Robots won't solve Japan's demographic problems: Ivanovitch
Japanese Prime Minister Shinzo Abe’s reassurances that “robots, wireless sensors and artificial intelligence” will solve the nation's weak economy, declining labour force and flagging productivity growth are unfounded, according to Michael Ivanovitch, a former OECD and Federal Reserve economist. Moreover, Abe's focus on robotics means that he is neglecting necessary economic reforms and relying on the Bank of Japan to continue to flood the market with yen liquidity through loose monetary policy, which has so far failed to boost demand.
Japanese business men walk along the street in Tokyo, Japan. Getty Images

Undermined by deep-seated structural roadblocks, Japan's aggressive monetary easing since the early 2013 looks very much like Einstein's famous quip about "doing the same thing over and over again and expecting a different result." Japan's central bankers are now farther than ever from their price inflation objective of 2 percent. Accelerating declines of consumer prices in the first seven months of this year culminated with 0.5 percent annual dips in June and July. In spite of that, they keep unfolding measures of credit expansion which, in their view, are supposed to lead them to their elusive inflation goal. One wonders whether there is a need to remind people that accelerating increases in costs and prices are created by sustained excess demand in labor and product markets. In other words, a precondition for steadily accelerating price inflation is a growth of demand and output that is hitting the limits of the economy's production potential. And here is what Japan's data are saying about that: Between the 2013 and the second quarter of this year, Japan's economy was growing at an average annual rate of 0.6 percent. That was also the period of no productivity growth despite a stagnating labor input. Are robots the solution? The above paragraph is a story to meditate by Japan's economic strategists; it is the key lesson showing the futility of an exclusive reliance on the long-running monetary experimentation. I know personally some of these strategists, and I am aware that they have known all along that Japan needs root-and-branch reforms to unlock its economic growth potential through rising stocks of human and physical capital and reviving productivity advances. Sadly, that message keeps falling on deaf ears.

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The latest example of that is Prime Minster Shinzo Abe's statement on the sidelines of the U.N. General Assembly meetings in New York on September 21 that "robots, wireless sensors and artificial intelligence" will solve the problems of weak economy, declining labor supply and flagging productivity growth.

That sound to me like another "sayonara" to economic and social reforms, effective economic policies and a meaningful opening of Japanese markets. That also suggests that the avalanche of yen liquidity is set to continue. And here is more bad news. A look at Japanese exports – the traditional engine of the country's growth - in the first eight months of this year could lead one to believe that Tokyo has given up on some of its largest export markets. During that period, Japan's sales to Asia – a destination for 52 percent of total Japanese exports - were down 11.5 percent from the year earlier. Business with China and South Korea was particularly bad; exports to these two countries fell at annual rates of 9.5 percent and 11.2 percent respectively. And that was not offset by sales to U.S. and Europe, because the combined exports to these markets declined during the January-August interval by nearly 5 percent compared with the year before. Exports offer a fast return to growth How important is all this for Japan? How will this affect its growth prospects? And what would it take to stop and reverse Japan's shrinking market shares in East Asia – by far the fastest-growing segment of the world economy? Here are a few thoughts on that. Exports represent 18 percent of the Japanese economy. They are also roughly equivalent to the total private sector investment (i.e., the sum of residential and nonresidential gross capital formation). With domestic demand declining by 0.8 percent between 2013 and the second quarter of this year, the economy managed to grow over that period at an average annual rate of 0.6 percent thanks to the 1.4 percent contribution from net exports. During that same period, exports went up 3.4 percent – a very poor showing compared with the 8.5 percent increase over the previous three years. Still, exports turned out to be the strongest component of Japan's aggregate demand. A dismal record indeed for the monetary stimulus, because interest-sensitive aggregates like household spending (61 percent of GDP), business investments (14 percent of GDP) and residential investments (3 percent of GDP) rose 0 percent, 1.3 percent and 1 percent, respectively.

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