Japan - two lost decades, or not?

The phrase “lost decade” is most often associated with Japan’s economic development during the period 1990–2000. Twelve years into the new millennium, many economists are calling the period 2000–2010 another lost decade for the Japanese economy. In this article, I will show how looking at short-term, isolated statistics can hide huge looming problems and even blind the public to those that have been present since the early 1990s.

A little history

During the period 1980-1990, the economy of the Land of the Rising Sun enjoyed unprecedented success. The country's gross domestic product (GDP) tripled, there were major improvements in infrastructure and the standard of living rose. At the same time, however, two huge bubbles began to inflate. Low interest rates during the period encouraged Japanese citizens to borrow and invest large amounts of capital in the local stock exchange and real estate market. As a result, the latter increased in value more than three times and at the end of 1989, the Japanese Ministry of Finance decided to put an end to speculation in the market by increasing interest rates. This, of course, led to the bursting of the credit bubbles almost simultaneously and to the Japanese economy falling into crisis. What followed were 20 years of low growth (in some years even negative), zero nominal interest rates and deflation. To this day, the stock market and real estate market levels of late 1989 cannot be reached – a clear indicator of the size of the bubbles.

Are these two decades really lost?

According to an article by Eamon Fingleton, published on January 6, 2012 in The New York Times: Sunday Review, the lost decades for the Japanese economy are a myth. The author believes that by some indicators the Japanese economy has performed much better than those of the United States and Europe. For the period 1989-2009, the average life expectancy in Japan increased by 4.2 years, which means that on average a Japanese citizen lives 4.8 years longer than an American. The reason for this, according to Fingleton, is an improvement in the country's healthcare system. In addition, over the same period Japan has made tremendous progress in its Internet infrastructure. According to a study by Akamai Technologies, 38 of the 50 cities in the world with the fastest Internet access are in Japan, compared to only 3 in the United States. During the same period, the yen appreciated by 87% against the US dollar and 94% against the British pound, making Japanese citizens relatively wealthier than citizens in those two countries (on the other hand, this is not good for the Japanese economy, which relies heavily on exports, but this issue is discussed below). Currently, unemployment in Japan is 4.5%, which is half the rate in Europe and almost half the rate in the US.

There has also been an improvement in some macroeconomic indicators. Between 1989 and 2010, Japan’s current account surplus more than tripled to $196 billion, while the US current account deficit jumped from $99 billion to $471 billion over the same period. Another article from November 19, 2011, entitled “Whose Lost Decade?” and published in The Economist, also examines Japan’s economic and social development over the past 20 years. According to its data, the average annual GDP growth for the period 2001–2010 in Japan, the Eurozone and the US was 0.75%, 1.05% and 1.6% respectively. An analysis of average GDP per capita growth (considered a more accurate measure of the wealth of citizens in a country) shows that Japan has performed better, with average growth for 2001-2010 being 0.7% compared to 0.55% in the Eurozone and 0.65% in the US. This is due to the fact that during the analyzed period, Japan's population has decreased, while that of the Eurozone and the US has increased.

I would like to make a few criticisms of Eamon Fingleton’s article, which does not address some of the major problems facing Japan at the moment. It is widely known that the Japanese government is currently the most indebted in the world, with a debt-to-GDP ratio of over 220%. Furthermore, according to a December 27 article published on the EconMatters website, 49% of Japan’s government budget will be financed by debt in 2012. Also, social security spending in the country has increased 2.5 times over the past 20 years and will account for 52% of all government spending in 2012. A closer look at Japan’s debt, such as the one in the CQCA Business Research analysis (see chart below), reveals that the bulk of the Japanese government’s debt will mature by 2020. This is not a problem for the state at the moment, as the main creditors are Japanese, who clearly have confidence in their country's economy, because the demand for Japanese debt is high, as can be seen from its price (the interest rate on 10-year Japanese bonds is below 1%).

Source: CQCAbusinessresearch.com

Въпросът е колко още може да продължи една подобна ситуация? Не много, ако разгледаме другия основен проблем, пред който е изправена Япония – демографското положение на страната. Тревожен е фактът, че половината от японците са над 45 годишна възраст. Освен това през последните години населението намалява, а растежът при работоспособното такова (виж графиката по-долу) през 2010 год. достигна 0%. Това означава, че бремето за осигуряването на средства за пенсиите и социалните помощи на възрастните и нетрудоспособните ще се прехвърля върху стремително намаляващ брой данъкоплатци, въпреки че безработицата в страната е 4.5%, а при хора на възраст 15 – 24 години е 9.1%. Това е далеч от шокиращите цифри в някои европейски държави в момента, но за страна като Япония  е ясен знак за назряваща криза.В допълнение към демографските и дълговите проблеми, Япония страда и от сериозен спад в приходите от данъци, което допълнително усложнява картината. Зле влияе и поскъпването на йената, особено върху страна, чийто износ формира 70% от БВП. На последно място, но не и по значение, географското положение на Япония я прави високо рискова откъм природни бедствия. Въпреки че през годините японците са се научили да се справят с голяма част от тези рискове, бедствията във Фукушима през март 2011 г. показаха, че един такъв „черен лебед” може да предизвика големи шокове в икономиката.

Although the last twenty years in Japan can be considered successful by many measures, the country remains the most indebted country in the world, and this, together with its demographic problems, could lead to a serious crisis in the future. Such a crisis would once again remind us that we need to be careful with the opinions of people who paint attractive portraits of reality with only a fraction of the available statistics – like the leftists at the New York Times. Accumulating debt to support a welfare state with a rapidly aging population cannot be a good long-term strategy, no matter how fast the Internet is.

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