SHF2023｜Takehiko Nakao

Takehiko Nakao

Former President of the Asian Development Bank;

Chairman of the Institute at Mizuho Research & Technologies, Ltd.  

First, I would like to touch on the issues of global challenges and already many previous speakers mentioned this. But I’d like to say the many challenges to global economy, including Russia invasion to Ukraine and its impact on food and energy prices.

And also after this, there were some very difficult problems in the Middle East. And then is the rewinding of fiscal policies in many countries, including Europe and America. But America also introduced the Inflation Reduction Act, which is to boost the fiscal expenditure for kind of industrial policies. And also Europe is doing that.

The third one is the increase of interest rates, most notably by the Fed and its impact on emerging economies and others. The fourth one is weaker real estate prices and the kind of the fear over the bust or the bubble in China. And also China is challenged by the kind of tension with the United States, and also demographic changes over aging and declining population. And the fifth one is about the US. The US has a very serious social divide and political divide. The very serious social and political divide causes a kind of stalemate over important policies.

And Europe also has a lot of difficulties because Ukraine problem, the new emerging Middle East, immigration, and the Brexit, the exit of the UK from Europe. I think there is a reason for that, but there are many kinds of difficult issues politically and economically in Europe, including the issues of euro, which are the serious issues in Greece and others in 2012 or 2013.

About the Japanese economy, Japan now looks a little bit rebounding, but is it really solidly based or it’s because of recovery from the Covid, and because of a very expansionary fiscal and monetary policies? Monetary policies have reached extraordinarily by having a zero rate for the short term, but also because yield curve control, even if taking a bond its yield is close to 0%. So is it artificially made economic recovery or growth? So that is also the challenge to the sustainability.

The last one is a decoupling or the de-risking of a global economy, which is the main discussions of today.

And more fundamental global issues like climate change, ocean health, and increasing demand for energy and food, especially because African countries are still having a growing population. So we must once again look at the issues of energy and food.

Demographic changes. In many countries East Asia, including China because of one-child policy, and also Korea and Japan, even many other countries like Thailand, they start having a declining population, which means it is aging because there are more people in the 65 years and over. And it will continue to have this because fertility rate is less than 2.1 (the generation replacement level). If it is 1.2, 1.4 and so on, the population will continue to decline and the aged population is always bigger than the younger generations, and productive age ratio of the population is becoming smaller. It’s not just about production, but it’s also about the resource allocations. We need to spend more for elderly care, medicine and pensions instead of promoting research and education. That is what Japan has faced because Japan’s populations above 65 years is 29% of the population. China is aging; still the portion of aged people over 65 years is 15, but it is going toward the directions of Japan.

Another issue is increasing divide within countries. Richer people become richer because of their connection to globalization, access to the foreign language and so on, and also because of the new technologies. Globalization and technologies are increasing the divide in the society in America and in many developing countries because the access to these technologies and foreign companies is limited to more educated people. Maybe students in Fudan University are the better off. Some people in the factories in developing countries are becoming better because of investment from abroad and so on. But especially in developed countries, including America, the middle class and workers are suffering, they lose jobs or they don’t gain in the wage increase.

Then is the acceleration with digital economies and AI. Some previous speakers said this has a very large advantage merit. But at the same time, it also has a lot of challenges to the humanity because of our data,production, privacy, disinformation and misinformation, and whether AI can take over the sum elements of humanity, whether they start attacking the human or not. I don’t think so, but the same time there are so many challenges. How to use it better is a very important issue.

Also, there are issues of platform companies. They accumulate wealth and they are super rich so it’s more than the power of the sovereign states these days. So how to manage them, how to touch them, and how to apply the competition policies to them.

There are issues of the sustainability of democracy due to social divide. Many democratic countries are now facing the challenges from populism and divide and identity politics and so on.

Finally, there are issues of the globalization and whether we can keep exchanges of trade, ideas and the human migrants and so on. We have had the acceleration of globalization; there is a challenge to globalization. I think there can be some adjustments because of a pandemic, because of economic securities. We need to avoid suspensions over the supply chains due to disasters and the pandemic and so on. And also we need to look at more domestic workers. But at the same time, we should avoid serious protectionistic attitude, because the world has made a lot of growth and development and poverty reduction because of the trade, investment, financial kind of interactions, and also technology transfer. So we should keep it.

That is a general remark, but I would like to touch on whether the China’s economy today is facing a kind of a Japanese occasion, which is long slump with deflation. And I thought that this is a very important topic in China today.

