How Japan’s economy put itself out to pasture


The Globalist

Following the start of “Abenomics” in 2012, Japan moved back to the center of attention of global financial markets. After 2½ decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation.

Plenty of economists around the globe hoped that, in so doing, Japan would show the Western world, mainly the eurozone, the way to do the same and avoid a similar long period of low growth and stagnating incomes.

Conversely the failure of Abe’s plan for Japan’s recovery would not only be a disaster for the country of the rising sun. It would also be very bad news for central bankers and politicians in the West as well. It would prove that Keynesian policies don’t work in a world of too much debt and shrinking populations.

To assess the probabilities of these scenarios, it is worthwhile to have a deeper look on how Japan ended up in the current economic malaise.

Japan served globally as a role model for economic development in the 1980s. After an economic miracle following the World War II, Japanese companies started to dominate in leading industries like machinery and equipment, automotive and consumer electronics.

Similar to today’s views on China, back then books explaining the Japanese miracle and describing the unstoppable rise of the nation to the leading economic powerhouse of the world were highly popular around the globe.

Japanese corporations also began to invest in prestigious artwork and trophy real estate assets around the world. When the Japanese bubble — like all bubbles — deflated from 1990 onward, asset prices collapsed. However, credit levels in Japan remained high.

Japan acted just as the Keynesian textbook prescribes. It compensated a deep drop in domestic demand with higher government expenditures. As a result, many companies, which in reality were insolvent, were not restructured — but kept alive with low interest rates and bridge financing.

What has happened over the past 25 years is simple: Japan’s corporate sector was a net saver and reduced its leverage. Private households also reduced their savings significantly from levels of 20 percent to 3 percent today. Finally the Japanese government built up a huge debtload, rising from about 50 percent of GDP at the end of the 1980s to close to 250 percent today.

Despite all of this, efforts to reignite growth in Japan failed. The results were a significant increase in the overall debt burden of the country and a change of the principal debtor. That debtor is now the government — instead of Japanese corporations as before.

At the same time, the workforce in Japan started to shrink. Actually Japan reached the peak in its workforce at the same time as its financial bubble peaked. That suggests that the peak in the workforce became an additional driver for the buildup of the bubble.

If so, this would be another disquieting parallel to Europe, where the labor force also peaked in parallel to the credit bubble in 2007.

One fact is often overlooked. Precisely because of the Japanese population’s shrinking, on a GDP per capita basis the Japanese economy has been outgrowing the U.S. economy in the quarter century since 1990. That seems to be good news. Why then worry?

Unfortunately GDP and debt are nominal quantities. Debt can only be served out of nominal income. It thus does not help a country if its GDP per capita grows and at the same time the population shrinks.

Here again, Europe has reason to worry. Europe is in the beginning of a similar demographic development — albeit one that is not as severe in all European countries as it is in Japan, thanks to the European Union’s more open immigration policies.

Japan can therefore be described as a country that has the following features:

(1) Above-average per capita productivity growth.

(2) A shrinking population (from currently 127 million to 87 million inhabitants by 2060).

(3) Low real economic growth for decades to come (as demographics continue to deteriorate).

(4) Shrinking savings rate due to an older population that will start “dissaving” soon and, therefore, will not continue to fund the deficits of the government as in the past.

(5) Corporate sector with a strong balance sheet after 25 years of deleveraging, but with low investments and no inclination to invest in Japan (given demographics). Corporations are thus a net saver.

(6) A government with record-high debt of nearly 250 percent of GDP.

(7) Debt service already consumes 43 percent of the Japanese government’s revenues, just to cover interest on the outstanding government debt — and in spite of interest rates being close to zero.

(8) A central bank that adapted quantitative easing already in 2001 and is willing to do everything that is necessary to support its economy.

(9) A country that has failed to generate inflation until now, but has rather seen a long period of stable consumer prices and slightly falling overall price level as measured by the GDP deflator.

Simply put, such a country is bankrupt. No economy can sustain a total debt level (for the government, households and nonfinancial corporations) of more than 400 percent percent of GDP without having a nominal growth rate that is significantly higher than the level of interest rates.

Daniel Stelter is the founder of the German think tank Beyond the Obvious. © 2014 The Globalist

  • Steve Jackman

    All these problems can be easily fixed if Japan prints more money, teaches school kids more about traditional Japanese values and the importance of patriotism, takes a more assertive military stance, whitewashes history and keeps foreign residents in check.

    • rossdorn

      Cool !

    • Paul Johnny Lynn

      The road to success is clear and open then!

      • phu

        And we’re barreling along at full throttle. Damn the economy, full speed ahead!

    • Dipak Bose

      “whitewashes history”

      Who can be better than Winston Churchill?

      “keeps foreign residents in check”.

      Mrs Thatcher won the election in 1979 by abusing the Asian immigrants.

      “a more assertive military stance”

      like in Vietnam, Cambodia, Laos, Iraq, Libya, Syria, Yugoslavia

      • phu

        Another excellent “someone else did it so you can’t criticize anyone for it” post. That’s great! So when exactly do you think nations should start addressing the problems they have? When they’re totally unique and no one else has done anything similar, ever, to any degree?

