Avoiding Japan’s mistakes

| November 16, 2010

Robert Samuelson is, in my opinion, one of the most level-headed and independent business/economics journalists around. I don’t always agree with him — but when I don’t, I strongly consider that I may be wrong. His latest piece can probably be read as another shot across the bow of the stimulus efforts coming from the Fed and the Obama Administration:

Despite massive stimulus, rapid growth hasn’t resumed two decades later. Although the Japanese reacted slowly, they adopted the advice of economics textbooks. They raised spending, cut taxes and let budget deficits balloon. Gross government debt soared from 63 percent of the economy (gross domestic product) in 1991 to 101 percent of GDP by 1997. It’s now around 200 percent. The Bank of Japan (their Federal Reserve) cut interest rates, going to zero in 1999 – a policy that, with some slight interruptions, endures. . . .

Japan’s lackluster performance has two main causes. One is the “dual economy”: a highly efficient export sector (the Toyotas and Toshibas) offset by a less dynamic domestic sector. Until the 1980s, Japan depended on export-led growth that created jobs and investment. An undervalued yen helped. “You had 20 percent of the economy carrying the other 80 percent,” says Richard Katz, editor of the Oriental Economist newsletter and the author of several books on the dual economy.

But the yen’s appreciation in the mid-1980s – making Japan’s exports more expensive – doomed this economic strategy. Ever since, Japan has searched in vain for a substitute. Cheap credit (which fueled the original “bubbles”) and many “reforms” haven’t sufficed. Japan’s domestic sector remains arthritic, often protected by cartels or government regulations. Japan has one of the lowest rates of business creation among major industrial countries. One survey ranked Japan 44th in the world in the ease of starting a new firm, reports economist Randall Jones of the Organization for Economic Cooperation and Development. (The United States was fourth.) Indeed, Japan’s best recent years of economic growth (2003-07) occurred when a weaker yen revived exports.

The second cause is an aging, declining population, which dampens domestic spending. For decades, Japan’s traditional family – a workaholic husband, a stay-at-home wife and two children – has been besieged, as anthropologist Merry White of Boston University shows in her book “Perfectly Japanese.” Even in 1989, the fertility rate (children per adult woman) of 1.57 was below the replacement rate of about 2. The poor economy further discouraged family formation. Low wages and insecure jobs make children seem too costly. For men, the age of first marriage is 35, up from 27 in 1990, says White. The fertility rate is about 1.3.

As the saying goes, read the whole thing.  ..bruce w..

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Category: Economics, Japan, Main, Obama Administration, Stimulus, US Politics

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at bwebster@bfwa.com, or you can follow him on Twitter as @bfwebster.

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