Friday, June 15, 2007


This article from today's edition of the FT might seem like none-of-our-business, but I see it as not only interesting information but also a good brush-up on macro-economic principles. Plus, it's a simple and well-written non-fiction essay. Copyrights and congrats to them, obviously.

To treat Japan as an economic curiosity looks ever more odd
By Chris Giles, Economics Editor

Published: June 15 2007 03:00 | Last updated: June 15 2007 03:00

For more than a generation Japan has been a rich country with the second largest economy in the world. But it has always been treated as an exception.

In the 1970s and early 1980s other advanced economies viewed Japanese annual rates of 4.5 per cent growth with envy, since others in the Group of Seven leading industrial nations could manage little over 2 per cent. In the late 1980s, the continued Japanese expansion was greeted with startled awe and Japan's future domination of the global economy seemed assured. An asset boom gave rise to incredible calculations: the land value of the Imperial Palace grounds in central Tokyo was notionally worth more than the entire state of California.

But it did not last. The bursting of the asset price bubble in 1990 ushered in Japan's "lost decade" when property values fell by as much as 80 per cent and economic growth slid to the bottom of the G7 league as the country moved in and out of recession. Prices in general began to fall, heightening the debt burden of companies. As deflation stalked the land, Japan's economy became regarded as a basket case, with zombie companies kept alive by equally insolvent banks, staggering government inefficiencies financing roads going nowhere, crippling public debt and a looming demographic time bomb.

With such differences in performance, "except Japan" has been the watchword of economic comparisons. The "except Japan" argument has three strands: the country's economic performance is radically different from other rich countries; its culture is so weird and the concerns of its population so unique that the latest global reform ideas are inapplicable; and the political system is so opaque that reforms could not be implemented anyway.

All three are increasingly wrong, according to many of the country's most forward-looking thinkers.

Fukunari Kimura, economics professor at Keio University, says the most serious misconception of Japan is that "it is not normal". He points to its steady recovery over the past five years, the longest growth spurt in Japan's postwar history, and how similar its recent trade integration with developing Asia has been to that undergone by other rich countries such as the US.

The Japanese economy is indeed much more normal now than it has been for decades. The recovery has been long by Japan's standards but not particularly vigorous. With annual real growth rates in gross domestic product of between 1.5 per cent and 2.5 per cent since 2003, Japan is now back in the middle of the G7 pack - it outpaced the eurozone and the US in the first quarter of this year. More important, the economy now seems able to grow at these steady but uninspiring rates, just like other advanced countries.

Even though interest rates at 0.5 per cent are much lower than in Europe or the US, after adjusting for inflation the real rate of interest faced by companies and households is similar - positive and low. Wage growth has also lagged behind corporate profits, just as in every other G7 country.

Household savings rates have been low and fallen in most G7 countries as consumers have taken advantage of greater access to credit, low interest rates and the expectation of continued steady growth. Japan is no different. While in 1990 its households were the misers of the world, squirreling away 15 per cent of their incomes, by 2005, the household savings rate had fallen to 3.1 per cent.

Moreover, almost every issue of public concern in today's Japan is the same as prevails in other advanced countries. Rising income and regional inequalities, the fairness of pension reforms and how to retain women (especially mothers) in the labour market are at the top of the domestic political agenda.

Fear of China's rising economic power haunts Japan as it does the US and the eurozone. As elsewhere, the concerns are misplaced, according to Chi Hung Kwan of the Nomura Institute of Capital Markets Research, who points out that Japan's exports to the US are not even in competition with those from China, since the two countries produce radically different products, something that Japan shares with the eurozone. Rather, in common with the rest of the G7, the success of Chinese low-wage sectors has benefited Japan greatly, through falling import prices, while Japanese export prices have risen.

There are are, of course, exceptions to all this normality. Japan's inflation rate is negative, although the sustained growth of the economy is expected to return it to positive territory next year. The rise in the number of elderly relative to young people is more acute than elsewhere. The country remains difficult for foreign investors, with few takeovers of Japanese entities - the cumulative stock of foreign direct investment as a share of GDP stands at 3 per cent in Japan, in comparison with 22 per cent in the US and 37 per cent in the UK.

Japan's labour market has changed radically for the young, who work on flexible contracts, but not for those who started work before the 1990s.

The weakness of the yen, too, is sometimes difficult to explain, especially given Japan's huge trade surplus. But the most convincing and verifiable cause is that Japanese households are beginning to ditch their previous unusual bias for holding all their savings domestically.

The Japanese diversification of household savings shows another weakness in the "except Japan" argument. Japan, like most other countries in the Organisation for Economic Co-operation and Development, is feeling its way towards further reform. Monetary policy is now based on an inflation target. The OECD last week showed that a series of pension reforms since 1990 has already cut the generosity of the Japanese public pension system by 15 per cent, pretty much the same as in most other large advanced economies.

Maternity and childcare rights have improved markedly, with the aim of changing companies' and women's wary attitude to childbirth. The government's innovation strategy is centred on opening Japan to foreign influences, not finding the next technological gizmo.

The speed of change will be driven by politics and slow demographic shifts. But the need for reforms and the inevitable obstacles along the way to make the economy more dynamic provide the same challenge that faces every other G7 country.

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