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Source link: http://archive.mises.org/16504/the-myth-of-japans-lost-decades/

The Myth of Japan’s Lost Decades

April 15, 2011 by

Japan’s economy has not been stagnant; it has in fact been growing in real terms — although not in monetary terms. Observing real economic growth — the production of real goods and services — instead of just GDP, we see that Japan’s lost decades weren’t really lost.

FULL ARTICLE by Kel Kelly

{ 70 comments }

victor April 15, 2011 at 9:03 am

The nail that sticks out gets the hammer. Remember 80′s Japanese bashing over the perceived “unfair[ness]” of Japanese goods exported to this country? Better to broadcast bad news and keep the envious protectionists and Pols gazing at China instead. Same vis a vis the wealthy and trial lawyers. Don’t look like a deep pocket, and one can more easily avoid their mopery.

Ohhh Henry April 15, 2011 at 10:03 am

“The strong yen, so much the bane of exporters, is the domestic consumer’s friend.
Imported cars, food, clothing, even energy and raw materials for industry all cost less now than 20 years ago. A nice bottle of Italian wine that sells for about $15 in Tokyo carried a price tag of $41.95 in Vancouver during the Olympics last year.”

I don’t know about Japan’s regulatory and tax scheme for alcoholic beverages, but British Columbia has a government-run monopoly which drives the cost up through astronomically high taxes and also with inflated salaries and benefits paid to everyone who works for the organization. In Ontario, which has a very similar regime to BC’s, it would cost me almost $60 to buy a 60-oz bottle of inexpensive distilled spirits which costs only about $10 in tax-free Delaware, for example. Wine and beer are more reasonable, being only priced around 2 to 3 times as high as in other places.

The article doesn’t address either the growth of wages in Japan (or lack of it) or the overall tax burden, except with anecdotes. Are there statistics related to take-home wages and the overall tax rakeoff which would help explain the seeming prosperity of Japan in the face of what is undoubtedly a major downturn in the economies of many other developed countries such as USA and Europe?

Another interesting factor would be the generational deficit, if any. That is, the future liability for old-age pensions and socialistic health-care benefits versus the known demographic trends. It may be a major blunder to call the Japanese economy a success story if due to demographic factors it is sitting on a ticking time bomb in the form of an unfunded future welfare and public debt payments. Are the Japanese (like most of the rest of the developed world seemingly) living in a fool’s paradise built by years of artificially low interest rates related to the US Federal Reserve money printing and the infamous dollar-yen carry trade?

bobobberson April 15, 2011 at 12:18 pm

Capitalism has found a way to ease your troubles:

http://www.wired.com/gadgetlab/2011/04/the-personal-brewery-is-an-all-in-one-beer-factory/

Maybe one day soon due to division of labor and automation, it may be possible to achieve practical autarky in areas that have government monopolies.

Horst Muhlmann April 15, 2011 at 12:52 pm

In Ontario, which has a very similar regime to BC’s, it would cost me almost $60 to buy a 60-oz bottle of inexpensive distilled spirits which costs only about $10 in tax-free Delaware, for example.

That’s why the cops hang out at the PA/DE border – to nab any Pennsylvanian bringing any booze in from DE.

fundamentalist April 15, 2011 at 10:33 am

Excellent article! But I would like someone to address the issue of the Japanese governments huge deficit spending over the last two decades. How is that financed if not through money printing or tax increases? Some might argue that the increased gdp per capita came from government spending.

Dave Albin April 15, 2011 at 11:57 am

This is what I was thinking, too – do we know the full effects of money pumping into the Japanese economy yet? Could some of these goods and services that make the Japanese better off go away? Good article…..

skylien April 15, 2011 at 12:34 pm

This is because the Japanese people had/have an insane savings rate. As far as I know aprox. 90% of the government debt is domestic. But I agree, this puzzles me as well. What effect did this huge government deficit caused through Keyensian spending sprees and the extremely low interest rates have over the last two decades? Why didn’t they screw the real growth of Japan? Aren’t they any problem as long as money supply doesn’t increase too much and people don’t lose faith in their government’s credit worthiness?

Great article.

Kel Kelly April 15, 2011 at 1:11 pm

Hi all, thanks for your comments. Japan’s deficit is indeed a problem. It has sucked capital and the ability to grow out of the economy, just as it has in the Europe and the U.S. and other places. I don’t know how much of it has been financed by savings versus by monetization. It could be that most of the money being printed goes towards government spending. And good point, fundamentalist, in that all the government spending might have made GDP rise. But if a too large an amount of GDP increase was due to government spending, so much capital would be taken away from the productive sector that amount of goods consumed there would be diminishing, thus offsetting GDP the increase in the government component. That’s just a thought—I don’t exactly what the numbers are.

