Friday, December 2, 2011

Japan’s Curious Economy: Another Perspective

When one encounters Japan in discussions concerning economics, it is usually referred to in the context of a "lost decade," or even "lost decades." Japan provides a ready example when economists ponder subjects such as stagnation or deflation. Economists love to treat whoever chooses to listen to them as if they were fearful children. "Be careful or you will end up like Japan."

To be sure, Japan is not your typical country. In terms of the average age of its citizens, it is probably the oldest society on earth. It underwent a speculative bubble collapse around 1990 that was much more severe than what was experienced in the US a few years ago. Real estate values have yet to return to anything like their values in the early 1990s. Japan has been living with deflation for a long time. That creates economic expectations that are difficult to even comprehend for most people. But does all that make Japan a "failed" country?

There is an interesting perspective on Japan and its economy in an article in The Economist: Whose lost decade?

Does Japan have sick, underperforming economy? The article provides this data.

If one looks only at net GDP, then Japan does look like a modest laggard compared to the US and the Eurozone. But if one considers GDP per person, Japan is actually outperforming both. Japan has an aging, shrinking population, while the US is still growing in numbers. Europe is somewhere in between. Japan has also been able to maintain a reasonable unemployment rate which is currently about half that of the US and Europe. One can consider productivity as an indicator of the health of an economy.

"Though growth in labour productivity fell slightly short of America’s from 2000 to 2008, total factor productivity, a measure of how a country uses capital and labour, grew faster, according to the Tokyo-based Asian Productivity Organisation."

Japan is viewed as a nation facing a huge debt problem. Its government debt as a percentage of GDP is about the highest in the world.

"People often think of Japan as an indebted country. In fact, it is the world’s biggest creditor nation, boasting ¥253 trillion ($3.3 trillion) in net foreign assets."

"To be sure, its government is a large debtor; its net debt as a share of GDP is one of the highest in the OECD. However, the public debt has been accrued not primarily through wasteful spending or "bridges to nowhere", but because of ageing, says the IMF. Social-security expenditure doubled as a share of GDP between 1990 and 2010 to pay rising pensions and health-care costs. Over the same period tax revenues have shrunk."

Falling tax revenue and increasing expenditures do not sound healthy.

"The flip side, though, is that Japan has the lowest tax take of any country in the OECD, at just 17% of GDP. That gives it plenty of room to manoeuvre."

Japan could eliminate its deficit by adopting a more typical tax policy, but the politics of such a move have been too difficult. But the country has a viable response if it needs one. The story of Japan’s debt is yet more peculiar. The economy is hampered by the fact that the majority of the population’s wealth is tied up in the savings of its elderly, who do not want to give any of it to the government in taxes, nor do they choose to spend much of it. A lot of Japan’s government debt is accumulated by borrowing money from its elderly at very low rates and spending it to stimulate the economy. This borrowing costs the government little, and, in a deflationary economy, the lending becomes a good investment for the elderly.

In any event, it is probably inappropriate to refer to Japan’s economy as "weak." Unusual works. Strange and bizarre work also.

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