The impact of decline

Over the last twenty years or so,  the Japanese economy has fallen into a slow decline from the boom years of the 80s while the government has limped along by issuing bonds to a largely domestic audience of retirees. Owing this money internally in Yen has allowed debit to GDP ratio to reach a staggering 250% and it is this economic deflation combined with a shrinking, aging population that form the biggest structural issues for Japan.

The Abe reforms or “Abenomics” designed to restart economic growth come in three forms: quantitative easing (otherwise known as printing money), increased government spending and structural reform of the economy. So far the initiatives have had little success, QE has had little effect other than to boost stock and commodity prices, government spending has had some effect while the most politically difficult, structural reform (i.e. deregulation and free trade) has been underwhelming. The recent TTP signing might have changed things but unfortunately we aren’t allowed to know what is in it. Despite the decline in the economy, commercial land development particularly in Tokyo has continued apace, driven by increased plot ratios and interest rates that are essentially stuck at zero.

Possibly the biggest hurdle to structural reform of the Japanese economy are farming groups who form a large support base for Abe’s controlling LDP. Farming in Japan is still dominated by small scale and inefficient farms, which gives Japan a highly fragmented pattern of land ownership. This differs from Australia and USA where relatively large landholdings on the outskirts of cities allows for effective subdivision control through zoning.

The effect of fragmented land ownership can be seen at the city fringes where small farms only survive due to incredibly high tariffs on imported produce, and often exist to claim government subsidies and generous reductions in land tax, that see farms pay only 1-2% tax compared to similarly valued residential properties. As-of-right subdivision and development under a certain size results in the ad-hoc sprawl with limited services that ring the outer areas of Japan’s cities and has had probably the greatest influence on the way outer urban development has taken place. A look out the train window as we traveled through the suburbs showed the patchwork effect with small plots of farmland interspersed with housing.

To get around the limitations of this fragmented land ownership and to ensure the provision of basic public services there is a reliance on Land Readjustment to aid urban development. Like ‘land pooling’ in Australia, Land Readjustment sees landowners form a collective to agree to develop their land. Strong individual property rights has limited the use of expropriation to consolidate land for development and with Japan’s weak development controls Land Readjustment is one of the few ways to ensure adequate basic infrastructure is included in developments and forces landholders to contribute to the costs.

The success of Land Redevelopment in part has to do with the consensual and cooperative nature of Japanese society. This strength of this was evident in the way entire communities south of Sendai in the tsunami-affected areas chose to relocate to a new development as a collective. Similarly, the conversations we had around insurance and the way Japanese culture provides a backstop during disasters highlights the same collective mentality. Coming from a far more individualistic society, we’re inclined to view this kind of close co-operation in Japan enviously but the homogenous nature of society can also be highly exclusionary. The reluctance to allow migrants to work and live in Japan is one example of the darker side of this cultural homogeneity and is bringing to a head the second major structural issue around demographic change as the Japanese population shrinks and ages.

Will Bakes