The real reason Japan’s economy keeps stumbling into recession

Japan is back in recession. The country’s GDP shrank 0.8 percent in the third quarter of 2015 after shrinking in the second quarter, so it meets the technical definition. On its surface, this looks like a damning indictment of “Abenomics” — a program of aggressive money printing that Prime Minister Shinzo Abe ordered upon taking office a few years back in order to jolt the Japanese economy out of its doldrums. But look closer and you’ll see that the opposite is the case.

The Japanese economy is shrinking because Abe already succeeded in fixing Japan’s unemployment problem. Japan is simply in an odd situation where low and falling levels of unemployment aren’t good enough to ensure economic growth.

First things first — Japan’s unemployment rate has tumbled, reaching a low point it never achieved during the previous global expansion phase:

And unlike in the United States, the labor force participation rate of working-age adults has soared to a record level:

Abenomics, in other words, has accomplished exactly what macroeconomic stabilization policy is supposed to accomplish — while millions of able-bodied Americans and Europeans sit idly, Japan has achieved something close to full employment.

So why is the Japanese economy shrinking? Well, it’s pretty simple. The country is running out of people:

In the context of a working-age population that’s shrinking 1.5 percent a year, an economy that is “only” shrinking at 0.8 percent per year is actually doing okay. If you define a recession as two consecutive quarters of negative GDP growth, then a country like Japan, where the population is shrinking, is going to tumble into recession basically every time anything even slightly bad happens.

You might or might not think this is a problem, but either way it’s clearly not something monetary policy could solve. For a while, monetary policy was effective at solving the problem of unemployment, which helped make up for the declining working-age population. But now that Japan has achieved full employment, only a surge of people or a sustained increase in the productivity growth rate can generate consistent positive GDP numbers.

Can we be sure that Abenomics is responsible for the recovery in the Japanese labor force? It’s hard to prove anything conclusively in macroeconomics. But we can see that the Japanese price level has stopped falling ever since Abe came to office determined to make it stop falling:

In tandem with the return of inflation, nominal GDP growth — which is key to ensuring full employment — has set in:

Critics of monetary stimulus in the United States and Europe often note that it’s not a panacea for every economic problem that exists. Japan is a living, breathing example of what that slogan gets right and what it gets wrong. By deploying monetary stimulus Japan was able to boost inflation and nominal GDP, increasing demand for labor, reducing the unemployment rate, and increasing the labor force participation rate. Relative to a years-long spell of mass unemployment, that’s pretty good! But other aspects of the fundamental economic situation matter, too. In Japan’s case, demographics is now destiny.