09 January 2012

Japan: What Lost Decades?

Sunday's NYT had a provocative essay by Eamonn Fingleton challenging conventional wisdom of Japan's "lost decades" (Fingleton blogs here). Here is an excerpt:
Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.
While per capita GDP in the US has outperformed Japan, the graph at the top of this post shows that over the past decade Japan's per capita GDP has increased by more than 40% whereas the US has has seen its increase by less than 30%. If Japan seems like it is getting wealthier faster than the US, well, it is. Fingleton writes:
As longtime Japan watchers like Ivan P. Hall and Clyde V. Prestowitz Jr. point out, the fallacy of the “lost decades” story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years.

William J. Holstein, a prominent Japan watcher since the early 1980s, recently visited the country for the first time in some years. “There’s a dramatic gap between what one reads in the United States and what one sees on the ground in Japan,” he said. “The Japanese are dressed better than Americans. They have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models. I have never seen so many spoiled pets. And the physical infrastructure of the country keeps improving and evolving.”

The data above show that Japanese are enjoying their wealth over increasingly longer lifespans than Americans since 1989.

But all is not well in Japan either. Last week the FT reported on Japan's concerns about its shrinking competitiveness in manufacturing:
Since the country’s economic bubble burst in the 1990s, real income per worker has fallen by 10 per cent and the loss of more well paid manufacturing jobs would accelerate the downward trend. Although official unemployment remains low, at a little more than 4 per cent, the government calculates that the rate would increase more than threefold if companies cut their workforces to match the actual level of demand. So far, that outcome has been deferred by worker-friendly labour laws, government job subsidies, sometimes called a dole for the idle employed, and the legacy of postwar “lifetime employment” schemes but it is unlikely to be avoidable for ever.

More broadly, Japan’s industrial problems have coincided with the country’s shrinking role on the world stage. Two decades ago, its economic output accounted for 14 per cent of global gross domestic product; today, it is less than 9 per cent. Even in Asia, it has been eclipsed by China as an economic and a diplomatic power.
And of course last year's earthquake and tsunami was a huge setback that the country continues to recover from, particularly as related to energy supply and costs. Japan is also grappling with the changing nature of the global economy, including the loss of low-value manufacturing to locales where labor costs are cheaper. Like the US, Japanese wonder about where future jobs will come from.

For anyone who has not had their investments tied up in the Nikkei stock index since 1990, claims of Japan's "lost decades" are indeed vastly overstated. Japan remains an industrial powerhouse that has delivered notable benefits to its citizens, especially over the past 10 years. Could things be better? Sure. But they also could be much worse.


  1. Here is a graph of GDP changes in PPP terms for Japan and the US 2002-2012:


  2. "...the government calculates that the rate would increase more than threefold if companies cut their workforces to match the actual level of demand. So far, that outcome has been deferred by worker-friendly labour laws, government job subsidies, sometimes called a dole for the idle employed, and the legacy of postwar “lifetime employment” schemes but it is unlikely to be avoidable for ever."

    The practice of lifetime employment has decreased in Japan, but I'm not sure that legacy plus other effects of the underlying communal societal values and attitudes that led to such policies are any less affordable long-term than what we we have.

    Japanese are more inclined to think of companies and their employees as working for mutual benefit -- in contrast to the more individualistic mentality among Americans that leads to a more adversarial relationship. Frequently Japanese students express amazement that clerks who work in American stores could seem so indifferent to customers needs - wondering why American employees don't care much about the overall welfare of the company they're working for.

    I've worked with Japanese execs who were sent to expensive training programs in the U.S. that they didn't really need and weren't really interested in because the companies thought it was expected that the employees be trained and the employees thought that if the company wanted to send them it was their obligation to go.

    Japanese employees compete with each other to log in more face time even if they aren't accomplishing much at their desks.

    In similar situations, American managers would obsess about unneeded labor expense and American employees would quit to find jobs where they have fewer expectations. As as result, we wind up with fewer people employed and fewer people who can afford to buy what the companies produce.

    Is the higher unemployment we have here as companies increase profitability by squeezing out any potentially unneeded labor costs (and laying off workers) more sustainable long term?

