I have been thinking about Japan for a long time. Back in 1990, at the dawn of Japan’s real estate and banking crisis, I read an article in the US News and World Report questioning whether it was the time to invest in Japan. The Nikkei had just fallen from 35,000 to 20,000. I was intrigued, studied up, and decided to pass – not because I was wise – I was 20 – but because the costs to invest $1,000 in the Nikkei were around 10%. Since then, the Nikkei has bobbled lower and lower to 10,200, where it currently trades.
Lately there has been much written about Japan, about its lost decade, about its debt, and about how it does or doesn’t reflect our future here in the States.
Like the heavy sampling of the Rolling Stones in Bittersweet Symphony, one can hear the song of Japan in our present circumstance. That is the subject of Today’s But If Not.
After 20 years of “stimulating” its economy Japanese government borrowing currently exceeds its tax revenue. Really? How can we avoid this fate?
The origins of the Japanese crisis began with a commercial real estate bubble that turned into a banking crisis when creditors began defaulting (sound familiar). The banks, effectively insolvent if they realized the losses, chose to pretend and didn’t write off the defaulted loans. Rather than have its banks and economy collapse, the Bank of Japan lowered interest rates to zero. The low rates, advertised as stimulus, had the effect of subsidizing the banks while they worked off bad debts. (Recapitalizing banks is also among current US Fed policies.) The plan was to slowly absorb the enormous losses into the Japanese economy through diminished growth.
The government borrowed heavily for a long time to try to engineer this growth. The result was long-term growth of 1%.
Meg McArdle postulates that they have “reached the limits of Keynsian policy.”
Demographics is obviously a big contributor to that slow growth, and there are a whole host of secondary factors one could nominate, but whatever the reason, they have now had two decades of anemic growth, which they have fitfully attempted to address with stimulus. Maybe not enough stimulus, maybe badly designed, but they’ve certainly tried to follow the basic Keynesian playbook: borrow money and spend it when times are bad, in the hopes that you can bring back growth.
Well. “Hope” is not a strategy. All Japan has to show for this spending are additional zeros on its currency.
But what of this demographic change?
Over the past 5 years Japan has undergone absolute population decline, losing 600,000 people. Further, the population is getting old fast. Since 2007 the number of people aged 65 and older has increased by 2,000,000 (in an era of shrinking population) and the number of people 15 to 64 years old has decreased by the same 2 million.
Put starkly, for that economy to grow it has to do it on the backs of fewer workers. At the same time those fewer workers must also support a growing retiree population. And for a long time they did. In fact, GDP per worker increased from $52,000 to $62,000 from 2006 to 2009. That’s an incredible productivity increase from Japan’s workers. But they would see none of those gains. When spread across the entire population per capita GDP declined from $34,800 to $32,600 over the same time period.
Now Japan no longer has any “easy” options. Heck, I am not sure they have any options. They are staring serious structural change in the face without time to adjust. They lost its 20 year opportunity to ease into it. The story can be told in jargony financial news ways, but diminished standards of living have already begun and more are to come.
The story of Japan is a bittersweet symphony. To manage a huge deficit and to care for an aging population its decreasing workforce has dramatically increased its productivity. But it has not been enough to stave off a shrinking economy. And still we do not hear of rioters protesting cuts (perhaps because cuts have not been sharp enough yet). Is this portentous of a peaceful rebalancing toward a smaller economy? Can a people peacefully manage the dual challenge of demographic decline and deficits?
While the US demographic change is not as severe as Japan’s, we face the same challenge of a decreasing number of workers. But, with the baby boomers just reaching retirement age, ours is just beginning. We still have time to rebalance. We just have to actually get on with doing it.
What dramatic innovations and productivity enhancements will we find to offset the huge retirements to come? Are we different from the French, Greek and British protesters railing against cuts in benefits? Are we willing to sacrifice diminished benefits now to ensure that our children don’t have to suffer dramatic reductions in standards of living? I hope so.
Or is the union-led blizzard clean-up work slowdown in New York City a look at our next 20 years? From the wintry streets of New York I hear The Verve and the violins.
No change, I can’t change, I can’t change, I can’t change,
but I’m here in my mold , I am here with my mold
And I’m a million different people from one day to the next
I can’t change my mold, no, no, no, no, no
(Well have you ever been down?)
(I can’t change, I can’t change…)