        Aside from completely missing or ignoring some nicely applied sarcasm, all you have to say is “other people are bad too.” What exactly is your point? If you don’t think Japan should improve, you’re doing the Japanese a disservice. I suspect you simply don’t care about Japan, and you’re just looking for an excuse to demonize Western nations… which is another disservice, though this time it’s to all of us who wasted our time reading your drivel.

      • Dipak Bose

        My point is that White Washing history or Comfort women are not the monopoly of Japan; however, you western people only blame Japan.
        It shows your ulterior motive. You want mass unemployment, homelessness, riots on the streets, starvation, communal riots in Japan between the Chinese and Japanese but these are not happening, thus you are very unhappy and you are trying to provoke Japan to go to these roads.
        You, Western people never look at the real cause but repeat the irrelevant or wrong causes.

      • Steve Jackman

        Dipak, criticism of certain aspects of the Japanese is not limited to Westerners only, as you wrongly seem to think. Radhabinod Pal, the famous Indian judge from the war tribunal, characterized the Japanese as “devilish and fiendish”. This comes from a guy who is highly revered in Japan and has a special memorial dedicated to him at the Yasukuni Shrine. Go figure!

    • Guest

      Nice one ^^

  • Dipak Bose

    The author repeated what we read about Japan in Western media outlets. There is no suggestions what Japan should do. If Japan is bankrupt, why the Germans are coming to Japan for jobs, sometime using fake CVs and eating massive amount of free food offered in corporate gatherings? I am sure many Germans, Americans, British, and of course Spanish, Greek, Irish, Italians will be very glad to get a job in this Bankrupt Japan.
    How can the author explain the high growth of productivity in a stagnant economy?

    • Steve Jackman

      Dipak, you are mistaken. The real reason Germans flock to Japan is for the excellent wiener schnitzel here. If you are not a vegetarian, I encourage you to try it for yourself.

      • rossdorn

        He provides some real entertainment in this forum, doesn’t he?

        I have spent 15 years of my life in India, they are all like that…. I had lots of fun.

      • Dipak Bose

        One German, in some cases uninvited, can eat for 10 Japanese.

      • rossdorn

        Maybe the japanese ought to start doing that, THAT would revive the economy…

    • Bach Tran

      It should also be realized that stringent government regulations are holding back productivity growth further. We could expect much higher growth in productivity were economic reforms put into place. Demographics is only part of the story why there is low investment.

      Surely, if they wanted to, they could also open up the country to immigration. This is of course a controversial issue and I understand their wanting to preserve cultural homogeneity.

      It’s also hard to tell the future. Better healthcare means longer lives, and there are also studies showing that a possible demographic rebound could occur in developed countries into the next century with fertility rates above 2. We surely cannot discount Japan’s lead in robotics and what they will unlock in terms of productivity with them.

      • Dipak Bose

        These arguments are incorrect. Immigration, means Chinese immigration, will destroy Japan, as it is the case in some parts of Fukuoka, Nagoya and Tokyo.suburbs.
        There are high rate of youth unemployment in Japan. University graduates are working in Family Marts-Lawson. Thus, there is no need for immigration, but Japan Government can increase the compulsory retirement age to 75 or 70 rather than 65 if there is any labour shortages, as Britain did recently .
        Reform is a dirty word. Mrs Thatcher did that in 1980, creating mass unemployment, riots on the street, destruction of manufacturing industries, and homelessness. Japan has avoided all these, but these so-called Western Experts wants Japan to suffer. That is the reason, they are suggesting policies that will ruin Japan.

    • Paul Johnny Lynn

      Are you related to Subhas Chandra by any chance?

      • Dipak Bose

        Upto 15th century.

      • rossdorn

        First of all you are bragging, there are millions of people called Bose in India.
        And still, even that would not be a reason to think with 15th century brain…

  • Richard Solomon

    This author is correct in noting that Japan’s demographic trends are a huge source of its problems. It is also true that the government allowed week, bankrupt corporations and large banks to remain afloat in the early to mid 1990’s rather than force them into reorganizations of some kind. This is because the government/LDP lacked the backbone to engage in this admittedly tough decision making that would have hurt its primary supporters, at least in the short term.

    Japan’s ‘leaders’ for the last 20+ years never really fully implemented a Keynesian model to try to revive the economy. Half hearted, stop and go measures were doomed to fail, in the context of the declining population.

    Abe is cut of the same cloth. Too beholding to the big corporations, big banks, nuclear power industry, and small farmers to really reorganize the economy. Too beholding to the traditional, nationalistic segments of the country to do some dramatic things about the demographic trends. Young people, especially women, need better opportunities for jobs if they will reverse the declining birth rate. Immigration needs to be encouraged as well. The USA and Israel are two examples of countries which have accepted the latter as a means to growth….not without its challenges and tensions, admittedly. But one important way to encourage a country to grow.

