The Sad Tale of Japan: New Prime Minister Fumio Kishida has caved in and given up.

• Author: Katz, Richard

Had new Japanese Prime Minister Fumio Kishida actively pursued the two economic goals he declared during his rise to the top last fall--a restoration of Japan's past entrepreneurialism and ensuring that households get their fair share of national income-he'd be sending Japan well on the way to recovery. Unfortunately, like so many of his predecessors, he has failed to back his lofty goals with the measures needed to reach them. On the contrary, he quickly caved in the face of opposition and now retains only hollow slogans--like "a new form of capitalism"--plus a few leftover measures that have proved futile.

This creates the risk that Japan's three "lost decades" could add a fourth. If so, living standards for a large share of the population will continue to stagnate or decline. Over the past three decades, subpar productivity has kept Japan's per capita growth at just 0.6 percent per year, the third lowest rate among thirtyone countries in the OECD. Meanwhile, even this meager level of growth is failing to benefit so many households. From 1995 to 2018, median disposable income plummeted 11 percent for the seniors who now comprise nearly a third of the population. Even though the average Japanese worker produced 30 percent more GDP per workhour in 2019 than in 1995, real wages per hour dropped 1 percent. This is the worst productivity-wage gap in the entire OECD. Kishida was accused of preaching socialism for saying, "If the fruits of growth are not redistributed, consumption and demand will not increase." In reality, this is a longstanding finding of textbook growth theory called the Uzawa theorem. That theorem has played out in spades in Japan. Not only is Japan's potential growth low, but despite decades of big budget deficits and near-zero interest rates, actual GDP has fallen short of potential by an amount averaging 1.2 percent of GDP over the past thirty years (see Figure 1).

One reason is that Japan's economic weakness makes it very susceptible to economic shocks. Even though Japan played little role in the widespread malfeasance that produced the frightening global cataclysm of 2007-2009, its GDP fell twice as much as the rest of the OECD. Covid caused relatively few cases and deaths in Japan. Yet, due to Covid and two hikes in the consumption tax (2014 and 2019), Japan's real GDP in January-March 2022 was only 2 percent higher than it was almost nine years earlier during calendar 2013. Consumer spending was 3.4 percent lower than in 2013. This pattern bodes ill for Japan if the world enters a new recession.

On the security side, economic weakness is causing Japan to lose influence in Asia to an increasingly bellicose China. In terms of "the capacity to exercise influence and leverage through economic interdependencies" within Asia, like trade, investment, and technological leadership, the Asia Power Index reported that Japan's score fell from 56 in 2018, when the index was launched, to only 40 by 2021. China's score rose from 96 to 99.

CAVING IN TO PRESSURE

For six long months, the Kishida...