Hist 131/445 Postwar Japan:
Are The US and Japanese Economic Situtations Similar?
The word “Japan” has become synonymous with economic malaise. Any time an economist wants to describe how bad things could get for an industrialized economy, he or she inevitably says something like the place “could end up like Japan.” And there is good reason why Japan has become a four-letter word in the world of economics. Ever since a gargantuan stock-and-property price bubble deflated in the early 1990s, Japan has never returned to its pre-crisis glory days. The economy slips in and out of recession. Japanese companies seem dazed and confused, and are losing out to more aggressive rivals from South Korea, Taiwan and elsewhere. The welfare of the population has stagnated. Meanwhile, Japan’s policymakers and political leaders do a lot of blabbering and very little reforming. They often appear out-of-touch with the real problems of the economy or unwilling to fix the ones they do recognize. Japan’s mess is that dreaded “L”-shaped recovery, in which an economy collapses, and then just goes flat, year after year, never quite recovering from its fall.
With the recovery in the U.S. so feeble nearly three years after the evaporation of Lehman Brothers, we have to wonder: Is America facing the same future as Japan? Here’s what I think:
We can find some unfortunate similarities between the Japanese and American economic situations. In both countries, asset bubbles left financial sectors gutted and in need of drastic reform and repair, with huge consequences for other sectors. Just like the property bust in Japan, the housing bust in the U.S. will take years to work itself out. Both governments experienced worsening fiscal balances and precipitous increases in national debt as they struggled to keep growth alive through government spending. And in both capitals, political paralysis (though rooted in different factors) has prevented policymakers from truly tackling the problems head on. The course of the two recoveries has also been similar, in certain respects. Just as Japan limped along for years after its bubble burst, the U.S. has consistently appeared poised to sink back into recession – those recurring fears of a “double dip.” Just when hope comes alive that the recovery is really, truly on track, we find out it’s not. The Japanese know all about that. Clive Crook of the Financial Times recently argued that the possibility the U.S. might end up like Japan has to be taken very seriously:
The administration thinks the pace of recovery will pick up soon. Last week President Barack Obama called the pause a “bump in the road”. Others think the slowdown will persist and might get worse, fears that cannot be dismissed. One alarming possibility is that the traits the US has relied on to drive growth in the past – labour market flexibility, rapid productivity growth – might have become toxic. If the US is unlucky, traits seen as distinctive strengths are now weaknesses, and a “lost decade” of stagnation, like Japan’s in the 1990s, might lie ahead.
He has a point. One of the reasons why Japan has been unable to recover is that the strengths that drove rapid growth before its financial meltdown — bureaucracy-led policymaking, close ties between government, business and banking, and consensus-based corporate management systems — became impediments to growth after the crisis. Too much government interference came to stifle new thinking on policy, while insular management became resistant to globalization and out-of-touch with emerging business trends. What happened is that the world changed around Japan and Japan didn’t change with it. Japan’s economic model could no longer succeed in a world where up-and-coming economies (South Korea, Taiwan, China) were eating away at Japan’s competitive edge. The Japanese failed to reform and respond, and the result is continued stagnation.
Crook raises the possibility that today the main factors behind America’s usual strong economic performances and post-recession recoveries are becoming the anvils in a Wile E. Coyote cartoon. The vaunted flexibility of America’s labor market – usually seen as a key factor in its corporate competitiveness compared to more protective Europe — may in these times be a hurdle to growth if unemployment remains too high for too long. Crook also notes that the famed American ability to improve productivity may actually hurt demand by turning real interest rates positive. In other words, the very things that make the U.S. economy tick, as in Japan, could end up prolonging the pain.
I, however, don’t see things that way. While I have little hope for Japan’s economic future, I don’t see the U.S. heading in the same direction. There are just too many differences between the two economies, differences that can work in America’s favor.
