Turning Japanese is a boon

What few seem to appreciate, either inside or outside of Japan, is just how strong the resulting Japanese recovery from 2002-2008 was. It was the longest unbroken recovery of Japan’s postwar history, and, while not as strong as pre-bubble Japanese performance, was in fact stronger than the growth in comparable economies even when fuelled by their own bubbles.

How on Earth did Japan manage that with their ageing population and zero population growth? Indeed, Japan outperformed Australia in productivity growth since 2000 and very nearly kept pace with real GDP per capita growth.

Australia’s average annual real growth in GDP per capita since 2000 is 1.28%. While I can’t find a direct measure from the Japanese Statistical agency, using the World Bank data collection I can make a comparison of real GDP growth per capita of Australia and Japan using a common methodology. Using these statistics I find that Australia had a mean annual growth in real GDP per person since 2000 of 1.8% while Japan’s was 1.4%.

Notice in the graph, however, that Australia’s growth in real GDP per capita fell considerable from 2004, when population growth rates began to push up from 1.2% to a peak of 2.16% in 2008. Since 2002, when Japan’s real growth per person increased, the population growth rate declined from 0.2% the preceding 2 years to near zero (average 2003-2008 is -0.002%) till the financial crisis hit at the end of 2007.

Australia’s economic performance is terms of productivity growth looks pitiful in comparison to Japan. Average annual Total Factor Productivity growth since 2000 was a shy 0.47% (including a productivity recession in 2004-05) while Japan recorded a strong 1.77% over the same period (data from OECD here).

Of course there is always unemployment to consider.  The graph below shows that on this measure, Australia is also behind Japan (having been in front for just the period 2007-2008).  Some longitudinal data is here.

Recent research also suggests that Japan’s economic track record was unfairly blemished by asset price deflation followed by short recessions in the 1990s (1993, 1997 and 1998). The graph below (from here – including 20yr data set), shows Japan’s solid performance over the past decade, with their longest boom since WWII occurring from 2002-2008.

It appears that turning Japanese is not the tragedy it is made out to be by popular economic commentators. Here’s just one example of the popular perception-

As it turned out, Japanese investors lost nominal wealth equal to three entire years’ GDP. And the economy today hasn’t grown in 17 years or created a single new job.

Nor has the debt been reduced. Instead of permitting the private sector to destroy and pay off its debt, the public sector fought against it…borrowing heavily to try to bring about a recovery. Result: no recovery…and almost exactly the same amount of debt. But while the private sector paid off its debt, the public sector picked up the borrowing. Now it’s the government that owes money all over town.

Detractors cite the massive and growing public debt in Japan as a problem.  But if the debt is denominated in Yen, and interest rates are set near zero, the burden from the debt is minimal. In fact, Modern Monetary theorists might claim public debt in ones own currency is never a burden because government can enact future policys to pay down debt with freshly printed money. I’ll leave that particulars of this option to a future MMT debate.

The above graph confirms that Japanese government debt has replaced a substantial portion of private debt since the early 1990s. In my view this is a justified effort to keep the value of the yen stable by maintaining money in circulation – an approach that could be adopted in Australia in the coming decade, with government debt replacing household debt for the same reason.

One must keep in mind that it is probably not the intention of the Japanese government to ever pay off this debt. I am sure they are happy to continue to progress with a high savings rate, high productivity, high GDP, net exports and almost every other fundamental ingredient for economic success.  Turning Japanese appears to be about fundamental economic prosperity cradled in an unfamiliar monetary framework.

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  1. I’d say one of the factors in the Japanese performance from 2002 – 2008 was that it coincided (mostly anyway) with the term of Koizumi as PM – the longest serving PM in Japan since 1972, with a strong government able to enact policies and make badly needed changes. Didn’t realise it had been such an effective term, though.

  2. The above graph confirms that Japanese government debt has replaced a substantial portion of private debt since the early 1990s. In my view this is a justified effort to keep the value of the yen stable by maintaining money in circulation – an approach that could be adopted in Australia in the coming decade, with government debt replacing household debt for the same reason.

    Japan runs a chronic CAS. Aus runs a chronic CAD. So we are at totally opposite ends of the spectrum and solutions to our problems should be quite different unless Rumples you arethinking we will start to run massive CAS for the next decade?
    Even then a better solution would be to start buying back some of our own country than to create massive Govt debt just to keep consumption, a CAD, and a continued sell-off of our industries going.

    And KARAN we DO run a CAD so you didn’t know what you were talking about last time you commented on my post…’Aus runs a CAS but don’t let that bother you’

    • +1 flawse.

      people seem to be getting confused about our positive terms of trade and the current account balance (which is negative).

