By Edward J. Lincoln -- Nov 29, 2012
A more informative measure of the success and health of advanced economies is GDP per person - a crude but widely used measure of affluence. In the 20th century successful advanced economies have typically experienced growth in GDP per person in the range of 1.5 to 2.0 per cent annually, but there are reasons to fear that Japan may not be able to achieve this growth rate.
The low birth rate is first among these. The age structure of the population has been shifting as the ratio of people over the age of 65 to the total population rises rapidly. Though this shift is happening in many countries, Japan has the highest ratio among OECD countries (23 per cent in 2010), and the ratio will continue to climb.
This shift causes an obvious fiscal problem for both the social security and the national health insurance systems. The government is already running a large fiscal deficit and has accumulated a large government debt, raising the possibility of a Greek-like fiscal crisis at some point in the future. At the moment there is no danger of such a crisis because high levels of domestic savings continue to be more than sufficient to finance the government deficit, but this situation cannot continue indefinitely.
An ageing population could have a negative effect on productivity or output per worker, because it will likely cause economic resources to shift towards those industries that serve the elderly. Japan's productivity per worker has traditionally been higher in manufacturing than in services. If the ageing population results in less manufacturing output (less domestic demand for automobiles, for example) and more demand for services (such as health care, travel or other leisure activities), Japan could experience a drop in output per worker. Even with a constant level of output per worker, output per person in the total population will fall because changes in the national age structure are reducing the proportion of the total population that is in the labour force.
The dearth of young adults entering the workforce could also have a negative impact on productivity. With a low birth rate for the past four decades, the absolute number of adults aged 20-24 has been falling rapidly. From 1995 to 2010 the number of people in this age cohort fell 32 per cent, and based on the number of people aged 0-4 years old in 2010, it is due to fall a further 20 per cent by 2030. If young employees are a source of innovative thinking in corporations, then Japanese corporations face a problem as managers become increasingly older, less innovative and more risk-averse.
Although World War II devastated most of the Japanese economy, the social foundations laid down during the Meiji Era contributed to the post-war economic miracle from the 1960s to the 1980s. New constitutional and economic policies implemented by the US during the American occupation of 1945-1952, also contributed to the eventual recovery of the Japanese economy. Furthermore, although there were attempts to dissolve the Zaibatsu system, the Zaibatsu managed to evolved into the Keiretsu with the six major Keiretsu being Mitsubishi, Sumitomo, Fuyo, Mitsui, Dai-ichi Kangyo and Sanwa Groups.
However the greatest contributing factor of the Japanese Economic Miracle was the establishment of the Ministry of International Trade and Industry (MITI) in 1949. MITI implemented numerous policies that led to heavy industrial growth in Japan. Many scholars have described MITI to have had the greatest impact on the economy of a nation than any other governmental regulation or organisation in the world. According to prominent political scientist Chalmers Johnson, author of MITI and the Japanese Miracle, “MITI formalized cooperation between the Japanese government and private industry. The extent of the policy was such that if MITI wished to “double steel production, the neo-zaibatsu (keiretsu) already has the capital, the construction assets, the makers of production machinery, and most of the other necessary factors already available in-house”.
During the post-war economic miracle from the 1960s to the 1990s, Japan experienced huge economic growth – at an average of 10 percent annually in the 1960s, 5 percent in the 1970s, and 4 percent in the 1980s.
Growth in the 1990s slowed down largely due to the asset price bubble in late 1980s, and the crash of the Tokyo Stock Exchange in 1990-92. This period is termed as the “Lost Decade” in Japan.
In the aftermath of the 2008 global financial crisis, the Japanese economy began to undergo a strong period of economic recovery. In 2010, Japan’s real GDP growth (constant prices, national currency) was 3.938 percent – the fastest growing economy among the G-7 nations for the year. However, the 2011 Japanese earthquake and tsunami has threatened to derail Japan’s economic growth. On April 2011, the Japanese government was forced to downgrade its assessment of the economy for the first time in six months. According to the Economics Minister Kaoru Yosano, “The biggest risks, or uncertain factors for the economy, are when power supplies will recover and whether the nuclear situation will keep from worsening."
