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Japan can again become the land of the rising sun. We should watch and learn from them.

1 November 2012

Summary:  Today we look at the future of Japan, and how well it will cope with one of great trends of the 21st century: the next industrial revolution. Japan’s weaknesses suggest they have some tough times ahead, but their unique strengths (sometimes wrongly considered weaknesses) suggests the 21st century might become a century of the rising sun over Japan. America too will face this challenge; we should watch and learn from Japan’s experiences — successful or otherwise.

Content

  1. The bad news: current weakness, massive debt
  2. The next Industrial Revolution
  3. Falling population is a boon for Japan
  4. For More Information

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(1)  The bad news: current weakness, massive debt

In July 2009 I wrote this conclusion to As Japan sails into the shadows, let’s wish them well and wave good-byJapan’s political regime may have passed the point of no return.  The demographics are essentially fixed for a generation or two.  The debt is too large and too short-maturity to inflate away — rising interest expense would bankrupt the government (or force hyper-inflation) before it reduced the real debt.  And its too big to pay — or even sustain.

That still looks likely. In 2009 there were many Japan-boosters, forecasting a strong recovery and bright future. Their ranks have thinned since then (example: “Forget Europe: Is the Real Debt Crisis in Japan?“, The Diplomat, 30 October 2012). This graph shows the why. Japan has stabilized their economy since the 1989 crash through massive fiscal stimulus.  Year after year. Decade after decade. The resulting numbers — GDP, income, investment, retail sales — look fine.  But at the cost of rising government debt.  Japan might have passed the point of no return, with little prospect of the rapid growth that could save their regime.

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But just as America is not the Second Republic, Japan is not its political regime.  If we look out to longer horizons Japan has a bright future. Japan might have the formula for success in the 21st century:

  1. A highly educated and hard-working people with a high-savings rate (the foundation for economic success),
  2. a homogeneous population with strong social cohesion (avoiding the internal turbulence possible in multi-ethnic societies), and
  3. a shrinking population.

The latter is usually considered a negative, especially compared with exceptional America with its large numbers of families that breed like bunnies. Some economists believe a falling population means economic decline, pointing to formulas that show more people = more national income. That’s mad for an over-crowded island like Japan.  And it is probably wrong about the nature of national prosperity in the 21st century.

A tool of 15th century labor protest

(2)  The next industrial revolution: robot revolution

(This has been revised for greater clarity and detail)

There have been several industrial revolutions, usually described as the first (1750-1850), second (1860-1920) , and third (information revolution, so far the smallest in its effects). The first two reshaped society, but the productivity gains were shared only after long periods of social violence. Eventually elites in the developed nations, frightened by the communist revolution and Great Depression) decided that sharing was the price of social stability.  The word sabotage might refer to poor textile workers tossing their wooden shoes (“sabot”) into the machines as a protest.

The next wave of automation already looms ahead, with massive job losses from machines having rudimentary senses and processing capabilities. In the future beyond that lie semi-intelligent machines. The result will be massive structural unemployment, shifting the shares of national income decisively from labor to capital. Look around to see it happening now, slowly accelerating.  Unusually high unemployment, rising levels of income inequality (both have other drivers as well, of course).

The process of sharing these vast gains among the different classes might become a — or perhaps the — major social issue of the 21st century. A highly educated but shrinking population like that of Japan is well-suited for this new era. They will have lower unemployment, thus reducing the inevitable social stress of this technological transition, and facilitate adoption of this world-changing technology. The obvious contrast is with America, and its growing population of increasingly poorly educated people.

See the links at the end for more information.  You’ll be hearing more about it during the coming years.

(3)  Falling population is a boon for Japan

Japan’s population peaked in 2008 at 128 million (their baby boom ran from 1947 – 1949), crowded into a narrow urban belt along the coast — at densities far beyond any rational level. By 2100 their numbers might be half that, back to the level of 1930.  perhaps as low at 60 million (1925) or even 50 million (1910). Their living conditions, Japan’s overall environment, will be improved.

Japan could be a garden with the cleaner technology of that era (a common question in grade-school history will be “Teacher, what is ‘pollution’?”).

The transition might prove painful. Like most late 21st century societies, Japan probably will be an old society and so quite different than those of our time (or anything seen in history). Look at this graph from Japan’s National Institute of Population and Social Security Research showing the coming evolution of age distribution in Japan.