First, I have much more faith in the American corporate sector than Japan’s. One big problem that stymied Japan’s recovery was the sickness of its companies. During the boom years, companies took on too much debt and built too many factories, creating useless excess capacity. The result: “Zombie” companies that were too indebted to grow and were kept alive by creditors. Japanese companies have also been slow to adapt to new trends in global business. They’ve haven’t been aggressive enough, for example, in capitalizing on emerging markets or latching on to new consumer trends. Japanese firms, for example, are losing out to Samsung and LG in flat TVs and to Apple and others in smartphones. American firms don’t have either of these problems. Continued strong profitability and rising stock prices are a testament to the health of America’s corporate sector, even after the Great Recession. And American companies continue to lead in all sorts of innovative industries. It’s Americans who are developing the iPad and Twitter, not Japan. That makes America’s situation much different than Japan’s – the corporate sector is potentially part of the solution, not the problem.
Secondly, the U.S. is a much more globalized economy. True, exports play a bigger role in Japan’s economy than America’s. But the U.S. is much more open to foreign investment and foreigners. We can’t underestimate the importance of the fact that the U.S. is still a very attractive place to invest. Nor can we ignore the benefits the U.S. gains from immigration – entrepreneurship, talent and new influences. Japan hasn’t been willing to open to the world, and that has made the domestic economy uncompetitive and the population old.
Third, I just don’t think that the level of denial is the same in Japan and the U.S. What I find so infuriating about Japan is that the place has been an economic catastrophe for 20 years and its politicians and corporate leaders don’t seem willing to do much about it. Denial has been a big part of the Japan story since the bubble burst. It took a half decade for the Japanese government to begin restructuring the moribund banking sector after its financial crisis. The unwillingness to admit the depth of the problems continues to this day, built into a policy-making process and political system resistant to change. In the U.S., matters are different. Yes, there is paralysis in Washington, with pointless ideological battles and political posturing. But there is also a national debate on what ails America to a degree that doesn’t exist in Japan. That gives me a bit more hope that the U.S. can more readily reform than Japan.
And don’t get me wrong. There are problems that need solving and reforms that need to get done. I worry that the sentiment in Washington is that fixing the stalled recovery means simply creating more demand – to get consumers spending again and companies investing again. Then there is the debate over the need for continued government stimulus. Of course, demand is the problem, but things aren’t that simple. There are also structural impediments that need to get resolved if the U.S. is return to health. That’s something the Japanese never realized. Its politicians thought that if they just spent a bit more money this year, growth would restart without making politically sensitive choices. Now they have government debt equal to 200% of GDP.
What I mean by structural is that real damage has been caused by the housing bust and Great Recession that needs to be addressed. Take a look at unemployment data, for example. Joblessness in construction is at 20%, the highest of any industry. That’s a consequence of the housing bust. These people may need to find jobs outside of their industry – who knows when the housing market will stage a major comeback. That means the U.S. needs to invest more in job training and education to prepare the unemployed for new jobs in new industries.
There also needs to be reform in the corporate sector. Productivity gains are all well and good, but not if they destroy your market. If the unemployed don’t have the money to buy the cars you make or burgers you flip, then eventually the profitability gains from cost-cutting turn counterproductive. Corporate America needs to reform its idea of “shareholder value” and look as much at the long-term interests of their businesses as the short-term stock price.
Fixing America’s economy will not be easy, and it may take a while. But some changes need to get made. Otherwise the word “America” may turn into a synonym of “Japan,” and the U.S. could end up going to L.
Read more: http://business.time.com/2011/07/08/is-america-facing-a-japanese-future/#ixzz2OHWhdsqP
Listen to a similar NPR story at
In the 1980s, Japan appeared to be a world beater — the China of its day. Japanese companies were on a tear, buying up firms in the U.S. and property around the world. But these days, Japan is considered a cautionary tale for post-industrial economies around the world. The country is facing its fourth recession in what are commonly known as the "lost decades."
Japan's story resonates this holiday season as American politicians try to reach a debt deal.
"I really hope the U.S. is not getting into a Japanese situation," says Hiromichi Shirakawa, chief economist for Credit Suisse in Japan.
Shirakawa says a rapidly aging society, rising public spending and political paralysis have contributed to years of stagnation in Japan and that Americans should pay attention.
