Japan’s 20 Years in the Dolrums Highlights Need for Effective Recovery Policies
I think a lot of people have the intuition that if you see a bubble followed by a bust and a recession, that the recession is sort of “making up” for the bubble and then soon enough things will snap back onto the righteous middle path. But as Felix Salmon observes this isn’t a real mechanism:
One important lesson, here, is that it’s foolish placing much faith in mean-reversion. There’s still a feeling out there that, yes, we had a few years of bubble and exess, and surely that bubble needs to be popped, but then we can get “back to normal”. Well, it’s been 20 years in Japan since its bubble burst, and it seems further away from recovery than ever.
And note that the only reason Japan’s been able to stabilize its economy after their initial downturn is that there was sufficiently robust consumption growth outside of Japan for the Japanese to have a robust export sector. Now that non-Japanese growth is gone, and they’re looking at a annualized GDP shrinkage of over 12 percent. The Germans, who’ve had a similar-but-not-as-severe situation of slow domestic growth plus robust exports are in a similar situation. The moral of this story is that there’s no extra economy outside of the planet earth that can help stabilize us with export-led growth if the U.S., Japan, China, and the E.U. all fall into simultaneous deep recession. That’s the bulk of world output right there, and everyone else will see the value of the commodities they export drop to nothing. There’s no law of nature that says these problems need to correct themselves—policymakers in the key countries need to do the right thing, and really they all need to do it, or else the whole pattern of global growth really could go L-shaped.
22 Responses to “Japan’s 20 Years in the Dolrums Highlights Need for Effective Recovery Policies”
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February 16th, 2009 at 11:08 am
I think we’re going to experience convulsions in our society not seen since the Civil War. I hate to go all “Jim Kunstler” on things but it will be bad. Drastic increases in property crimes, drug abuse, domestic violence, homelessness, hunger, unemployment, civil unrest and mental depressions. Even now suicides among those unable to cope are rising. Veterans and investors are taking their lives in increased numbers. States are letting people go, failing to fund basic services and teetering on insolvency. One party in our two party system earnestly wants the worst to happen, hoping it will forever prove Democrats inapable of governing and leading, therefore dooming it to the sidelines permanently. Talk of stocking up on basic staples, buying personal protection and hoarding your money in a mattress is not unwarranted. Maybe the next few years will only amount to a series of rather tallish speed bumps. Or, as many fear, it’ll be like steering into a steel pillar. Buckle up!!
February 16th, 2009 at 11:19 am
A perspective on Japan written in 2001
FROM: http://www.oftwominds.com/japan.html
“…having borrowed itself into a deep hole to pay for ten ’stimulus packages’ (read construction pork-barrel spending) totaling over $1 trillion in the past eight years, it no longer has the ready ability to borrow enough to cover the estimated $1 trillion in bad debts held by banks, insurance companies and other institutions…”
You often hear Japan’s mistake is it didn’t do enough “stimulating”, but note the $1 trillion figure above. Relative to Japan’s GDP, that would be the equivalent of over $2.5 trillion “stimulus” for the U.S.
February 16th, 2009 at 11:20 am
There’s no law of nature that says these problems need to correct themselves
Except they usually do. Check out this chart from Kevin Drum.
And for all of Americas’ shortcomings our inability to save will make an American lost decade less likely. Of course this conventional wisdom clashes with Matt’s post-consumerism American fantasy.
February 16th, 2009 at 11:27 am
I think most Americans already know this. They just remember Hoover instead of Keizo Obuchi.
February 16th, 2009 at 11:27 am
Talk of stocking up on basic staples, buying personal protection and hoarding your money in a mattress is not unwarranted.
Yes, it is.
You often hear Japan’s mistake is it didn’t do enough “stimulating”, but note the $1 trillion figure above.
I think the complaint is usually that they didn’t do it early enough or fast enough.
February 16th, 2009 at 11:30 am
I think the real GDP trend line for the US is about 2.5%.
If you account for demographic and productivity effects, and allow about + or – 3% variation, you pretty much have the reasonable outlook for the economy.
The problem for the last 30 years is that Washington and Wall Street caused a shift from the real economy to financial distortions and now we have to adjust back. The financial share of real profits will have to be cut at least in half. That will require some serious industrial policy.
February 16th, 2009 at 11:35 am
That’s “dolDrums,” Matt.
February 16th, 2009 at 12:36 pm
Only not really. You’re omitting the role that Japan’s low interest rates played in setting them up. The yen is up 20% against the dollar and 30% against the euro in the past six months or so. This is a result of the unwinding of the yen carry trade. For many years people borrowed yen from the Bank of Japan and immediately traded them in for some other currency they could use to get a decent return. Now that trade is running in reverse, people are buying yen back, and the Japanese export sector is screwed. Why is why we’re seeing 10+% annualized shrinkage for Japan and more modest ‘regular recession’ figures for the US and Germany.
February 16th, 2009 at 12:38 pm
I think that the most sobering set of data and argument is nicely put by Axel Leijonhufvud (voxeu.org). He noted that there’s an enormous amount of private debt that somehow needs to clear the system. WWII did this very effectively by replacing private with massive public spending and after several years, there was a really very sharp decrease in private debt compared to the early 30s. The combination of massive government spending and very low levels of consumer spending effectively cleared this private debt and got everyone’s balance sheet back to a reasonable state. We aren’t quite up to the early 30s state but we’re not far and I just can’t imagine a WWII level of government spending. The result is that we’re looking at a very long haul of private deleveraging.
February 16th, 2009 at 12:47 pm
I would be very wary of attributing Japan’s extended economic weakness to bad macroeconomic policies. Those certainly played a role, but I believe it was a minor one.
Structural rigidities in the Japanese economy (cross-shareholdings, bureaucratic control of industries, the two-tier labor market, entrenched protectionism) have held down productivity in many areas. Japan’s massive government debt run-up was probably a result of its messed-up political system. And Japan’s shrinking population masks the fact that per capital GDP have done about as well in Japan as in Europe during Japan’s extended “bust.”
The U.S. will not experience the same kind of “lost decade” that Japan experienced. But if we fail to shift our economy away from finance, rebuild our infrastructure, and rebuild our human capital with education and immigration, we may suffer our very own kind of “lost decade”.
February 17th, 2009 at 7:52 am
We can sell to fishes and beetles. They have yet to wear underpants.
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