For More Information

The next phase of automation (aka The robot revolution):

  1. The coming big increase in structural unemployment, 7 August 2010
  2. The coming Robotic Nation, 28 August 2010
  3. The coming of the robots, reshaping our society in ways difficult to foresee, 22 September 2010
  4. Economists grapple with the first stage of the robot revolution, 23 September 2012
  5. The Robot Revolution arrives, and the world changes, 20 April 2012

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28 Comments leave one →
  1. guest permalink
    1 November 2012 12:24 am

    > a common question in grade-school history will be “Teacher, what is ‘pollution’?”

    The question will not be asked — the remains of damaged nuclear power plants such as Fukushima, and legacy landfills will form the concept of pollution.

    “The result will be massive structural unemployment, shifting the shares of national income decisively from labor to capital.”

    Massive automation is a decisive factor in the long-term — and the cultural implications on our societies are considerable. How can one keep a society together, infuse it with a sense of purpose, steer it to some meaningful achievements and ensure a minimum of peace and prosperity when the unavoidable, permanent, definitive message to a very large fraction of the population will be: “you are useless — we do not need you”?

    • 1 November 2012 1:02 am

      (1) “The question will not be asked — the remains of damaged nuclear power plants such as Fukushima, and legacy landfills will form the concept of pollution.”

      Perhaps, but I doubt it. The intense radioactivity is mostly from short-lived elements. The long-term waste can be easily disposed of, with a little common sense.

      (2) “How can one keep a society together, infuse it with a sense of purpose, steer it to some meaningful achievements and ensure a minimum of peace and prosperity”

      Perhaps. But I don’t understand why it’s necessarily horrific to have a society where people are freed from the necessity of laborious daily effort (like most people have today). Even more so, why is this incompatible with peace and prosperity? Throughout history the world’s aristocracies have done quite well living on unearned income. Why can a larger fraction of humanity share their lifestyle?

  2. guest permalink
    1 November 2012 1:41 am

    “The long-term waste can be easily disposed of”

    Every attempt in every country to dispose of long-term radioactive waste so far met with failure. It does not work, or it does not scale up.

    “why it’s necessarily horrific to have a society where people are freed from the necessity of laborious daily effort”

    It would not, but for the fact that our societies’ economic, legal and even religious fabric are based on people earning their living through gainful work.

    Besides, from what I read it seems that the next wave of automation is going to affect workers whose daily effort is not laborious in the sense of physically trying — i.e. mainly white-collar employees.

    The increasing restrictions and cuts made throughout developed countries to institutional support mechanisms for those who cannot work (unemployed or disabled), and the reluctance to sustain a training/retraining effort for those who could but whose skills are not yet/no longer up to date (no meaningful apprenticeship programs, university tuitions becoming unaffordable, effective winding down of grants and scholarships) show that we are moving in a direction where those people pushed aside through automation are at a high risk of being practically dealt with as dead wood — cast aside as “useless”.

    All good conditions for social dislocations.

    In that context, you remark about the demographic decline being a boon for the future of Japan is right on the mark.

    “Why can a larger fraction of humanity share their lifestyle?”

    Everybody sharing Mitt Romney’s or John Edward’s lifestyle?

    You cannot bring the income of everybody to the corresponding level of income of whichever aristocracy is in place, which is only achievable through substantial inequality, inequality which is at risk of increasing even further.

    • 1 November 2012 2:09 am

      (1). “Every attempt in every country to dispose of long-term radioactive waste so far met with failure.”

      Examples?

      (2). “You cannot bring the income of everybody to the corresponding level of income of whichever aristocracy is in place, which is only achievable through substantial inequality, inequality which is at risk of increasing even further”

      That is the opposite of what I said.

      Just as previous industrial revolutions have increased national incomes, so will the next. If it is shared, even unequally, large numbers can be freed from the need for full-time work — so that the reduced employment need not be a problem.

      That does not mean equality of income, or even reduced inequality.

      The point of my comparison with past aristocracies was rebuttal to your comment that work was necessary for people’s self-esteem. Aristos have fine self-esteem without working.

      Getting the next productivity gains shared might be difficult, much like the violent labor-owner clashes between the civil war and WW2.

    • guest permalink
      1 November 2012 10:05 am

      “Examples?”

      Look at World Nuclear Assn’s website page about Storage and Disposal Options for a comprehensive survey of long-term disposal techniques. They do not scale (too expensive, too limited in time), are “can’t do” because they violate international treaties, or results have been unsatisfactory because of leaching (direct injection — see Oak Ridge USA, or salt mines — see Asse in Germany). Remaining techniques are under study and are still to be applied.

