Japan's Great Stagnation and Abenomics

Lessons for the World

Masazumi Wakatabe

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781137438843
• eBook ISBN: 9781137438850
• Topic: Betriebswirtschaft
• Subtopic: Internationale Wirtschaft

Japan has experienced and valiantly overcome the burst of their Bubble economy, financial crisis, lukewarm recovery, and more than a decade-long deflation and stagnation to become one of the most stable economies today. In this book, economist Masazumi Wakatabe explains how Japan's economic revitalization can be used to help us understand the goings on amid the Great Recession. Japan's Great Stagnation and Abenomics reveals the striking similarities of economic events and policies between the Great Stagnation and the current Great Recession. It also suggests possible dangers ahead and way-outs in the future. This exciting new volume is based on Wakatabe's expertise in economic history and the history of economic ideas and argues that any policy decision is related to cultural ideology. An investigation into the relationship between cultural ideology and policy, this book helps us better understand the policy-making process in context.

Chapter 1

Introduction: Once It Happened in Japan

I. Introduction

As the world economic crisis continues, people are turning to the Japanese example. Japan was one of the best macroeconomic performers in the world until 1990. Then Japan experienced the bursting of the asset price boom, a financial crisis, and more than a decade of deflation and stagnation. The Japanese episode, known as the Great Stagnation, received much attention during the 1990s and the early years of the 2000s, but the onset of the current crisis invigorated a renewed interest in that episode. Some commentators are even worrying about the Japanization, or Japanification, of the Western countries.¹ The prime example was the lead article in the July 30–August 5, 2011, issue of The Economist. Aptly titled “Turning Japanese,” the article featured U.S. President Barack Obama and German Chancellor Angela Merkel wearing Japanese kimonos. The image the news magazine tried to convey was the sense that United States and European political leaders are marred with the same problems as their Japanese counterparts: a lack of leadership, incoherent policy initiatives, and the resultant prolonged stagnation.² Paul Krugman, the most vocal critic of macroeconomic policy as it is currently practiced all over the world, remarked several times that he should apologize to the Japanese because the Americans were not doing better than the Japanese were. His so-called apology was mere rhetoric for this master debater, but his reference to Japan is more substantial.³

Then, for most people, everything changed suddenly, or so it seemed. Shinzo Abe, the Liberal Democratic Party (LDP) politician and the prime minister of Japan from 2006 to 2007, emerged as the leader of the LDP once again and won the general election in December 2012. He has initiated a new policy package, commonly known as “Abenomics.” This entails three pillars, or “three arrows” in Mr. Abe’s terminology—that is, the “bold monetary policy,” the “flexible fiscal policy,” and the “growth strategy.” The yen has immediately depreciated since November 14, 2012, when former Prime Minister Yoshihiko Noda announced that the general election would be held, thus virtually securing Abe’s succession as the next prime minister. In addition, the stock market has soared. In February 2013, Abe appointed Haruhiko Kuroda as the new governor of the Bank of Japan (BOJ). Kuroda subsequently launched the “quantitative and qualitative easing (QQE)” on April 4, 2013, doubling the amount of base money within two years, to achieve a 2 percent inflation rate. The government has also budgeted for increased public spending. The early signs were promising: economic growth has resumed, and deflation has been receding. The real gross domestic product (GDP) growth rate for the first quarter of 2014 exceeded the 6.9 percent annualized rate, and the unemployment rate decreased to 3.7 percent, according to data released in July 2014.⁴ However, the government raised the consumption tax from 5 percent to 8 percent in April 2014, in the name of fiscal consolidation. The data for the second quarter of 2014 showed that the GDP has plunged to negative 6.9 percent, and the data for the third quarter of 2014 recorded that the GDP has further decreased by negative 1.9 percent. The Japanese economy is again in danger of returning to a recession.

What happened in Japan’s Great Stagnation? What caused it, and what lessons can the world learn from it? What is Abenomics? What is it trying to achieve, what is the likelihood of success, and what lessons the world can learn from Abenomics? These are all important questions, but to answer these questions, this book focuses mainly on the history of the economic controversies and debates during the Great Stagnation. Since any policy is related to—though not necessarily based on—certain ideas, an investigation into the relationship between ideas, policy, and outcomes is required to better understand the policymaking process. David Laidler, a renowned monetary economist and historian of economic thought, argued that, as economics assumes, every economic agent has a “model” of how the economy works, and policymakers must also have models, however crude or unsystematic a “model” may be. Therefore, the historians of economic thought can shed a light on the policymaking process by examining the models that policymakers have (Laidler 2003). Hamada and Noguchi (2005) argued that the policymakers of two deflationary episodes in Japan, the Great Depression era and the 1990s, were largely misled by “misconceived ideas,” an erroneous understanding of the economy. Moreover, a cross-country comparison between economic ideas in Japan and those in the West would reveal not only similarities and differences in policy responses but also similarities and differences in ideas. As Fourcade’s (2009) comparative analysis of the developments in the United States, Great Britain, and France showed, economic ideas have been situated in cultural, institutional, and historical contexts. One may pursue a similar line of research in comparisons between economics in Japan and economics in the Western countries, highlighting the cultural and institutional characteristics of the Japanese economics academia (Wakatabe 2014a).

Yet one may discern similarities across countries as well as differences. During the debate, there have been several points of contention. Macroeconomic stabilization has been advocated, criticized, dismissed, and resurrected, while liquidationist thinking or macroeconomic policy nihilism—the belief that an inflationary boom should be followed by a deflationary recession, so the best remedy to recession is to “let things run the natural course,” which is a nonintervention policy—has been returned to the policy discussion. With deflation and deflationary expectations persisting, the role of monetary policy became the center of the discussion, while professional economists were divided on the efficacy of monetary policy. As the recession became prolonged, a number of economists turned their eyes on the structural factors, proposing a wide variety of remedies in the name of “structural reforms,” while these structural factors explanations changed over the course of the controversy. Furthermore, during the crisis, discussions became heated and emotionally charged, contributing to the policy paralysis in Japan.

