Immediately after the Lehman shock, major western countries pressed the fiscal accelerator all the way to the floor, implementing substantial tax cuts and expanding government spending. As a consequence, economic growth picked up somewhat for a while, but now it is declining again. Only today, governments have exhausted almost all the policy tools at their disposal.
The monetary authorities are at a similar impasse. The US Federal Reserve System has been pursuing a zero-interestrate policy for almost three years. It has also implemented quantitative easing, but the effects have been meager. Prior to his appointment as Federal Reserve Board chairman, Ben Bernanke criticised the Bank of Japan for not being bold enough in easing its policies; but now, despite Bernanke’s skillful efforts to cope with the financial crisis, the Federal Reserve seems to be following the same path that the Bank of Japan took.
As I observe these trends, it strikes me that the US and other western countries are experiencing “Japanisation”. It is ironic that history seems to be repeating itself. Back in 1991, Japan’s real estate bubble burst, and private-sector corporations found themselves saddled with three unwanted surpluses: excess equipment, excess staff and excess debt.
Even in the post-bubble years, from 1992 to 1996, with the implementation of eight stimulus packages, Japan’s economy kept growing, albeit at a more modest average rate of 1.6%. What made matters much more serious was the double dip that the Japanese economy took in 1997, six years after the bubble burst. That year a number of major banks and brokerages went under, unable to bear their heavy loads of non-performing assets. The employment system took a significant hit as companies switched their focus to trimming their payrolls; they also put the brakes on capital investment and worked to reduce their debts. This led to a contraction in aggregate demand, which set off chronic deflation. Japan’s GDP in nominal terms, which was JPY 516 trillion in 1997, contracted to JPY 491 trillion in 2002. And following the Great East Japan Earthquake in 2011, it has shrunk to JPY 462 trillion.
The first lesson of Japan’s 20 years of economic stagnation is that it takes a long time to get economic growth back on track. Fiscal and monetary policy may be effective in countering temporary downturns, but they cannot quickly cure a massive balance-sheet recession. If the pressure for balance-sheet adjustment remains strong even with the passage of time, the next economic slowdown will set off another financial crisis. What is required is a separate set of policies to strengthen private-sector corporations so that they can act as an enduring engine for the economy. Examples include deregulation to encourage the development of new markets and revision of tax and accounting systems to promote investment by businesses and risk-taking by financial institutions. The process of strengthening the economy’s metabolism takes time; patience is of the essence.
The second important lesson of Japan’s experience is that long-term stagnation in the economy is accompanied by a succession of structural problems. In Japan’s case the woes of the economy have been compounded by the declining birthrate and an aging, shrinking population; the widening of income disparities; and the withering of local economies. Over the past two decades Japan has been what we might call a “problem pioneer”, running into structural problems in advance of other major developed nations.
In order to deal with these multiple problems, the government needs to strengthen its fiscal foundations with tax hikes while at the same time achieving economic growth. In Japan the long-pending task of raising the consumption tax remains uncompleted; our political leaders need to take a firm stance on this issue and overcome the strong public resistance.
In closing I would like to note that the Japanese people’s consciousness has been changing since the March 2011 earthquake and tsunami. The ensuing nuclear power plant accident resulted in a shortage of electricity that required a huge effort to conserve energy. As a result of this conservation campaign, electricity consumption in the summer of 2011 was held down to about 80% of the 2010 level, and we made it through the season without blackouts. Looking back, we find that energy-conservation related outlays pushed up consumer spending. Businesses have also taken the initiative to develop new markets for next-generation energy products. We can expect the momentum towards preparation for the future to serve as the driving force for private-sector demand. This sort of initiative has allowed Japanese corporations to bounce back from numerous difficulties since World War II, and it gives us hope for the revival of Japanese business in the period to come. Of course, we hope other countries will not suffer the setbacks that Japan suffered in the past, but the country’s experiences give a possible roadmap of what could be in store for many OECD countries, and offers reasons to worry, and to hope.
OECD Statistics for Japan
©OECD Yearbook 2012