TOKYO – Leaders of the Group of Seven rich nations will undoubtedly voice unity over fighting terrorism, pandemics and tax evasion at their summit in Japan this week. Finding a consensus on how to breathe life into their sluggish economies is proving more elusive.
Aging workforces, sagging productivity and lingering damage from the 2008 financial crisis are complicating efforts to spur growth while the effects of the slowdown in China and the other big developing economies ripple across the globe.
At a pre-summit meeting in northern Japan’s Sendai, finance ministers and central bank governors of the G-7 failed to concur on a co-ordinated approach to fighting what Nobel prize-winning economist Joseph E. Stiglitz calls the “Great Malaise.”
They did agree the world’s growth engine is running on fumes: “We as the G-7 believe the biggest economic problem is demand. Demand – there is no demand – and that is the biggest problem around the world,” said Japan’s finance minister, Taro Aso.
The reluctance of consumers to buy and businesses to invest, despite rock-bottom interest rates, has caught economists by surprise and policymakers flatfooted, as the IMF, World Bank and governments repeatedly have had to downgrade overly rosy forecasts.
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Last month, the IMF lowered the economic growth projection for 2016 and 2017 for the world’s advanced economies, including Europe, the United States and Japan, where collectively growth has remained below 2 per cent since 2010.
“It’s a difficult environment indeed,” PepsiCo CEO Indra Nooyi said last month in announcing a drop in her company’s first-quarter sales and profits.
“Most of the developed world outside the United States is grappling with slow growth.”
When G-7 meetings began in the 1970s, Japan was in the midst of its post-World War II industrial boom. Growth peaked in the late 1980s, and has mostly stagnated since a massive stock market and lending bubble imploded in the early 1990s. It has continued to limp and languish despite massive public works spending and, more recently, a barrage of monetary stimulus.
In Sendai, U.S. Treasury Secretary Jack Lew and other officials said co-ordinating growth strategies was difficult given the varied challenges and resource constraints of each country.
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“It’s not a one-size-fits-all,” Lew said. Nonetheless, he made a point of urging Japan not to derail its faltering recovery with a sales tax hike planned for next year and cautioned Tokyo against intervening to drive the yen weaker for the sake of its exporters.
The IMF says advanced economies could get a healthy economic payoff by investing in research and development, roads, bridges and other infrastructure, and to rewrite tax codes that discourage people from working.
Instead, governments have tended to rely on central banks to keep interest rates low, or – in Japan and Europe – even negative.
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Meanwhile, some economists, notably Robert Gordon at Northwestern University, worry the world lacks the kinds of technological advances needed to drive up productivity and growth.
Japan’s population is shrinking and aging the fastest among G-7 countries, and its predicament is deepened by productivity that lags behind its G-7 peers.
The country appeared poised for a revival, emerging from recession as Prime Minister Shinzo Abe took office in late 2012, promising to “bring Japan back” with share price-plumping plans to fire up growth through government spending and a flood of stimulus from the central bank.
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The “Abenomics” three-pronged combination of monetary easing, government spending and structural reforms was supposed to end deflation and get households and businesses to spend more in the sort of “virtuous” cycle all major economies have been striving for ever since the global financial crisis.
The Bank of Japan’s “big bazooka” of monetary easing pumped trillions of dollars into the economy, helping to weaken the yen against the U.S. dollar as profits of big exporters like Toyota Motor Corp. soared.
But Japan is still dipping in and out of recession, and a 2 per cent inflation target remains far beyond reach. Recent data show the outlook deteriorating, despite a 1.6 per cent uptick in annual growth in January-March.
After more than three years, Abenomics is viewed mainly as a “marketing slogan,” said Kenneth S. Courtis, chairman of Starfort Holdings and a former Asia vice chairman at Goldman Sachs Group Inc. Japan needs to “take a blowtorch” to regulations and red tape that discourage competition, he says.
“There’s a much more critical view of the Abe regime today than in the past,” he said.
Most Japanese companies simply are not investing in their shrinking domestic market, even after the Bank of Japan pushed interest rates on some bank deposits it is holding below zero.
The G-7 summit venue of Ise once was a centre for silk and cotton processing and shipbuilding. Today, its main industries are pearls, “Matsuzaka” fat-marbled beef and tourism.
The region is picturesque but sparsely populated: Villages have been emptying out for decades as businesses, mines and entire communities were abandoned.
Some were casualties of earlier shifts in the global market, as factories migrated to China and other developing countries.
Stalling growth is not unique to rural Japan: Long-term economic growth in each of the G-7 countries is the worst it has been since the annual summits began 42 years ago, says Howard Rosen, an independent economist based in Washington.
In the advanced economies, automation and online commerce have meant the disappearance of many skilled, high-wage jobs. To a growing extent, the meagre or unpredictable pay of service-sector and contract or part-time work is sapping consumers’ purchasing power.
As the usual policy tools fail, for the G-7 as a whole what prevails is uncertainty, said Dave Tilstone, president of the National Tooling and Machining Association.
His group’s members are showing “a lot more hesitation, more than before, to make long-term commitments. Their customers just aren’t getting those long-term contracts either,” he said.
Looming unknowns include the ups and downs of oil prices; whether the Federal Reserve will raise interest rates again, possibly slowing the U.S. economy; whether Britain will opt to leave the European Union in a June 23 vote; and the outcome of the U.S. presidential election, which could put Donald Trump in the White House.
Europe is struggling with floods of refugees, as its banks, still holding bad debts left over from the financial crisis, remain wary of lending.
“There are deep holes in the banking system, and there is no appetite to deal with it,” said Ashoka Mody, visiting professor at Princeton University. “Someone has to bear the losses and no one wants to deal with the losses.”
Though Germany alone has kept its conservative stance toward spending, the other G-7 members have been constrained in varying degrees by law, politics and financial limitations from pursuing needed spending increases.
“Years ago, they came out with a co-ordinated growth plan and everyone kicked into gear,” said Courtis. “Now there are very different views and that’s what’s paralyzed the G-7.”
—
Wiseman reported from Washington.
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