Guy Hands: Japan's oldies must get a yen for change

Economic View

Japan's recent economic history has haunted Europe ever since the global financial crisis first hit. With every quarter of weak or non-existent growth, the country's two lost decades of stagnation was seen as a terrible warning of what the future held for Europe and the UK.

But in the last few months it is the optimists rather than the gloom merchants who look east. Japan's stellar performance – the best of major developed economies – has raised hopes that its troubles are now over. Hopes were strengthened further by recent figures showing prices not falling for the first time in five years.

The turnaround in Japan's prospects, thanks to an aggressive mix of monetary and fiscal stimulus from Premier Shinzo Abe's new government, has been remarkable. Tokyo's success in winning the 2020 Olympics is seen as another reason to believe Japan has turned the corner. But Mr Abe now has to move from delivering a quick shock to get the economy's heart beating to creating the conditions for sustained health.

It is the difficulties he faces – and in particular his country's powerful Grey Vote – which I fear might be the real lesson from Japan's plight for the rest of us. For Japan may be the first country where the majority of the population have little interest in the steps needed to secure a prosperous future. Indeed, they possibly see these reforms and investment as damaging to their own prospects. Japan, a country whose fascination for me began when trading there for Goldman Sachs and developed further when working for the financial giant Nomura for eight years, is one of the world's fastest ageing societies. It already has nearly twice as many people over 65 as under 15. The working population is set to fall by another 17 per cent by 2030. And this extraordinary demographic shift is reflected even more starkly in the electorate.

The average voting age in Japan's 2010 election was 56 while those aged between 20 and 29 made up just 7 per cent of ballots cast. Any politician would be sensible to give greater weight to the priorities of the older generation. And unhappily for Japan, their priorities are very different from those best for the country's future.

Their main concern, like Judi Dench and the other inhabitants featured in The Best Exotic Marigold Hotel movie, is how to live within their fixed incomes or in their existing jobs. Scarred by the last two decades, Japan's older generation have lost faith in investment and are unconcerned with how the country's huge public debt, the largest in the developed world and now twice the size of the country's economy, will be paid off. Instead stagnation and 15 years of falling consumer prices have suited them very well.

So it is no surprise Mr Abe announced this month that he has dropped planned labour reforms which would have made it easier for employers to take on or lose staff. It is a damaging retreat from structural measures desperately needed to boost productivity.

Despite minor improvements, Japan is still saddled with a culture of jobs for life. Employers don't have the flexibility to reduce staff numbers which prevents them taking on additional employees as well. Wages are still linked to age and tenure rather than performance. This encourages older workers to stay in posts. The result is a static labour market and high costs, with the young cut off from employment opportunities and the economy from the energy of youth and new ideas.

The demographic divide is more advanced in Japan than in Europe. But already many of the same difficulties can be seen across our continent. Spain is just one example where job security and excessive bureaucracy mean more than half of its young people are unable to find work.

We have seen as well a general lack of urgency to reduce unsustainable pension burdens. Retirement ages have not been put up fast enough to reflect much longer lifespans. Pension entitlements are not being cut back to what can be afforded. Even in the UK, far further down the right track than continental Europe, benefits for the elderly have been protected from cuts.

Japan should be a lesson to us. The health of our economies and our prosperity depend upon politicians showing the vision and courage to get the balance right between the generations. This must start with an honest dialogue with voters of all ages, ensuring no group has a veto on what needs to be done.

The Best Exotic Marigold Hotel turned out well for almost everyone young and old. But as Japan has shown over the last 20 years, happy endings are not so easy to achieve in real life and real economies.

Guy Hands is the founder of the private equity firm Terra Firma