The 2011 earthquake and tsunami in Japan is expected to result in US$235-310 billion worth of damages. The Bank of Japan has injected more than ¥325 billion into the economy to stabilize the financial market and slow down the appreciation of the yen.
Japan's Economy in Brief
Japan’s Economic Structure
Japan had a population of 127.08 million in 2010, with a labour force of 65.7 million. In 2010, Japan’s unemployment rate was the lowest among the G7 nations at 5.058 percent.
One of the biggest challenges that the Japanese government face today is its aging population and negative population growth rate. 22.9 percent of the Japanese population is above the age of 65 while Japan’s total fertility is the 5th lowest in the world.
Japan has a land area of 364,485 square km. 70 percent of Japanese land is forested and unsuitable for agricultural, industrial or residential uses. As such, much of Japan’s economic activity is concentrated in major cities such as Tokyo, Yokohama and Osaka.
With only about 15 percent of its land being arable, Japan imports about 60 percent of grain and fodder crops from other countries, and relies on imports for most of its meat products. Japan is also the largest market for EU and third largest market for US' agricultural exports.
With its lack of natural resources, Japan rely on the imports of commodities such as fuels, foodstuffs, chemical, textiles and raw materials from various countries for its industrial sectors. Japan is the world's third largest oil importer, with 5.033 million barrels per day to meet 45 percent of its energy needs in 2009. Japan boasts the largest fishing fleets in the world, accounting for almost 15 percent of the global catch.
Japan’s Economy Set to Slip under the Waves
It will likely take a new financial crisis in Japan — something that may befall the nation in the short run — for the country to finally make the economic adjustments needed to pull out of its long-time downward spiral, says Wharton finance professor Franklin Allen.
That downward spiral lately has been accelerating, with recent economic reports looking very bleak and possibly leading to a breaking point. GDP fell an annualized 3.5% (0.9% actual) in the latest quarter. The trade deficit hit a record for the quarter, with September’s exports dropping by 10.3% (versus September 2011), the fourth-straight monthly decline. First-half fiscal year results were similarly dour: Japan’s trade deficit hit US$41 billion, the largest ever for a six-month period as exports dipped 2% and imports rose 2.6%.
New forecasts suggest that GDP in the current quarter will fall 0.4%, which would push the country into its third recession since 2008.
Although unsustainable economic conditions in a country can sometimes drag out much longer than most observers think is possible before a serious break occurs, in the end there is usually a reckoning. And reckoning day may not be far off for Japan, says Allen.
The long-term trend is well known – some 20 or more years of relative economic stagnation, though the Japanese population has continued to live comfortably for the most part, largely because the unemployment rate has never soared like it has in the U.S following the 2008 financial crisis.
What is behind the new rash of bad economic news coming out of Japan over the past couple of weeks? “China is a big factor,” Allen says. The Chinese are continuing to avoid buying Japanese goods in response to a dispute over control of islands in the East China Sea, and that certainly contributed to the devastating drop in exports in September. That dispute has taken on outsized importance because of sensitivities dating back to Japan’s ruthless occupation of large swaths of China for several years before and during World War II.
Notes Allen: The dispute with China “may well get much worse before it gets better. It looks like [Liberal Democratic Party leader Shinzo] Abe will become the new prime minister in upcoming elections. This is likely to lead to deterioration in relationships from their current low level.”
Saber rattling between China and Japan over the territorial issues has caused great uncertainty recently, but there are, of course, many long-standing reasons for Japan’s economic quagmire. “Demographics is a part of it,” Allen notes. “[Japanese] are getting older on average; the workforce is shrinking, and gradually [Japan] will start to dissave as a country as the older generation runs down their savings.”
The other big factor contributing to Japan’s economic malaise, says Allen, “is that Japanese companies are losing their competitiveness. The problems at Sharp, Panasonic and Sony are symptomatic of this.”
So what would it take for Japan to start turning things around?
“The decline will continue until there is a crisis,” Allen adds. “I think this is going to come sooner rather than later…. The timing is very uncertain, though. They need to let the market set interest rates.”
