Whether you live in Japan or somewhere else, many people are talking about Japan’s economy. I get a lot of articles forwarded on the topic and you cannot open a local paper without something on the topic of Abeconimics.

Many foreigners are excited about the decline of the Yen, a hot stock market and media news about the revitalization of the economy. But unfortunately, revitalizing an economy that has been flat or deflating for 20 years is turning out to be not as simple as driving inflation and driving down the Yen to increase exports.

As I “re-learned” in the spring while supporting my son on a project, economies are fickle things that governments can manipulate over the short term, but over the long run it is the consumer and business owner that decides the fate of the country.

In our North American, consumer driven economies this isn’t as big an issue. People buy bigger houses when rates come down and load up on debt. The same isn’t true in Japan. In the article Japanese husbands get allowances—and they’re at a 31-year low, in a bad sign for Abenomics, the author explains a very different reality in the Japanese culture:

In at least half of Japanese married households, the wife controls the budget and allocates a proportion of her husband’s salary for spending money known as “okozukai”—which covers mobile phone bills, drinks, cigarettes, and entertainment. The average allowance has slipped to $386 per month, according toa new survey by Shinsei Bank (pdf), down 3% from last year and to the lowest level since 1982.

Last year the BBC interviewed one 47-year-old Japanese man who had been receiving an unchanged allowance from his wife for 15 years. He tried to negotiate a raise, but “she [drew] a pie chart of our household budget to explain why I cannot get more pocket money,” he said, defeated.

The okozukai system is part of a broader Japanese financial culture where families often save huge amounts, particularly when times are bad. The result has been an economic disaster, which is why a key part of the government’s “Abenomics” suite of economic reforms is encouraging savers to spend.

Now overlay that notion with the demographics: the Japanese population is aging rapidly and every year the population declines significantly as young people are not getting married and having children. This means that the strain on the government social system is going to increase as time goes by and in one estimate I read the population is on a trajectory which may see it hit 100M people by 2040 (down from the current 127M).

Japan needs young people to pay for the upcoming social system burden, replenish the workforce and create that next wave of naive, exuberant, consumerism to drive demand. But many are rebelling at the notion as the young males do not want to enter the okuzukai system like their dads (neither would I) or the salaryman culture that is pervasive in Japan: (Via A Geek in Japan):

Salarymen wake up at around eight o’clock in the morning, have breakfast, put on their suits, take up their briefcases, and get on the train for a commute of approximately an hour. They work, have lunch with their coworkers, and usually work overtime, arriving home very late at night. Often, before going home, they will go out for a drink with their workmates and pass the time at an izakaya.

From a simple logistics point of view, how do you get the population to spend more and jump start the economy when they spend 5 or 6 days a week in the office till late at night when the promise of lifetime employment is no longer on the table? (read Japan’s Lost Generation).

Now add the cultural conundrum of immigration which seems to be the only way that Japan can maintain their population, a strong workforce and base of consumers. Japan is one of the last homogenous societies in the world. 99% of Japan is Japanese, bolstered by the last earthquake which lead to a max exodus of foreigners (Flyjin). That homogeneity is one of the fundamental underpinnings of Japanese society; it means shared values, group minded thinking, true social consciousness, safety as a group, and the most orderly society in the world. But when the population is aging and declining rapidly what other choice is there? Japan is heading to this cliff and rightly recognize that this one topic will change the very fabric of their 3,000 year old society – which is why they so actively resist it.

On the business side, the stock market is up and exports have swung upwards due to the weakened Yen. But for Abenomics to work, Japanese companies need to start hiring more people (which creates more consumers) and start building factories (which drives jobs). One of the best articles to articulate this is Will Abenomics Work?

We think the current economic upsurge is mainly due to: i) exporters
enjoying a temporary respite until either China and Korea react with
devaluations of their own or there is a repeat of the Eurozone
meltdown, and ii) the spending habits of exporters wealthier
shareholders and suppliers. But since exporters only account for 16%
of the economy, and just 15% of Japan’s households hold any shares at
all, these very visible players should not be mistaken as representing
the Japanese economy as a whole. Rather, we think that while the top
1% might indeed be feeling wealthier, and 1m people can certainly buy
a noticeable amount of high-end goods, but there’s another 126m who
are not seeing anything other than rising prices and instead are
wondering just when things will get better.

Add into that an inflated labour market where companies will struggle to add to their workforce when they are not allowed to remove low performers or surplus workers:

Near the top of the reforms list, just under deregulation and lowering corporate tax, is the need by employers for more “labor flexibility” — code for the ability to fire people they no longer need. Economists reckon that 10% of employees (about 4.5m people) in Japanese companies are redundant, and if they could companies would let that many go in order to increase productivity.

When you add all these up it makes a simple point: this isn’t as simple as driving inflation, this is about culture and the question of deep change.

The challenge with that is that if you start changing the cultural foundations of the society, the downstream impact is that you reshape the very fabric of what it is to be Japan.

In a 3,000 year old society, that is not to be taken lightly and one needs to beware the rabbits as the consequences are significant.

Japan is a fascinating place with many big questions looming. It is a privilege to be here at this point in time, listening, learning and observing.

As an aside, a few of my favourites on Japan:

• One Obstacle Won’t Budge in Japan’s Fight With Deflation   Fascinating read on the economy and Japanese vending machines (there is a vending machine for every 33 people)
• A Geek in Japan    A great read on Japan culture, and what it means to be a gaijin working in a Japanese company.
• The Japan Times.    I find the “local” papers are a great insight into what it means to be part of the culture. I still read the Guardian out of the UK.