The next section of the chapter overviews what happened during Japan’s Great Stagnation. Main economic and social indicators show that the Japanese economy has a sluggish economic record and disturbing social trends. Section III sets out the theoretical perspective of the book in detail. It is my contention that events, ideas, and policies interact with each other and that “bad” economic ideas have grave consequences on performance. The last section offers a brief tour of the book.

II. Japan’s Great Stagnation at a Glance

We start with the three most important figures in economics, the real GDP growth rate, the unemployment rate, and the inflation rate. Figure 1-1 shows Japan’s real GDP growth rate: before 1990, Japan achieved an average growth rate that was around 4 percent during the 1980s, but the growth rate declined to less than 2 percent during the 1990s and even less in the first decade of the 2000s.

Figure 1-1 Japan’s Real and Nominal Growth Rates from 1956 to 2014

Note/Source: The 1956–1980 data are from the 68 System of National Accounts settled in 1998 (with 1990 as the base year). The 1981–1994 data are from the 93 SNA settled in 2009 (with 2000 as the base year). The 1995–2012 data are from the 93 SNA settled in 2012 (with 2005 as the base year). Data from the Cabinet Office.

It has sometimes been claimed that on a per capita basis, the growth rate of the real GDP in Japan has not been as poor as has been commonly assumed. For example, Masaaki Shirakawa, a former BOJ governor, contended: “Japan’s real GDP growth rate has declined and growth has been subdued compared to other developed countries. However, comparing the average real GDP growth rate per capita over the past ten years, Japan’s growth rate is almost the same as other developed countries. Moreover, Japan is highest in terms of real GDP growth rate per working-age population” (Shirakawa 2012, 7).⁵ But the comparison is misleading because this does not account for the unused resources: the unemployed people, in particular. The more appropriate way is to take a look at the output gap: as Figure 1-2 shows, after 1993, the Japanese economy has had a constant output gap, averaging around 2 percent, with the exceptions of brief intervals in 1997 and 2007–2008. In other words, the Japanese economy might have performed better than was generally assumed by economists, but it could have performed even better if these unused resources had been utilized fully. Admittedly, the concept of the output gap and its estimation method are not without their problems.⁶ Indeed, some economists argue strongly against the use of the concept of the output gap, but arguing against the output gap implies that Japan’s Great Stagnation has been purely a long-term phenomenon in that all prices, including wages, have been adjusted fully. This has become a contentious matter in controversies during the Great Stagnation period, as we see in Chapter 3.

Figure 1-2 Output Gap (%) from 1980 to 2014

Source: Data from the Cabinet Office.

Historically, Japan has been known for its “low” unemployment rate, and it is still “low” by international standards, but it has increased since the 1990s, reflecting the output gap during the same period since the 1990s. It should also be noted that the Japanese official figure is somewhat misleading because the government subsidizes firms to keep employers, a system known as koyo chosei jyosei kin (employment adjustment subsidy). The exact magnitude varies: the government estimates that the system reduced at least 1 percentage point in 2009 when the unemployment hit the record high of 6.5 percent (Naikakufu 2012, fig. 1-1-26). In any case, what matters is that unemployment has increased, and unless we assume that those unemployed people are voluntarily unemployed, this issue needs to be addressed.

Some of the major characteristics of Japan’s Great Stagnation have been the low inflation rate and, since the mid-1990s, deflation. Figure 1-3 shows the trend in the inflation rates in Japan in two measures, the changes in the consumer price index (CPI) and in the GDP deflator. Both show that the Japanese economy has been experiencing deflation since the mid- to later 1990s. It has been known that there is a 1 percent upper bias in the CPI because the basket of goods and services that make the CPI are fixed, but Handbury, Watanabe, and Weinstein (2013) showed that this upward bias might be bigger than 2 percent. They argued that the information content would be lost when a change in the CPI goes below 2 percent.⁷

Figure 1-3 Japan’s Inflation Rates from 1981 to 2014

Note/Source: The annual percentage change in CPI data are from the Ministry of Internal Affairs and Communications, Statistics Bureau. The percentage change in the GDP deflator in 1981–1994 is from the 1993 SNA settled in 2009 (with 2000 as base year). The percentage change in 1995–2012 is from the 1993 SNA settled in 2012 (with 2005 as base year). The 2013 data are from the Cabinet Office.

Another major characteristic of Japan’s Great Stagnation has been its persistent asset price deflation after 1990. Figures 1-4 and 1-5 show the movement of stock prices and land prices, respectively. Carmen Reinhart and Kenneth Rogoff of Harvard University compiled long-term data on banking, currency, and economics crises (Reinhart and Rogoff 2009). These researchers designated five major crises occurring post-World War II and pre-2007 in advanced economies as the “Big Five.” These crises include Japan after 1992. What is remarkable about Japan is its persistent asset price decrease in terms of land price: no other countries, whether they are in the “Big Five” or among other developing countries, ever experienced such a sustained decrease in ass...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface
• Acknowledgments
• 1 Introduction: Once It Happened in Japan
• 2 Thirty Years’ Economic Crisis
• 3 Thirty Years’ Intellectual Crisis
• 4 The Shadow of History: Lessons from Japan’s Great Depression in the 1930s
• 5 The Future Again? The Assessment of Abenomics
• 6 Concluding Remarks: Beware of Japanization
• Notes
• Bibliography
• Index