Lost in stagnation? Japan’s economic paradox

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The Economist.

Hello and welcome to the Intelligence from the Economist. I'm Rosie Blore.

And I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

Animal testing has deep, if controversial, roots. But a new study shows that very few therapies tested on animals end up being applied to humans. Our correspondent probes the difference between mice and men. And if you were invited to Buckingham palace and presented with a giant bowl of spaghetti, would you have the guts or the manners to dig in? Well, don't worry. TikTok can help we investigate a new craze for etiquette classes.

First up, though, For decades Japan had seemed entirely unable to shake its problems with low inflation. And it's come at a sharper and sharper cost to its workers, to investors, to the whole economic system declines. The Japanese economy is no longer in the world's top three. With total output for 2023 at $4.2 trillion, the Japanese economy has now fallen into fourth place globally, behind Germany's four and a half trillion. Much of that loss in stature. But as we've been pointing out, it looks like Japan may have turned a corner after three decades. At about a third of a percent annual inflation, it's now been above 2% for more than two years. In February, the tech heavy Nikkei stock market index broke its bubble era high in March. The central bank at last raised interest rates after waiting 17 years for eight of those rates had been negative. So is it or isn't it the turnaround that the country has craved?

Looking at Japan's economy today, one can find two pretty different and seemingly diametrically opposed pictures.

Noah Snyder is the Economist's East Asia bureau chief.

When you talk to the optimists here, they will tell you that Japan is back, that the lost decades are over, the country is revitalized, a bright future lies ahead. And you turn your head a little bit and you start talking to the pessimists, and they'll tell you that a lot of the same big structural problems that have held Japan back in recent decades are only getting deeper. The country's workforce is only going to shrink further, and. And that the future is at the very least gray, if not grim.

So let's dig into the arguments that the optimists and the pessimists are making make the cases for me.

So, on the optimistic side, the fundamental argument is that in Japan in recent decades, the big problem has been stagnation, a lack of dynamism. Prices have been stagnant, wages have been stagnant, and companies have been stagnant. And that seems to be changing. Prices are above the 2% inflation target. They have been every month since April 2022. And expectations of where inflation will be in the coming years have risen and become embedded in a way they haven't been in decades. Wages are rising at record levels, at least in nominal terms. And the stock markets are booming, in part because companies are looking a bit more dynamic, a bit snazzier. On the flip side, people will point to the fact that even though inflation is picking up, growth isn't. The last three quarters, Japan has seen either contractions or basically zero growth. Some even say that Japan's fallen into kind of mild stagflation. And when you look towards the future, demographic headwinds loom. The currency is in a kind of free fall. And those pessimists will say that those structural problems are no closer to being solved than they were a few years ago.

So, Noah, you're there on the ground. Do you have a view of which camp is correct?

Well, I've been trying to puzzle it out or trying to sort of unpack why it is that it looks so different to different people who I talk to. And to do that, I thought it would be helpful to go to the ground. And I spent a week running around the neighborhood of Nihonbashi, which is a part of eastern Tokyo that historically has kind of moved in parallel with the national economy. It was a center of commerce during the Edo era. Merchants kind of congregated. In fact, people measured distances traditionally from Edo or now Tokyo, with the zero point being the bridge in Nihonbashi because all of the big roads converged there. So we went and visited shops and companies and talked to people across the neighborhood. For example, a bento shop which claims to be Japan's oldest continuous seller of the famous Japanese lunch boxes. And the owners of the shop, who've been in the business since before America's black ships arrived to open up the country to foreign trade. They pointed to the kind of shock, the black ship as it were, of rising import prices, rising costs of things like food and energy that really have kind of shifted price setting behavior and have shifted consumers expectations. So even though the bank of Japan had been trying to stimulate the economy with unorthodox monetary policy over the course of really the last decade, it never really shifted consumer behaviors in the way that these supply chain shocks have in the last few years. And now something that was once unimaginable has become kind of commonplace. Companies raise prices and their customers keep on coming back. I know that might sound kind of quaint in the rest of the world, but it's a really big deal. It's a different dynamic here in Japan.

In the sense that it is across Japan, not just in this neighborhood or in this bento shop.

That's right. When you look at prices for goods and services, they're rising at faster rates than at any time since the 1990s. And they're rising across a wider swath of countries, goods and services, and people are expecting them to keep rising. So firms expect inflation to be above 2%. That's having a big knock on effect, for example, in terms of wages and in turn monetary policy. It's a big reason why the bank of Japan raised rates in March for the first time in 17 years. It's still very, very loose monetary policy. Relatively speaking, the policy rate is just a hair over 0%. But it's the direction that really counts. And this sense of the direction changing is also helping to fuel optimism amongst investors who've been pouring into Japanese stocks this year and driving Japanese stock indexes to record highs to break through their bubble era peaks.

So all told, it sounds like you side with the optimists here. This all sounds like good news.