But net, net, I think the important thing is that despite capital consumption in the form of government spending and debts, the productive sector of the economy has been funded enough and efficient enough to grow, even if it’s to a very small degree. Just as Europe and the U.S. have grown (if, indeed, they truly have) with rising deficits, so has Japan. This is not to say that that trend can easily continue; it can’t, as there will in fact be a breaking point. The bottom line is that because there are debts and deficits, it does not mean that an economy can not still produce more goods and services, as Japan clearly has. It means that the private sector still has enough to work with—for now—so as to be able to accomplish that task.

fundamentalist April 15, 2011 at 1:18 pm

That makes sense. The Japanese must have a huge savings rate to be able to finance such massive government spending, grow their economy and not suffer from inflation. Kudos to the Japanese for pulling that off!

Makes me wonder what their gdp per cap would be had the state not done so much deficit spending! They could of been rich!

Dave Albin April 15, 2011 at 3:22 pm

This is exactly the problem, IMHO. Policy makers and the public can look at analysis like this and say, “see, with all this government intervention, the private sector is still productive”. Hence, the state gets bigger and bigger. We need to focus on individuals or businesses who are suffering or gone as a result of state intervention – this big picture stuff is interesting and useful, but can and is used against us.

Mike B April 17, 2011 at 4:29 pm

Considering the government debt in Japan, I have always thought that the government is really fooling the people into believing that they are wealthier than they really are. Instead of taxing the money away, the government is borrowing it with the illusion that the people still have the money. It is a ponsi scheme that will someday fail and then the bond holders will realize that they really never had that wealth. The abuse of debt always ends in some form of trouble. This country will also learn that in the not too distant future.

noah April 15, 2011 at 10:50 am

I find this article fascinating, not only for what is says about Japan but for what it implies about us!

Don Lloyd April 15, 2011 at 11:20 am

“… No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it …”

This is a misleading relationship. The finite quantity of money is not any kind of limitation on spending since a purchase transaction does NOT consume money, but just transfers its ownership.

Rather the finite quantity of money limits the total time of possession of money that can be spread over the entire population. If I hold $1000 in cash for 30 days before I pay my rent, that is $1000 that no one else can hold at the same time. If I only hold the cash for 1 day, then the impact that I have on other peoples’ ability to hold cash is reduced by a factor of 30.

Both the total supply of, and the individual demand for money should not be denominated in raw dollars, but rather in dollar-days per month, or equivalent.

Purchasing power does not reside in money alone, but also in anything that can be converted to money. With a fast enough computer with scheduling capability, all of the current spending could be supported with orders of magnitude less money as the computer would convert non-money assets to money nanoseconds before the money is needed, and then convert the money back.

Also, in a modern economy, many exchanges do not actually require the involvement of an actual medium of exchange.

Regards, Don

DW April 15, 2011 at 11:35 am

Good explanation, Don; money is simply a means of overcoming time-lags and uncertainties that would otherwise exist in a world subject to the “lack of coincidence of wants”. The faster transactions can be made with or without it, the less money that is required.

Concerning your computer analogy, I think it’s important to note to others that this come close to becoming an ERE. If such a truly all-knowing machine was realized, however, then money would cease to exist entirely in the said economic system, as it would be unnecessary for use in transactions.

Beefcake the Mighty April 15, 2011 at 11:52 am
Beefcake the Mighty April 15, 2011 at 11:36 am

“Purchasing power does not reside in money alone, but also in anything that can be converted to money. ”

That would be every non-monetary good in the economy.

“Also, in a modern economy, many exchanges do not actually require the involvement of an actual medium of exchange.”

So a modern economy is actually akin to a barter economy? Interesting theory you have here.

Zach Bush April 15, 2011 at 2:51 pm

I cannot speak directly for Don, but I believe he is referring to the use of clearing house type devices to limit the amount of money actually required for exchange.

Beefcake the Mighty April 15, 2011 at 3:11 pm

The existence of innovations in how transactions are conducted does not mean an actual medium of exchange is not involved. He should clarify his statement here.

Prakash April 15, 2011 at 12:00 pm

I wonder why Kelly has not used one of the simplest metrics. Goods per unit time of labour. If the average japanese has got more goods per unit labour hour, they are in general better.

Housing per unit hour, Food per unit hour, Clothes per unit hour.

Kel Kelly April 15, 2011 at 1:12 pm

Prakash, you are absolutely right. I would love know exactly what those numbers are. Please let me know if you find them.

panika2008 April 15, 2011 at 12:31 pm

“if GDP is rising the money supply must be rising, because a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree” – damn! Decades of work, hundreds of PhDs, dozens of Nobel prizes invalidated just like that. Just brrrrrrilliant!

