A Lost Decade?

We Should Be So Lucky
Economy - June 14, 2016 By Satyajit Das

Japan was already rich before its bubble burst

A growing number of economists seem convinced that the U.S., European Union and
China are all headed for a prolonged period of sluggish growth -- secular stagnation,
in the words of former Treasury Secretary Larry Summers. A close parallel would
seem to be 1990s Japan. There, too, the bursting of debt-funded asset price bubbles
gave way to multiple rounds of fiscal stimulus, massive monetary easing and rock-
bottom interest rates. Rescue efforts stabilized conditions but couldn't spark a
sustainable recovery, leaving the economy mired in low growth, low inflation and high
debt.
In some ways, this outcome might not seem so terrible. (One visiting English
politician dazzled by Tokyos Ginza noted that if this was a recession, he wanted one
too.) When Japan entered its downturn, however, the country had several
advantages both internally and externally that nations today don't. For many, a
Japan-style slump may be the best-case scenario.
First and foremost, at the onset of its crisis, Japan enjoyed modest levels of
government debt -- around 20 percent of GDP -- as well as strong domestic savings
and an abnormally high home bias in investment. Even now, around 90 percent of
government bonds are held by Japanese buyers. This has allowed successive
Japanese governments to run large budget deficits and finance their spending
domestically, assisted by an accommodative central bank that's kept the cost of
servicing debt low.
By contrast, many problem economies today suffer from high levels of government
debt -- around 80 percent to 100 percent of GDP -- as well as total debt. China's
official government debt is lower, around 55 percent of GDP. But that number doesn't
take into account borrowing by large banks and other state-owned enterprises, which
is backed up to varying degrees by the government. Some countries also have low
domestic savings and are reliant on foreign capital, limiting their ability to finance
budget deficits.

Second, Japan's downturn at least unfolded during a period of strong global growth.
Exports thus partially offset the lack of domestic demand, while healthy international
markets allowed Japanese to invest abroad in search of returns. Now, sluggish
demand and gloomy markets mean countries can't look outside their borders for
help. To make matters worse, cross-border trade and capital flows increased
throughout the 1990s and 2000s. Today, globalization is under pressure, further
limiting the ability of individual nations to tap external demand and funds.
Third, over the last quarter century, Japan has intermittently been able to weaken the
yen in order to boost economic activity; the currency's plunge after the Bank of Japan
began its massive bond-buying program in 2013 led to record corporate profits
among big exporters. Today, the fact that everyone is suffering means that any
attempt to gain competitive advantage by weakening one's currency is likely to
provoke swift retaliation.
Fourth, by the time its bubble economy collapsed, Japan was already relatively rich
and technologically advanced, with world-class automobile, consumer electronics
and advanced manufacturing industries. Countries such as China aren't anywhere
near the same stage of development. At the beginning of the 1990s, Japans GDP
per capita was around $29,000 (in current dollars), about 20 percent greater than that
of the U.S. at the time. Chinas GDP per capita today is around $7,500,
approximately 15 percent of that of the U.S. China is still in the early stages of
shifting from low-cost manufacturing to more advanced industries. A slowdown now
threatens to cast the country into a middle-income trap and endanger the
government's efforts to raise incomes.

Fifth, even though Japan's aging population is now complicating efforts at

rejuvenating the economy, its demographics at the beginning of the crisis were
helpful. An older population had accumulated considerable wealth. Declining birth
rates meant fewer workers who needed to be absorbed into the labor force, which
kept unemployment low. By contrast, high unemployment or underemployment rates
in many countries today, especially among younger workers, pose a major social and
political challenge.

Finally, Japan is an insular, homogenous society. It's also de facto a one-party state,
where the ruling Liberal Democratic Party is able to pursue its policies with little
political opposition. Japans culture is based around a strong national consciousness
and stoicism shaped by the experiences of World War II and the hardship of the
immediate postwar period. Citizens have accepted the sacrifices made necessary by
their country's economic woes.
China possesses some of these characteristics as well. But more diverse and
politically volatile societies may not so easily accept the measures required to
manage their economic challenges. The political polarization and resistance to
austerity policies evident in Europe and elsewhere underscores just how messy a
prolonged economic downturn is likely to be.

Japan's experience is instructive, not predictive. Unfortunately, as Brazilian writer

Paulo Coelho once observed, "Every time we repeat the same mistake, the price
goes up."