"If you look at some economic indicators, they're very, very similar," he says. "My concern is the U.S. economy may — not will — may follow the Japanese economy's path."
Over the years, the economies of Japan and the U.S. have faced some similar problems, albeit at different times and to different degrees.
Both had real estate bubbles that burst and banking systems that racked up tons of bad loans. Both Japan and the U.S. also have ultimately unsustainable public debts. Shirakawa says Japan's economic problems are about 10 years ahead of America's.
"The American people should learn from Japan that the economy could be like Japan without the political will to change the economic system," he says.
A Rapidly Aging Society
Robert Feldman, chief economist for Morgan Stanley MUFG Securities in Tokyo, says one big problem is Japan is rapidly aging, driving up health care and pensions costs. But the country's electoral system favors the elderly, so most politicians are afraid to slash services.
"It means they can't cut medical benefits, even though they are overgenerous," he says. "There's only a 10 percent copayment for older people when they go to the doctor, and they pay no insurance premiums."
So, Japan continues to shovel money toward older people — running up the national debt — instead of investing for the future.
Japan borrows money to fund current consumption. That does not help improve productivity, which is crucial to economic growth. Feldman says the problem in Japan, as in the U.S., is fundamentally political.
"There is an inherent myopia in the way democracies make decisions," he says. "Unless we can redesign our democratic institutions to think about the future a little bit more than we do now, then the sustainability of our living standards is called into question."
Some Key Differences
Of course, analogies only go so far and the U.S. has avoided some of the traps that have ensnared Japan.
For instance, the U.S. Federal Reserve has flooded the American economy with money, which prevented the potential price deflation that has plagued Japan.
And Naohiro Yashiro, who teaches economics at International Christian University in Tokyo, says that U.S. politicians are trying to force themselves to confront the debt.
"Japanese also need a device like the 'fiscal cliff,' " he says. "We don't have such schemes. So actually that is us who wants to follow the example of the United States."
Feldman says voters in both countries have to look past their short-term interests and think about the long-term health of their economies.
As an example — and perhaps a metaphor — he points to Japan's annual health exam, which includes body measurements. Among other things, the doctor measures your waist and let's you know if it's too big. Then, it's up to the patient to address the problem.
Feldman, a trim 59-year-old, went in for his exam last year.
"Fortunately, I was just under the limits," he says. "They are pretty tough limits here in Japan. I was quite proud of myself."
Feldman recalled the doctor said to him: "Hmm. Not bad for an American."
Is The U.S. Economy Turning Japanese?
Gary Shilling's View
A. Gary Shilling, Contributor
Interest rates close to zero and all the related issues are relatively new in the U.S. and Europe, but they’ve been around in Japan for two decades. So, many wonder if the U.S. is headed for Japan’s 20-years-and-running deflationary depression. And regardless, what does the Japanese experience tell us about living in this atmosphere?
The Japanese bubble economy was cruisin’ for a bruisin’, and its demise was aided by the Bank of Japan’s hike in interest rates, starting on May 31, 1989. Soon, exuberant real estate prices collapsed as did stock prices and economic growth nearly ceased. Lately, the earthquake and tsunami have added to Japan’s woes, at least on a short-term basis. Real GDP fell 1.3% in the second quarter from a quarter earlier at annual rates, following the 3.6% drop in the first quarter and the third quarter in succession to decline.
There are a number of similarities that suggest that America is entering a comparable long period of economic malaise. The Age of Deleveraging forecasts a similar decade, at least quite a few years, of slow growth and deflation as financial leverage and other excesses of past decades are worked off. The recent downgrade of Treasurys by S&P parallels the first cut in Japanese government bond ratings in 1998, followed by S&P’s cut to AA-minus early this year and Moody’s reduction from Aa2 to Aa3 last month.
The recent slow growth in the U.S. economy—real GDP gains of 0.4% in the first quarter and 1.0% in the second—looks absolutely Japanese. Furthermore, the prospects of substantial fiscal restraint in the U.S. to curb the federal deficit is reminiscent of tightening actions in Japan in the mid- 1990s. The economy was growing modestly, but deficit- and debt-wary policymakers in 1997 cut government spending and raised the national sales tax to 5%. Instant recession was the result.
