Searching the reasons for Japan’s “lost decade” — the deflation and stunted growth said to have plagued Japan ever since the collapse of the “bubble economy” in the early 1990s — has long been popular among U.S. and British commentators seeking an answer to the West’s current economic problems.
The interest is welcome. But some of the results are bizarre. Almost all the main U.S. media, the conservative Wall Street Journal in particular, have run articles saying the blame lies with Japan’s postbubble, Keynesian-style infrastructure spending.
Do these people have the slightest idea of what has been happening in Japan? Japan’s economy prospered in the brief periods of increased infrastructure spending. It collapsed when this spending was cut. To argue that the collapse was because of the spending is like saying food is bad for you.
In 1992, after the bubble collapse, Tokyo quickly expanded public works spending to kick-start the economy. The policy was so successful that a mere four years later, Japan’s annual GDP growth at 4 percent was the highest of all the world’s advanced economies. If the growth had continued, most bank bad loan problems would have disappeared. As the bankers put it, “a rising tide floats many stranded boats.”
But with the Hashimoto regime (1996-98) all this came to a shuddering halt. Fiscal discipline was demanded. Public works spending was slashed. In a move that mirrored the disastrous collapse of Lehman Brothers in the United States, market fundamentalists allowed Yamaichi Securities to go into bankruptcy. From there on it was downhill all the way, until Prime Minister Ryutaro Hashimoto was bundled out of office for economic failures.
The Obuchi and Mori administrations — 1999-2001 — saw a reversion to economic stimulus through public works spending. The Nikkei stock market index surged to over 20,000 in just three years. But once again progress was stopped in its tracks by the return to fiscal discipline policies and public works cuts under the administration of Junichiro Koizumi. In just one year the Nikkei collapsed to around 7,000. Growth since has been anemic, relying heavily on expanded exports.
In short, there has been a clear correlation between fiscal stimulus policies causing growth and fiscal discipline policies causing decline. Japan’s so-called lost decade was not lost. Its very real possibilities for recovery and growth were thrown away by people obsessed with the size of government debt (which ironically their policies managed to increase — by ¥200 trillion in the Koizumi years) and a need to emulate U.S market-fundamentalist policies that eventually did the damage to the world economy we see today.
Today most in the West and Japan seem finally to have realized the need for fiscal stimulus policies. But conservative centers of resistance hold out. Most of this spending will be wasted they say, and the main result will be to increase national debt and postpone recovery, as we allegedly saw in Japan. Hence those “food is bad for you” articles in the U.S. media.
But Japan with its chronic lack of consumer demand was and remains a very special case. Regardless of whether Tokyo spends or not, national debt tends to increase. Skillful policies that encourage consumer spending and increase government revenues simultaneously are clearly beyond the wit of the government planners, most of whom do not even begin to realize the chronic problem of lack of consumer demand.
In this situation arguments for the government to issue currency or for the Bank of Japan to issue interest-free bonds are compelling, especially since Japan is in little danger of creating uncontrollable inflation. But that too seems beyond the wit of the planners. Lack of wit caused the lost decade, and will continue to cause many more lost decades.
Indeed, we now have the amazing sight of Koizumi, angered by growing willingness to rethink the meaningless policy of post office privatization he sold so successfully to a mesmerized public, coming out against even the current policy of small cash handouts to registered citizens.
For those on the stimulus side of the economic debate, such handouts, while messy, are much the easiest way to inject desperately needed demand into the economy. Already we have the example of how the Taiwan economy has been revitalized in this way. It is a tribute to the ease with which Japan was also mesmerized by Koizumi “structural reform” slogans that some even welcome his return to the political scene.
The other main center of conservative resistance in Japan has been the powerful Nihon Keizai Shimbun media stable. Nikkei seems to have moved somewhat from the heady Koizumi days when it lambasted Keynesian economics as an “anachronism.” But while reluctantly admitting the need for stimulus policies, its calls for longer-term strategies to avoid waste.
Conservatives do not seem to realize the cumulative spiral nature of the current economic downturn — how a fall in one area triggers falls in other areas that worsen the original fall and so on. To cut the vicious circle, action must be immediate, even if there is some waste. Talk of the long term is fatal. For a while earlier this year it seemed as if governments were ready to move quickly, and stock markets rebounded immediately. Then the delays and fumbling set in, leaving us all in a deeper mess than before.
China does realize these simple Keynesian truths. By rapidly pumping funds, mainly into infrastructure projects, its economy already shows signs of recovery. Meanwhile, Japan still has to make up its mind what it wants to do. Promised stimulus moves are still delayed by bureaucratic and Diet inertia.
As ever, Japan seems to want to wait for global economic recovery to boost the exports it needs for its own recovery, while China turns to domestic demand for stimulus. Increasingly Japan’s negative role in the world economy will be compared with China’s positive role. Downgrading of Japan’s political role — “Japan Passing” it is called — will follow soon after.
“Nippon Chinbotsu (Japan Sinking)” was a wild fictional best-seller in the 1980s. Then, the cause was said to be tectonic action. Today, lack of fiscal action is making it an ugly reality.
Gregory Clark is vice president of Akita International University and a former member of the Bank of Japan, Expert Consultative Committee. A Japanese translation of this article will appear on www.gregoryclark.net.
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