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Economic Development of Japan: 

Economic Development of Japan No.11 Economic Maturity & Slowdown YEN OIL TRADE

Environmental Policy Shift: 

Environmental Policy Shift High growth caused serious environmental problems-- esp. air and water pollution by factory emissions. Motorization also caused urban air pollution, noise problems and traffic accidents. Growth-orientation was accused (“Down with GNP!”) leading to anti-pollution lawsuits & civil movements. 1967 Basic Law on Environment 1971 Environment Protection Agency Japan now asserts that environment should not be sacrificed for growth, and the cost of preventing pollution is much less than the cost of cleaning it up later (ODA policy) – Rejection of the inverted U curve. GDP Pollution ?

The 1955 Regime (LDP dominance): 

The 1955 Regime (LDP dominance) The Liberal Democratic Party (LDP) formed in 1955, held power until now (except 1993-96). Securing rural votes by subsidizing agriculture and building rural infrastructure (firmly established by PM Kakuei Tanaka 1972-74) LDP has many factions and zoku-giin groups (politicians promoting subsidies in particular fields) Opposition parties are too weak to challenge LDP’s rule. Reform movement inside LDP (Koizumi, Abe)—how successful? P.178 LDP Factions & zoku-giin Other parties

Slide4: 

Real GDP Growth 1st Oil Shock 2nd Oil Shock Yen floats Bubble collapses P.162

Slide5: 

Monetary Growth and Inflation (12-month change) Bretton Woods fixed dollar system ends General float begins 1st oil shock 2nd oil shock Plaza Agreement Bubble Bubble collapses P.187

Growth Slowdown in the 1970s-80s: 

Growth Slowdown in the 1970s-80s Japan’s economic maturity—income reached the world’s highest level Oil shock and global stagflation General floating of major currencies Italy UK Japan France W.Ger. US

Slide7: 

Productivity Slowdown (estimated by labor-material Cobb-Douglas prod. func.) Income Distribution (Lorenz Curve) OECD Economic Outlook, July 1976 --Postwar land reform --Agricultural subsidies (1955 Regime) --Labor migration to cities

Delayed Systemic Reform?: 

Delayed Systemic Reform? After catch-up industrialization, Japan should have changed its system in the 1970s However, large macro shocks diverted policy makers’ attention (oil shocks, floating, stagflation, trade disputes) As a result, the Japanese economy continues to be over-regulated even today. Opposing view: Don’t copy US financial capitalism—stability, equity, patience, teamwork should be maintained. PP.190-91 Long-term relations Official intervention Open markets Private initiative

The 1940 Regime: Farewell to the War Economy by Yukio Noguchi (1995): 

The 1940 Regime: Farewell to the War Economy by Yukio Noguchi (1995) I would like to advance the hypothesis that the key components of the Japanese economy today were created during the war. The 1940 Regime--(i) production-first; (ii) suppression of competition, (iii) social policies to reduce friction These alien systems were implanted to execute total war (enterprise system, finance, bureaucracy, land reform) and they continued as systemic core after the war. They worked well for growth, but not for coping with change. Deregulation and consumer-oriented society cannot be realized unless this regime is removed.

The Cause of 1970s Stagflation: 

The Cause of 1970s Stagflation Supply shock view OPEC’s oil price hike was the main cause. Aggressive wage hikes also contributed. Expansionary fiscal & monetary policy accommodated and softened the blow. Global monetarist view As US lost monetary discipline, the fixed rate regime collapsed in 1971-73 and USD fell. Major central banks expanded money to counter appreciation pressure, causing global liquidity glut in the early 1970s. Oil shock was the result, not the cause, of global inflation. PP.188-90 AS AD P Y World Money Growth Source: McKinnon (1979), p.264

Mercantilist Pressure on Surplus Countries: 

Mercantilist Pressure on Surplus Countries Komiya (1994), McKinnon-Ohno (1997), McKinnon (2005) When a country emerges as a new industrial power, it is often criticized for unfair trade and undervalued currency. Trade and exchange pressures mount. But the trade gap cannot be eliminated by currency appreciation or trade liberalization. Ronald McKinnon

Elasticities Approach vs. Absorption Approachin Financially Open Economies: 

Elasticities Approach vs. Absorption Approach in Financially Open Economies Conventional view (elasticities approach) Exchange rate adjustment can reduce Japan’s trade surplus and US trade deficit. Fred Bergsten, W. Cline (IIE, Washington) Krugman—the Mass. Ave. Model: Imports = f (yt, rert-2) Friedman, Krugman— “daylight saving time” argument for currency float PP.191-94

Slide13: 

Our unconventional view (syndrome of the ever-higher yen) Thanks to wrong economics and Washington lobbying, the yen-dollar rate is manipulated for mercantile purposes. But yen appreciation cannot reduce Japan’s surplus and US deficit, because they are structural (US savings < US investment). The real solution is increasing US savings. Current account = Y – A = S – I Intermittent yen rises only destabilize the Japanese economy through recession, deflation and depressed interest rates. Japan’s surplus with US 1971-73, 1977-78, 1985-87, 1993-95 Pressure to appreciate yen Bilateral trade negotiations Persistent trade gap American responses Reinforcement through failure

Exchange Rate Impacts Are Complex...: 

Exchange Rate Impacts Are Complex... E Trade balance Competi- tiveness Inflation Absorption Monetary expansion (-) offset (-) (+/?) Pass-through Reverse absorption effect Yen appreciation Relative price effect LM curve shifts Subject to M-L condition & J-curve Price channel Quantity channel Engi- neered “Endaka fukyo” or high-yen induced recession

Slide15: 

International Reserves --Countries with large F/X inflows often buy up USD to resist currency appreciation --However, having too much foreign reserves may cause: --Excess liquidity and bubbles --Unbalanced asset position --Exchange risk

Slide16: 

“Original sin” (inability to borrow in home currency) Developing countries that borrow in USD face exchange risks in trade and debt payments. This may lead to higher risk premium, higher interest rates, balance-sheet mismatches, and the possibility of currency crisis. “Conflicted virtue” (inability to lend in home currency) Any high-saving country that lends in USD faces (i) exchange risk on accumulated foreign assets, both private and public; and (ii) accusation of unfair trade and pressure to appreciate the currency by deficit countries (esp. US) If the leading economy (US) is the largest lender, this problem does not arise. In fact, it is now the largest borrower.

Slide17: 

Uncovered interest parity: ijp = ius + E(ė) + φ E(ė) --expected dollar appreciation (negative) φ—risk premium for holding dollar assets (negative) As more dollar assets are accumulated, the second component rises. Source: McKinnon (2007), originally IFS. Long-term Interest Rates (10-year Gov’t Bonds)

Estimates of Japan’s Net Liquid International Asset Holdings(% of GDP): 

Estimates of Japan’s Net Liquid International Asset Holdings (% of GDP) Source: R. McKinnon, “Japan’s Deflationary Hangover: The Syndrome of the Ever-Weaker Yen,” April 2007.