Japan: Back to number one?
In the late 1970s, Ezra Vogel’s book, Japan as Number One, became a runaway best seller both in Japan and in the United States. Contrary to popular belief, the book did not predict that Japan’s GDP would surpass America’s to make Japan the world’s biggest economy. Rather it noted that in a wide variety of ...
In the late 1970s, Ezra Vogel’s book, Japan as Number One, became a runaway best seller both in Japan and in the United States. Contrary to popular belief, the book did not predict that Japan’s GDP would surpass America’s to make Japan the world’s biggest economy. Rather it noted that in a wide variety of industrial, technical, and socio-political fields, Japan’s performance was, well, number one.
Over the past twenty odd years, what Japan had accomplished and is capable of accomplishing has been forgotten in a dismal fog of schadenfreude inspired denigration of what has come to be widely accepted as Japan’s “two lost decades.” During this time, it is said, Japan has endured anemic growth rates, has lost its ranking as the world’s number two economy to China, has pushed its national debt to the world’s highest at 220-40 percent of GDP (Greece is only about 160 percent), and has generally lost its former samurai mojo.
Never mind that Japan’s GDP growth for the twenty one years 1990-2011, when adjusted for inflation and population growth, was about the same as that of the United States. Indeed, its growth of GDP per capita actually exceeded that of the United States as did its growth of productivity per capita. Never mind that Japan’s debt is almost entirely funded from internal sources and that its interest rates are at rock bottom and that its currency , the yen, has become a safe haven currency. Never mind that Japanese life expectancy is near the top of the rankings and far above that of the United States and that Japan’s streets are safe for walking at any hour and that it has more Michelin three star restaurants than France.
The truth is that the denigration of Japan (what I call the true “Japan bashing”) has been way over done by western analysts and officials. Nevertheless, it is true that Japan has lost some of its edge. What we long expected from the likes of Sony now comes from Samsung and while Toyota vows to maintain production in Japan, other Japanese manufacturers have embraced what they long criticized American producers for doing — offshoring production to China, Vietnam, and other low cost countries in Asia.
Now a new prime minister and a new administration have taken hold in Tokyo and have announced a bold program to kick start and revitalize the economy and to rekindle the old samurai spirit of Japanese enterprise. The program calls for huge new public works spending especially aimed at the areas of Japan recently devastated by the tsunami and the nuclear reactor emissions. It also calls for increased technology development programs, for a weaker yen, and for the Bank of Japan to adopt a monetary policy with an inflation target of 2 percent , something the bank has long resisted but which it now seems to be considering. This is all aimed at immediately boosting GDP growth by 2 percentage points and creating an initial 600,000 jobs.
Will it work? There are no guarantees. Japan has tried these kinds of programs on numerous occasions in the past without success. Indeed, that is how its debt has grown so large. Or some would say that it has had some success in the past only to snuff it out with premature interest and tax rate hikes. In any case, my guess is that Abe’s program will show a significantly positive short term impact. He is throwing a lot of money at the problem and I guess the Bank of Japan will listen to the election returns and do some quantitative easing of some sort that will further loosen monetary policy.
But the big question is the long term. Actually there are two questions. Can Japan ever expect to retrieve the old vitality? Does this program of Abe’s have a chance of doing so?
To the first question, I offer a qualified “yes”. Nations are resilient beasts, capable of extraordinary effort and accomplishment. So I would never say never with regard to a Japanese renaissance. But to understand the extent of the necessary effort we must understand the factors now at play on the Japanese scene. The single most important one is the aging and shrinking of the population. Forecasts indicate that by 2050 Japan’s population will be down to about 90-100 million from today’s roughly 127 million. Keep in mind, that during the period of Japan’s rapid growth (1950-1980) population growth was high and the age of the population was young. New workers were flooding into the economy and providing the basis for expanded health care, retirement, and social welfare programs. The opposite of that is now the case. It will be very difficult if not impossible for Japan to enjoy a robust and dynamic economy with a shrinking and aging work force.
A second major consideration is integration into the global economy and the adoption and development of new technology and new techniques. Here, what the Japanese call a “Galapagos syndrome” seems to have taken hold in a way that seems to slow the development and introduction of new ideas and ways of doing things. The ability to learn from the outside seems to have diminished in some way.
A third issue is that of the gap between the ability of ordinary Japanese to endure hardship and sacrifice and to engage in self-organization and the inability of the governing authorities properly to lead. This gap was most apparent in the contrast between the heroic reaction of citizens to the twin disasters of the tsunami and the nuclear emissions and the bumbling responses of both corporate and political leaders.
There are many other structural issues that could be raised such as agricultural subsidies, land use and land tax rules, zombie companies, bridges to nowhere, corporate governance, and more. My Japanese friends can easily add to the list.
But the point is that, so far at least, the Abe program doesn’t seem to deal with these issues very well. So while I believe that Japan can become number one again, I doubt that Abe’s current plan will do the trick.
What more would he need to do? Stay tuned.
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