Japan's Economic Malaise

Topics: Economics, Investment, Saving Pages: 26 (9654 words) Published: July 4, 2014
Japan’s Economic Malaise
Three simple models for why
Japan’s economy will never grow again
Michael Smitka
Professor of Economics
Washington and Lee University
Lexington, VA 24450-0303
Version 2
May 23, 2003
---------------The first version was entitled Three Simple Models for Undergraduate Economists and was prepared for the ASIANetwork Conference, Furman University, April 11-13, 2003. This paper differs primarily in the introduction and summary, and in the addition of more figures. The core analysis and most of the calculatioins remain the same.

Smitka / The End of Growth v2

May 23, 2003

Page 1

I. Introduction
I argue below that Japan’s economy will not grow again, and that (with hindsight) this should not be surprising. First, Japan has matured, to the point where its labor force is in decline. Such an economy is unlikely to grow in absolute terms. Second, that maturation occurred in a short span of time, resulting in large structural shifts in the economy. These strained the Japanese financial system past the breaking point, and have stymied efforts at macroeconomic stimulus. I believe, however, that the magnitude of these shifts would have overwhelmed any financial structure. I do not deny that Japan’s financial system exhibited large vulnerabilities, and its macroeconomic policy systematic failures. Again, I believe that these are beside the point. Third, the current structure of Japan’s economy is not sustainable; financial liabilities (bank deposits, government social security commitments) and financial assets (good loans, and tax receipts under the status quo) are wildly out of balance. Bringing these into balance will inevitably impose a drag on economic growth into the distant future. The bottom line is that we should not expect the Japanese economy to grow again in our lifetimes.

Let me preface the paper proper with a methodological digression. The slowdown of the Japan’s economy during the past decade deservedly has been analyzed extensively. These analyses, however, assume implicitly or explicitly that Japan is “unique.” If that were not true at some level, analysis would be unnecessary; indeed, there would be no point to an Association of Japanese Business Studies. But I value my membership in AJBS; it is more useful to me intellectually than the American Economic Association. However, as someone trained in the social sciences, I am opposed to using the assumption of uniqueness as a starting point. What I present below are three simple models – one of which admittedly has several subcomponents – that seek to avoid that bias.

There are gains to be had from viewing Japan as a political-economic “system” on one extreme, and delving into the details of monetary policy transmission under the particular circumstances of Japan in the latter 1990s. The cost is missing commonalities with other countries – I stress those with China – and of substituting complex stories for simple ones that

Smitka / The End of Growth v2

May 23, 2003

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can be told without resort to the peculiarities of Japanese institutions. Now I feel confident that I have substantial knowledge of those peculiarities; I could not have written this paper otherwise. So while what I present are simple models, they are not simple models naively applied. As is obvious, I am an economist, for whom Japan today poses interesting questions. For example, in the last half-century it is the only major economy to undergo a full decade of stagnation; only the much smaller Switzerland has experienced something similar. More compelling, Japan will be the first developed country – indeed, perhaps the first sizeable society in human history – to see its population decline for other than traumatic reasons; Italy is following close behind, but as part of the increasingly integrated EU it is much harder to analyze. Finally, Japan is the first developed economy to confront deflation since the Great Depression, and...
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