Thoughts on the Japanese Economy

I would characterize long-term Japanese economic policy this way:

  • Technocratically planned economy where the government chose winners and losers and directed capital to industries favored for development (e.g. MITI with steel, autos, electronics).
  • Strong government favoritism for exports and exporters over the domestic economy -- export industries are heavily protected at the cost of raising costs for internal consumers and limiting competition in domestic markets.
  • Enormous, near Herculean commitment to deficit spending as stimulus.  With deficits consistently running in the 8% of GP range and total government debt a stratospheric levels, Japan is the poster child for Krugman's anti-austerity

To these three I would add something that is seldom mentioned, that Japan has a near Scandinavian GINI index, with income inequality well under that of the US.  Oh yes, and they were an enthusiastic adopter of CO2 limits.

And the result of all this has been... 25 years of stagnation.

I remember when every one of these three planks was enthusiastically lauded by the US elite.  I was at Harvard Business School in the late 1980's and much of the discussion was about the US needing to adopt MITI-like government industrial planning and management.  If pressed at the time, people might kind of sort of acknowledge that life wasn't so good for Japanese consumers, but we were in a Michael Porter big picture competitiveness-of-nations phase, and no one seemed to care that their definition of national success did not turn out so well for the people actually living there.

To me, Japan is a giant case study in Austrian economics.  It's like they set out to run a quarter-century test: "let's see if mispricing of credit and forced misallocation of capital is really the cause of recessions."  So it is amazing that no one seems to want to acknowledge the results of this experiment.  Paul Krugman appears weekly in the New York Times to frequently advocate for exactly this same economic plan.


  1. NL7:

    Your first bullet point is also the most aesthetically fundamental. Many countries don't want their top companies to change or die. Something that was successful decades ago is treated as a cultural entity with significant meaning and value that trumps the needs of consumers, investors, executives, and employees today. Rather than letting a dying behemoth be dismantled or significantly altered, many countries prefer to have them limp along in innovation while continuing to dominate the domestic economy in relative terms. This is big in Japan and Europe, where old-line companies are so connected that it's unrealistic to characterize them as truly private - the national government protects them, regulates them, and interacts with them as quasi-subsidiaries.

    We shouldn't value sentimentality for an incumbent conglomerate over the needs of people today. Sure, some car companies and airplane companies made lots of things of cultural and even technological significance. But if they are providing a bunch of ugly cars or overpriced airplanes, we shouldn't subsidize them just for the sake of the past.

  2. Sam L.:

    There's that aging population, too, and the low birthrate to make it worse.

  3. paul:

    China is basically running the same policy. Hold down interest rates to consumers so that capital is directed where the government decides. In China, consumption by the people that live there is a staggeringly low 40% ( even less I think) and 60% of GDP goes in investment in infrastructure and the export sector. But the world cannot absorb any more Chinese exports so expect to see some sort of lost decade (or half-century) in China too.

  4. Matthew Slyfield:

    Perhaps, but that isn't a characteristic that distinguishes Japan from the US.

  5. mesaeconoguy:

    More succinct summary:

    HyperKeynesian hyperFAIL

    Japan is absolutely screwed, as their demographic profile is even worse than ours.

  6. Somaranon:

    One interesting viewpoint on this is the book How Asia Works where points 1 & 2 were used by japan to go from a developing economy to a developed one (along with land redistribution to small garden plots and the legal enforcing of a textbook free market in agriculture etc.). while he argues that this is roughly the only way a country in Asia can become developed (citing Korea, China & Taiwan as examples) Japan has kept these policies even though they have outlived their usefulness as the policies needed by a developed economy are radically different to a developing one.

  7. Andrew_M_Garland:

    Recently, an economist on his blog discussed a new paper on the effects of central bank operations on GDP. The math was complicated and did not catch my interest. Here is why.

    The math manipulated a variable G*, the GDP attainable at full employment. The discussion mentioned that investment was not part of the model, although interest rates were a part. The discussion went on about what the math model predicted.

    I pointed out that G* could not be calculated or predicted, and "full employment" was not even defined. A math model based on these "variables" which did not include investment could not possibly represent reality or predict anything useful. What other important factors were left out?

    The economist replied that a map could be useful even if it omitted some details. Wow! This wasn't a map, it was a complex interplay of time dependent variables.

    People like Krugman believe these models. Politicians will believe any model which says that their spending and whatever schemes are good for the "economy". Government spending is accounted as GDP no matter what it is spent on or how it is wasted. All of these "models" say that government spending is good, no matter what.

    Politicians world-wide are driving us over a cliff, following a math model pasted to the windshield for guidance.

