Degrowth and Japan – a shift in government strategy towards business failure?

I am briefly in the UK (arrived Tuesday and returning to Melbourne early Friday). We are officially launching our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – later this morning at the UK MMT Conference in Leeds, England. I am avoiding many of the sessions to reduce Covid risk, given the lecture theatres do not seem to have been refitted with modern ventilation. But from what I can see the Conference is well attended and going well. I should add that I had nothing to do with the organisation of the Conference but as usual I thank those who have put time to build an event that focuses on the work that I am part of. Anyway, a whirlwind trip this time. Today, though I reflect on the latest developments in Japan with respect to its ageing and shrinking population and how that impacts on business viability and skill shortages. All part of my research on degrowth strategies.

Japan – How to manage a declining population and Zombie businesses

I have written before about the problem with small businesses that Japan is facing as its population ages.

My current book project with Dr Louisa Connors, which we hope to have finished by the end of 2024 for publication early 2025 is focused on degrowth and system viability from an Modern Monetary Theory (MMT) perspective.

That perspective means that the sort of questions we ask and answers we are prepared to accept are different from those that a person operating in the mainstream paradigm would indulge.

And part of that project is dealing with how societies can adjust to natural events such as ageing of the population and the resulting skill shortages that emerge from that without radical redistribution of populations between nations.

I have written about the situation in Japan, which is probably having to face up to these issues earlier than most nations, given its declining population and reluctance to engage in wide-scale immigration.

My analysis of the Japanese situation is that the government should allow for the natural attrition of businesses when the skill shortages or the age of the owners render such a business nonviable.

That should be a sign that the business just closes.

One way that this process can accelerate is if businesses simply close their doors once the owner reaches what he/she considers an acceptable retirement age.

In Japan the average age of owners of SMEs is rising fast and the “peak age of business owners moved from 47 to 69 in 23 years” from 1995 to 2018 (Source).

The same data source (from the Japanese Small and Medium Enterprise Agency) shows that in 2013, 34,800 businesses just closed or dissolved.

By 2018, this number had risen to 46,724 and was will continue to rise as the owners get older.

The Japanese government has resisted this process and have been implementing “succession (transfer) of management resources” plans, which include tax incentives etc. to “further promote business successions outside family and relatives”.

While there might be some situations where such successions are sensible and policy can help them materialise, my general approach would just allow the natural attrition in these businesses to occur and see the closures as providing space for degrowth and a reduction in the material footprint.

If that natural attrition was allowed to continue, the skill shortages that are associated with the SME sector would also fall.

A recent Japan Times article (July 16, 2024) – Japan finds a ‘stealth’ cure for zombie businesses: Let them fail – considered this issue.

It considers the case of the so-called ‘zombie’ “small and midsize firms squeaking by on state help and almost-free funding”, which currently “account for around 7 out of 10 jobs” and are now facing “a shake-up as pandemic-era support dwindles and interest rates rise for the first time in 17 years.”

It seems that the Japanese government has decided to change its strategy somewhat:

… to let more underperforming companies fail …

So is that what I have been arguing for?

Not really, because the government thinks that there is:

… an urgent need to replace sclerotic businesses with those able to deliver growth.

So far from a degrowth strategy, the government is seeking to increase its GDP growth rate, despite the declining population, which necessitates less GDP growth if material standards of living are maintained.

The change in government thinking, however, does reflect a willingness to allow firms to go broke and the unemployment rate to rise.

The government believes that the unemployed workers will then be absorbed by growing firms that are currently being constrained by skill shortages and there is some truth to that.

The high-cost ‘zombie’ firms will die and the real resources (particularly labour) can be transferred into lower-cost firms, with higher productivity.

Such a dynamic will also help end the, up until now, wage stagnation in Japan as wages will become a measure in which to entice workers into the new areas of growth.

That is the logic and as I noted there is some truth in the reasoning.

The problem is that the Government is hoping that these resource transfers will come about through:

… mergers and acquisitions, rather than large-scale bankruptcies and lay-offs …

And therein lies the problem.

Up until now, the ‘zombie’ sector has been a source of stability for jobs and business owners have told me in person that they hate laying off their workers and will do anything they can to avoid such an outcome.

