Japan's Horror Story Not So Scary After All
Friday 01 October 2010
by: Paul Krugman, Krugman & Co. | Op-Ed
The tale of Japan’s economic woes is a nuanced one, despite its unearned reputation as a horror story.
It is fairly amazing how much of the nation’s slide since the early 1990s can be explained not by economics, but by demography.
I’m not the first person to make this point, but it comes to mind because I recently took a look at the Total Economy Database from The Groningen Growth and Development Center in the Netherlands. I found that from 1992 to 2007 (the eve of the global economic crisis), Japanese gross domestic product per capita — or the approximate value of goods produced in a country, divided by its total population — fell from 88 percent to 76 percent, as compared to the United States’s G.D.P. per capita.
That sounds bad, and it is.
But about two-thirds of that decline can be explained by the aging of Japan’s workforce.
According to the Organization for Economic Cooperation and Development’s fact book, working-age adults, or people between the ages of 18 and 65, made up 69.7 percent of Japan’s population in 1992, compared with 65.5 percent of the United States’s.
By 2007, the Japanese figure was down to 64 percent, while the United States’s was up to 67 percent.
So it is clear that demographics played a big part, though that is not the whole story.
Japan also suffers from inadequate demand, and this is why it faces persistent deflation, why ever-fewer workers can get long-term employment, and why unemployment has risen while working hours have fallen.
Japan’s demand failure hasn’t been as severe as the G.D.P. figures suggest. Most of the relative decline of Japan’s G.D.P. as compared with the United States’s would probably have happened even if Japanese economic policy had managed to avoid the deflationary trap in which the economy is currently stuck – this is when falling prices make consumers and businesses less willing to spend because they expect additional declines in prices, further depressing the economy. In Japan’s case, the result has been a depressed economy, though the nation is not officially in a depression.
By the same token, Japan’s fiscal policies have not been the utter failure that some economists and government officials portray them to be. The Japanese have not created self-sustaining growth because these policies have never been sufficiently forceful to restore full employment and pull the economy out of deflation.
But the policies have kept the economy afloat.
Japan’s is not a good story by any stretch of the imagination, but it is not as terrible as you may have heard; certainly not as terrible as some policy makers would lead you to believe.
And given the way we in the United States responded to the bursting of our own bubble, I think Americans need to stop being so hard on the Japanese.
Backstory: A Change Of Plan
Faced with dwindling public confidence in both a shaky government and the strength of the Japanese yen, Naoto Kan, the prime minister of Japan, was forced to make some sweeping changes to his administration this month.
On Sept. 14, after only three months in power, Mr. Kan narrowly survived a challenge from an opponent within his governing Democratic Party. A close party vote allowed Mr. Kan, the fifth Japanese leader in four years, to keep his office.
Three days later, Mr. Kan reorganized his cabinet, appointing members known to be open to changing the way Japan is governed — especially with regard to foreign affairs and economic matters. Mr. Kan is also trying to deal with the massive challenges posed by the country’s pension system, as Japan’s population ages and fewer workers pay into the plan. Today, 21 percent of Japan’s population is over the age of 65. By 2055 that number is expected to reach 40 percent.
Japan’s Government Pension Investment Fund is already starting to show signs of strain, and it plans to sell assets worth 4 trillion yen by April 2011 to honor the fund’s obligations. Most of the fund’s assets are in low-yielding domestic bonds — investments unlikely to grow much in Japan’s environment of chronically low interest rates.
Complicating the situation further, the Accounting Standards Board of Japan has proposed changes to the accounting system for pension plans that would require companies to record any shortfalls in pension funding on their current-year balance sheets, which could be a potential blow to the profitability of Japanese businesses. To protect their interests, Japanese business groups have appealed to Mr. Kan and his cabinet to implement economic stimulus measures and come up with strategies to address deflationary problems.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2010 The New York Times Company.
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