Beefcake the Mighty April 15, 2011 at 12:48 pm

For once I have to agree with panika. This is a really dumb statement here.

Kel Kelly April 15, 2011 at 1:20 pm

Well, thanks, guys. The next step for you is to explain and to show mathematically how the sum total of the prices of all goods in the economy can rise without more money.

Beefcake the Mighty April 15, 2011 at 1:26 pm

I wasn’t aware that GDP measures the prices of “all” goods in an economy.

panika2008 April 15, 2011 at 3:02 pm

GDP is the sum of monetary value of transactions for produced goods and services. While it obviously goes up nominally under intense inflation, with stagnant money supply it can both go up and down nominally and both up and down in real terms; for example, after a major cataclysm there is usually much less new goods produced (at least until production capacity is restored), so the – both real and nominal – volume of transactions goes down for at least some months. And there needs not to be a cataclysm, a cyclic rise in interest rates (which could but does not have to be induced by central authority) usually leads to some form of lowering of transactions in and production of high value consumer goods (real estate, luxury goods) financed with credit which sometimes can lead to prolonged recessions.

Well, it’s really elementary economics and expanding these themes would make my comment into an econ 101 book. I suggest the author get one and get acquainted with what econometric actually is before criticizing it.

(To be sure, that in no way does invalidate other points made in the article.)

Kel Kelly April 17, 2011 at 6:58 pm

Panika: thanks for your continued punches. I would be glad to learn economics 101, but in this case, I think I’ve already covered that part of the textbook in my article. Specifically, I stated that when the amount of goods diminish, prices (and GDP, in this case) can rise. Plus, I stated that in the cases we’re discussing, it’s not continually diminishing goods pushing up prices. But more importantly, you make your argument as though periodic short-term fall in supplies is what is responsible for centuries-long increases in prices. The amount of goods would have fallen to zero long ago if that was what was pushing up prices/GDP. In reality, it is quite obvious that I’m not referring to periods of temporary reductions in supply. Thus, you still have not explained how prices/GDP can rise on a SUSTAINED BASIS without additional money and spending. I will look forward to hearing that explanation.

panika2008 April 18, 2011 at 1:35 am

I never stated that prices can rise on a sustained basis without additional money prinitng and spending.

As to why GDP can rise on a sustained basis without money printing, see my other comments.

Sorry if I offended you with my comments, but I really think you should not throw the baby out with the bathwater.

Kel Kelly April 15, 2011 at 12:34 pm

Hi Ohhh Henry: I did not say Japan was a success story. Few countries are, and few for very long. I said Japan has performed about the same as other developed countries. Japan, along with all other countries, could have done dramatically better over the last 20 years. That also means that Japan has had it tougher the last several years due to the crisis. I noted that they too are affected by these things.

As also noted in the article, wages would not rise when money supply is not growing. REAL wages do not rise by way of an increase in salaries; real wages ALWAYS rise by way of the prices of goods falling in price relative to wages, due to an increase in the supply of goods per worker/increase in productivity.

orlando's friend April 15, 2011 at 12:53 pm

I loved to read this article – many revelations…

this might seem trivial to most of you, so please forgive me; but

ONE BIG QUESTION came up in me: how do you measure the goods in an economy thus the real economy if not in money?

feedback appreciated!

Kel Kelly April 15, 2011 at 1:15 pm

Hi Orlando. That’s not trivial at all. That’s the key question, as Prakash above noted. We can look at how many goods have been produced per labor hour one year over the last with respect to certain goods, but it’s very difficult to aggregate those measurements, since we can’t add up cars, movies, and toys. There would have to be some kind of aggregation related to percentage increases across goods, but that would still be very difficult to do.

Anthony April 15, 2011 at 2:18 pm

I think Mises would say that you can’t measure the goods in an economy. There is no consistent way to value things apart from money, and as Kel pointed out using money is problematic too. The impossibility of accurate measurement in an economy is an other reason we would be better off without central planners…

Everyday Anarchist April 15, 2011 at 3:46 pm

Exactly. Aggregates are for commies.

panika2008 April 15, 2011 at 4:01 pm

Difficult – yes – technically very difficult. Problematic in theory – no. That’s what GDP is for. The aggregate valuation of the markey BY the market. One of the few simple, unskewed and automatic measures of productivity.

Allen Weingarten April 15, 2011 at 1:49 pm

Prakash suggested metrics such as Housing per unit hour, Food per unit labor hour, Clothes per unit labor hour, etc. That is a good start, but there is also the matter of the differences in the housing and clothing. Even after allowing for the size of an apartment, and the time till clothes wear out, there are many other considerations as the goods, products, and services evolve. Perhaps someone has found a way to measure how much of our subjective value has been met by our production. For example, he might conclude that our indoor plumbing is worth five times what existed in 1900, or that dentures today are worth ten times what false teeth were worth then. But I am unaware as to how this might be done. Can you for example determine how many adding machines in 1950, it would take to equal an electric calculator today?