Employment (and income) stability is an important aspect of social stability in Japan (or any society for that matter) and once a society starts accepting elevated levels of unemployment to be the norm (a NAIRU sort of mentality) then that stability and prosperity is lost, particularly for the workers and their families that are most susceptible to extended bouts of unemployment.

Without the government support for the firms over the last 3 decades or so since the property bubble burst in the early 1990s, unemployment levels would have risen to levels common in the West with all the attendant problems that that state has brought our societies.

While the Japanese government is clearly trying to avoid such a malaise becoming entrenched in Japan, the shift in policy introduces a susceptibility that they may live to regret.

It will mean that economic cycles driven by fluctuations in aggregate spending will be far more devastating in Japan than they have been in the past.

The Japan Times article hints at that:

This rethink of Japan’s traditional approach to business faces several hurdles, not least the social contract that has governed the postwar economy …

And the Government is clearly aware of that sensitivity to:

… the Ministry of Economy, Trade and Industry said it would continue to support small and midsize enterprises with funding and other measures … to ensure bankruptcies do not increase at an inappropriate level that would cause the unemployment rate to rise.

However, it is clear that a “stealth” strategy is now being implemented by the Government, which is unwilling to publicly declare that it is actively seeking business failures.

The Government knows that there would be “a public backlash that would be unwelcome for the ruling party”.

The Government also knows that in regional Japan, the local businesses play a much more broader role than just being a capitalist firm seeking profit.

They are part of the glue that binds the local communities together – providing meeting places (small cafes etc) and jobs.

There is also limited scope in these regional communities for significant resource transfers via mergers and acquisitions to occur, which means if the government support is withdrawn, then chronic unemployment and rising poverty would be the result.

I prefer to see the government support in those regions as being like a variation of the Job Guarantee idea – providing an essential safety net while maintaining the social and personal advantages of full employment.

While the government is keen to lift productivity growth (measured in conventional and narrow terms), I see maintaining the viability of the community by supporting the few employment opportunities available to be highly productive in social terms.

The other pressure the government is facing is from the mainstream economists who think that by increasing profits in these firms, wages can be higher and the government will be able to reap more tax revenue to reduce its deficit and debt levels.

Pure sound finance thinking.

Erroneous.

At any rate, Japan is at the forefront of these issues and is at a critical juncture in terms of its social makeup and the sort of challenges the nation is facing (labour shortages, climate urgency, etc).

How they respond to the challenges will shape the future of the nation.

And as the quotes in the next short piece tell us, Japan might make catastrophic mistakes if it follows a mainstream logic that is “dominated by fables and metaphors that describe not the world as it is, but an idealized, simplified planet”.

All part of my on-going work.

Groupthink abounds

I have been reading the 2022 book by George Monbiot – Regenesis (Penguin) and on page 25, by way of summing up the first chapter he writes:

Learning about the soil has taught me, to a greater extent than ever before, that we establish our truths from information that’s patchy and shallow, beneath which lies realities we scarcely imagine. Widely accepted claims are based on hearsay and myth, while scientific findings, however dramatic and intriguing, are scarcely known beyond a small circle of specialists. George Monbiot Regenesis

This was a reflection on his observations after digging a shovel into some soil at his allotment in Oxford, UK and studying the very complex life that lives below the surface.

He then wrote:

Our beliefs about food and farming are dominated by fables and metaphors that describe not the world as it is, but an idealized, simplified planet, prompting us to make catastrophic mistakes.

And, if we replaced the focus on soil and food production methods with efforts to understand the way the monetary system and the economy works then the words above would be equally apposite.

I realised that early in on my economic studies at University, having been aided by earlier readings on Marx and other critics of mainstream thinking in the fields of philosophy and history.

And it was that realisation that sparked my curiosity and ultimately set the path I took in macroeconomics, labour econmics and regional studies, the areas that I have worked and published in the most.

I will talk a bit about all that in my presentation that will officially launch our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – later this morning at the UK MMT Conference in Leeds, England.

The book is now available through the publisher and also from all the major book sellers.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.