  • Sigh Westberry

    no happy ending. I first visited Japan for 6 months in 1984. Tokyo did not feel right back in 1984.
    My take on it is that Abe(Japan Inc) never had any real intention of reviving Japan. Japanese corporate types simply cannot function unless they are dressed in a dark gray suit and have some OL serving them green tea three times a day.
    If a korean has a heart attack in Tokyo there are a number of things you just must do if you hope to save her life.
    Abe has simply not attempted anything that even remotely resembles the necessary moves required to stimulate an economy. And If he had the audacity to try anything realistic in Japan, it would be like driving a 2015 Toyota directly into a 8 foot thick brick wall at 45 mph. Come to think of it…i never once saw Abe wearing the appropriate clothes for the job!

    • rossdorn

      I think you have the wrong impression here…

      “My take on it is that Abe(Japan Inc) never had any real intention of reviving Japan.”

      Oh no, he certainly has, the problem is systemic. He has no clue how to…
      No one who actually would be qualified to do a good job could ever make it in Japan. (Similar to the USA)
      Abe would be very happy if all the corporations would just bloom, and the crumbs from the table would then fall down to the masses and everybody is happy. (Different to the US)

      • phu

        I agree with your cynicism but not your optimism. Abe is doing exactly one thing: Pushing his conservative agenda to the exclusion of all else. If he wants to “revive” Japan, it’s a revival in a very narrow sense, and it’s almost certainly not a vision that will fit in with the reality of the current global economy, in which Japan is struggling to find and maintain a place.

        There are absolutely systemic problems — mountains of them — and yes, Japan has the same problem as the US in that neither country will ever end up with a quorum of leaders that actually wish only to act in either nation’s best interests.

        Your “crumbs” analogy is trickle-down economics, which is exactly what Abe is leaning on, but it’s also the same thing America was sold by Reagan and some contemporaries. It didn’t work for the US and it hasn’t and won’t work for Japan.

      • rossdorn

        I do not quite understand where you can see optimism about Japan or Abe in my comment.

        And I disagree with you. Abe does NOT have a clue what he is doing. You yourself write that Abe’s only hope is the trickle down, something that seems to appeal to nation leaders with, as the saying about RR goes, broccoli for brains…

        On the other hand we should not forget, that at present more or less ALL countries of the world are sliding into a gigantic economic break down. The reason being that there simply are no new products for the markets. EWe would have been in that same situation in the 80s, if the PC had not been developed for mass consumption.
        So, blaming Abe makes no real sense, unless there is an alternative to his approach, that might work. One that is feasable!

  • Dipak Bose

    Reform is a dirty word. Mrs Thatcher did that in 1980, creating mass unemployment, riots on the street, destruction of manufacturing industries, and homelessness. Japan has avoided all these, but these so-called Western Experts wants Japan to suffer. That is the reason, they are suggesting policies that will ruin Japan.
    Immigration, means Chinese immigration, will destroy Japan, as it is the case in some parts of Fukuoka, Nagoya and Tokyo.suburbs.
    There are high rate of youth unemployment in Japan. University graduates are working in Family Marts-Lawson. Thus, there is no need for immigration, but Japan Government can increase the compulsory retirement age to 75 rather than 65 if there is any labour shortages, but there is none. People are living long in Japan but they supports their unemployed sons and daughters. When people are unemployed or poor, how can they marry and produce children? In Japan there is also lack of free child care as it was in the Soviet Union, to promote employment of the women.
    Japan should not listen to the Western experts, as The West wants to ruin Japan. Those who have listened to The West ( Yeltsin`s Russia for example ) got ruined. Those who had refused to listen to the West have prospered ( like China).


    • phu

      It’s idiotic to lump all “reform” into a single group characterized by the failures of specific reforms. Oh, something failed? It can NEVER work! If everyone had that point of view, we would have absolutely nothing. The first time surgery failed, medicine would be abolished. The first time flight failed, aeronautical transportation would have been put to sleep.

      Yeah, China’s a great example of prosperity! They’re one step ahead of Russia, and they’re only ahead because they have such massive resources, human and natural, that they can throw their weight around and still support themselves.

      “The West” does not have all the answers, and yes, they push too hard too often. Yes, it’s a good idea to question both the intentions and wisdom of a nation that’s coming in to try and “help” you industrialize/modernize/etc. But no, that does not mean everything or everyone from the western hemisphere is stupid, misguided, or bigoted.

      • Dipak Bose

        Reform means adaptation of Washington Consensus. If you do not know what it is look at the Google.

        The purpose is not to “help” you industrialize/modernize/etc”, but to ruin the country and subjugate it.


  • Jonathan Lunn

    All Japan has to do is import labour. All those smart young educated Southeast Asians would be a massive boost to Japan’s economy. But avoid the mistake the UK made with importing vast amounts of dumb Eastern Europeans crushing everybody’s working wages.

    • Dipak Bose

      You are suggesting ruinification of Japan. Who can immigrate to Japan, except the Chinese, who only can master the Kanji. Imports of thousands of Chinese will ruin Japan.

  • Jorge Vasquez

    There have been brief periods when a centralized economy has been successful, but never for long. A healthy and wealthy economy will always have a greater amount of freedom – but that is not tolerable to statists, which most people are today.

    • Dipak Bose

      “A healthy and wealthy economy will always have a greater amount of freedom ”
      What freedom is there is china?