The writer is president of the Peterson Institute for International Economics and the author of ‘Restoring Japan’s Economic Growth’
Japan really had only one lost decade. There are widely applicable lessons to be learnt from the country’s economic evolution since its bubble burst in 1992. But the lessons from recent years are those of economic policies to emulate, as opposed to the lessons from before 2003 of which to avoid.
Japanification should be used as shorthand for failure to respond adequately to financial fragility, and being too timid with macroeconomic stimulus. The term certainly fits the Japan of the 1990s, and for that matter, the eurozone of 2010s. As early as 2003, I feared the eurozone would fall into this kind of policy inaction, as to some degree it did. But the current common problems of high-income countries, aptly characterised by Lawrence Summers as secular stagnation, are just that: common problems, not a catching of some Japanese syndrome and not the result of easily rectifiable policy errors.
When policy turned around, so did the Japanese economy. The result is that between 1990 and 2002, Japan had the lowest average per capita gross domestic product growth rate in the G7, and from 2003 through 2019, it has had the third highest and the second highest productivity growth rate.
The relevant lessons for the rest of the world come from after 2012.
Notably, three aspects of what are often asserted to be part of Japanification did not constrain the economic turnround. Changing the value of the yen against the dollar played next to no role. Productivity growth has accelerated, while the real effective exchange rate has been stable since early 2013.
The accelerating shrinking of the working age population also did not prevent sustained recovery. This is partly due to the success of former prime minister Shinzo Abe’s Womenomics policies, which raised female labour force participation from 48.3 per cent in 2012 to 52.8 per cent pre-Covid-19. As Olivier Blanchard and Takeshi Tashiro have argued, that shows that supply-side enhancing fiscal stimulus is attainable.
Zombification of the corporate sector, now a widespread concern also in Europe and the US, proved no barrier to sustained growth improvement either. Mr Abe’s corporate reforms have not been as deep or as impactful as those of Womenomics. Yet, the rate of gross fixed capital formation has come up to a solid third place in the G7 after working off the corporate debt overhang from the 1990s and, again, productivity has risen. Importantly, this all comes without an obvious asset price bubble in equities or other assets, which those most concerned about zombies incorrectly assert must be the result of monetary ease. Not in Japan.
One ongoing syndrome from the lost decade is on the monetary side. Japan continues to have the lowest rate of inflation in the G7, despite the Bank of Japan’s aggressive expansionary efforts since 2013. The primary factor seems to be the persistent downward pressure on inflation expectations and on wage demands from the BoJ’s lagging response through 2012. In that way the eurozone has been Japan-like, while the US, Canada and UK have not been. The direct costs of deflation in Japan have proven to be smaller than widely expected — but deflationary pressures have also proven stickier than we expected, contributing to monetary policy’s inability to fight deflation by keeping the economy at the effective lower bound on interest rates.
Japan, however, does herald good news for us all on the fiscal front. A high-income market democracy can respond to secular stagnation with sustained fiscal stimulus, and that can continue to stimulate private demand. Substantial public debt can accumulate to levels previously thought dangerous and the warning sign of fiscal danger to watch is when private investment bids up interest rates, not before. Some public investment can indeed be supply and productivity enhancing; attention should be on assessing the quality, not the spectre of private capital misallocation.
FT Series: Lessons from Japan
As developed economies struggle to recover from the pandemic, what lessons can be learnt from Japan, which has been battling low growth and interest rates for decades?
November 23: Fearing prolonged stagnation, governments are looking to Tokyo’s experience
November 24: Adam Posen: ‘When Japanese policy turned round, so did the economy’
November 25: Can a Japan-style public investment boom save the global economy?
November 26: What ‘Mrs Watanabe’ can tell investors about how to cope with low returns
November 27: Living with low growth — how western children can learn from Japanese youth
Looking ahead, the lasting impact of coronavirus on the trend rate of growth may seem unclear or variable. It seems likely, however, that it will deepen secular stagnation across the high-income economies by further reducing risk appetite and inflation expectations. Covid-19, however, may have killed Japanification by breaking the taboos on sustained public spending and monetary-fiscal co-ordination.
Japan may in the end come out back on top in its economic peer group for the next decade, having done a better job on public health management than the EU or US, and having seen the smallest decline in its productivity growth rate since 2003. Maybe we all should be so lucky as to be turning Japanese?