Japan's Government Encourages Unemployment

Jeff Harding.

I don’t mean to keep picking on Japan. But, they are the textbook case of why Keynesian economics doesn’t work. Actually, now that I think about it, they are the textbook case of why Austrian free market economics works. I have set them up as the poster child for bad policies. They have had one of the worst economies of the major economic powers in the world (they are the No. 2 economic power, after the U.S.).

I’m just reading the numbers that are coming out for Japan.

Dec. 8 (Bloomberg) — The Japanese government unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama’s popularity are waning.

Hatoyama’s first stimulus plan includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives, the Cabinet said today in a statement in Tokyo. The measures had been delayed because of haggling within the coalition government.

The Democratic Party of Japan, which took office in September pledging to support households battered by two decades of economic stagnation, is grappling with a slide in prices and a surging yen. The government will say third-quarter economic growth was slower than initially reported in revised figures tomorrow, according to economists surveyed by Bloomberg News.

“It’s a necessary step,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “Without another stimulus package, it’s very likely that the economy will fall back into recession. The government simply can’t risk this right now.”

They also say:

Japan has the world’s largest public debt, with liabilities that are approaching twice the size of the economy.

Finance Minister Hirohisa Fujii said bond sales for the current fiscal year will exceed tax revenue for the first time in the postwar period. The government will sell 53.5 trillion yen [$588,200,000] in bonds, more than the 44 trillion yen budgeted in April, he said. Tax revenue will slump to 36.9 trillion yen, less than the 46 trillion yen projected.

Yikes! Maybe that’s why their economy has averaged 0.6% growth over that last 20 years.

The new and old government have been doing the sames thing Japan has always done: increase government spending as “fiscal stimulus,” reduce their “Fed Funds” rate to 0.1%., borrow the money to finance the programs, spend the money on wasteful projects, and generally discourage failed companies from going under. They’ve been doing this stuff for the past 19 years and it always yields the same results: sluggish economy, high de facto unemployment (“window sitters”), deflation, and high debt. Remember the definition of insanity: doing the same thing over and over and expecting a different result.

Let’s face it, they are the quintessential mercantilist state. You’ve heard of Japan, Inc. It’s true. The big zaibatsus and the interlocking  keiretsus get treated with kid gloves and had a nice cooperative arrangement with MITI, the government agency that used to determine who does what (formerly a very powerful agency but now folded into a larger agency, METI ). These policies are inherent in the Japanese system and have existed in some fashion since they emerged as a world power in the early 2o^th C. I don’t really think I’m exaggerating here, but I’m sure my mistakes will be pointed out by my Japanese readers.

But here’s the latest foolish policy. They are talking about enacting legislation that will actually raise unemployment. Heres the story from Bloomberg:

Japan may ban manufacturers from hiring temporary workers, Health and Labor Minister Akira Nagatsuma said, as Prime Minister Yukio Hatoyama seeks to fulfill a campaign pledge to shift more employment to full time.

The government is preparing legislation “that will stop manufacturing firms from employing temps and encourage them to hire full-timers,” Nagatsuma said yesterday on a business program broadcast by public network NHK.

Japanese companies have cut jobs to remain profitable in an economy struggling with deflation and as a strengthening currency erodes export earnings. Unemployment rose to a postwar high 5.7 percent in July, while the yen has gained 2.8 percent against the dollar in the past three months.

“Manufacturers have drastically slashed labor costs, but those expenditures are still dragging down profits,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “We’ve seen some improvement in the jobless rate the past three months, but it’s too early to expect any shift in the trend.”

Companies started replacing retirees with temporary workers after deregulation in 2004, creating a two-tiered labor market in which mostly younger workers enjoy less security and fewer benefits. The jobless rate, which unexpectedly fell to 5.1 percent in October, has stayed at 5 percent or more since April. …

Boosting employment is a priority of the stimulus package Hatoyama is to unveil this week to protect the economy’s rebound from its worst post war recession. Third-quarter profits at manufacturers including auto and electronics makers decreased 69.3 percent from a year earlier while sales fell 21.2 percent, a Finance Ministry survey showed last week.

Younger people aren’t reaping the benefits of the improved labor market. The proportion of college students with job offers tumbled 7.4 percentage points from a year earlier to 62.4 percent, an Education Ministry report showed last month, the steepest drop since the survey started in 1996.

There are two possibilities here. One is that they will continue with subsidies to employers to keep full-time workers on the job. If the economy is tumbling, then we’ll have an increase of window sitters, employees who apparently have nothing to do all day but look out the window.

Actually their economy is tumbling. The fake boost from stimulus is wearing off (again). If profits have fallen almost 70% in the leading industries, you can guess at the outcome here. It is just an expensive form of unemployment insurance. The resulting increase in national debt to pay for it will just further dampen the economy as taxpayer have to pay for it.

The other outcome is more frightening. This kind of reminds me of what Herbert Hoover did after the 1929 Crash. He thought that the way to prosperity was to keep wages high so that workers would have money to spend and thus boost the economy. The result was massive unemployment as companies kept on workers at high wages. Companies went bust trying this out and it was one of the policies that caused the Great Depression.

If the Japanese government puts some or all of the burden on employers to pay for this, then why would companies hire anyone? With declining output and deflation, they really need to shed employees, not keep on workers who have nothing to do.

Whatever the details of the policy are, the result will just be more de facto or de jure unemployment and economic stagnation. Perhaps very serious unemployment and stagnation.

Maybe next they’ll raise the minimum wage.