HESP May 1, 2018

Last month, I had an opportunity to visit Japan. Having grown watching Japanese anime and loving Ramen, I couldn’t contain my excitement at the prospect of visiting the country that has been such a huge part of my upbringing in India. Although Japan didn’t disappoint in helping me re-live my childhood memories, the country made me aware of its certain aspects that I wasn’t aware before going there.

The first one being vending machines. Vending machines are everywhere in Japan, I mean everywhere! To quote some statistics, there is a vending machine for every 23 people in Japan (Tokyo Excess 2014). It’s the highest per-capita in the world. Japan’s vending machines serve everything from rice, sake, umbrellas to toilet paper, ties and hot ramen. I was impressed by the durability and the convenience of these machines, not to mention the low prices. I was intrigued and wanted to know why these machines are everywhere.

I discovered that Japan has an aging population. The median age of the people in Japan is 46 years, which is almost twice the global average. One of the effects of this phenomenon is the scarcity of low-skilled labor. The labor market in Japan is expensive. Thus, instead of hiring a sales guy to collect money on the transaction, the entire process is automated and done through a machine; This makes sense given the population density in Japan. To put things into perspective, Japan is roughly the same area as the state of California, but it’s the 10th most populated nation in the world. More than 90% of the population lives in cities. It’s convenient to have a machine rather than to hire a shop and employees to run the same business operation.

In a broader perspective, Japan is a country that’s obsessed with automation. Culturally, Japan is the place that widely accepts the existence of robots and has been a pioneer in developing robotics technology. Japan sees robots as a controllable, artificial human rather than a programmable machine. You will see automation and robotics everywhere in Japan from banks, airports, restaurants to convenience stores. Japan automates everything that can be automated. In Japan, taxis have automated doors that the driver controls. Opening and closing door by yourself could be seen as impolite behavior as the drivers see this simple act as an opportunity to serve their customers. Moreover, there’s a Robot restaurant in Shinjuku, Tokyo where robots perform alongside humans to entertain guests. Such comfort level with automation is another reason for the profound prevalence of vending machines. However, it doesn’t mean that handcrafted goods are any less valuable. Japanese pottery, Japanese swords, and even the handcrafted chopsticks are few examples of goods that are highly regarded for their craftsmanship.

In addition to that, there’s a less apparent reason for the prevalence of vending machines. It’s the coinage. Japan is mostly a coin and cash-based economy. It hasn’t really got on board with credit cards. This may be, in part, a reason why the coins have a bigger denomination in Japan. The most prominent coin is 500 Yen which translates to approximately 5 US Dollars whereas the highest denomination for a bill is 10,000 Yen. Only South Korea has a larger denomination currently in circulation: 50,000 Won. On a more strategic level, vending machines allow food and beverage businesses to test new flavors at a low cost and segment the market to target certain varieties of products selectively. The sheer number of flavors of KitKat and Coca-Cola should serve as a testimony of this strategy.

Just as I was getting hold of vending machines, I was made aware of another peculiarity of Japan. Although not exclusive to Japan, Negative interest rates were largely unheard of a few years ago in the global banking system. Negative interest rates mean depositors pay money to save their money, a reversal of the normal rules of economics (Soble 2018). Interest rates turn negative when central banks charge commercial banks a fee to hold the money. The negative interest rate is a monetary policy tool employed by central banks to push commercial banks to lend more. In reality, though negative interest rates are not passed on to the bank customers.
Negative interest rates are indicative of deflation – a scenario where the prices of goods/services fall as the time progresses. In a deflationary economy, people put off spending to a later date to avail lower prices, in effect stalling the growth of an economy. Negative interest rates are meant to give a spending boost to an economy in the hopes of turning deflation into inflation.

Compared to inflation, deflation is a much worse scenario. The retailers that can outsource a part of their business are able to keep up with deflation. On the contrary, those retailers who can’t afford to do so have to cut labor costs to remain competitive which leads to unemployment which leads to more deflation. It’s a vicious circle that heavily contracts the demand. Cutting interest rates below zero is a desperate measure indicating that central bank has run out of ideas to spur demand and growth. Negative interest rates, no matter how well-intentioned, could have a distortion effect. Not only they squeeze profit margins of commercial banks but also they, in theory, could initiate a run on banks, leading to unintended consequences. In 2016, Bank of Japan cut interest rates below 0% mark. However, this move was not made in isolation. The negative interest rate was employed in combination with other tools such as Yield Curve
manipulation under which short-term yield on Government bonds is negative, and the long-term yield is positive. Although this move was met with initial success, the effect has quickly faded, and Japan’s economy has become deflationary again.

Central banks across the world do not have enough data to conclude whether negative interest rate works. As far as Japan is concerned, using below 0% interest rates along with other policy measures have only made the future outlook of the country more bleak and confusing. It remains to be seen as to how much more creative Bank of Japan will get with its policy measures.

To bring it all together, beneath the surface of anime, manga, robotics and unending natural beauty, Japan struggles to keep its economy afloat. Within the larger canvas, both vending machines and Negative interest rates highlight some of the challenges unique to Japan namely aging and shrinking population, deflationary environment and costly job market. However, these challenges have not dwindled the spirit of Japanese people, and they continue to
strive for a better future, every day.

 

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