Predictions can be dangerous when Japan is involved.

The 1997 claim that Tokyo would persuade Moscow to accept Japan’s territorial claims and conclude a peace treaty by 2000 now looks rather sad (though this column’s prediction that Tokyo would eventually have to accept Moscow’s 1956 compromise proposal over territory does seem on track).

Even sadder are the predictions that Japan’s economy would overtake the United States by 2000, and that the 21st century would be Japan’s. Currently, the sick Japanese economy seems in no shape to challenge anyone.

The prediction was based on Japan’s clear superiority in manufacturing. But advanced economies do not live by manufacturing alone. Service industries provide a much larger share of GNP, and here Japan is weak, for a variety of cultural reasons.

Poor management of the economy makes things even worse. The bubble economy of the late 1980s has been replaced by the “bumble” economy of the 1990s, with the economic managers getting it wrong at almost every call.

On top of all this is a problem peculiar to Japan — the chronic lack of domestic demand.

Economists have the bad habit of assuming that if the supply of goods and services is efficient, then the economy is in good shape. They fuss over the various reforms they see needed to improve that efficiency. But efficiency in supply is meaningless unless there are people out there who want to buy your goods and services. And it is here that Japan’s economy is fatally handicapped.

(It is also handicapped by some badly bumbled efforts at reform. One of them was liberalization of the banking system, designed to improve supply of financial services. All it did was turn the system into an efficient conveyor of funds to gangsters, mad speculators and corrupt politicians. It will be years before the economy recovers from that “reform.”)

There is a world of difference between a developing economy and an advanced economy. In a developing economy, as Japan’s was through to the 1970s, people want basic goods and services — cars, houses, refrigerators, transport, basic education, etc. Supply these things and they will sell, easily and quickly. Efficiency in supply is important.

But in the advanced economies, basic demands have been met and need to be supplemented by what could be called lifestyle demands — second cars, second houses, freezers, yachts, leisure. If those lifestyle demands are weak, even the strongest economy can easily grind to a halt, which is precisely where Japan is now.

Savings levels highlight the problem. The U.S. and other Anglo-Saxon economies have low savings thanks to high lifestyle demands. People are willing to go into debt to get the luxury houses, yachts, etc., they think they need to satisfy themselves and to impress others. Their economies have been turning over very nicely as a result.

European nations have somewhat higher savings levels, and their growth rates are that much weaker as a result. Japan has by far the highest level of personal savings, and the weakest growth rate. The correlation is perfect.

Why do the Japanese save so much, or rather, spend so little? Some say it shows anxiety over the future. But Japan is not the only nation where people have to worry about getting old or losing jobs.

Weakness in the service sector is a better reason. People would spend more on leisure, for example, if facilities other than boring “pachinko,” vapid theme parks and pampered golf courses were more available.

But strong workplace identity has to be the main causal factor. The rich self-employed — doctors, dentists and lawyers — spend conspicuously, especially when times are good. But for most of workplace Japan, both satisfaction and status lie more in what one does than in what one spends — an admirable quality in itself, but of little help in expanding demand.

Status spending does not go much beyond weddings, funerals and expensive university education — all rather spasmodic by definition.

Japan has been living with this problem ever since the 1960s. For two decades it got round it through export surpluses — by relying on foreign demand to fill the lack of domestic demand.

Now it has to find some other way to rescue itself. And if individuals do not want to spend money on lifestyle, then it is up to the government to borrow or tax some of that money and spend it for them, through better roads, schools and other public facilities. But in today’s bumble economy, don’t expect that kind of wisdom to come easily.

So the 21st century belongs to economies like the U.S. with heavy lifestyle spending? Not necessarily. Eventually manufacturing weakness will catch up with them in the form of chronic trade deficits, triggering downturns.

And cyclical downturns now cause much longer recessions than in the past, as we saw in the U.S. in the 1980s, since lifestyle demands are much more volatile and retractable than basic demands.

Rather, the future lies with the developing economies. In Hong Kong, the shacks for the homeless have been replaced by high-rises extending across the border into China. As it boosts production to fill basic demands, China’s growth rates now match those of Japan in the past. Meanwhile in Japan and the U.S. the humpies of the homeless are invading the high-rises. An omen perhaps?

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