Grim Outlook for Japan Economy: Barclays Economist

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That collapse has sparked a knock-on collapse in Japan, and triggered a general slowdown in Japan.

Yes. In 2005, at the height of quantitative easing there were no signs of inflation. At the time, observers explained it as people having greater faith in the central bank's monetary policy which suppressed inflation. However, we were wrong. Inflation was rising abroad behind out backs, namely in the commodity market and in stock prices. Central banks now know they have to look at all asset classes for signs of inflation, not just CPI and stock indices.

So, capital was flowing out of Japan and fuelling inflation across its borders. It no longer has to appear in CPI. I'm wondering who will suffer most in the coming slowdown. Will we see serious damage in the small enterprise sector, for example, or will they still be insulated by the low interest rate policy?

They will have to rely on cheap money for survival. Many of them are still weak and will continue to be so. Small, non-manufacturing companies in Japan have to thrive for Japan to thrive, and many such companies are directly or indirectly dependent on private consumption. So private consumption has to thrive, but I am bearish about that. We have found that the path connecting corporate profitability to households is seriously eroding. Why? One reason is globalisation. Not only are Japanese companies offshoring, but 30% of the market capitalisation is held by foreigners. This means that 30% of dividends generated in Japan are going offshore. In addition, foreign shareholders are very vocal. They criticise company managements when managers pay out too much money in salary costs, ending up with smaller profits. In the past, company profits used to be distributed to employees since shareholders were silent—but that's no longer the case. Japanese company managers have been taught by foreign shareholders that wages are costs (they weren't viewed that way in the past). So they are suppressing wages in favour of shareholder dividends, which are flowing out of Japan.

It's almost incredible to see Japan getting steadily poorer in a relative sense over such a long time. A recent report by the Organisation for Economic Cooperation and Development (OECD) said that Japan's ranking in terms of per capita income fell from the fifth highest in the OECD in 1992 to 19th in 2002. This is very unusual by the standards of Western economies, where long-term income growth tends to remain positive, even when punctuated by violent financial crises.

Yes, it is strange. But a major factor is the terrible demographic situation. In a country with positive demographics, the government's liabilities get diluted over time per head of the population. But in Japan, the opposite is happening. Japan's population has been shrinking since 2006, which will continue to put downward pressure on GDP. In 300 years, at the current rate of decrease, Japan's population will be extinct.

Bankers often call for M&A to boost consolidation and increase productivity to stimulate GDP growth. Do you agree?

Very much so, but it's not happening fast enough. Some people say that former prime minister Koizumi's reforms were excessive and have led to the current slump. In fact, we need more reform. The most important lack is that Japan has globalised to the outside, but has not allowed globalisation to come inside its own country. There is not enough foreign direct investment and immigration to offset a slowing Japan. We need fresh labour and fresh taxpayers.

Could robots or automation substitute for demographics? Or is the problem that they can't consume?

We do need them, along with FDI and immigration. Theoretically, robots can consume, since they depreciate. Depreciation is a form of consumption in economic terms.

You mentioned the Koizumi reforms were inadequate. Why is that?

Koizumi wanted to cut the budget deficit. Also he was obsessed with the Post Office privatisation plan. But we should have done more. We have to ask: why did Japan grow during the Koizumi cabinet? It was purely down to exports.