    • Jeez, talk about holding a grudge… I got that wrong, I confused a trade surplus with a current account surplus. Move on now?

    • Jumping jack flash

      So the government can take back some of that debt they heaped on us over the late 90’s early 2000’s so they could appear squeaky clean and excellent economic managers?

      Govt: “Look at my surplus, look!”

      People (in a sea of debt): “glub glub glub …”

  3. Ronin8317MEMBER

    The Japanese government debt is at over 200% of GDP. Fortunately, most of the debt is held locally. For Australia to go anywhere near that level of debt, funded by foreign borrowings, will be national suicide.

    The price of Japan’s “growth” is paid for by the younger generation. Despite the aging demographic, youth unemployment remains high, and most employees are only hired as ‘temporary’ workers to bypass labour laws. Large corporations in Japan still maintain a ‘hire for life’ mentality, and it is very, very difficult to find new employment once you’re made redundant. Furthermore, while Tokyo remains thriving, regional Japan suffers from a drain of people as the young moves to the big cities. Visit any regional town, and you’ll see rows and rows of closed shops on what used to be busy shopping strips. GDP doesn’t tell the whole story.

    • I think the older people will also suffer in the Japanese economy.

      Who thinks that Japan will be able to return all their deposits when they retire?

      Who thinks that they will be able to replace those deposits with new ones from a shrinking younger population?

      Who thinks that while already using over 1/3 of their tax revenue on interest payments at 1% this situation can be reversed, let alone sustained?

      Who thinks they will get anywhere close to 1% on international markets when they need them?

      I’d love to have good answers for these but I’m afraid that it’s simply: Not Me*4

      • “Who thinks that while already using over 1/3 of their tax revenue on interest payments at 1% this situation can be reversed, let alone sustained?”

        Yes it can be sustained.

        Government debt = private sector savings. In Japan, most of the savings are domestic – local owns government bonds directly or indirectly through the banking system.

        So when we say 1/3 of tax revenue pays interest of debt, what actually happens is a simple transfer of money – from taxpayers to government bond holders. Bond holders then pay taxes on the interest income (when earned or spent).

        While there are distributional variations between the two groups, at the aggregate level it is simply the Japanese population as a whole.

        The net burden of the debt on Japan as a whole is minimal because the debt is mostly domestic.

        The situation is quite different when debt is foreign. Perhaps I’ll write more about that in another post.

        • +1

          this is where the pundits who bash people over the head with “Rogoff & Reinhart have shown that …” get it wrong.

          The R&R stuff is primarily about sovereign debt dominated in currencies that aren’t floating fiat currencies of the debtor nation. i.e. their analysis doesn’t apply to Japan, USA, ‘straya etc. but does apply to Eurozone nations.


          • Interesting challenge to aspects of R&R which appear to have been absorbed unquestioningly into current economic thinking. Thanks for the link.

        • But the savings rate is falling. Lower savings rate = lower new government debt. The debt outstanding will remain.


          The savings rate is falling, population is shrinking, and the ratio of old to young people is headed the wrong way.
          Eventually the savings rate will turn negative and/or there won’t be enough savers to fund the retirees. At this point the Japanese Government will have to offer higher interest rates to attract more depositors. This will increase their interest payments. So that 1% cannot be sustained.

          Higher interest payments and lower tax receipts (likely if there are less young working people) will eventually lead to some kind of crunch.

          • Japanese savings rate have bounced since 2007 – as it must have if government debt shows an uptick in the final chart.

            “… population is shrinking, and the ratio of old to young people is headed the wrong way.”

            Most countries will be dealing with this situation in the coming decades, so it is insightful to look to how Japan has performed under these conditions.

            I’m not so sure that government will have to offer higher interest rates to attract savings to increase the debt in future.

            I’ll expand on this in more detail in a full post.

  4. The other reason that Japanese public debt is not a concern is that most of it is owed to their own people.

  5. Government debt does not equal private savings.If you want to be accurate, Private savings = private investment + govt deficit. The govt deficit is only financed so long as the private sector chooses to finance it; cause and effect needs to be considered the right way around.

    Sideshow Bob, default is a political decision, and happens when the negative effect of further currency debasement is deemed to be worse than the effect of default. There is no free lunch here.

  6. The Japanese had the benefit of strong export income from trade with China and the USA. What happens if China and the USA enter a slump?
    Also, they’ve run up one of the largest public sector debts in history. Just because they haven’t defaulted on this yet or inflated it away doesn’t make them a success story.
    The real story of the Japanese slump or “boom” will be written twenty years from now when we see how they deal with 200% debt to GDP rations with an aging and declining population, amid slow export sales to economically depressed gloabal customers.