Japan had a serious bubble in late 1980s. It was a long time ago, but it was because of the yen’s appreciation and expansionary policies to tackle deflationary effect from appreciation, when yen appreciated from 244 to dollars in 1985 to 153 in one year. So it caused a kind of deflationary impact on the Japanese economy. But because of the expansionary monetary and fiscal policies, and also Japanese people felt they became rich because yen appreciated and the income in dollar time appreciated, there was a very kind of optimistic view about the future. Financial activity accelerated the investment in real estate and the stock prices went up by 3 times from 85 to 89. The land prices also went up, and asset value of land increased by 200% of GDP, which is three times the increase in GDP in 5 years, just by looking at the value and then it was passed.

There are reasons for long slump of Japanese economy and the lasting impact of bubble bust, balance sheet adjustment. The liability side of a balance sheet, it is always there, but the quantity of assets and their future earning capacity will decline. So both in company sectors, corporate sectors, and also banking sector, they had these serious issues of balance sheet adjustment. They must cut cost and they must be very cautious about the investment to recover the balance of balance sheet. And also very large negative wealth effect because people feel they become poorer because of land prices and stock prices, they don’t spend much investment and consumption.

And more-than-expected the speedy catch up of emerging economies like China, Korea and so on. Japan was a stronger manufacturing country in the world because of Sony, Panasonic, Toyota and so on. But the Japanese economy was caught up by the emerging economies and Japan couldn’t produce such an innovative and winners-take-all type of the companies like platform companies in the United States. So Japan was in a sense cornered by both emerging economies and America. There is more reliance, dependence on the government policies, easy monetary policies, and expansionary fiscal policies. Japanese companies and people are spoiled by having such a big government intervention in the economy, which I really hate because the growth should come from entrepreneurship and private sector activities. But during this three decades, government tried to support the economy again and again, including monetary policy. It was not really successful. The reasons I’m talking about these issues is because China is now kind of facing this kind of discussions, I mean whether they must support the economy by fiscal and monetary policy or not.

Anyway, and especially the real per capita growth of productive age population is not so bad, even compared to the United States. But the value in terms of yen deflator has been decreasing, and also Japan had a depreciation with currency. So by dollar time, Japan’s total GDP in 1990 was more than 68 times as much as that of China. And then in 2022, China’s GDP is 4 times as much. Today because of further depreciation of yen, Japan’s GDP is still lower than that last year. Maybe China’s GDP is 5 times as much as that of Japan. Japan’s GDP stays around the same amount for these 30 years, while the US and China grew a lot. But this is not just because of real growth, especially for productive age, but it is because of the value deflator has been decreasing. But it doesn’t mean the yen didn’t appreciate based on the Purchasing Power Parity Theory. If prices are stable, currency should appreciate, but it didn’t happen somehow. So there are many potential for Japan and I hope that it would be used to monetize Japanese economy to create more value and thereby expanding the value of its GDP.

Japan has many potentials because of the stable societies and less divide, well-educated and diligent population; the very unique history, which is different either from China or from the other west countries; and many seeds to be monetized and craftsmanship; and a very important kind of the trust among the merchants and so on; and a long history of capitalism from Edo period or even before. Japan is the front-runner as an aging society. Japan manages the economy rather well although the growth is very slow. The close relation with the other emerging Asian countries, including China, is the one of the strengths of the Japanese economy.

There are many things that Japan does. I wouldn’t go into the detail, but such as diversity in the flexibility, more participation of women and foreigners. Women’s participation is becoming larger, but they should be given more power in the management of the economy. And also further integration with a global economy; many tourists are coming. But I think Japan should have a mindset of a selling good quality product and service at the higher prices. Japan has a mindset of selling good quality product and service at a reasonable price or low price to serve the customers. It’s okay to do that within the countries but to foreigners it’s important to sell the product the higher price, like a Swiss watch or German car or whatever. So that is my idea. Digitalization and green economy is important. And private sector vividity is once again promoted. It’s we should avoid the kind of mindset of a dependent on the government intervention and government policies. And enhancing corporate governance is important, but it’s not just about compliance. It’s not just about the compliance to the regulations and so on, but it’s also about promoting, I mean, fostering of the entrepreneurship or risk taking by the companies instead of trying to avoid a risk. We should take risk to earn money. That is about Japan.

