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Japan has been, for the past ten or twelve years, a miracle of contradictory economic factors. Japan experienced little inflation, little economic growth, a deterioration in trade, more government spending than previously, and unreliable savings and investment both by business and individuals. Added to that was the specter of an aging population requiring more services, and an international trade picture that included oil price fluctuations, as well as more unemployment than had ever happened in Japan before. Despite all that, Japan was not apparently as economically whipsawed as one might first suspect.
The reasons for that may appear from just a brief glimpse at the conduct of the Japanese economy through the end of the 1990s and into the 2000s.
Inflation: In 1998, Japan was trying to avert a deflationary spiral and some economists wanted to create a mini-bubble of inflation to jumpstart a sluggish economy. That would have been done by increasing liquidity. They argued that the Bank of Japan (BOJ) needed to aggressively increase liquidity by printing money or by purchasing securities from the money market. In turn, this would push down interest rates and trigger demand for corporate capital investment and encourage consumers to buy. Part of the reasoning behind this was that Japan was in a liquidity trap and money was not circulating as it should: under those conditions, even extremely low interest rates did not encourage companies to borrow for investment because the return on their investments would be so low as well. In fact, the opposite behavior was keeping inflation low. Companies were holding large amounts of capital as a hedge against their expectation that the economy would worsen. That concept was also affecting consumers, of course. But consumers were also worried about a thinly stretched pension system and job security, or lack thereof. (Kobayashi, 5)
Before the events of September 11, 2001, Lynn Browne, Vice President and Director of Research for the Federal Reserve Bank of Boston, drew comparisons between the inflationary period in Japan of the 1980s and that of the U.S. In the 1990s. Browne noted that rises in inflation in both countries had been caused in great part by the same factor: wide fluctuations in oil prices. In 1986, oil prices declined sharply, contributing to low rates of inflation in Japan in 1986 and 1987. When oil prices rose again at the end of that decade, inflation in Japan also increased again. Because of global oil price rises in 2004, and Japan's dependence on foreign oil to fuel its manufacturing and lifestyle, it is possible that the need for creating a mini-bubble will not arise again, as the natural forces in the oil-driven marketplace may take care of that on their own. (Browne, 5+)
Unemployment: In the year 2000, for the first time, Japan's unemployment rate had exceeded that of the United States. (Yamagami, 25+) But some economists noted that the truth of that depended on how the figures had been developed. Some thought that the official unemployment rate was understated because the Japanese defined it differently than did U.S. economists. On the other hand, some observers thought the figure was too high because the figure had been developed using various other forms of labor underutilization.
While the argument about the first concept was not settled, most economists agreed with the second, and concluded that Japan's labor market was not as efficient as the government would have had people believe, although collection of data is arguably more efficient. (In Japan, the unemployment rate is reported every month in the Labor Force Survey by the Statistics Bureau of the Ministry of Public Management, Home Affairs, Posts and Telecommunications.) The discrepancy was caused, they said, by "slack in the labor pool" which consisted of workers pushed into uncounted unemployment. For example, this included discouraged job seekers during recessions. (Yamagami, 25+)
Whatever the exact figures on unemployment, there was some agreement that during the 1990s, Japan's economy had experienced an extended downturn. It had a small resurgence between 1994 and 1997, but again turned down3ward from 1997 to 1999. More recently, unemployment rates have soared, however, by Japanese standards. At the beginning of 2001, the rate was approaching 5%, which was higher than the U.S. rate. And it seemed similar forces were in effect to those in the United States. "Restructuring" was bringing new higher rates of unemployment to white-collar workers. Even some Japanese economists were arguing that the nation's much-heralded "long-term employment system" could not be sustained, and the job security had, as in many modern economies, gone the way of the dodo bird: It had become extinct. (Yamagami, 25+)
GDP: During the Asian miracle, economists praised Asia for its high savings rate. Leightner suggested that "underconsumption" and "oversavings" explains the economic downturn in Asia in general and Japan in particular. He notes that the demand for investments, "whether in the form of intermediate goods or additional capital, is derived from consumption." So, if no one buys the additional goods produced from savings and subsequent investment, then the economy will have endured all the costs and received none of the benefits of that production. In such cases, prosperity suffers and the GDP does, obviously, as well. (Leightner, 385)
The formula, C+I+G, works, according to Leightner, only as long as Asian thrift and resulting investment was balanced by the extravagance of others. Worse, outside investment in Japan compounded the disparity, making it seem to the economy as if the Japanese were even more thrifty -- and thus more investment-prone -- than they were. However, consumption in Japan did not absorb the goods and services produced as a result of the investment.
Leightner notes that while 'saving for the future' is a rational thing for individuals to do, for nations/economies, it is not the same. He says that "the total amount of useable savings in a society is limited by consumption, [whereas] individuals will compete with each other in order to save." (385) Logically, then, a fall in prices or profits would decrease the amount of goods and services created and available, and restore equilibrium so that the creation of them matched the consumption of them.
But Leightner says that is not so, either. A fall in income will cause consumption to fall further, which would make even ordinary production into the equivalent of overproduction. He adds that static models (Y = C + I + G + X - M) are insufficient, in view of the problems in Japan, and that to prevent future GDP crises, it will be essential to understand the interconnections between not only national, but worldwide savings, consumption and production. (285)
Consumption: It is difficult to consider Japanese consumption without comparing it to that in the rest of the G-7 nations. In all, the correlation between domestic and world consumption growth is generally lower than the correlation between domestic and world output growth. Obstfeld notes that among the G-7 countries over the period 1951 to 1988 there has been a marked tendency for domestic consumption to become more closely correlated with world consumption. Moreover, he added, the effect was most notably present in two nations, Germany and Japan. (Cited in Olivei, 3)
Between 1973 and 1987, Japan's output growth correlation with global output changed from a positive to a significantly negative value. Olivei pinned the negative relationship to, largely, the combination of a prolonged Japanese recession and a U.S. expansion after 1992. (3) Writing in 2000, however, Olivei had not considered the more recent condition of the U.S. economy -- or the Japanese -- in this regard. As early as 2000, however, he was able to note the divergence of consumption in the United States, Japan and continental Europe as global consumption bench markers.
Finally, Olivei found little support for international risk diversification as a factor in consumption trends. He notes "The correlation of Japan's consumption and output growth from 1988 to 1998 is 0.81, while the correlation of Japan's consumption with world output is significantly lower at 0.35." (Olivei, 3)
Olivei concluded that Japanese investors, in 2000, held at least 90% of their equity portfolios in domestic assets. He expected that within 20 years of increasing globalization, portfolios would be better diversified, and Japanese domestic consumption would be less at the mercy of specifically Japanese economic shocks of various sorts. (Olivei, 3)
Investment: Investment in Japan was arguably partly the cause of the real GDP growth in Japan of 5% per year form 1985 to 1990, versus 3% the first half of the decade. (Browne, 3+) However, by early 1991, Japanese consumption had slowed; business investment slowed and residential investment also declined. As a result, the stock market continued to fall, and, not surprisingly, land prices also fell. In response, the Bank of Japan began cutting interest rates, which it continued well into 1992 in response to continued sluggish investment growth. However, consumption declined further still, and business investment fell off sharply. A sustained GDP growth of only 1% was sustained by public investment during the period. (Browne,…[continue]
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