    My money is on “Boom!”, but just not the way you’re thinking.

  7. “In fact, Modern Monetary theorists might claim public debt in ones own currency is never a burden because government can enact future policys to pay down debt with freshly printed money. I’ll leave that particulars of this option to a future MMT debate.”

    …..causing inflation and mal-investment??

    If printing currency was the way to wealth why don’t they just give exeryone a printing press with an approved currency seal??

    • All debt is new money.

      “If DEBT was the way to wealth why don’t they just give exeryone a LOAN?”

      If debt is being repaid, the total amount of money circulating is declining, leading to deflation. Under these conditions governments can take on debts and spend without causing inflation – why can’t they also print the money under the same conditions?

    • because it is not. You have to read the fine print which qualifies the conditions under which this is possible.

        • JC was citing a quote about MMT and money printing and then referring to inflation and malinvestment.

          This is the common straw man attack from people who have never read the qualifiers, i.e. fine print, from dastardly “money printing” MMTers.

          The fine print can be found in numerous places such as pragcap, billy blog, new economic perspectives, … plus DE has probably written about it as well.

          The bottom line is that you won’t find anyone who advocates an open ended, unqualified support of money printing or who suggest that printing currency is the way to wealth etc.

          That is all I am saying in my comment.

          • Aha. I thought you were referring to this comment of mine –

            “If debt is being repaid, the total amount of money circulating is declining, leading to deflation. Under these conditions governments can take on debts and spend without causing inflation – why can’t they also print the money under the same conditions?”

            Applying principles of MMT in practice has a lot of merit, and it is something I will endeavour to explore further.

    • JC
      Under a current account deficit like Australia , for GDP to grow , either the private sector or the public sector has to go into debt.

      You choose.

      • Indeed, yet both private and public seem content to use the vast majority of said debt in endeavours inflating non-producing assets (housing) that add very little utility to the economy, and whilst may lead to growing GDP in the short to medium term doesn’t really do a great deal to grow the actual productive capacity of the economy. Then when it’s time to repay the debt, said assets discontiue their price growth, start falling, and we all realise a big chunk of the growth is illusory. I.e. the mal investment i was on about.

        Debt is GREAT if used to invest for LONG TERM productive capacity that adds to economic utility and creates REAL economic wealth.

        I’m sure all of the Yanks felt really wealthy from 2001-2006 when all their debt was being reflected in massive gains in property and shares. I’m sure they also felt their economy was growing. Compare this to when they used debt to nation build after WWII, i.e. farms, factories, rail, ports, roads, real assets that helped the USA become the biggest power this planets history has seen. The debt actually resulted in real wealth creation.

        We are lucky that China is going through something similar to what the US did post WW2 in the 50’s and 60’s and we happen to have all the stuff in the ground they need to do all of this.

  8. I actually have a fair bit of confidence in the Japs, they know what occurs in respect to a default and I suspect we would see monetising of the debt. The falling population may actually end up being a big advantage so long as they can keep exporting.

    One of the hallmarks of their banking system was how Koisumi made them write off the big loans from the 80’s via recapitalising by selling off state assets. The banks also sold off non performing loans to the Yakusa who upped the interest rates and repossessed the non productive assets.

  9. I disagree with the false dichotomy.

    Its not a matter of increasing either private versus public debt to grow GDP.

    The idea behind productivity and deregulation is that you produce more output with less factors of production.

    Private debt is justified if it increases productivity and if it has a positive return.

    Public debt is usually a dead end with no dividend. Government spending in the US probably looks like it has a negative multiplier.

    So much for Obama’s economic modelling.

    • I agree that what matters is productivity. Which i why I note the impressive perfomance of Japan relative to Australia over the past decade.

      This occured in an environment of massively increasing public debt, and contracting private debt. Whereas Australia had the opposite debt profile.

      Remember, debt is the way new money is created. What happens when the private sector all decides to pay its debts at once? The quantity of money circulating decreases, leading to deflation, and making it even more difficult to pay off debts.

      If we paid back all our debts, we’d have no money. Currently there is a little voer $2trillion in private debt, or a little over $91,000 per person. The RBA only estimates that there is only about $1.4 trillion in broad money. So it simply can’t happen.

      If private enterprise begins to pay off debt, the public sector will need to step in to maintain price stability regardless of the interest rate.

      And I disagree that public debt usually has no dividend. It can be a dead end (as can private debt when used unproductively), but that doesn’t necessarily make it bad in all circumstances.

