency, Nikkei Asian Review wrote.

For Japan to keep its first-class infrastructure and provide for all those aging workers in retirement, the country's fiscal base needs to be shored up as well. The government confirmed Monday that a long-delayed increase in sales tax will proceed next year. This is risky; an increase in the levy was blamed for a recession in 2014 and set back the Bank of Japan's quest to get inflation back to 2 percent.

It's hard to even contemplate another Group of Seven leader pressing ahead with a tax increase, considering that a downturn followed the previous hike. But this is what population arithmetic does – eventually. The higher charge has been delayed a couple of times. It's moving ahead with a few caveats in case things sour: food and drink will be exempt from the bump, and sales of large durable goods will get some state support.

The concessions make sense given world growth appears to have plateaued. Perhaps Abe would have been better off nudging the tax up last year when the major economies were on an upward glide together.

It's hard to see Japan returning to the pedestal it once had when the country was seen to be challenging U.S. industrial might. But the idea that Japan is sunk, locked in inexorable decline and lacking China's star power looks increasingly dated. The demographic time bomb that supposedly would blow up Japan may lead to a technology renaissance. I've written about this here, here and here.

It's China's star power that now looks dimmed. Talk of a new Cold War was abundant last week, a trade conflict looks protracted, and there is an increasing acknowledgment that China has its own economic and demographic hurdles.

Given Japan's diminishing manpower, it's a wonder Abe hasn't done more to let women to play a bigger role. Professional women complain about a shortfall in daycare and the cost of nannies. Cultural barriers haven't been entirely dismantled.

Things tend to happen incrementally in Japan – that's democracy for you – but they are happening. Abe's tenure will be remembered as one of consequence.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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