Japan’s gross government debt last year was 226% of GDP, far and away the largest ration of any G-7 country. All governments lend back and forth among official entities so their gross debt is bigger than the net debt held by non-government investors, and Japan does more of this than other developed lands. Still, on a net basis, its government debt-to-GDP is only rivaled by Italy’s and leaped from a mere 11.7% in 1991 to 120.7% in 2010. Is the U.S. far behind?
Japan, in reaction to chronic economic weakness, has spent gobs of money in recent years, much of it politically motivated but economically questionable, like paving river beds in rural areas and building bridges to nowhere. Is that distinctly different than the U.S. 2009 $814 billion stimulus package that was supposed to finance shovel-ready infrastructure projects when, in reality, the shovels had not even been made yet?
A key reason for the 2009 and 2010 U.S. fiscal stimuli and continuing deficit spending in Japan is because aggressive conventional monetary ease did not revive either economy. Zero interest doesn’t help when banks don’t want to lend and creditworthy borrowers don’t want to borrow. Both central banks found themselves in classic liquidity traps, so both resorted to quantitative ease, without notable success.
But Differences, Too
There are, then, many similarities between financial and economic conditions in the U.S. and Japan. Nevertheless, there are considerable differences that make Japan’s experience in the last two decades questionable as a model for America in future years. Note, however, that every time I visit Japan, I return convinced that I understand less about how they function than I did on the previous trip. I’m sure they behave rationally, but it’s a different rationale than in the West, or at least the one I understand.
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The Japanese are stoic by nature, always looking for the worst outcome while Americans are optimistic—not as optimistic as Brazilians, but still prone to look on the bright side. Otherwise, why would the Japanese voters stand for two decades of almost no economic growth? Japanese are comfortable with group decision-making while Americans revere individual initiative, something the Japanese disdain. The nail that sticks up will be pounded down, is a favorite expression there. Perhaps because of this, the government bureaucracy in Japan is much stronger than in the U.S. while elected officials have less control and room for initiative.
Despite little economic growth, the Japanese enjoy high living standards.
And the Japanese are an extremely homogenous and racially-pure population. In a related vein, immigration visas don’t exist in Japan, so there’s nothing in Japan like the chronic shift of U.S. income to the top quintile. Nothing like the two-tier economic recovery that benefited top-tier stockholders in 2009-2010, but left the rest struggling with collapsing prices for their homes and high unemployment.
Fertility rates in Japan are about the lowest in the world and life expectancy is high. So the rapidly aging and declining population lack the innovation and dynamism of more youthful populations in the U.S. where immigration, legal and illegal, is high as are fertility rates.
Japan in the post-World War II era has been an export-led economy. “Export or die,” is the watchword. The result of robust exports and weak imports linked to anemic domestic spending is its perennial current account surpluses, which, along with earlier high saving by households and now by businesses, allow it to finance its huge government deficits internally, with foreigners owning only 5%. As a result, Japna’s government bond yields are extremely low.
In contrast, the U.S. is a chronic importer with a chronic current account deficit. So foreigners have perennially bought Treasurys with the resulting dollars they earn, and they now own about 50% of them. And Treasury note and bond yields are much more controlled by global forces and higher as well than in Japan. The U.S. is largely an open economy but Japan’s, except for her formidable export sector, is largely closed to the outside world.
Another big difference is the chronic strength in the yen and long-time weakness in the dollar, resulting in part from the difference between Japan’s chronic current account surplus and America’s chronic deficit. Even near-zero short-term rates and 10-year government bond yields of about 1% do not deter those who lust for the yen. Of course, in a zero interest rate world where interest returns have dropped close to traditionally low Japanese levels in the U.S. and elsewhere, Japan at present does not have much of a competitive disadvantage.