The relatively high level of the yen, meanwhile, has hurt Japan on the trade front. Yet, given that Japan is the world’s largest debtor – its debt is double the size of its economy — why has the yen held so strong? “This is a fascinating question. Since Japan finances its own debt it is still regarded as a safe haven. But now that it is running trade deficits, this may well change. Moreover, it may change quickly.”
The yen may get a policy push to add to any market push-down that may be coming, if Abe wins the December 16 election, as polls suggest is likely. He has pledged to attack deflation and weaken the high yen, which has been making life so difficult for Japanese exporters and manufacturers. Last week, he said he would set a 2% inflation target through monetary easing that would involve the Bank of Japan (BoJ) buying up Japanese debt to finance infrastructure projects.
But that arrangement would require changes in current BoJ law that would curtail its independence. How doable that is remains an open question. Abe’s comments drew a sharp response from BoJ Governor Masaaki Shirakawa, who looked unlikely to give up any of the BoJ’s independence without a fight. “Central bank independence is a system created upon bitter lessons learned from the long economic and financial history in Japan and overseas countries,” he said during a press conference.
Expect rough economic seas ahead for Japan regardless of the election’s outcome.
Economy - overview
In the years following World War II, government-industry cooperation, a strong work ethic, mastery of high technology, and a comparatively small defense allocation (1% of GDP) helped Japan develop a technologically advanced economy. Two notable characteristics of the post-war economy were the close interlocking structures of manufacturers, suppliers, and distributors, known as keiretsu, and the guarantee of lifetime employment for a substantial portion of the urban labor force. Both features are now eroding under the dual pressures of global competition and domestic demographic change. Japan's industrial sector is heavily dependent on imported raw materials and fuels. A tiny agricultural sector is highly subsidized and protected, with crop yields among the highest in the world. Usually self-sufficient in rice, Japan imports about 60% of its food on a caloric basis. Japan maintains one of the world's largest fishing fleets and accounts for nearly 15% of the global catch. For three decades, overall real economic growth had been spectacular - a 10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the 1980s. Growth slowed markedly in the 1990s, averaging just 1.7%, largely because of the after effects of inefficient investment and an asset price bubble in the late 1980s that required a protracted period of time for firms to reduce excess debt, capital, and labor. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, Japan in 2011 stood as the fourth-largest economy in the world after second-place China, which surpassed Japan in 2001, and third-place India, which edged out Japan in 2011. A sharp downturn in business investment and global demand for Japan's exports in late 2008 pushed Japan further into recession. Government stimulus spending helped the economy recover in late 2009 and 2010, but the economy contracted again in 2011 as the massive 9.0 magnitude earthquake in March disrupted manufacturing. Electricity supplies remain tight because Japan has temporarily shut down almost all of its nuclear power plants after the Fukushima Daiichi nuclear reactors were crippled by the earthquake and resulting tsunami. Estimates of the direct costs of the damage - rebuilding homes, factories, and infrastructure - range from $235 billion to $310 billion, and GDP declined almost 0.5% in 2011. Prime Minister Yoshihiko NODA has proposed opening the agricultural and services sectors to greater foreign competition and boosting exports through membership in the US-led Trans-Pacific Partnership trade talks and by pursuing free-trade agreements with the EU and others, but debate continues on restructuring the economy and reining in Japan's huge government debt, which exceeds 200% of GDP. Persistent deflation, reliance on exports to drive growth, and an aging and shrinking population are other major long-term challenges for the economy.
GDP (purchasing power parity)
$4.389 trillion (2011 est.)
$4.41 trillion (2010 est.)
$4.242 trillion (2009 est.)
note: data are in 2011 US dollars
GDP (official exchange rate)
$5.855 trillion (2011 est.)
GDP - real growth rate
-0.5% (2011 est.)
4% (2010 est.)
-6.3% (2009 est.)
GDP - per capita (PPP)
$34,300 (2011 est.)
$34,600 (2010 est.)
$33,300 (2009 est.)
note: data are in 2011 US dollars
GDP - composition by sector
services: 71.6% (2011 est.)
Population below poverty line
note: Ministry of Health, Labor and Welfare (MHLW) press release, 20 October 2009 (2010)
65.93 million (2011 est.)