Allen Weingarten April 15, 2011 at 3:45 pm

Let me take a stab at my own question. Suppose an individual provides his value to goods and services by dollars. Thus he says that a certain car is worth $20,000, a certain pair of shoes is $50 . Use these numbers for all people (or a sizable sample) and you can find values for indoor plumbing, false teeth, etc. It would not take into account relations among product preferences, such as an owner of a car valuing gasoline, more than the owner of a horse does. However, statisticians using correlations, could allow for such factors. Would this provide, in theory, a means of calculating and comparing GDPs?

panika2008 April 15, 2011 at 3:58 pm

That’s why there are measures such as GDP, which at least approximate the production “through the lens” of demand by aggregating market transactions. Contrary to what the author might think, it’s actually an extremely brilliant concept, even if faulty (every measure is). To appreciate how GDP and related measures effectively assess changes in productivity it’s good to consider your example of adding machines vs calculators. GDP accounts for the change in value automatically – because both adding machines and calculators are appropriately valued on the market and the market value carries on to the aggregate. If adding machines are assessed by the market to be worth 1% of calculators and an economy (“Zimbabwe”) thrives on producing and selling adding machines only, its GDP is around 1% of a modern economy vis-a-vis (“USA”) producing calculators only, at the same rate of produced units in time. Exactly the kind of sensible measure we would expect. When you consider all produced inventory and services in an economy, all sorts of efficiency and technological change aspects are taken care of automatically by the single concept of GDP.

Of course the more free market, the more effective measure GDP is, because the more it reflects collective real (not influenced by taxes, subsidies etc) valuations. Today GDP is extremely distorted by extreme amounts of quite nonsensical and unoptimal government spending, especially nonsensical and artificial services – because it was figured out by some “bright” economists that the government in fact can quite easily induce the GDP to grow short term by contracting such services, never mind it causes either bankruptcy or hyperinflation 20-30 years later. But does not invalidates the concept of GDP any more than the fact that the government can and routinely does manipulate prices invalidates the concept of prices.

Allen Weingarten April 15, 2011 at 6:45 pm

Perhaps what Mr. Kelley is addressing is that the use of GDP in different years is inaccurate because there are different amounts of money in different years. Here a correction factor is needed. In other words, if there is more money (or money substitutes) in a later year, even if the amount of goods per capita has increased, the recorded GDP might not. Then using the ratio of money supply in different years would result in a more accurate measure of GDP. Yet given the way statistics are kept, his direct measure of how people live, could be more accurate.

Craig April 18, 2011 at 5:42 pm

I can’t share your enthusiasm for the GDP equation.

It is purported to indicate the state of a national economy by aggregating spending, but doesn’t tell us where the spending comes from. Is increased GDP, for example, a result of increased production or the consumption of capital? And, of course, in an inflationary environment, because of the difficulty in making accurate economic assessments, capital is consumed almost invisibly.

I am happy, however, to see that you admit the foolishness of counting government spending — yet another nail in GDP’s coffin for me.

Mr. Kelly, thank you for the article. It has always struck me as unlikely that a people as hard-working and thrifty as the Japanese had allowed themselves to stagnate economically for decades. There was no evidence of dropping living standards or developing social problems. Good report.

panika2008 April 21, 2011 at 3:13 am

Don’t expect the GDP to measure something it does not measure. The source of spending of course IS important, but it does not explicitly enter the equation. Yes, it is possible to boost GDP significantly by consuming capital which probably would cause diminished future welfare. But it doesn’t negate that the aggregate production and in a sense material welfare IS elevated here and now.

Exactly the same as your car’s speed meter does not inform you about the roadblock ahead.

Everyday Anarchist April 21, 2011 at 5:09 pm

The government could spend money building bombs and then use those bombs to destroy buildings. This would raise GDP, but would it elevate material welfare?

fundamentalist April 15, 2011 at 5:00 pm

“this means that price deflators applied to GDP calculations to adjust for price inflation do not fully deflate GDP. If they did, real GDP growth would, by mathematical necessity, be zero.”

Not necessarily. You don’t want to deflate all of the increase in money if you want to measure the increase in production using money.

Assume your economy produces nothing but potatoes and you produce 5 bushels with $10 of gold money in the economy. The price of potatoes is $2/bushel. Ngdp is $10.