I spoke too much about Japan. About China, I observed the Chinese growth for years, for decades. When I was the president of ADB, ADB published a book about the Asian journey to prosperity, which is the 50 years’ history of Asian development which is miraculous

ADB’s membership of Asian countries is not including Middle East, but 48 Asian countries and out of which 45 developing countries including China. But the share of GDP in the world was just 4% in 1960. Today it is like a 25 to 30%. It is because of the miraculous growth of China and also some growth in southeast Asia and also India. But the China’s contribution is the largest. But anyway, China’s experience showed the failure of central planning and also import substitution. They started a reform and opening in 1978. China and Japan had the Treaty of Peace and Friendship in 1978. And Deng Xiaoping visited the Panasonic factory in Osaka and took a bullet train between Osaka and Tokyo. He was so surprised and shocked to see that the Japanese was already well ahead of China. Maybe he expected that America is already advanced, but he was so shocked by seeing the difference between China and Japan at that moment, because China still used steam locomotive in the trains and so the difference is very clear.

And Japan had tried to support the China’s development in a massive ODA (official development aid) loans, to support the ports and airports of Shanghai and Beijing. I think it was not just for economic reason. Japan can benefit from growing China. But at the same time, many leaders in the business and political communities regret what Japan did before the war and during the war and so on. So they were so repentant. They really wanted to support China’s development. The difference of economic power was so large and Japan was ready to support China by finance, investment and trade. Japan was the biggest trade partner, more than America, more than ASEAN at that moment, although it is now much below.

China started further acceleration of growth after 1993 and Deng Xiaoping’s south trip. China restarted again the more market-oriented economy by having the constitution of 1993, which defines the Chinese economy, socialist market economy. It’s like contradicting, but the socialist means Communist Party’s guidance and market economy is the price mechanism and also lease. Instead of ownership, they give a lease contract to land owners. They restarted, they accelerated the development. And then 2001, the entry to WTO made China the center of a global value chain because of the population on large good workers. It not only became the center of the global value chain, but it also became the very important consumption market. So many American companies and Japanese companies come to China.

So it’s a very important market for many countries. But is China heading for bubble and bust? That is a question. There are many discussions about it. The common feature is a belief that the real estate will continue to rise forever in prices and also the wealth effect-- they feel they become rich and have high expectation for the future. In the 1980s, Japanese people said that Japan would be the center of international finance and we can justify the very high price. I don’t know whether that is the case in China. China is also very optimistic about it. At that moment it started aging and declining. China already started having aging. Aging is obvious. The production age population already started declining and also total population is starting declining.

But there are differences. Japan’s per capital GDP in 1990 was 20% more than that of the United States, partly because of the strong yen. But the Chinese per capita GDP is still at the developing stage. There is less stability and the redistribution system or social services is not yet substant. And there was also the divide with the United States. Japan was bushed by the United States for many reasons. But the divide between the US and China and the friction is even more serious. Also, there are more regulations by the Chinese government and for many reasons. But there are some news that the private sector is now a little bit concerned about the stronger regulations by the government. That is another difference.

So what advantages are there? China has more space to grow because of the convergence at the stage. There is still room to do that. Also I noticed that the investment in the R&D and the higher education like Fudan is very massive. There is a very large population of researchers of PhD in science and technology. It would make China more competitive. And if we look at the Olympic game, China always has a very large number of medal owners because of talented people with a large population. It can happen to technologies. And also I feel that Chinese people always have very innovative entrepreneurship compared to Japan, for instance.

There can be difference, but how can they deal with these kinds of issues? More expansionary fiscal policies? The government decided to have some 1 trillion expansionary policies over fiscal policies. But it’s not a good idea to continue spending the government expenditures to support the economy. They can do it once, but they shouldn’t continue to do this like in Japan. I had a discussion with Liu He, the former vice premier. When I met him, we had a 2-hour meeting last week in Beijing. He was a little bit cautious about continued support by fiscal policies.

And what kind of structural policies? What is important is to keep the open trade and investment regime, and to give the safe, conducive business environment for foreigners and private sector. And social divides should be avoided by reforming Hukou system and to have the common standardized health and education system. And also maybe some redistributional functions by the progressive individual income tax and inheritance tax or property tax should be considered.

And finally the good cooperation, friendship between countries is so important. China’s success has been based on the friendly relation with other countries including Japan. Especially Japanese people always regard highly of China because of historical and cultural reasons. But the US is also a very important support of China. During the war, the Song family’s three daughters went to US to get the support of the US. From that period, I think the US and China have been very important partners and friends.

There is no reason to compete or to become a rivalry if they can cooperate. But for many reasons, they are kind of having suspicions. But both sides, including Chinese side, should be thinking about how to have a constructive relation with the United States. The United States is not a soft country. If they feel they are challenged, they would fight back. Of course China has dignity, but at the same time, how to pass moderate policies by both China and the United States is a key to the stability of the Asia and also key to the continued growth of China and also key to the stability and peace of the global community.

Thank you very much.