If Japan - where experts fear a debt and deficit disaster - is Britain’s future, there is much to fear.
Far beyond the harbour at Kamaishi town in north east Japan, the ravaged remains of its sea defences still rise jagged above the water.
Descending 63m, the breakwater had earned a place in the Guinness book of records as the world’s deepest and its presence offered the ancient steel town’s 40,000 residents visible reassurance.
When the tsunami struck on March 11, 2011, though, the five-year-old defences could not hold. The wave washed in, climbing 10 metres above sea level, levelling hundreds of homes and killing over a thousand people.
The sea wall held the water back for six minutes and reduced the height of the wave by six metres, but the protection had been an illusion.
“We thought we were at the cutting edge, but the tsunami was taller than we anticipated,” Takenori Noda, Kamaishi’s mayor, says.
“The biggest lesson we should learn is not to be complacent.”For many who follow the Japanese economy, another disaster is building. “The deficit and debt,” Kohei Otuska, a politician with the Democratic Party of Japan, says.
“It’s something like an earthquake. It may come tomorrow or in 10 years, but it is coming.” Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc.
The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.
If that was not unsustainable enough, Japan’s ageing population is piling even more pressure on the public finances.
A decade ago, social security expenditure was 12pc of GDP, it’s now 24pc. Over the same time, tax receipts have dwindled from 30pc to 28pc as the workforce has shrunk. The system is crying out for reform, but there is political stasis.
The two main parties have agreed to balance the primary budget no earlier than 2020, having struck a cross-party deal to raise VAT from 5pc to 10pc by 2015. It is not enough.
The IMF says VAT needs to rise to 15pc and welfare reform, of pensions and medical care, is long overdue.
The debate, though, has barely begun. In Kamaishi, Shoichi Shimura, a playwright who has been leading efforts to rebuild the community, says most people believe the debt is under control.
“People don’t understand the scale of the problem,” Mr Otuska concedes.
Japan has barricaded itself behind the defence of its peculiar debt dynamic - that 92pc of government bonds are owned by Japanese banks and institutions.
The arrangement shields it from immediate threat, but even there the political establishment is intent on dismantling the defences. A third of Japan’s energy is currently nuclear generated.
However, with emotions running high after the reactor meltdown at Fukushima, the government has committed to phasing that out completely by the 2030s.
The policy will drive up imports of oil, gas and coal - slashing the trade surplus savings and leaving the country exposed to international bond markets.
When it comes to political will, the UK is leagues ahead of Japan. But elsewhere, the parallels are eerie. Both nations suffered a financial crisis that, as economists put it, left them with zombie households (UK) or zombie companies (Japan), and zombie banks.
Policy has also trodden a similar path. Rates have been cut to near zero, central banks have printed money and tried “credit easing”, governments have looked to infrastructure to cure slow growth, and there has been a rapid rise in the non-regular workforce – in the UK, part-timers and the self-employed.
The young have been disenfranchised. The only big difference, so far, has been that the UK has avoided deflation.
If Japan is Britain’s future - and the joke in Tokyo’s academic circles is that “Japan is the front-runner for every economic problem” - there is much to fear.
Japan’s problems have morphed from the economic into the social, which has then looped back into deeper economic malaise.
Weak growth has reduced opportunities and, consequently, foreign investors have withdrawn and domestic companies have started to shift capital overseas. At the same time, deflation has made it desperately difficult for companies to manage their costs.
The response has been dramatic. Japan, one of the last torch-bearers for jobs-for-life, now has the largest proportion of “non-regular” contract workers – with little employment rights and reduced career prospects – in the industrialised world.
As the young try to cling on to the vanishing old ways, a new age of conservatism has taken hold.
In the last decade, surveys analysed by Masahiro Yamada, a sociology professor at Chuo University, have shown the proportion of newly hired workers wanting to stay in the same company their entire working life has risen from one-in-five to more than one-in-two.
A growing number want length of service rewarded over merit. Fewer are willing to find employment overseas. More women in their 20s and 30s want to be a housewife than among older generations. And the number of entrepreneurs is dwindling.
Although there’s no shortage of ingenuity in Japan - Honda’s remarkable Asimo robot is just one example - the dynamism has disappeared. Lack of opportunity has stripped the people of ambition.
According to one government official, this conservatism is at least in part due to the debt burden. Japanese society forbids any form of debt restructuring, though.
In Kamiashi, Mr Shimura told stories of families who had taken out a mortgage only to see their new home washed away, to be left with nothing but the debt.
No forgiveness was forthcoming from the banks, nor was it expected. Families and friends pulled together to pay the loan – spreading the burden wider but shallower. Moral hazard is invoked to defend the principle.
“We need a social understanding – we can not reward grasshoppers against ants,” I’m told In the meantime stagnation persists, the birthrate continues to fall, a generation is disenfranchised, and the debts loom ever larger.
There is a sense in Japan that optimism and fatalism have been dangerously confused. “The Japanese are optimistic. They believe the good times will come,” Tetsuo Yamaori, a professor of comparative religion, says.
Disasters happen and, over time, pass – like the seasons, he explains. So long as the old values are steadfast, spring will come again. For the government official, the time for rebirth is now.
The UK has been right to get on top of its debts before they choke off not just the economy, but the hopes of a generation.
Infrastructure spending is not the solution, he adds. Japan tried building its way to growth, but it just loaded up the debt burden.
Avoiding deflation is vital, but failing to address the deficit would be the worst kind of complacency.