Next year you produce 10 bushels of potatoes, but still have $10 in gold. The prices of potatoes falls to $1/bushel and ngdp is still $10. But you can “inflate” ngdp to get real gdp by using an index of price changes, in this case a change of $1 in the index of potato prices. Add that back to the current price and you have a real gdp of $20, even though the stock of money hasn’t changed.

Now let the stock of money change. Potato production doubled from 5 to 10 bushels while the money supply doubled from $10 to $20. The price of a bushel of potatoes didn’t change; it’s still $2/bushel, but ngdp rose to $20. Because the price of potatoes didn’t change, there is no deflator and the real gdp equal ngdp and accurately reflects increased production.

So if the money stock increases at the same rate as the increase in production, then we will see no price increases and the nominal price will accurately reflect the increase in production.

Now if the money stock grows faster than the growth in production, should the gdp deflator show no increase in ngdp? I don’t think so, because as I showed above an increase in production will raise gdp in one of two ways: 1) by using a gdp “inflator” to adjust for falling prices, in which case real gdp rises or 2) by the money stock growing at the same rate as the increase in production, which case real gdp equals ngdp and both rise.

So ngdp has two components, 1) the increase in the money stock that equals the increase in production and 2) the increase in the money stock above the rate of increase in production. If you want to measure the increase in production using money, then you only want to deflate ngdp for the price increases only. Remember that increases in the money stock that accurately measure increases in production will not cause price increases. Only increases in the money stock greater than the increase in production will result in price increases.

So if you deflate ngdp for just price increases, then the resulting real gdp growth won’t be zero, but somewhere close to the increase in production. Of course, the indexes are perfect, so you might want to use the price of gold instead.

Kel Kelly April 17, 2011 at 7:00 pm

Fundamentalist: you are absolutely correct. I made a mistake. I was thinking that since it is mathematically possible for prices to rise only with an increase in money and spending, that if even real GDP increases, it must be due to the money and spending. But in fact, the deflators—or inflators, as you point out, under falling prices—are calculated in a way to always adjust for changes in prices so as to show the increase in production as a numerical increase. (Of course, the deflators are far from accurate in reality, and can’t be trusted). Very good job in identifying my error!

fundamentalist April 19, 2011 at 8:06 am

I didn’t think of it as an error. I assumed you wanted to measure increases in output by non-monetary means, which is the only accurate means of measuring output. If you want to measure increased output by monetary means, you have to use some kind of deflator (inflator in the case of deflation), but we don’t have any that are very accurate.Current deflators track only consumer and producer goods. None track increases in asset prices where a lot of new money goes. The price of gold is the best deflator for the long run because it encompasses asset price inflation, but it doesn’t respond quick enough to year-to-year changes in money.

Alberto Zaragoza April 17, 2011 at 5:34 am

The US experienced deflation along with growth from 1865 to 1900, approximately. So it’s not true that, in order to achieve GDP growth, one needs an increasing monetary mass or inflation.

However, it’s true that in a country with little monetary growth (i.e. printing), the GDP can be badly mismeasured. This is because, for the same amount of money, one has to buy more and/or better services and goods; usually nor more, but better. So you have to deflate the prices of the previous goods to calculate how much are the new ones worth: that is very, very difficult and surely the bureaucrats compiling GDP data aren’t God.

So in an environment of no monetary growth, it is difficult to tell how much is your country growing: last year’s TV sets and computers now retails for half the price, but how do we throw that data into the rest of our numbers?

nate-m April 17, 2011 at 8:27 am

It really comes down to whether it’s more important for your country to be productive or for your country to post high GDP numbers.

We can play number games all we want and fudge and twist everything to give approximately the GDP, deflation or inflation rates we want. But all that means is that we are divorcing the numbers from reality. It ruins your accounting. I get the feeling that a lot of ‘mainstream’ economists out there are so obsessed about making sure that their graphs are illustrating the wiggling lines they want to see they are divorcing themselves and their policies from reality in order to achieve the graph shape that they want.

If we have deflation and growth and the GDP is not showing this… then it’s GDP metric that is flawed.

panika2008 April 17, 2011 at 11:46 am

You are accusing a hammer you don’t know how to use of being useless. Eliminating econometrics would in no way be good for economics, it would be kinda like physicists destroying their particle accelerators because sometimes the results they get from them are strange/hard to understand. Not very creative.

newson April 17, 2011 at 7:03 pm

the counterpoint was hong kong under sir john cowperthwaite.
http://www.cato.org/pub_display.php?pub_id=5432

Beefcake the Mighty April 17, 2011 at 7:23 pm

panika, to confirm: you regard price as a proxy for value?

