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.