    • Ronin8317MEMBER

      After you increased production, you’ll need to find a buyer. Now, where would the buyer get the money in the first place? In the days before we have banks, the answer is simple : you pull it out from under the mattress. With modern finance, every dollar you deposited into the bank is in turn lent out to somebody else. Once the system is leveraged to the hilt, an increase in GDP is only possible if someone, either government, businesses, individuals, or oversea buyers, goes into debt.

      This is not a defense of Obama. Rather, it’s an observation that both public debt and private debt have spiraled out of control, and those in charge didn’t realize the danger.

  10. Looking forward to RS’s explanation of how the Japanese Government (JG) can avoid having to offer higher interest rates.

    A huge chunk of JG debt is held by public institutions, such as the postal service and the pension fund.

    “Japan Post … holds about a third of the 700 trillion-yen government bond market. … Japan Post is the world’s biggest financial institution, based on the assets declared in earnings reports. It has financial assets of about 300 trillion yen ($3.3 trillion) — more than the GDP of France”

    Japan Post is in the process of being privatized (and split into four units). It’s a stop-start kind of affair, and I’ve lost track of the latest developments, but I can’t see a privatized Japan Post being content with 1% returns.

    Meanwhile, the Japanese pension fund has already started selling off JG debt to meet it’s obligations – and the wave of baby boomer retirees won’t start to hit until next year (although I wouldn’t be surprised if a lot of them continue to work for another five to ten years, where they have the option).

    For the last twenty years, “good” jobs have been hard to find for Japanese young people, and so their savings rates a probably a lot lower than the generations ahead of them. And in the next couple of decades these older generations are going to be using their savings to fund their retirements.

    Then there is the massive indebtedness of local municipal governments, which shoulder a much bigger share of service provision than they do here.

    Finally, as for productivity, there are basically two types of Japanese industries: highly efficient export industries that are exposed to international competition, and massively inefficient “inward facing” industries. My gut feeling is that IT has been behind a lot of the more recent productivity improvements, and that the widespread adoption of IT took place about ten years later than it did in the West (despite Japan’s image as a high tech society). So I think there is a lot more room for further productivity improvements.

    I don’t claim that this is the full picture of the Japanese economy/national debt (I come to MB to learn rather than to lecture) but any convincing account of how Japan is going to cope with debt levels at 200% of GDP will have to include the factors above.

  11. The burden of the debt lies not on the government, but on the people who must service their government’s debt with tax payments to pay for the government’s debt interest (as little as it may be in the Japanese case). Furthermore, their savings are eroded with inflation as the central bank continues to create more money to lend to the government.

  12. Ronin8317MEMBER

    I visited Japan in February just before the earthquake. There are a lot of things which you cannot see from a GDP chart. The Japanese model is in serious trouble.

    It’s hard to be prepared for Tokyo. The city spreads out like a concrete forest for well over 100km each side. It is HUGE. The city alone account for 1/3 of Japan’s GDP, however this has the consequence of draining the other regions of both labour and capital. During our visit, we went to the country town of Onomichi. Once a thriving port, the shipping yard have died out thanks to the rising yen, leaving behind the skeleton of a once thriving town. As we walked along the shopping strip, we see closed shops after closed shops after closed shops. More importantly, for the entire time we were there, we didn’t spot any children at all.

    Japanese’s development after WW2 followed a central planning model, and each regional is allocated an industry to specialize in. This worked for a long time until the weight of success and the rising yen made it unsustainable. The aftermath from the bursting of the Japanese asset bubble came as a shock to the planners, and they set out policies to protect the ‘core industries’ while sacrificing everyone else. Pretty much like how Australia is going to sacrifice the manufacturing sector for mining right now. The ‘adjustment to free market’ for the other industries did not happen, and the push to be more ‘competitive’ reduced wages, which in turn reduced consumption even more. Japan have the toughest retail environment in the world.

    When you look at the Japanese saving rate, household saving have ben falling, while corporate savings (retained earning) have grown. Bill Mitchell wrote a very good piece on this back in Feb.


    At some point you have to ask : what’s the point of corporations having so much money if they can’t find a way to spend it. Unless you can find a way to reform the Japanese economy, things will not get any better.

  13. Interesting- I lived in a large rural town for soem of that period, and had a year in a very far flung bedroom suburb of Tokyo. The bedroom suburb way dysing, shops closing and staying closed- because there were newer and shinier shops in easy reach. The large town in the counrtyside was doing better- distance from Tokyo allows towns to survive better.
    Kids- I was really surprised how many young children- babies and toddlers- I saw the last time I was there (in July 2011). Something has changed
    Whether or not it is working- well a friend of mine is married to a Japanese man and they have managed to build a lovely new house and have a child on one income- comfortably. I wish that were possible here.