Learning from Japan

There are two vastly diverse predictions about the future of the Irish economy. Some optimistic commentators hold that Ireland is in a secure funding position, given that there is still high demand for Irish government bonds. Moreover, in the unlikely event that the state is unable to secure funding on the international market, the National Pension Reserve Fund, as well as the European Financial Stability Facility, remain available to fill the gap.

Pessimists would like to compare the current situation to the economic events that Japan experienced after the burst of its housing bubble in the early nineties. Today, Japan is still feeling the effects of the so called “lost decade”, with deflation and unemployment continuing to stifle growth.

Japan witnessed major growth in the post-WWII period. The standard of living increased greatly, and low unemployment allied with easy access to credit helped facilitate a property bubble. When the bubble eventually burst, house prices fell dramatically and the economy was plunged into deep recession.

Like Japan, Ireland’s own property bubble has collapsed, leading to a banking crisis and a ballooning deficit. This has forced the government to implement a number of austerity budgets, further depressing the economy.

In both the case of Japan and Ireland, confidence, or the public’s propensity to spend, remains an issue, and a key factor in the direction of the economy. In the Japanese case, to counteract the fall in consumer spending, the government pumped money into the economy. However, this measure had only limited success.

Here in Ireland, household savings have doubled. Danny McCoy, director of the Irish Business and Employers Confederation argues that this is money that can be spent and that Irish citizens need only know exactly how much they will be paying in taxes for consumption to pick up.

But Japan is not the only nation to have a property bubble burst, and plenty have come out of such a crisis far less shaken. Is our comparison to Japan really warranted?

Recent figures have shown that the fall in Irish consumer spending has eased. Also, the increase in people signing on to the Live Register has fallen.

When Japan entered recession, the government employed “conventional” stimulus packages that were not suitable for the economy’s quandary. Europe, on the other hand, has had a quicker and more coordinated response to the downturn.
In Japan, retirees make up over 20 percent of the population, resulting in a smaller workforce and increased pension funding costs. In Ireland, the figure is 11 percent.

In this context, there is hope that Ireland will avoid our own “lost decade”. However, economic trends are notoriously difficult to forecast and thus fears will remain that Ireland may follow in our Japan’s footsteps.