Well, I think there is a lot of good news. I mean There is real change happening in the Japanese economy. But at the same time, you have to keep in mind how all of this feels to Japanese consumers. And that contrast really stood out to me as we were scouring Nihonbashi. For most Japanese, even though wages are rising, they aren't rising in real terms, that wages aren't quite keeping up with inflation itself. So that means pay cuts effectively for a lot of Japanese, and a sense of household budgets shrinking, the yen being weaker, imports and travel being less affordable, a gloomy atmosphere amongst consumers. And you see a lot of foreigners spending in the big department stores in Nihonbashi. And for them, of course, with the yen weak, Japan is relatively cheap. But for Japanese consumers, it's kind of a belt tightening moment. The bank of Japan is hoping that that dynamic will shift later this year, that the effects of the wage growths from this year's negotiation will start to filter through, that wage growth will start to turn positive later in the year, and that will ultimately leave consumers more confident, more optimistic, and get them to start spending more and driving domestic demand forward. And that, of course, is what basic economic theory would predict. But there's a big question about how it will play out in practice here in Japan, in a society and an economy that's been conditioned by years, if not decades, of deflation and low inflation. So there's a kind of a psychological aspect to this that's really important and hard to measure.

And to borrow another idea from the pessimist camp, the demographics, the aging workforce that we've talked about so many times on the show, that part hasn't changed either.

That's right, Jason. And that's a big reason why any optimism has to be measured or tempered. Japan's working age population, which is now about 74 million people, is projected to shrink by 30 million people between 2020 and 2070. So you see that already in shops and cafes in Nihonbashi, which having to shorten their hours or work fewer days because they just don't have the staff to stay open. And all of this impacts Japan's potential growth rate, its long term growth prospects, which for all of the improvements we've discussed, is still below 1% per year. So I think there are ultimately good arguments on both sides of this debate. And it leaves me coming down somewhere in the middle, somewhere close to where Masakawa Yoshio, the head of the local business association, and Ningyo Cho, on Nihonbashi's Easter edge, put it that everything was stagnant. But at least now there's some movement. So perhaps it's not that Japan is back, but that Japan has entered a new economic era.

Thanks very much for your time, Noah.

Thank you for having me, Jason.

In the 19th century, calves were used to develop a vaccine against smallpox. Monkeys were more helpful when it came to finding treatments for polio and yellow fever. Some drugs now used to fight cancer were first tried on mice. Many people think that using animals to test life saving treatments is the unfortunate cost of keeping mankind healthy. But animal rights activists have long disagreed.

Huntington Life Sciences is one of Europe's.

Best established centres for testing drugs on animals. For months, activists have been sending letter.

Bombs to staff, have been abused and several cars torched.

Now a new finding adds to the controversy. It turns out that only a small proportion of therapies tested on animals end up being used in humans. So are we worth it?

Animal experimentation is fundamental to modern medicine.

Tricia Pareel writes about science for the Economist.

All therapies and drugs must be proven safe and effective in animals before they go to market and are tried out in humans. But according to new research, only around 5% of biomedical therapies which are tested on animals eventually obtain final approval by America's Food and Drug Administration.

Five percent sounds weirdly small. What were they actually looking at in this study?

So to arrive at this number, Benjamin Anikin and his colleagues at Zurich University and the University of Edinburgh analyzed 122 research reviews and which evaluated just how well results from animal studies translated to humans. The breadth of these reviews spanned more than 50 diseases, everything from diabetes mellitus to lung cancer. And it included therapies ranging from anticoagulants to non pharmaceutical interventions like exercise and green tea. But they found that only half of the therapies tested on animals were promising enough to eventually warrant tests in humans. And only 1 in 20 made it to the market.

Okay, so if half the therapies tested on animals went well enough to warrant tests in humans, they're presumably doing a lot of animal testing. Is that what's going on here? There's just tons and tons of tests and then only a few end up on humans or what?

That's part of the reason. But like all scientific experimentation, some failure is inevitable. Lab animals are not humans. So not all the results in animal studies will translate well into clinical trials. And non clinical reasons like commercial interest can determine the fate of a therapy. In fact, Joseph Gardner, who is a professor of comparative medicine at Stanford, told me that even if every drug that worked in animals also worked in humans, only 25% would make it to market. So keeping that 25% in our mind as the upper limit, the 5% is less shocking.

Recently we had a segment on the intelligence about why it was so hard to test how drugs would work, work on women. Because mice, for example, most mice don't have periods. The hormone cycles are very different. I'm interested in whether that's any of the reason for this very small percentage.

That is part of the reason. Yes, there are those biological differences between mice and humans. And many mouse trials use young males with untested immune systems. Human patients, as we know, can be male or female. They could be all ages and have multiple diseases at once. But it's not just the biological differences that are the issue here. Dr. Anikin also stressed that not all animal studies are conducted with the same rigor. Dr. Anikin and his colleagues looked at therapies which were tested in multiple different studies. Results reproducibility can tell us just how well a study is conducted. So of these animal studies that had very reproducible results, a high 86% had similar results in humans. And this shows us that the more rigorous an animal study is, the better it will predict outcomes in humans.