The yen’s strength has led to Japanese manufacturers moving much of their production to lower-cost areas, but deflation in Japan has offset some of the difference. Corrected for deflation and on a trade-weighted basis, including trading partners such as Switzerland with robust currencies, the yen has been relatively flat since the 1980s, according to a Bank of Japan analysis.
Nevertheless, the government has intervened in currency markets numerous times, most recently spending $13 billion in early August, to arrest the yen’s climb vs. the greenback. And, of course, a government intervening against its own currency can’t run out of ammunition since it can easily create more of its own currency to sell on the open market. Still, intervention success has been limited, short-lived and expensive. Even a determined government with unlimited ammo has not been able to overcome the gigantic global currency markets that trade trillions of dollars daily.
Japan, of course, is mired in deflation, and while we continue to believe America is headed there as well, the U.S. CPI is still rising. In fact, many in and out of the Fed believe serious U.S. inflation is in the wings. As shown earlier, the spread between 10- year Treasurys and TIPS implies an annual CPI rise of about 2% over the next decade. A similar measure in Japan reveals expectations of continuing deflation over the next 10 years.
What’s Left To Be Done?
I conclude that the differences between the U.S. and Japan are too great to use the Japanese economic experience in the last two decades as a template for the U.S. in coming years. Still, as discussed in The Age of Deleveraging, I expect a similar lengthy period of slow growth and deflation as the economy delevers. In any event, can policymakers do much to forestall this outlook? I argue in The Age of Deleveraging that they can’t any more than the Japanese have been able to generate robust economic growth.
A decade ago, the Fed was worried about deflation infecting the U.S. and assigned a dozen of its top economists to study Japan to see how chronic falling prices could be avoided. Their conclusion: Institute massive monetary ease early before deflation becomes a well-established and anticipated phenomenon.
Now-Fed Chairman Bernanke in earlier years also believed the Bank Of Japan activities were too little, too late, and that then the Japanese central bank pulled back when the economy seemed to be reviving. Its holdings of government bonds jumped from ¥45.7 trillion in 2001 to ¥67.2 trillion in2004, but aren’t much higher today at ¥86.0 trillion. The BOJ’s securities-buying program earlier this year of ¥5 trillion, or around $65 billion, is only about 10% of the Fed’s $600 billion QE2 program. Note, however, that the Fed’s much larger quantitative easing hasn’t been a great success either, as discussed earlier.
Furthermore, the U.S. central bank’s fear of a self-feeding deflationary spiral has not occurred in Japan. That takes place when lower prices encourage potential buyers to wait for still-lower prices, which are then induced by mounting inventories and excess capacity. So those buyers wait even further, etc., in a self-feeding downward price spiral. In Japan, deflation has been an on-and-off phenomenon for 20 years with no cumulative downward spiral in prices. This graph also reveals that M2 money supply growth of about 3% annually in the last two decades has not prevented periodic price declines. Again, Japan has been and the U.S. now is in a classic liquidity trap.
Excerpted from the September 2011 edition of Gary Shilling’s Insight.
Fighting Deflation in the U.S. and Japan
"As the U.S. boom turned to bust, the monetary policy pursued by the Federal Reserve was far more aggressive than that followed by its counterpart, the Bank of Japan, in the 1990s and its decisive response may have helped the U.S. economy recover more quickly."
During the late 1980s, Japan's economic system -- its innovative management methods, efficient manufacturing processes, and bold investments in new technologies -- was widely seen as a model to be emulated. Little more than a decade later, America again turned to Japan for a lesson in economics, but for a different reason: this time the issue was not how to replicate Japan's success, but how to avoid its failure.
In Lost Decade in Translation: Did the U.S. Learn from Japan's Post-Bubble Mistakes? (NBER Working Paper No. 10938), NBER researchers James Harrigan and Kenneth Kuttner identify what went wrong in Japan in the 1990s, and the lessons the United States could - and perhaps did - learn from Japan's experience. Focusing on the critical role of monetary policy, their analysis reveals how U.S. policymakers successfully avoided the monetary missteps that are partly to blame for Japan's "lost decade."
