SYNOPSIS: Japan can't innovate itself out of Recession, either
Last week Japan's Nikkei -- the stock index that takes its name from the Nihon Keizai Shimbun, the country's leading financial newspaper -- fell almost 9 percent. Now normally it's a mistake to read too much meaning into the fluctuations of this or any other market index (especially because the index was revised to include more tech stocks just in time for the big tech slump). If the 30 percent rise in the Nikkei between June and April didn't foretell a real turnaround in Japan -- which it didn't -- then the 15 percent decline since April doesn't necessarily predict a new recession. But in this case the stock plunge is telling us something: namely, that the economic strategy of Japan's government is falling apart.
Japan, uniquely among the world's major nations, has managed to recreate 30's economics at the dawn of the 21st century. Much of the nation's huge productive capacity remains unused because consumers and businesses just don't spend enough. And the usual answer to a demand-side slump, reducing interest rates, hasn't worked: the Bank of Japan has cut the equivalent of the Fed funds rate all the way to zero, and yet the economy remains depressed.
True, Japan has avoided full-scale depression. Deficit spending, on a scale no nation at peace has ever tried before, has kept the economy afloat. But such huge budget deficits cannot be sustained indefinitely; so the central question for Japanese policy is, What will allow the economy to come off fiscal life support?
Western economists, including me, have urged Japan to supplement deficit spending with an aggressive monetary policy: the Bank of Japan, on this view, should both pump money into markets and promise that the grinding deflation of recent years will be replaced with moderate inflation. But the B.O.J. has not only refused to act; its governor has repeatedly indicated that he intends to raise interest rates as soon as possible. So what's the plan?
Japanese officials -- unembarrassed by a long history of prematurely declaring economic victory -- talk breezily about "self-sustaining recovery." That's a hope, not a policy. All that deficit spending could, in principle, "jump start" private demand, producing a recovery of consumer and business confidence so large that the economy would keep growing even when the government spending ended; but that's a very speculative prospect, and a steady drumbeat of adverse economic reports leaves no reason at all to believe that it's happening. (One friend likens the determination of Japanese officials and bullish investment analysts to downplay the consistent bad news to that of the knight in "Monty Python and the Holy Grail" who remains belligerent even as one limb after another gets hacked off: "Just a flesh wound!")
Lately, however, Japan optimists have had a new answer to the naysayers: technology! Any day now, they say, the new economy is going to arrive in Japan, generating not just a surge in productivity, but a surge in demand. Businesses will start spending trillions of yen on new equipment; individual investors, made wealthy by the soaring prices of technology companies, will start spending on luxury goods; and the time of troubles will be over.
And that's why the falling Nikkei is such an ominous omen. Mainly it reflects the "Nasdaq effect" -- the worldwide decline in technology exuberance over the last two months. But whereas the United States didn't need that exuberance -- in fact, the decline in tech stocks has made the Fed's job easier, by turning down the flame under our overheated economy -- Japan was counting on technology to save it from stagnation. As good as Japanese technology may be -- and much of it is very good indeed -- the prospect that technology will rescue Japan's economy is now receding. Instead, the country is right back where it started: with an economic malaise that shows no sign of going into spontaneous remission, whose symptoms are mitigated only by deficit spending that cannot continue at these levels. Meanwhile another year has gone by, and the mountain of government debt has gotten 30 trillion yen or so higher.
It's a sad story, which carries a moral for us all: technology is not a magic elixir. The Internet, mobile phones and all that are exciting and important, but those who count on them to solve all their problems are likely to be disappointed.
Originally published in The New York Times, 5.14.00