Also, re. a point newson raised before yesterday’s technical glitches: funny thing about the dirigiste economies of Japan, Sweden, etc: they’re full of Japanese, Swedes, etc. And Haiti is full of Haitians. To be clear: I favor Rothbardian anarcho-capitalism, but let’s not ignore the character of the people who try to make stupid economic systems work. They’d be better off with pure capitalism, but until then, let’s not pretend they’re complete failures.

newson April 17, 2011 at 10:11 pm

case in point: in brazil and peru, the ethnic japanese are signficantly better off than their indigenous co-nationals. and it’s not the sushi, as ceviche is part of the indigenous diet.

panika2008 April 18, 2011 at 1:37 am

Of course I regard price as a proxy of value. In a completely free market (hahaha!) this would work very nicely. In our current reality not so much, but I’m afraid even now it’s hard to find better measures…

Beefcake the Mighty April 18, 2011 at 6:15 am

In what sense? If something costs twice as much as something else, do you say the former is twice as valuable as the latter?

panika2008 April 18, 2011 at 7:20 am

Beefcake, that’s what the market says – and frankly, I can’t do much about it even if I disagree ;) [and oh boy I disagree 1oz Au is valued at 1480$, in my opinion it should be more like 148$, at least until I load up with it]. GDP does not measure anything else than value as seen by the market. What else could we measure that correlates well with general welfare and without being arbitrary?

newson April 18, 2011 at 5:34 am

the japanese have managed to internationalize their investment porfolio, but not their society. confounding multiculturalists and their diversity-is-strength message, japan doesn’t seem like a nation in terminal decline.
http://is.gd/JihISl

Sherman Broder April 17, 2011 at 6:51 pm

Here’s an interesting take on the subject by Ellen Brown:
“Japan Post’s stalled sale a saving grace”

http://atimes.com/atimes/Japan/MD01Dh01.html

Sherman Broder April 17, 2011 at 8:35 pm

Here is another article that sheds some light on what may be happening in Japan:

“The Unsettling Mystery Of Japan’s Perpetual Debt Machine”
http://www.businessinsider.com/japans-perpetual-debt-machine-2010-12

My hunch is that the economic “growth” and improved consumer living standards that Mr. Kelly describes is a classic case of mortgaging the future to provide these benefits. Japan’s interest rates have been at or near zero for the last 15 years. For the last 7 of these years, population growth has been near zero. And as the article above mentions, this population is rapidly aging, drawing on its prolific savings and cashing in promises made by the government. Last year the Japan government doubled the “Post group’s [Japan Post Bank's] statutory limits on savings deposits and personal insurance policies” in a bald-faced attempt “to bolster the market for government debt.”
http://www.theaustralian.com.au/business/japans-post-bank-takes-up-bonds-slack/story-e6frg8zx-1225851112152

As Ellen Brown is fond of saying: debt is money. Japan is swimming in debt which, thanks to the Post Bank — and the unremitting trust and generosity of Japan’s incessant savers, provides the capital to fund “growth” of today.

But tomorrow, when the debt comes due…what then?

Colin King April 17, 2011 at 8:53 pm

Quite eye-opening research, especially, as the perceived wisdom is that Japan has tried to print itself out of stagnation with numerous stimulus packages over the years. The thing I am a bit confused about though is how, given that economic growth would seem to be robust, Japan would appear to be so indebted?
It would also be interesting to see the same analysis as per your article carried out on the US.

Kel Kelly April 17, 2011 at 9:45 pm

Hi Colin. First, I didn’t say Japan’s growth has been robust. Just that it has been comparable to other developed countries. An analysis of the U.S. would look similar: The U.S. has managed to squeeze out a little growth each year despite a heavy tax burden, deficits, and inflation and crises. Japan had more debt and stimulus spending; the U.S. had more inflation and malinvestment. Not sure about comparative taxes or regulation. But there are different levels of these different variables in different countries. They all have similar effects.

Heath Nestor April 18, 2011 at 6:38 pm

Great article. I rarely find an article that adds a to my thinking. This one did. I should have recognized that GDP as calculate by government couldn’t increase without an increase in money supply or shorter holding periods for money.

To me the real point is that with a constant flow of money the dollar value of GDP wouldn’t change. The changes in real GDP would be measured by the changes in the real value of money. As well pointed out in the comments, its impossible to ever accurately calculate this number. That doesn’t mean that calculated numbers are useless. We should recognize that they aren’t precise.

Heath Nestor April 18, 2011 at 6:59 pm

For some reason half of my comment didn’t post. I’m trying again with the second half.

It follows that the deflaters used in adjusting apparent GDP to real GDP have to be in error when they show constant growth of GDP. It isn’t likely that the velocity of money has continuously increased to explain the calculated increases in the dollar value of GDP. If the same error is consistently applied the resulting numbers may have some meaning.

