The Japanisation of the West: part 1

Over-inflated credit, financial and property markets - we've heard this somewhere before. Nick Boulter on why Japan's 'lost decades' can show us what's in store for the UK economy.

by MT Staff
Last Updated: 09 Oct 2013
Last year, IMF chief Christine Lagarde warned that there’s a risk of a ‘lost decade’ of uncertainty, financial instability and potential collapse of global demand – echoing concerns expressed by President Obama over two years ago.

If they’re correct, Europe and North America could be in for a prolonged period of little or no growth – or even falls – in the stock markets and housing prices.

In many ways, it mirrors the ‘lost decades’ in Japan: over-inflated credit, financial and property markets led to a prolonged period of economic decline from the heights of the housing and financial markets in 1989. Japan’s economy has moved between recession and stagnation ever since.

Commentators have also drawn parallels between the demographics of Japan and the West, with both facing an ageing population, making the state provision of benefits (health, pensions, transport etc) increasingly difficult.

If the West’s facing a lost decade, what impact will it have on work? In part one of our look at the Japanisation of the West, we look at how Japan’s example heralds key changes to the economies and employment markets of Europe …

Reduced state benefits
Caught in a perfect storm of a rapidly ageing population and declining tax income, the states across the Western world have no option other than to reduce the provision of state benefits. To fund the benefits expected by their populations, all Western states have run up huge deficits – which are now being held in check by the bond markets. Cutbacks are the only option when there is so little economic growth.

Reduced employment benefits
Private sector companies are shedding unsustainable benefit costs as they strive to compete against companies based in emerging markets, where demographics are more favourable and employment costs lower. The most visible shift here has been in pensions, moving from final salary pension schemes to defined contribution.

Flexible employment
Judging by Japan’s example, there will be a continuing trend away from permanent, full time, pensionable jobs, to jobs based on flexible contracts with lower benefits, part-time and/or flexible working hours, and to jobs being outsourced either within or outside the country a company is based in.

Tightened remuneration costs
In order to compete domestically against imports, and to have access to export markets, companies are having to reduce their overall remuneration costs. This is being done through delayering, giving extra work to existing employees, and absolute or real wage reductions.

Increasing inequality
Recent decades have seen rising differentials between top executives, who operate in a more global market, and the majority of employees, who do not.

With public sector cuts and low private sector growth, unemployment is likely to remain high. In the UK, for example unemployment was 5.1% in August 2001 and 8.3% in November 2011; at its highest since 1996.

- Check back tomorrow for part two of our look at the Japanisation of the West. Nick Boulter is a member of Hay Group’s global executive team.

Economy Misc

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