Labor force - by occupation
services: 69.8% (2010 est.)
4.6% (2011 est.)
5% (2010 est.)
Unemployment, youth ages 15-24
female: 8% (2009)
Household income or consumption by percentage share
lowest 10%: 1.9%
highest 10%: 27.5% (2008)
Distribution of family income - Gini index
Investment (gross fixed)
20.9% of GDP (2011 est.)
revenues: $1.971 trillion
expenditures: $2.495 trillion (2011 est.)
Taxes and other revenues
33.9% of GDP (2011 est.)
Budget surplus (+) or deficit (-)
-8.5% of GDP (2011 est.)
208.2% of GDP (2011 est.)
199.7% of GDP (2010 est.)
Inflation rate (consumer prices)
0.4% (2011 est.)
-0.7% (2010 est.)
Central bank discount rate
0.3% (31 December 2009)
0.3% (31 December 2008)
Commercial bank prime lending rate
1.4% (31 December 2011 est.)
1.475% (31 December 2010 est.)
Stock of money
$5.417 trillion (31 December 2008)
$4.367 trillion (31 December 2007)
Stock of narrow money
$6.696 trillion (31 December 2011 est.)
$6.047 trillion (31 December 2010 est.)
Stock of quasi money
$6.16 trillion (31 December 2008)
$4.779 trillion (31 December 2007)
Stock of broad money
$16.46 trillion (31 December 2010)
$15.43 trillion (31 December 2009)
Stock of domestic credit
$16.39 trillion (31 December 2008 est.)
$13.32 trillion (31 December 2007 est.)
Market value of publicly traded shares
$4.1 trillion (31 December 2010)
$3.378 trillion (31 December 2009)
$3.22 trillion (31 December 2008)
Agriculture - products
rice, sugar beets, vegetables, fruit; pork, poultry, dairy products, eggs; fish
among world's largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, processed foods
Industrial production growth rate
-3.5% (2011 est.)
Electricity - production
937.6 billion kWh (2011 est.)
Electricity - production by source
fossil fuel: 60%
other: 1.8% (2001)
Electricity - consumption
859.7 billion kWh (2011 est.)
Electricity - exports
0 kWh (2011 est.)
Electricity - imports
0 kWh (2011 est.)
Oil - production
131,800 bbl/day (2010 est.)
Oil - consumption
4.452 million bbl/day (2010 est.)
Oil - exports
366,800 bbl/day (2009 est.)
Oil - imports
4.394 million bbl/day (2009 est.)
Oil - proved reserves
44.12 million bbl (1 January 2011 est.)
Natural gas - production
3.397 billion cu m (2010 est.)
Natural gas - consumption
100.3 billion cu m (2010 est.)
Natural gas - exports
0 cu m (2010 est.)
Natural gas - imports
98.01 billion cu m (2010 est.)
Natural gas - proved reserves
20.9 billion cu m (1 January 2011 est.)
Current Account Balance
$122.8 billion (2011 est.)
$195.8 billion (2010 est.)
$800.8 billion (2011 est.)
$730.1 billion (2010 est.)
Exports - commodities
motor vehicles 13.6%; semiconductors 6.2%; iron and steel products 5.5%; auto parts 4.6%; plastic materials 3.5%; power generating machinery 3.5%
Exports - partners
China 19.4%, US 15.7%, South Korea 8.1%, Hong Kong 5.5%, Thailand 4.4% (2009)
$794.7 billion (2011 est.)
$639.1 billion (2010 est.)
Imports - commodities
petroleum 15.5%; liquid natural gas 5.7%; clothing 3.9%; semiconductors 3.5%; coal 3.5%; audio and visual apparatus 2.7%
Imports - partners
China 22.1%, US 9.9%, Australia 6.5%, Saudi Arabia 5.2%, UAE 4.2%, South Korea 4.1%, Indonesia 4.1% (2009)
Reserves of foreign exchange and gold
$1.063 trillion (31 December 2010 est.)
$1.024 trillion (31 December 2009 est.)
Debt - external
$2.719 trillion (30 June 2011)
$2.441 trillion (30 September 2010)
Stock of direct foreign investment - at home
$146.7 billion (31 December 2011 est.)