      “Just as previous industrial revolutions have increased national incomes, so will the next. If it is shared, even unequally,[...]”

      All right, your assumptions are that

      1. income will be boosted by a forthcoming IR;
      2. the increase of productivity will be higher than the (on-going) increase in inequality;
      3. demographic decline will partly compensate for reduced work opportunities.

      On (1), I must pass. On (3), I agree. On (2), I notice that the IT revolution of the last 40 years or so, which economists discovered did lead to substantial productivity increases (albeit concentrated in certain economic sectors), accompanied an increase of inequality and a stagnation, even reduction, of income for the larger fraction of the population. So (2) is debatable. Time will tell.

      “work was necessary for people’s self-esteem.”

      I clearly stated that the legal and economic build-up of society make work indispensable. If one cannot live as a rentier, then one must work to live. It is not just a matter of self-esteem. I do not see those fundamentals changing any time soon.

      Once again, I agree with you that Japan will be the laboratory of how all those things work out and that the Japanese are in a better condition to succeed than other developed countries.

    • 1 November 2012 1:34 pm

      (1) Thank you for the link to the World Nuclear Assn website data on disposal. It’s not my field, but does not appear to support the statement that “Every attempt in every country to dispose of long-term radioactive waste so far met with failure.” As you note, two salt depositories in Germany have been problematic: the Asse II mine a major failure, the Morsleben radioactive waste repository probably following the same path to failure. But the WNA page by itself does not show the broad level of failure you mention.

      (2) Industrial revolutionss

      Your three steps perfectly summarize the case! As you state, #2 is just speculation. We can only guess about the next industrial revolution. They’re not all equal in scale! As you note, the economic effects have — so far — been quite small and concentrated in one sector. This wave is potentially similar in scale to the first (1750-1850) and second (1860-1920) industrial revolutions.

      (3) “I clearly stated that the legal and economic build-up of society make work indispensable. If one cannot live as a rentier, then one must work to live. It is not just a matter of self-esteem. I do not see those fundamentals changing any time soon.” in rebuttal to my comment that “work is necessary for people’s self-esteem.”

      I was not clear. I agree with that part of your reply about productivity (see #2 above) and the struggle to equally distribute national income. My statement was in response to a different section:

      “the cultural implications on our societies are considerable. How can one keep a society together, infuse it with a sense of purpose, steer it to some meaningful achievements and ensure a minimum of peace and prosperity when the unavoidable, permanent, definitive message to a very large fraction of the population will be: “you are useless — we do not need you”?”

      I misunderstood this as a comment about the cultural role of work, rather than the economics of income distribution.

      (4) “I agree with you that Japan will be the laboratory of how all those things work out”

      Agreed. This post took a stronger position (not explicitly stated): that Japan has a better chance than the US of successfully managing the next industrial revolution.

    • 1 November 2012 1:42 pm

      Another note about guest’s comment:

      “the increase of productivity will be higher than the (on-going) increase in inequality;”

      This is perfectly stated (better than I did), and goes to the heart of the coming struggle. The gains from the first and second industrial revolutions were shared adequately in the US only after long and often violent struggles — in which both private and public “armies” (ie, organized armed men) were deployed against strikers. Peaceful resolution came after the Communist revolution and Great Depression convinced our ruling elites that greater sharing was necessary to maintain social peace.

      How will the next IR play out in America?

    • 1 November 2012 1:44 pm

      Another note about guest’s comments: This is how a great comment section works. After this conversation with guest I understand what I said better than when I wrote it!

    • guest permalink
      1 November 2012 2:47 pm

      “the WNA page by itself does not show the broad level of failure you mention.”

      An interest group rarely emphasizes the failures in the area it wants to defend. That site is very useful because it clearly explains the techniques with their shortcomings and advantages, but does not list failures at all.

      Apart from the salt mines failures in Germany, the waste pond in Oak Ridge has been a problem. Attempts to stabilize it were deemed insufficient and finally everything had to be excavated. In France, contaminations of the water table in the vicinity of the Tricastin complex, and that could not be explained by incidents in the power plant, led in 2008 to an old burial site of casks containing low-level radioactive waste from a military installation that ceased its activities in the late 1970s. The disposal of nuclear waste at sea was based on the idea that radioactivity would dilute to safe levels — but the experience in the Irish sea has shown that radioactivity (mainly caused by Sellafield) does not dilute that fast and has been accumulating noticeably in marine life and sediments.