The error introduced by calling government spending additions to GDP probably aren’t consistent. The reckless spending during recessions probably compounds the errors. This error is separate from any deflater error.

Heath Nestor April 18, 2011 at 6:52 pm

Great article. I rarely find an article that adds to my thinking. This one did. I should have recognized that GDP as calculate by government couldn’t increase without an increase in money supply or shorter holding periods for money.

To me the real point is that with a constant flow of a fixed amount money the dollar value of GDP wouldn’t change. The changes in real GDP would be measured by the changes in the real value of money. As well pointed out in the comments, its impossible to ever accurately calculate this number. That doesn’t mean that calculated numbers are useless. We should recognize that they aren’t precise.

It follows that the deflaters used in adjusting apparent GDP to real GDP have to be in error when they show constant growth of GDP. It isn’t likely that the velocity of money has continuously increased to explain the calculated increases in the dollar value of GDP. If the same error is consistently applied the resulting numbers may have some meaning.

The error introduced by calling government spending additions to GDP probably aren’t consistent. The reckless spending during recessions probably compounds the errors. This error is separate from any deflater error.

Heath Nestor April 18, 2011 at 6:55 pm

For some reason half of my comment didn’t post. I’m trying again.

Great article. I rarely find an article that adds to my thinking. This one did. I should have recognized that GDP as calculate by government couldn’t increase without an increase in money supply or shorter holding periods for money.

To me the real point is that with a constant flow of a fixed amount money the dollar value of GDP wouldn’t change. The changes in real GDP would be measured by the changes in the real value of money. As well pointed out in the comments, its impossible to ever accurately calculate this number. That doesn’t mean that calculated numbers are useless. We should recognize that they aren’t precise.

It follows that the deflaters used in adjusting apparent GDP to real GDP have to be in error when they show constant growth of GDP. It isn’t likely that the velocity of money has continuously increased to explain the calculated increases in the dollar value of GDP. If the same error is consistently applied the resulting numbers may have some meaning.

The error introduced by calling government spending additions to GDP probably aren’t consistent. The reckless spending during recessions probably compounds the errors. This error is separate from any deflater error.

Heath Nestor April 18, 2011 at 7:00 pm

I am frustrated and annoyed. Half of my comment didn’t post and the system won’t accept the addition.

Sherman Broder April 18, 2011 at 7:44 pm

Mr. Kelly, Japan has been running annual budget deficits as high as 10% of GDP since 1994. Moreover, Japan Post Bank holds approx. $1.9-trillion in government bonds, local government bonds, corporate bonds and loans. You are more qualified to judge than I, but I would imagine that all of the above must result in a huge bit of malinvestment, i.e., investments in the production of goods and services which would not be made absent these government interventions in the marketplace. Japan Post Bank is a public institution.

Moreover, the Japanese are a homogeneous people, extremely frugal and conservative. According to the Japan Post Bank’s 2010 annual report, approx. 80% of Japanese household assets are held as cash, deposits, insurance or pensions (approx. 55% is in cash and deposits alone, the vast majority of which have been deposited in the Japan Post Bank earning interest rates that would hardly be tolerated by American cash holders). Compare this to American household assets, approx. 50% of which are invested in stocks, equities and other securities. Only approx. 12% of American household assets are held in cash or deposits.

The Japan Post Bank is far and away “the most convenient and trustworthy bank in Japan.” In short, it seems to me that Japan has set up a kind of government debt laundering machine enticing Japanese households to cast their financial lot, knowingly or not, with the public sector. Meanwhile, American households have a huge financial stake in the private sector. As a result, Japanese household tolerance for government spending and public debt is vastly greater than the tolerance of their American counterparts.

All this makes me think that when the Japanese debt bubble bursts Japanese households will be very, very badly hurt, far more than American households in a similar scenario. Furthermore, deflating the Japanese debt bubble would seem a far more difficult task than deflating the one over here. Am I wrong?

Norbert Szolnoky April 19, 2011 at 2:50 am

Dear Sherman,
Your comments have been very insightful and this very last one hit the nail in the head.
While Mr. Kelly’s article is great and true in its limited context (and thank you Mr. Kelly for the nice article!) we cannot really understand the last 20 years, or the present or the near future of Japan without understanding the context of Japanese society and the government actions that derived from their Japanese thinking. I am far from claiming that understanding but living in Japan for the last 3 years perhaps give me a better insight into the “on-the-ground reality”.

These are some general bullet points:
1. Far-Eastern societies are generally socialistic in their thinking. So while we call Japan a “capitalist” country it’s really a very socialist society where people revere the ever-present government and submit to it. They almost never question their government’s actions, have almost absolute faith in it and no interest (and no clue) of actually knowing what it does. Most people still have no idea that their government accumulated 200% debt to GDP (loan servicing is 57% of GDP!!!) from 1990 to “stimulate the economy”, that their inflated social services and myriads of wasteful government jobs are unsustainable, and as you said it, their government finances this from their personal Postal Bank savings.