$199.4 billion (31 December 2010 est.)
Stock of direct foreign investment - abroad
$880 billion (31 December 2011 est.)
$795.7 billion (31 December 2010 est.)
yen (JPY) per US dollar -
79.67 (2011 est.)
87.78 (2010 est.)
The Shirakawa redemption
Nov 21st 2012, 17:19 by R.A. | WASHINGTON
"THESE walls are funny. First you hate 'em, then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized."
I was reminded of this memorable line from the film The Shawshank Redemption upon reading my colleague's post on new developments in Japanese monetary policy:
Pushing too aggressively for 3% inflation when Japan’s consumer price index has barely risen by more than 1% for decades could shock a country whose banking system is up to its neck in government bonds. As an indication of growing nervousness in the inflation-sensitive long end of the bond market, the gap between the 30-year and ten-year Japanese government bonds has reached its widest since March 2008, according to Bloomberg. Though the moves are still relatively miniscule, a full-scale sell-off in the bond market would cripple Japanese banks. That fear makes it hard for the BOJ to reach its 1% inflation goal, let alone a 3% one.
Meanwhile, the prospect of debt monetisation is especially risky when Japan has one of the largest government debts in the world. The country is lucky to have a big enough pool of domestic savers to finance such borrowing. But their loyalty cannot be taken for granted, especially to fund a rehash of one of the LDP’s failed economic policies of the past: massive, often wasteful, construction spending.
The backstory: Japan has been stuck at the zero lower bound for the better part of 14 years now. Its economy appears to be operating below potential, but the Bank of Japan has been unable to use interest rate policy to boost the economy since its policy rate fell to zero in the wake of the great financial bust of the 1990s. Japan has used quantitative easing and targeted yen interventions since that time to try and fight off deflation and raise output. But these steps have had only limited success, at least in part because the Bank of Japan seems dead set against higher inflation. In the early 2000s, it responded to the return of only barely positive inflation rates by ending QE and briefly raising interest rates. At no point has the Bank seriously entertained policies suggested by those like Ben Bernanke, who in 1999 pleaded with Bank officials to temporarily target inflation around 3% to 4%.
But now the man who may be Japan's next prime minister, Shinzo Abe, is talking about a change in the Bank of Japan's mandate that might indeed include a higher inflation target. Some critics of the move have objected to the assault on central bank independence, though a change in official mandate seems like an entirely appropriate way for a politicial system to impose accountability. Bigger concerns relate to the economic consequences of pushing Japan out of its long demand-side limbo.
Japan's weak economy has long made fiscal retrenchment unattractive. Weak growth undermines the government's revenue potential. Both weak output and the binding zero lower bound make it probable that the fiscal effects of tax rises or spending cuts would be relatively large, especially since the government's rock-bottom borrowing rates leave little room for offsetting stimulus from a drop in borrowing costs due to a sounder public fisc. And so Japan's public debt has grown and grown and grown; its ratio of debt to GDP is now close to 240%! The lack of good private investment opportunities has kept big banks and insurance companies buying government debt (which carries reasonable real rates of return despite low nominal rates thanks to deflation). But the government has helped the process along through financially repressive measures that require banks and others to hold lots of government securities. That, in turn, has made big banks very vulnerable to falling government-bond prices. Bad monetary policy encouraged bad fiscal and macroprudential policy, in other words, thereby making it more difficult over time to switch away from bad monetary policy.
Developments in the Japanese economy may make an exit from this equilibrium inevitable, though not necessarily painless. There is a lesson in the story for politicians elsewhere. Some may read the Japanese experience as suggesting that insufficiently expansionary monetary policy is no excuse not to pursue fiscal consolidation. A better lesson, however, might be that central bankers worried about long-run fiscal conditions would be wise to push their economies back to potential as quickly as possible. Ben Bernanke is once again warning politicians in America not to send the economy back into difficult straits by allowing the economy to run off the "fiscal cliff". They might turn the warning back on him, and remind him that fiscal consolidation in America remains difficult because Mr Bernanke's management of demand has left unemployment well above the natural rate more than three years after the end of recession.