Okay, so I guess that's not that surprising that a rigorous study is better and therefore has better results in humans. What else can be improved with experiments?

Experiments should be designed to closer resemble human trials. And one part of this is mimicking the diversity in humans. So one researcher told me that if scientists are trying to model humans who are males, who are genetically identical and living in identical impoverished environments, then mice are great models because they're mostly male, genetically identical, living in cages, with the same layout, eating the same diet, have little exercise, and are even kept in rooms at the same temperature. There is evidence that animal studies which represent the variety in human trials, actually works. In 2017, a study found that experiments with wild mice are more accurate models for humans than laboratory mice that are very highly controlled.

Fascinating stuff. So we might not live in cages, but at least some of us don't exercise enough. I guess one improvement that could be made would be removing animals from testing altogether. It would solve some of these problems and of course the objections to animal testing in general. Do you think that's possible?

It is possible. And in fact, some animal free testing already exists. There are organs on a chip which are these battery sized devices that are lined with human cells, and organoids, which are replica organs built with lab grown tissue. So organs on a chip and organoids can take animals out of the equation altogether, or even allow scientists to test therapies before moving it on to animals. Computer simulations check the viability of therapies before animal tests. AI is helping in this regard. So an AI model can predict just how well a chemical will affect humans without even bringing in a lab rat. These technologies are great, but they don't yet reliably demonstrate whole body effects like they do in animal models. So for now, animal testing is here to stay.

Tricia, thank you so much for talking to me. Sure.

Thank you, Rosie, for having me.

A century ago, Emily Post made manners popular. Her best selling book, Etiquette, framed the fundamentals of good behavior as fashionable rather than fusty.

Caitlin Talbot writes about culture for the Economist.

Places always find a welcome. That's why everyone should learn to smile.

She offered practical advice such as when in doubt, wear the plainer dress, as well as dramatic warnings. A young lady unprotected by a chaperone is like an unarmed traveler walking alone among wolves. A century later, young people are saying yes, please to politeness. Once again, we're seeing a flurry of interest in etiquette, led by influencers who offer lessons on everything from posture to table manners.

It is not okay to call people incessantly. The maximum you can call per time.

Is twice you're enjoying a meal and by mistake you drop your knife. They're in season once more.

So let's talk strawberry etiquette.

Sarah Jane Ho, a Chinese etiquette guru, has taken niceties to Netflix Mind you'd Manners, her reality show was nominated for an EMMY Award in 2023. She told me that etiquette gives young people more confidence.

Etiquette is not limiting, it's not restricting. Instead, it's enabling and empowering. Etiquette can help you set boundaries. It helps you refuse to do things that you don't want to do because it's all about how you do it, your style and your delivery.

People are looking for help at the office as well as at home. Influencers cover topics such as how to start meetings promptly and advise on digital faux pas, including how to leave a group chat quietly. More than half of American companies are enlisting experts to help employees hone their professional Personas. Old institutions are also adapting to 21st century norms. Debrett's the Guide to Britain's Aristocracy has updated its A to Z of modern manners to include trends such as man spreading and ghosting. Yet this flurry of politesse comes at a time when most people think manners are in decline. Some 85% of Americans believe society is less civil than it was a decade ago. While 90% of American parents think youngsters aged between 6 and 18 are disrespectful, most blame social media and peer pressure. Interest in gentility has surged for two reasons. The first is Covid, which stopped people from interacting face to face. People started worrying that their social skills were getting about as much use as their formal wear. Micah Meyer, an etiquette coach, told me that people's social skills are a little rusty after the pandemic.

After Covid, I think, came a huge resurgence in etiquette because people lost soft social skills and they realized they feel anxiety when they have to talk to somebody, whether it be virtually or on.

The phone or in person.

The second reason is a confusion about what constitutes best practice in a global digital age. There are guides online to everything from email etiquette to selfie etiquette, flying etiquette to Airbnb etiquette. So, like more customs, what's deemed polite is subject to change. An often cited example is the phrase if it please you, which was popular in Shakespeare's day. By the time Emily Post published etiquette, it had been shortened to please. Young people now find it perfectly acceptable to type pls on mobile phones. Artificial intelligence will change politeness once more Manners may become more important and soft skills more valuable in an age where artificial intelligence can do much of the analytical heavy lifting. AIs might also make people ruder as they bark orders at smart speakers. Yet polite prompts actually make AI models perform better. A recent study found that rude requests cause chatbots to make things up and emit important bits of information. That's likely because AIs are trained on massive amounts of human data and so mirror human receptiveness to social etiquette in the digital world as much as the real one. It helps to mind your P's and Q's.

And since we're talking about politeness, I'd like to respectfully remind you about all the other excellent content you can listen to if you sign up to Economist Podcast plus at the moment, you can get a month's free trial and enjoy all our weekly podcasts. I'm sure you'll thank me for this reminder.

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