    Many progressives say that removing one species can alter an ecosystem in dramatic and upredictable ways. Those same people have no qualms about creating and spending $1 trillion each year, about $7,000 per household, without hesitation about what they are affecting or how the debt will be repaid.

  8. Stan Forron:

    It is when coupled with a lack of immigration.

  9. FelineCannonball:

    Silly comparisons. They have no fossil fuels and their demographics preclude significant GDP growth.

    More importantly, unemployment is half that of the US. Life expectancy five years longer.
    Average real incomes are the same as Germany's, and inequality lower.

  10. mesaeconoguy:

    Update: Mohammed El Erian (ex-PIMCO and Harvard Management guy) has a nice piece out encouraging Europeans (and the US) to heed the warnings of Japan’s now dire situation.

    Japan is now effectively a failed nation, and demographics ensure that no recovery from their massive, gargantuan debt overhang can occur.

    However, as I have mentioned here and elsewhere, Japan’s only advantage is their strong sense of tradition and cultural submission, which is lacking in most Western nations:

    If Western nations don’t do a better job of internalizing the lessons of Japan, some of these economies may find themselves in even deeper trouble. And if they aren't careful, they could well end up in an even worse position, since they lack Japan's social cohesion, sense of collective action and its cushion of wealth.

    Translation: If Europe (and the US) doesn’t end it’s out of control spending and job-destroying taxation and regulation, it will be subject to violent revolution.

  11. Matthew Slyfield:

    This is true, Immigration is about the only thing currently saving the US from a population crash.

  12. Stephen:

    When we visited Japan in the late 90's my wife and I had the great good fortune to be shown Tokyo by the owner of a successful trading firm with well over 100 employees. My wife asked the most insightful question, "How much does it cost to start a new business in Japan?" Without hesitation, our host said, "One million dollars." He explained that the startup had to effectively pay off both the industry group and neighborhood in order to get regulatory approval. This, as much as anything else explains Japan's stagnation.

  13. MJ:

    Not that there was likely a good answer to this, but why would they bother to include interest rates in a model that ignored investment? Do they just assume that all investment is exogenous and comes from "Big G"?

    The curious task...

  14. MJ:

    Silly excuses. Why would an absence of fossil fuels preclude growth? I thought wind and solar were cheaper?

    Do demographics also preclude growth in Western Europe, which has a fairly similar demographic profile?

    More importantly, unemployment is half that of the US. Life expectancy five years longer.

    It's easy to have low unemployment when your labor force is constantly shrinking. That Japan's income levels are similar to Germany's is not surprising. Both have been at relatively high levels since WW2. The issue is growth, and neither have posted very impressive outcomes in the last couple of decades, despite the dirigiste economic policies Warren describes. Inequality is a non-sequitur, since it has nothing to do with growth and is merely a reflection of arbitrary income redistribution policies.

    Life expectancy is likewise not a measure economic performance, but if you're so inclined, you can compare expectancy rates of Japanese citizens to those of Caucasian U.S. citizens, who are less likely to die of homicides. You could also compare expectancies beginning at age 35 or 40, which would net out most deaths from car crashes and other sources of mortality that have nothing to do with either living standards or the quality of health care.

  15. MJ:

    Worse yet, there are real limits to those economic policies. For one thing, there are declining returns to infrastructure investment and China has already picked most of the low-hanging fruit in this area. Infrastructure for them is now mostly a make-work program. Secondly, many of those exports are dependent on low-skill (and hence low-cost) manufacturing. As wages have risen, many of the multinationals who have set up shop there are looking elsewhere in Asia and other parts of the developing world for more cost-competitive sites. Currency manipulation can only counter this trend so much. China is now awkwardly trying to reorient its economy toward domestic consumer spending. Hard to do when you keep devaluing your currency.

  16. MJ:

    Or most of Europe.

  17. FelineCannonball:

    A lack of coal, oil, gas means that national economic interests converge with CO2 reduction goals -- conservation, nuclear, renewable. Reduces trade deficits and dependence on volatile energy markets. This was a reference to just a portion of the post.

    Yes, if GDP growth or having lots of kids with equal or higher paying jobs is the goal, Japan is not the model. If a high standard of living for the majority of the people in the country is the goal, they haven't done poorly. At least so far.

  18. Andrew_M_Garland:

    To MJ. As I understand it, interest rates would affect "economic activity" and employment by some means, and was something that the central bank could affect.

    Why worry about investment when one can (supposedly) get to GDP directly by assuming past relationships apply in the future. (smile).

    All of the complexity is at