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June 03, 2009

[SSJ: 5590] Re: Japan's Recession in Perspective

From: Richard Katz
Date: 2009/6/3

Paul Midford wrote:
> Many thanks to Rick Katz for placing Japan's
recession
>in comparative perspective.

Thanks. I should not that we are starting to see some of those famous "green shoots" in the April data on indusrtrial output and exports, though at a weaker pace of recovery than in export-reliant Korea and Taiwan.

> Yes, Japan's fall certainly appears to rival that of developing
> economies, although Germany's fall does too, albeit at a slightly
> smaller magnitude. What's the
> lesson? The cushioning effects of German's better developed welfare
> state, which might account, at least
> in part, for Germany's slightly better performance, would be a good
> lesson for Tokyo to learn.

I don't know that much about the German situation, but I have studied the Scandinavian model and believe that there are lessons there for Japan. The point is not that the Scandinavian countries are immune to global recession, but they do a better job of cushioning their people and have done a better job of recovering from their own structural flaws. See
http://academiccommons.columbia.edu:8080/ac/handle/1002
2/AC:P:15774

> Beyond that, the lesson from these two appears to be:
> don't over rely on exports, especially to the US or other economies
> that fund their consumption with overseas borrowing.

In my view, the problem is not relying on exports, but rather on an export SURPLUS. During the most recent recovery, growth in the trade surplus provided more than one-third of GDP GROWTH, even though the surplus comprised at the top only 5% of GDP. That is not a sustainable trend, because it requires that someone else, i.e. the US, keep having a rising trade deficit.
The world can absorb a balanced increase in both exports and imports, but not an ever-growing trade surplus relative to GDP. This is a problem for China and Korea as well. The Chinese leaders have recognized this; so far, Tokyo has not, despite occasional lip service. It is only in the past half-decade that China has relied on a trade surplus to drive growth, as opposed to balanced growth in both exports and imports. Japan had tried this repeatedly in the past few decades.

> This is why we cannot expect a turnaround in Japan anytime soon,
> because no turn around in the US is expected anytime soon either. The
> US may eke out a few
> quarters of slightly positive growth between now and 2011, but not
> much is expected before 2011, and
> perhaps not even then.

That remains to be seen. The US will not recover overnight but it will not repeat Japan's "lost decade."
For my views on this, see my comment in "Foreign Affairs:" (at http://www.foreignaffairs.com/articles/64823/richard-ka
tz/the-japan-fallacy) and a back-and-forth with Robert Madsen on this in the following issue (at http://www.foreignaffairs.com/articles/64917/robert-mad
sen-richard-katz/comparing-crises)


> However, the previous global political economy of the
> past 60 years, in which Japan and East Asia could export
> their way to prosperity appears to be broken, and where
> demand will come from in the new economy remains unclear. I think R.
> Taggart Murphy's Japan Focus article from last Fall on Asia and the
> meltdown of American finance well covers the issues and consequences
> involved.

Taggart and I had a dialogue comparing the US and Japan at Japan Focus at
http://japanfocus.org/-R__Taggart-Murphy/3131 and http://www.japanfocus.org/data/Response2Murphy.m.send.d
oc

> If Japan learns the lesson that it needs to raise incomes and domestic
> demand that certainly would be welcome, although it is not clear how
> long Japan can continue to afford to do this through government
> stimulus, as it is doing now.

I completely agree. The DPJ has raised this an issue, although their solution is less than satisfactory. But at least they've raised the issue. In their economic policy declaration of last November in response to the recession (http://www.dpj.or.jp/english/financial/f_crisis.html),
they said:

> It is now essential for Japan to make a transition from
> an economy that is over-reliant on exports to an economic structure
> led by domestic demand, an issue that has been on the table for the
> past 20 years. In order to achieve this, we need to implement bold policies
> that will increase the amount of money households are
> free to spend, that is to say policies that will result
> in higher disposable household income.

PM continued:

> This lesson might also encourage Japan to become more
> protectionist, just as there are pressures in the US and elsewhere to
> spend stimulus funds domestically.

There are some pressures, but Obama has resisted them, even in the case of autos. What is remarkable is that, Chrysler and GM have gone bankrupt and no one is blaming Toyota. What a difference from the 1980s when a lesser problem in autos caused a pro-free trade President (Reagan) to impose quotas on auto imports from Japan (under a thin veneer of a negotiated "voluntary" export restraint)

> One final thought: the picture looks almost completely
> reversed if we focus on unemployment rates instead of
> economy-wide growth rates. Japan's unemployment rate,
> at 5%, despite the much larger fall in overall output, is still barely
> more than half the unemployment rate of the US, which is around 9%
> (and may hit 10% later this year)!

Japan's unemployment rate is not a measure of the severity of the recession, or lack of such, but rather of how Japan approaches such things. In the US and elsewhere, firms respond by laying off redundant workers. In Japan's "share the pain" approach, firms instead cut wages and hours before cutting jobs, although irregular workers are losing their positions.
As of April, jobs were down 2% from their December 2007 peak, but aggregate workhours in the economy were down 7%; and real wages per worker during January-April were down 3% from a year earlier.

Richard Katz
The Oriental Economist Report

Approved by ssjmod at June 3, 2009 03:04 PM