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Japan’s Economic Quandary

CAMBRIDGE – The Japanese economy is a paradoxical mixture of prosperity and failure. And, in a significant way, its prosperity makes its failures difficult to address.

Japan’s affluence is palpable to anyone who visits Tokyo. The standard of living is high, with per capita income in 2015 (in terms of purchasing power parity) amounting to $38,000, close to the $41,000 average in France and Britain. The unemployment rate, at 3.3%, is substantially lower than the US rate of 5% and the eurozone rate of about 10%.

But Japan’s economy has now slipped into deflation, with consumer prices lower in March than a year ago, while real GDP is declining. Despite near-zero borrowing costs, the fiscal deficit is running at nearly 7% of GDP, and government debt exceeds 230% of GDP. The population and the labor force are shrinking, implying even higher debt ratios in the future.

When Prime Minister Shinzo Abe took office in December 2012, he announced a strategy – comprising three “arrows” – to overcome the economy’s combination of slow growth and low inflation: very easy monetary policy, a short-term fiscal stimulus, and structural reforms to labor and product markets. But the government’s economic policies (so-called Abenomics) have not fixed Japan’s problems and are unlikely to do so in the future.