  3. Maybe choosing a different time frame can help resolve the "lost decades" arguments.


  4. -3-John M

    Yes, we can call it, 1995-2003: the lost 8 years ;-)

  5. Interesting. One other factor to consider is Japanese demographics, and the fact that they have perhaps the fewest children per woman in the entire world. Long term, this is shorting the future, but in the short term will tend to drive GDP per capita numbers.

  6. Japan's recent growth is the result of an unsustainable growth in the rate of deficit spending. Japan's public debt as a per cent of GDP is now over 200% versus the US which is "only" 100% with Greece in between. Japan is the proverbial "fly in search of a windshield".

  7. #2
    Japanese are more inclined to think of companies and their employees as working for mutual benefit

    I worked for a Japanese company in Japan about 20 years ago.

    Japanese workers are 'owned' lock stock and barrel by their companies. The low interest mortgage on their home comes from the bank that belongs to the karetsu of their employer. Their children are going to go to a karetsu sponsored pre-school. They will drink at a karetsu owned bar. If they travel they stay at a karetsu owned hotel.

    If they stand up and tell their bosses to stick it where the sun doesn't shine they don't just lose their job and since there are only a handful of karetsu's the list of potential new employers is extremely short.

  8. #7 - Harrywr2,

    I have to say, your description seems pretty much an example of how I described the difference in attitudes.

    I've never met a Japanese person who considers lifetime employment as "ownership." Those that I have met view it more as a system of shared societal goals. And there might be various relevant metrics to assess that view; for example, the Gini index:

    Perhaps this (WSJ, 2008):


    "Japan's biggest bank by market capitalization, paid a total of $8.1 million for 14 top executives in the fiscal year ended March 31, according to a regulatory filing.

    But at Morgan Stanley, in which MUFG acquired a 21% stake in September, John Mack, the chief executive, alone took home five times that amount -- $41.4 million -- in the year ended Nov. 30, 2006. His pay was cut to $1.6 million last year after the company posted a quarterly loss and he declined a bonus.

    On average, chief executives at Japanese companies with more than $10 billion in annual revenues are paid about $1.3 million a year, including bonuses and stock-option grants, according to Towers Perrin, a consulting firm, based on data gathered between 2004 and 2006. But chiefs in the U.S. are paid about $12 million, and chiefs in Europe are paid $6 million."


    In my experience, while on the surface Japanese business hierarchies seem more top-down, in reality they work in more of a consensual basis than American businesses.

    I worked with one Japanese exec who spoke of his colleagues that were taking early retirement; not because they felt it was in their own best interest but because they felt a sense of loyalty (because of what they felt was past loyalty of their company to them) and felt it would be better for their company to replace their high salaries will less expensive employees.

    There is more than one reason why Japanese are less likely to stand up to their boss and tell them to stick it where the sun don't shine, and I'm not sure that they're all bad.

    In general, their view is that everyone looks out for everyone else and everyone benefits as a result. That is in opposition to an American attitude of everyone looking out for themselves and believing that widespread self-interest will prove to benefit everyone.

    Japan has become increasingly more like the U.S. w/r/t many of these differences - the question I think is interesting is whether or not that will prove to the benefit of the Japanese population as a whole long term (even though it will work out to the benefit of high level execs in Japanese companies, particularly Japanese companies that are global in scope).

  9. Interestingly, the long-term GDP per capita graph shows rock-steady growth for the U.S. over the last 50 years. Remarkable. Even the latest downturn appears as only a slight correction to the equally slight acceleration in the 2000s. By contrast, Japan had a seriously erratic, boom-or-bust pattern since the early 1990s.

  10. Of course, if one wants to talk about lost decades, one ought to talk about at least two.


    Data take from this spreadsheet, which shows GDP in 2005 dollars, which I've normalized for both Japan and the US to 1990 = 1.


  11. The lifestyle and the new infrastructure looks great but they have to pay back all the money they have borrowed to achieve those goals and right now there appears to be no possible way they can do that without a lot of pain. Which they will experience shortly. (Unless they somehow manage to grow their economy out of their problems, which is possible but very unlikely.)