Monday, October 18, 2010

More on how the NY Times is wrong about the Japanese economy

The NY Times writes Japan Goes From Dynamic to Disheartened. As highlighted by Dean Baker, this article grossly misrepresents the dynamics of the Japanese economy. I likewise read this article with some dismay, wondering was there any actual research done in preparation for this commentary?

First, the reporter draws conclusions on the aggregate economy through anecdotal accounts of Japanese businesses and households. Here's one example:

But his living standards slowly crumbled along with Japan’s overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. Last year, he sold his condo — for a third of what he paid for it, and for less than what he still owed on the mortgage he took out 17 years ago.

As highlighted by Dean Baker, the Japanese standard of living, measured by real per-capita income listed in the IMF World Economic Outlook database, has grown markedly over the last two decades. Spanning the years 1990 to 2010 (f), Japanese real average income grew 17%, while that in the US grew 33%. The growth differential across the two countries is admitteldy large; but Japan's standard of living has not crumbled, rather grown.

The article is overly pessimistic about the effects of Japanese deflation on the standard of living. Spanning the years 1999 - 2010 (f), the period for which the Japanese economy experienced persistent annual deflation, real per-capita income in Japan grew neck and neck with that of the US: 9.7% in Japan, versus 10.4% in the US.

Even worse, the article barely touches (misses actually) on the fundamental economic problem in Japan: the shrinking labor force. Spanning 1999 - 2010 (f), real GDP in Japan grew at less than 1/2 the pace of that in the US, 10% in Japan versus 23% in the US. Deflation? I think not; it's a secular decline in employment.

The chart illustrates a measure of productivity, as real GDP normalized by the level of employment (also from the IMF World Economic Outlook database). During the period 1999 - 2010 (f), productivity growth in Japan's been roughly in line with that of the US, 14% and 17%, respectively.

Finally, in my view this is the most egregious NY Times error:
But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed.
It wasn't that government deficits were not able to slow the decline - fiscal policy mistakes caused some of the decline.

Richard Koo, author of Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications and Chief Economist of Nomura Research Institute, who was interviewed for the NY Times article must be quite irked by the NY Times account of Japanese fiscal policy. Here's a presentation that Koo gave in 2008, where the title of slide 9 says it all: "Exhibit 9. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit".

The government raised taxes in 1997 to see growth deline from 1.6% that year to -2% a year later.

Be careful what you read. Rebecca Wilder


  1. i sensed there was something wrong when i read that story, because ive read others that suggested the japanese didnt have a clue as to why our pundits were so afraid of entering a "japanese decade", because they felt they were doing fine...

    it goes to show you can prove anything with anecdotes....

  2. One of the points not discussed here that played a role in Japan was the aging of the population.

    I do not have the data to show it, but over the last twenty or so  years hasn't Japan's working age population either been flat or actually contracted?

    I do know that the share of retired persons in the population increased significantly.

    Do you have any good data and/or analysis of this factor?

  3. Hi Spencer,

    Yes, the shrinking labor force has been driven primarily by demographic shift (I addressed that above). The effects on the economy are rather staggering.

    Spanning the period 1999-2010 (f), the annual level of employment fell 3.4% in Japan but grew 4.4% in the US.

    The Japanese labor force participation rate has dropped markedly over the second half of the century: 69.2% in 1960 to 60.2% in 2008.

    Spanning 1968-now, employment for those aged 15-24 declined more than 50%, while that for 25-34 is essentailly unchanged.

    The Japanese historical statistics are pretty good. The Ministry of Internal Affairs and Communications Statistics Bureau has the labor force statistics.

    Here's the link for their historical labor force statistics.


  4. <span>Hi rjs,  
    I can't believe that article was published.  

  5. This is what many people have been saying for a number of years - good animation that gets the point across well!

  6. With a couple of exceptions, countries with better educated workforces tend to have fewer children and concentrate on raising them to that higher level. Given how difficult it is for Japanese school children of any age (through grade 12), I sure wouldn't want to have that responsibility.  aj

  7. Hi Rebecca,
    Lets not lose sight that Richard Koo's 2008 presentation had 26 slides, all of which, led to the conclusion that the Japaneese economy suffered severe stress! He is consise and brilliant in his analysis of the cause and effect of their economic malaise.

    I read the NY Times article, already have been aware of Richard's work, and took the piece more from the sociological impact the crisis has had on Japaneese attitudes and values towards consumption,  their views on debt and their confidence in the future. I believe from that point of view the article has merit. I do not believe the writer, of the article, is an economist and I did not expect him to know that some of the fiscal policies utilized actually accelerated the problem.
     Factually, the Japaneese do have enormous budget deficits, factually they have suffered enormous asset price deflation in stocks and realestate and factually their GDP was on its way to the moon back in 1991 at $5.7 trillion and remains the same today while the USA's GDP has doubled in size to $14.7 trillion.
     I think it reasonable that there may well have been a secular change in the attitudes, values, and perspectives of individuals who have lived under the deleveraging type of balance sheet recession the Japaneese have been living with for a generation now. 
     I valued the piece for its sociological perspective of the Japaneese condition, just as I valued Richard's presentation for its economic perspective of the crisis.

  8. The fact that a 17yr old condo is not worth much in Japan should not really be a surprise. Even during the housing (as opposed to land) was a wasting asset in Japan. You buy a house then live in it (very few houses trade secondary) then after 25 or so yrs knock it down and build another (bit of a problem for condo owners). It is far more an illustration of bad lending than economic malaise.

    That Japanese life expectancy has pulled ahead of the rest of the developed World (the US has lagged) is strongly suggestive that things aren't as bad as advertised (the gap in healthy yrs is even larger). I'm not sure how one adjusts GDP figures for this kind of measure but it is clearly worth something when one considers the sums we pay to stay alive.

  9. Mate, it doesn't matter what is right. The media is bashing Japan for a great reason. It's because now is a great time to invest in Japan! The media makes or breaks the market!

  10. Hi Rebecca

    In addition to Koo, Adam Posen is well worth reading:


  11. Bra,

    If you must know, best companies are outside stock/ bond markets. Because in this computer trading madness, still don't know how financial industries would be (collaboratively, internationally) regulated, when markets get played by politics, what is a point of getting money from markets? They have good ties with banks, you won't know which, communities, and all with good CF.

  12. from Lie of the Tiger (foreign policy):

    Japanese GDP growth from 1990 to 2000 -- Japan's so-called lost decade -- was just 0.2 percent less than America's when you account for increases in the U.S. population.

  13. GNP included then.....


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