Jeremy Warner: Japan may struggle to afford stimulus

Outlook: Unlike most of Europe, Japan seems to have no scruples about borrowing to spend. In the face of a collapse in exports and industrial production, the Japanese Prime Minister, Taro Aso, yesterday announced a fiscal stimulus package worth a massive 15.4trillion yen (£105bn), equal to 3 per cent of national income. If ever there was a country which has come to abide by the Keynesian principle of look after the short term and the long term will take care of itself, it is Japan.

It was not ever thus. Japan was once as cautious about anything that might damage the public finances as Europe is today. Nearly two decades of deflation has taught the country otherwise. Today, public debt stands at a massive 172 per cent of GDP, higher than anywhere else in the developed world. Yesterday's package is only the latest in an ever growing list of similar initiatives.

The "quantitative easing" being applied by the Bank of England to the British economy might seem dangerously exotic and unconventional to us, but it is nothing new to Japan. The land of the setting sun has been applying it on and off for years. None of this policy action has succeeded in lifting the economy out of deflation.

It is small wonder that Japanese officials have been among the most vocal in urging the world to adopt a coordinated approach to fiscal stimulus at recent meetings of the G20. From bitter experience, Japan knows that failure to attack a deflationary spiral early may condemn economies to decades of negative or sluggish growth.

So far, Japan has had no difficulty borrowing the money it needs to embark on these spending and tax-cutting initiatives. With interest rates at close to zero and apparently no risk of default, investors are happy to lend. And if there was ever any doubt about it, Japan can just turn on the printing presses. It seems to have no effect on demand, prices or the currency.

Yet even for Japan, there must be a worry about the country's ability to afford all this short-term therapy. Japan's population is among the most aged in the world, with the ratio of dependent, over-65 pensioners to the total labour force already at some 40 per cent.

Refusal to allow younger, immigrant labour into the country, for fear it might damage Japan's cherished social cohesion, will in the years ahead make things a great deal worse. According to OECD forecasts, on present demographic trends the pensioner dependency ratio will rise to close to 70 per cent by 2030. Japan is destined to become a nation of "Struldbrugs", the mythical human beings from Gulliver's Travels who do not die but continue ageing. It will come to us all eventually, but Japan will be the first.

It is hard to see how this phenomenon can be affordable for any nation, however rich and developed, other than by people working a lot longer, which I guess will inevitably be the outcome. Yet for the time being, it is one of the key reasons why Japanese people have a tendency to save but not to spend, thus perpetuating the deflationary story of the last two decades. They are terrified of what will happen to them in old age.

The savings instruments of choice are government bonds or post office accounts, the latter of which amount to much the same thing, as the deposit accounts tend to get invested in government bonds. Maybe these savers ought to be asking how safe their money is.