In 1991, after years as the economic envy of the world, Japan entered a period of stagnation from which it has yet to fully emerge. Ten years later, in 2001, America's own record expansion came to a halt. And some of the same problems that have caused so much pain in Japan -- chiefly, falling prices or "deflation" -- began to loom as threats to the U.S. recovery. Yet the United States avoided Japan's fate and may have Japan to thank.
Harrigan and Kuttner document a number of worrying parallels between the situations in Japan and the United States as the two countries fell into recession. Both economies' expansions were powered by extraordinary investment growth, and both countries experienced asset price bubbles. And the U.S. government's fiscal situation, like that of Japan's, deteriorated sharply as the economy collapsed. There were also some important differences, however: Japan's asset price bubble was significantly larger, and its financial system more fragile than that of the United States.
Harrigan and Kuttner note that the U.S. Federal Reserve and the Bank of Japan both responded to the recessions in their countries by cutting interest rates. But a more detailed analysis of monetary policy reveals that, as the U.S. "boom turned to bust," the monetary policy pursued by the Federal Reserve was "far more aggressive" than that followed by its counterpart, the Bank of Japan, in the 1990s and that "its decisive response may have helped the U.S. economy recover more quickly."
Harrigan and Kuttner suggest that, with Japan's sobering lesson in mind, Fed policymakers were sensitive to the threat of deflation, and acted accordingly. "Perhaps because it had learned from Japan's experience, the Fed was prepared to implement a vigorous anti-deflation policy...much more quickly than the Bank of Japan," they write. "Moreover, this intention was consistently backed up by statements and speeches by Fed officials emphasizing the seriousness of the deflation threat, however small, and pledging to do whatever was necessary to prevent it."
The impact of their action, if judged by the state of the economy, appears to have been positive. By the summer of 2004, three and a half years after the onset of recession in the U.S., its economic recovery had become self-sustaining, and deflation had receded as a threat. The contrast with Japan's experience is stark. At the same point in its own post-peak period, the Japanese economy remained stagnant, and deflation was emerging as a chronic problem.
While it's easy to understand why the Fed would want to do what it could to avoid with the corrosive effects of deflation, Harrigan and Kuttner said it has remained puzzling why Japanese responded "so slowly and so erratically in the face of deteriorating economic conditions." The insufficient response early in the crisis, they said, could be attributed to the simple fact that few anticipated how rapidly disinflation would assert itself. But even when it was apparent to all that it was well established, Japan's response remained weak.
In fact, in 2000, the Bank of Japan actually raised interest rates and a senior bank official publicly stated that deflation was beneficial. Harrigan and Kuttner note that some economists compare this decision to the Federal Reserve's move in 1937 to effectively restrict bank lending, which is widely blamed for extinguishing the incipient post-Depression recovery underway at the time.
Harrigan and Kuttner suggest that the reluctance to act consistently and forcefully against deflation could be partly attributable to bureaucratic turf wars between the Bank of Japan and the country's Ministry of Finance, with the lack of cooperation producing weak policy. They also note that others view the long-term effort by the Bank of Japan to seek independence from the Ministry of Finance, which was formalized in 1998, as producing what is known as an "independence trap." Bank leaders may have feared that if a bold initiative against deflation backfired, they might lose their new autonomy.
Harrigan and Kuttner also note that Japan's inaction may have been the result of a simple, rigid adherence to "certain economic doctrines," such as those that stress caution in doing anything that could cause inflation. These doctrines might work well in normal conditions, they observe, but can be obstacles to effective action in other times.
The authors offer one cautionary note in an otherwise favorable view of U.S. response to its post-boom period. One difference between the two countries that does not bode well for the United States is a comparatively high level of government debt, which stood at 43 percent of GDP prior to the recession, compared to 13 percent for Japan. There also is the even more troubling fact that U.S. foreign indebtedness has "soared in recent years" while Japan continues to run surpluses in this area. Harrigan and Kuttner view foreign indebtedness as a serious issue that remains unresolved, despite the recovery. "Such a large U.S. current account is not sustainable and adjustment is likely to be a substantial policy challenge in the coming decade," they conclude
-- Matthew Davis