      Earth burials, waste ponds, salt mines, disposal at sea, have been the techniques used so far — they failed repeatedly. More advanced techniques are being investigated, but (engineering-wise) reliable results will take decades to come.

    • 1 November 2012 3:05 pm

      Guest,

      All interesting information, about an important topic. Thanks for providing it!

      I wonder if nuclear power has much of future after the repeated disasters, and the many close brushes with disaster. Even China is, from some reports, reconsidering their ambitious program. There are interesting next-generation proposals (see the section on nuclear power on the FM Reference Page about energy), but the industry’s history might have ruined public confidence.

  3. 1 November 2012 4:19 am

    Very interesting take on how this one nation’s demographic trends will benefit it in the future.
    Japan has been ahead of the curve with regards to automation and demographics for at least 50 years. It’s quite clear that they love their robots.
    Perhaps we could learn something from this idea that it’s not so much GDP we should strive for, but GDP per capita.

    I heard once that the standard of living was higher for the survivors of the plague in 1350′s Europe. Not sure how true that is, but it is interesting to consider. The houses, farms, municipal infrastructure, etc are all still there, but fewer people competing for them.

    • guest permalink
      1 November 2012 3:03 pm

      The lack of manpower apparently led to an increase of wages after the Black Plague.

      However, I also read another, much less comforting analysis (sorry, no longer a reference to this): it led to a considerable restriction of labor mobility, enforced by employers who would lose from the new conditions. As consequences, a reinforcement of guilds in Western Europe and the systematic application of serfdom in Eastern Europe. Some historians postulate that whenever large disparities between available and required manpower arise (basically zero unemployment), labor choice of employment is forcibly curtailed — via the whole range of measures from slavery, serfdom, residence permits (Russian propiska and Chinese hukou), and obligation of guild membership — so that labor largely loses its new bargaining power based on scarcity.

    • 1 November 2012 3:14 pm

      Guest,

      “it led to a considerable restriction of labor mobility, enforced by employers who would lose from the new conditions”

      You might be thinking of the work of Evsey D. Domar. His collected essays are published as Capitalism, Socialism, and serfdom.

      “The lack of manpower apparently led to an increase of wages after the Black Plague.”

      The effects of the Black Death — a very different phenomenon than the industrial revolutions we’re discussing — are still debated. One school says that it had highly beneficial effects, reducing chronic overpopulation and increasing the value of workes (esp skilled workers).

    • 1 November 2012 6:28 pm

      This may be offtopic but

      > One school says that it had highly beneficial effects, reducing chronic overpopulation and increasing the value of workes (esp skilled workers).

      That’s easier for historians to say in hindsight but I think that the families of the people who died horribly would beg to differ. Historians don’t have to smell the rotting corpses and fail to appreciate the realities of war and disease in history.

    • 1 November 2012 7:26 pm

      Mtinberg,

      No, I don’t believe that is at all an accurate reflection of what they are saying.

      Many events in history were horrific for participants but had net beneficial effects. However unpleasant, that is reality. Some wars were like that. The Plague might have been like that. The invention of agriculture might have been like that (with shorter and less healthy lives than their hunter-gathering ancestors).

      Such is life. Historians just observe, they don’t make history.

  4. 1 November 2012 4:57 am

    “Some economists believe a falling population means economic decline, pointing to formulas that show more people = more national income. That’s mad for an over-crowded island like Japan. ”

    Great quote. It feels mad even in some places with supposed low population density like the strip malls and frontier suburb divisions.

  5. 1 November 2012 2:28 pm

    Much has been made of how Apple outsourced their manufacturing to Chinese companies where people work like robots. My assumption had been that when the Chinese workers are replaced by real robots, it will happen in the United States and not there. However the entire logistical system the Chinese currently have going to support manufactuing suggests that the next stage of the robotic revolution will occur in China. This may be the implication of what Steve Jobs told Obama, that the Chinese have the logistics to support manufacturing and we don’t.

  6. 1 November 2012 2:30 pm

    Appologise for re-routing topic from Japan to China but the same issue, the logistics for manufacturing may work against the Japanese too.