2. Due to this faith-in-government thinking even those who know what’s going on are either afraid or not willing to discuss these issues. It’s the proverbial elephant in the room nobody talks about.

3. Your assessment is totally correct: Japan finances its HUGE deficit mainly (again, try to sheer that into your mind: 200% GDP debt, 57% GDP debt servicing) from domestic Postal Bank savings. When the whole system will collapse (and it will at some point) domestic savings will be totally wiped out. EVERYBODY keeps their savings in Japan Postal Bank. God knows what will happen then.

4. Work Conditions: Part of staying afloat has been working longer. Japanese are famous for working long hours and their dedication to the company but not they work even longer – and without overtime pay. So I would be very curious about those “per unit labor hours” Prakash mentioned… Additionally due to their socialist thinking Japanese employers (including gov’t) avoid firing people by all cost – i.e. the madogiwa-zoku, “window tribe”, who doesn’t do anything but stare out the window whole day. Add this and low domestic spending up: companies hire much less, well-paying and skilled jobs with benefits are scarce so most jobs available are low-pay work with no generous social benefits and bonuses.

5. Demographics: the HUGE elephant in the room: Japan is aging twice as fast as Europe. Young people don’t want to get married, have children. Japan has the highest life expectancy in the world – I think 87 years old. With generous social benefits, dwindling youth, and 200% debt this means: Japanese bankruptcy or never seen dramatic changes are coming soon. Which one and when, I don’t know; it depends on the courage of the Japanese people to finally face with their own reality. But Japan is running out of time…

Patrick Barron April 19, 2011 at 8:52 am

Wonderful essay! I, too, am a big fan of George Reisman. I met him in California last fall and got his signature on my old copy of Capitalism. I have Capitalism propped up next to my computer, turned to page 505, where we find the famous P=Dc/Sc formula. I have used this in my Introduction to Austrian Economics class at the University of Iowa. It is so basic, yet it contains so much wisdom. A thorough understanding of this basic formula will prevent much muddled thinking about money, production, and the price level.

Thanks, Kel, for another really great essay. Mandatory reading for my class.

cheech April 19, 2011 at 10:01 am

What about all the debt they have accumulated over the past 22 years

Norbert Szolnoky April 19, 2011 at 10:18 am

cheech,
See my comment just above. Yes, they have largely financed their modest growth from domestically borrowed stimulus payments that is now a huge weight around their neck. Their 200% GDP debt servicing requires 57% of the Japanese budget (I mistakenly wrote 57% GDP above – sorry).

So while theoretically speaking Kel is right that the Japanese economy didn’t stagnate regardless of the accepted public consensus, it came with a very heavy price that might just brings them to total ruin.

It is another proof how the Keynesian idea of stimulus spending out of recession not only just delays the day of reckoning but brings a much bigger ruin down the road as it would have been in the first place.

andreas April 19, 2011 at 2:52 pm
Norbert Szolnoky April 20, 2011 at 12:46 am

Very nice article, andreas! Did you write it?
Two small points:
1. While the keiretsu system served the Japanese well so far, it poses a serious problem for badly needed structural reforms on several fronts. First (due to as well to the general Japanese culture), they are carrying dead weight as they are very reluctant to downsize or make serious changes. Sometimes they hire foreigners to do the inevitable (see Nissan, Sony). Secondly, they hinder the development of other competiton and flow of capital.

2. I think demographic changes pose a much bigger challenge to Japan’s future than the article would say. Here are a few shocking numbers from the Japan Statistic Bureau:
- Japan’s current 127 million population will shrink to 115 million by 2030 and to 95 million by 2050. That’s 30 million less people in 40 years. I was born in Hungary; Hungary has 10 million people; that’s 3x my country disappearing…
- By 2050, adults over the age of 65 will rise from the current level of 23 percent of population to 40 percent, while the working age group will fall from 64% to 52%.

Given the 200% GDP debt burden, who will pay it off if the working age population is rapidly shrinking? And if can’t be paid off and result in wiping out the savings the debt is borrowed againts, those savings largely belong to the older generation who could have paid for their own care, then now they will largely have to rely on government services magnifying the government’s fiscal problems.

andreas April 20, 2011 at 11:45 am

No,the name of the author and site owner is Alasdair Mcleod.I find his articles very interesting.

i agree with your points but i’m not so sure about those future numbers.Maybe they will be better maybe worse, nobody can tell for sure because things change.What does not change is the fact that relying on goverment is a sure road to failure(unless you are the goverment of cource)

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