Mr Otuska’s final analysis provides little comfort. “The Japanese people,” he says. “Unless they experience a crisis, they don’t think they need to respond.”
telegraph.co.uk
Far beyond the harbour at Kamaishi town in north east Japan, the ravaged remains of its sea defences still rise jagged above the water.
Descending 63m, the breakwater had earned a place in the Guinness book of records as the world’s deepest and its presence offered the ancient steel town’s 40,000 residents visible reassurance.
When the tsunami struck on March 11, 2011, though, the five-year-old defences could not hold. The wave washed in, climbing 10 metres above sea level, levelling hundreds of homes and killing over a thousand people.
The sea wall held the water back for six minutes and reduced the height of the wave by six metres, but the protection had been an illusion.
“We thought we were at the cutting edge, but the tsunami was taller than we anticipated,” Takenori Noda, Kamaishi’s mayor, says.
“The biggest lesson we should learn is not to be complacent.”For many who follow the Japanese economy, another disaster is building. “The deficit and debt,” Kohei Otuska, a politician with the Democratic Party of Japan, says.
“It’s something like an earthquake. It may come tomorrow or in 10 years, but it is coming.” Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc.
The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.
If that was not unsustainable enough, Japan’s ageing population is piling even more pressure on the public finances.
A decade ago, social security expenditure was 12pc of GDP, it’s now 24pc. Over the same time, tax receipts have dwindled from 30pc to 28pc as the workforce has shrunk. The system is crying out for reform, but there is political stasis.
The two main parties have agreed to balance the primary budget no earlier than 2020, having struck a cross-party deal to raise VAT from 5pc to 10pc by 2015. It is not enough.
The IMF says VAT needs to rise to 15pc and welfare reform, of pensions and medical care, is long overdue.
The debate, though, has barely begun. In Kamaishi, Shoichi Shimura, a playwright who has been leading efforts to rebuild the community, says most people believe the debt is under control.
“People don’t understand the scale of the problem,” Mr Otuska concedes.
Japan has barricaded itself behind the defence of its peculiar debt dynamic - that 92pc of government bonds are owned by Japanese banks and institutions.
The arrangement shields it from immediate threat, but even there the political establishment is intent on dismantling the defences. A third of Japan’s energy is currently nuclear generated.
However, with emotions running high after the reactor meltdown at Fukushima, the government has committed to phasing that out completely by the 2030s.
The policy will drive up imports of oil, gas and coal - slashing the trade surplus savings and leaving the country exposed to international bond markets.
When it comes to political will, the UK is leagues ahead of Japan. But elsewhere, the parallels are eerie. Both nations suffered a financial crisis that, as economists put it, left them with zombie households (UK) or zombie companies (Japan), and zombie banks.
Policy has also trodden a similar path. Rates have been cut to near zero, central banks have printed money and tried “credit easing”, governments have looked to infrastructure to cure slow growth, and there has been a rapid rise in the non-regular workforce – in the UK, part-timers and the self-employed.
The young have been disenfranchised. The only big difference, so far, has been that the UK has avoided deflation.
If Japan is Britain’s future - and the joke in Tokyo’s academic circles is that “Japan is the front-runner for every economic problem” - there is much to fear.
Japan’s problems have morphed from the economic into the social, which has then looped back into deeper economic malaise.
Weak growth has reduced opportunities and, consequently, foreign investors have withdrawn and domestic companies have started to shift capital overseas. At the same time, deflation has made it desperately difficult for companies to manage their costs.
The response has been dramatic. Japan, one of the last torch-bearers for jobs-for-life, now has the largest proportion of “non-regular” contract workers – with little employment rights and reduced career prospects – in the industrialised world.
As the young try to cling on to the vanishing old ways, a new age of conservatism has taken hold.
In the last decade, surveys analysed by Masahiro Yamada, a sociology professor at Chuo University, have shown the proportion of newly hired workers wanting to stay in the same company their entire working life has risen from one-in-five to more than one-in-two.
A growing number want length of service rewarded over merit. Fewer are willing to find employment overseas. More women in their 20s and 30s want to be a housewife than among older generations. And the number of entrepreneurs is dwindling.
Although there’s no shortage of ingenuity in Japan - Honda’s remarkable Asimo robot is just one example - the dynamism has disappeared. Lack of opportunity has stripped the people of ambition.
According to one government official, this conservatism is at least in part due to the debt burden. Japanese society forbids any form of debt restructuring, though.
In Kamiashi, Mr Shimura told stories of families who had taken out a mortgage only to see their new home washed away, to be left with nothing but the debt.
No forgiveness was forthcoming from the banks, nor was it expected. Families and friends pulled together to pay the loan – spreading the burden wider but shallower. Moral hazard is invoked to defend the principle.
“We need a social understanding – we can not reward grasshoppers against ants,” I’m told In the meantime stagnation persists, the birthrate continues to fall, a generation is disenfranchised, and the debts loom ever larger.
There is a sense in Japan that optimism and fatalism have been dangerously confused. “The Japanese are optimistic. They believe the good times will come,” Tetsuo Yamaori, a professor of comparative religion, says.
Disasters happen and, over time, pass – like the seasons, he explains. So long as the old values are steadfast, spring will come again. For the government official, the time for rebirth is now.
The UK has been right to get on top of its debts before they choke off not just the economy, but the hopes of a generation.
Infrastructure spending is not the solution, he adds. Japan tried building its way to growth, but it just loaded up the debt burden.
Avoiding deflation is vital, but failing to address the deficit would be the worst kind of complacency.
Mr Otuska’s final analysis provides little comfort. “The Japanese people,” he says. “Unless they experience a crisis, they don’t think they need to respond.”
telegraph.co.uk
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