By Robert J. Samuelson
Monday, November 15, 2010;
It's hard to remember now that in the 1980s Japan had the world's most-admired economy. It would, people widely believed, achieve the highest living standards and pioneer the niftiest technologies. Nowadays, all we hear are warnings not to repeat Japan's mistakes that resulted in a "lost decade" of economic growth. Japan's cardinal sins, we're told, were skimping on economic "stimulus" and permitting paralyzing "deflation" (falling prices). People postponed buying because they expected prices to go lower. That's the conventional wisdom - and it's wrong.
Just the opposite is true: Japan's economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that's been missing in Japan. This is a lesson we should heed.
Japan's economic problems, like ours, originated in huge asset "bubbles." From 1985 to 1989, Japan's stock market tripled. Land prices in major cities tripled by 1991. The crash was brutal. By year-end 1992, stocks had dropped 57 percent from 1989. Land prices fell in 1992 and proceeded steadily downward; they are now at early 1980s' levels. Wealth shrank. Banks - having lent on the collateral of inflated land values - weakened. Some became insolvent. The economy sputtered. It grew about 1.5 percent annually in the 1990s, down from 4.4 percent in the 1980s.
Despite massive stimulus, rapid growth hasn't resumed two decades later. Although the Japanese reacted slowly, they adopted the advice of economics textbooks. They raised spending, cut taxes and let budget deficits balloon. Gross government debt soared from 63 percent of the economy (gross domestic product) in 1991 to 101 percent of GDP by 1997. It's now around 200 percent. The Bank of Japan (their Federal Reserve) cut interest rates, going to zero in 1999 - a policy that, with some slight interruptions, endures.
Deflation doesn't explain persisting economic stagnation. Japan's consumer prices have declined in nine out of the past 20 years; the average annual decline was six-tenths of 1 percent. "People aren't going to say, 'I'll wait until next year to buy a car, when the price will be a half a percent cheaper,'" says New York Univeristy economist Edward J. Lincoln, a Japan specialist. If the Japanese were delaying spending, the household saving rate would have risen; instead, it fell from 15.1 percent of disposable income in 1991 to 2.3 percent in 2008.
Japan's lackluster performance has two main causes. One is the "dual economy": a highly efficient export sector (the Toyotas and Toshibas) offset by a less dynamic domestic sector. Until the 1980s, Japan depended on export-led growth that created jobs and investment. An undervalued yen helped. "You had 20 percent of the economy carrying the other 80 percent," says Richard Katz, editor of the Oriental Economist newsletter and the author of several books on the dual economy.
But the yen's appreciation in the mid-1980s - making Japan's exports more expensive - doomed this economic strategy. Ever since, Japan has searched in vain for a substitute. Cheap credit (which fueled the original "bubbles") and many "reforms" haven't sufficed. Japan's domestic sector remains arthritic, often protected by cartels or government regulations. Japan has one of the lowest rates of business creation among major industrial countries. One survey ranked Japan 44th in the world in the ease of starting a new firm, reports economist Randall Jones of the Organization for Economic Cooperation and Development. (The United States was fourth.) Indeed, Japan's best recent years of economic growth (2003-07) occurred when a weaker yen revived exports.
The second cause is an aging, declining population, which dampens domestic spending. For decades, Japan's traditional family - a workaholic husband, a stay-at-home wife and two children - has been besieged, as anthropologist Merry White of Boston University shows in her book "Perfectly Japanese." Even in 1989, the fertility rate (children per adult woman) of 1.57 was below the replacement rate of about 2. The poor economy further discouraged family formation. Low wages and insecure jobs make children seem too costly. For men, the age of first marriage is 35, up from 27 in 1990, says White. The fertility rate is about 1.3.
So Japan's economy is trapped: A high yen penalizes exports; low births and sclerotic firms hurt domestic growth. The lesson for us is that massive budget deficits and cheap credit are at best necessary stopgaps. They're narcotics whose effects soon fade. They can't correct underlying economic deficiencies. It's time to move on from the debate over "stimulus."
Economic success ultimately depends on private firms. The American economy is more resilient and flexible than Japan's. But that's a low standard. Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan's.