VCAS2002

Japan’s Economic EngineWhy Did It Stall, and Can It Be Restarted? : Japan’s Economic Engine Why Did It Stall, and Can It Be Restarted? Michael Smitka Prof of Economics Washington & Lee University Virginia Consortium of Asian Studies 2002 Conference Mary Washington College February 9, 2002


Claims : Claims Japan’s economic slowdown was inevitable Japan’s economy will never grow again If things go well, that will not matter But Japan-related enrollments?!


Three Theories : Three Theories “Macroeconomic Mistake” Ministry of Finance and Bank of Japan goofed big-time, several times “System That Soured” old world politics in a new economy fiddling while Japan declines smoke & mirrors hide business as usual “Secular Decline” Demographic change & economic maturity


My Emphasis: Secular Decline : My Emphasis: Secular Decline Secular decline Lots of capital - real returns low Productivity growth modest Services! Protected sectors! But in past declining sectors disappeared juxtaposition of old & new not novel Labor force now shrinking


Growth Accounting: % pa contributionCapital contribution shows diminishing returns : Growth Accounting: % pa contribution Capital contribution shows diminishing returns Yoshikawa, Hiroshi (2000). Technical Progress and the Growth of the Japanese Economy – Past and Future. Oxford Review of Economic Policy. 16:2, 36.


Population Profile : Population Profile


Macroeconomic Policy Mistake : Macroeconomic Policy Mistake Japan responded to shocks with easy money Sept 1985 Plaza Accord / ¥ appreciation Oct 1987 US stock market crash Only hiked interest rates May, 1989 Raised sharply through August 1990 low rates for 3 1/2 years But already obvious reaction in Jan ‘90


The “Bubble” : The “Bubble” Stock market up 4-fold in 2 years Land prices, too. “Bubbles” burst - bad debt, other fallout Example: Onoue pencil buildings, golf, stocks Only $2 billion in a $5 trillion economy But repeated many, many times over


Bubble Aftereffects : Bubble Aftereffects Massive bad loans Bankrupt banking system Massive bad government assets too Fearful public Bad recession


How to cure : How to cure Better monetary policy But classic liquidity trap When no one needs to borrow, low interest rates don’t help


Slide14 : Interest Rates in Money Markets and Lending Rates


Fiscal policy : Fiscal policy Better fiscal policy??? But spend on what? Done poorly, not credible 11+ packages full of “smoke & mirrors” Saved not spent Net effect is a “bond bubble” Debt 150% of GDP Current interest rate 1.5% pa Modest inflation ==> 6% pa interest rate 150%x6%= 8% of GDP or +60% of central budget Fiscal policy also impotent / not viable


Slide16 : Italy [blue]: profligate but improving Japan [red]: debt still rising sharply Germany [pink]: now past spike due to reunification US [green]: now past “Reagonomics” debt explosion Country data: central + local debt as % of GDP Green bars: Japan’s central + local long-term debt, trillions of yen, fiscal year basis


Structural Barriers : Structural Barriers Too much agriculture Farmers are dying off……very slowly Too much construction Bankruptcy, U up Inefficient retailing, services Daiei de facto bankruptcy Sogo de jure bankruptcy


Auto example : Auto example 11 firms in a small market Big structural issues even here! Nissan 20 year decline: not just bubble It and 8 other firms acquired, 6 by foreigners Honda in contrast booming, Toyota OK Firm-level variation Periods of understandable optimism in an industry with an 8-year planning horizon But steady shrinkage of employment


Structural Optimist : Structural Optimist Current recession shows problems are being addressed But will take years to complete Nissan turnaround: 3+ year process But suppliers now must adjust! Hollowing out to continue Mismatches remain: current labor force allocation versus needs for health care Latent demand for labor is growing


Macro Optimist View : Macro Optimist View I don’t know any optimists


The Dismal View : The Dismal View Financial meltdown a real possibility Hyperinflation, as in 1946-49 Recession can turn into a long-lasting depression Another Soviet Union?! “Japan-passing” is likely No ability to contribute to world And China will face the same problems


Macro growth? Never again : Macro growth? Never again Bad debts remains large Government deficits hard to cure Short-term pain: unemployment adjusted for labor force exit already at 8.5% level! Recovery won’t be quick. But will heal time. Structural adjustment is at best icing on the cake


Does it matter? : Does it matter? Slow growth but declining population Output can shrink while incomes rise Yet long-run retirement gap huge Taxes and/or benefits must suffer But that would be true even without the “bubble” and its aftereffects


Ideal World : Ideal World Japan, with an aging population, would like to save a lot Domestic opportunities few So accumulate foreign assets Globalization not advanced enough Unlike the late 1800s! We’ve retrogressed! “Hollowing out” isn’t a problem, it’s a necessity! Long-run pressure on incomes is huge absent large-scale immigration


Bottom Line : Bottom Line Japan is basically an upper-middle income society, at European levels Belt tightening will hurt But Japan will remain prosperous Lessons for other developing countries Slowdown won’t be unique to Japan But slowdown produces huge imbalances Large swings in the flow-of-funds are bound to stress any financial system, no matter how well run


The End : The End Addenda follow, deleted from talk to honor time constraints


US Role and Interests : US Role and Interests Structural change creates opportunities Japan is more open than any time since the early 1930s US, other foreign firms major players in several industries International trade will remain sizeable Not an issue this recession, for the first time in memory! Weak yen will increase exports; the problem is a poorly functioning international financial system: “Globalization” has retrogressed since the early 20th century!


Slide30 : More recent data: debt to GDP and total debt in yen trillions for Japan


Slide31 : Compensation of Employees Stagnant / falling incomes don’t encourage growing consumption


Slide32 : Bankruptcies: numbers are high but hide increase in failures of very large firms


Slide33 : Birth rate and annual number of births (left scale is units of 10,000, right scale is BR) The “echo” of the 1947-49 baby boom peaked in 1973, 24 years later. However no 2nd echo showed up in 1997…


Slide34 : Unemployment is lower than it would be in the US context because of large swings to “not in labor force” status.