  7. Pluto permalink
    1 November 2012 5:06 pm

    “1.A highly educated and hard-working people with a high-savings rate (the foundation for economic success),”

    I agree with much of what you said but the high saving rates seems to be coming down to US standards. See the third chart on this web site: “Land of the Rising Sun” by prestonni at CapitalSynthesis, 18 Feb 2012

    • 1 November 2012 5:48 pm

      Pluto,

      I agree. But these kinds of comparisons have to adjusted for demographics, so that we’re comparing like-to-like.

      Savings rates vary with age. The US Boomers are in their peak savings years, just prior to retirement. Japan’s boomers are retiring, as their Boom preceded ours.

      My poorly stated point was that they — as a people — save more than Americans do at equivalent circumstances. That can change, of course!

  8. 1 November 2012 5:48 pm

    I love the quick read of these speculative little forays. Emphasis on quick.

    And the little discussions about a Plague; how glib. I say, HOW will the land of the rising sun get from here: “Sharp Drops After Saying Material Doubt on Survival“, Bloomberg, 1 November 2012. ……to there/where? And America?

    Breton

    • 2 November 2012 1:02 am

      Breton,

      The situation of Japan’s corporations (eg, Sharp) and US corps are not similar. US corps have record high profits. Japan’s are suffering from a grossly overvalued currency. Japan has to take drastic action to devalue its currency, fast. This is one of several problems which they have let fester and grow since 1989. Time is running out.

  9. 1 November 2012 7:24 pm

    Japan is way, way, over centralized in Tokyo. This really became apparent after the 2011 earthquake. The important government offices are in Tokyo and the large businesses want to be near to them. They don’t even really need to lower the population, there’s a lot of underdeveloped land in Japan and many smaller towns with dwindling population. The quality of life would improve dramatically over there, I think, if more businesses would just spread out more evenly across the country.

    This article makes an interesting point on the ‘Japan is not doomed’ side of the argument. “If Japan Is Broke, How Is It Bailing Out Europe“, Eamonn Fingleton, The Atlantic, 23 April 2012

    Let’s note that a balance sheet has two sides. The Japanese government’s liabilities may be large. But it is important to take a look at its assets before resorting to extravagant denunciations of its financial policy. What is clear is that the Tokyo Finance Ministry is increasingly borrowing from the Japanese public not to finance out-of-control government spending at home but rather abroad. Besides stepping up to the plate to keep the IMF in business, Tokyo has long been the lender of last resort to both the U.S. and British governments. Meanwhile it borrows 10-year money at an interest rate of just 1.0 percent, the second lowest rate of any borrower in the world after the government of Switzerland.

    On the population graphs, one point I’d make is that in terms of health, and this is just an observation, I’d compare Japanese at 75 to Americans at 65. Japan just has a whole lot of healthy people in this age range, 65-75, and a lot of them are still working. I think it’s mostly that the diet is better and people walk more over there. Eventually, Japanese get dementia and other problems just like Americans do, but too many Americans are falling apart in their 60′s due to diabetes and obesity.

    • 1 November 2012 7:34 pm

      Cathryn,

      Thanks for this comment! Great point about Tokyo.

      I have not read the article, but this detail looks misleading or wrong: “What is clear is that the Tokyo Finance Ministry is increasingly borrowing from the Japanese public not to finance out-of-control government spending at home but rather abroad.”

      Japan’s foreign currency reserves are aprox $1.2 trillion. The gross debt of Japan’s national government is aprox $14 trillion. The debt is increasing far far faster than the foreign lending.

    • 1 November 2012 7:37 pm

      Cathryn,

      Also, that is a powerful and sad comment on the relative health of Americans and Japanese. I have long wondered about its cause, esp our greater use of smoking, drugs/alcohol, and our obesity.

      Guessing, diet seems insufficient. Cultural? Short-term perspective? A rot in our souls? The question is over my pay grade to answer.

    • 1 November 2012 7:56 pm

      I guess most Japanese would attribute the health differences to diet. Drug use is pretty rare in Japan, and even Marijuana has severe legal penalties, but alcohol and tobacco are everywhere. However, Americans are way way more obese. Walking around you see a few fat Japanese guys these days, but it’s nothing like the USA.

  10. Matt D. permalink
    2 November 2012 1:07 pm

    In my opinion, people who idealize sterility are pathologically frightened of dynamism. Just a hypothesis.

    • 2 November 2012 2:24 pm

      Matt,

      I understand and to some extent agree with your viewpoint. But there comes a point at which crowding becomes intolerable. Japan might have reached that point.

      It happens with animals, as experiments have shown.

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