SYNOPSIS: Scary story of how wonderful country collapsed through no fault of its own
In an early-'90s
Dilbert, an excessively trendy manager exhorted his team to "search
for excellence in the total quality chaos, or whatever the Japanese are
doing this month." Only a few years ago, the business sections of
airport bookstores were largely given over to tracts revealing the supposed
secrets of Japanese management and the menace Japan posed to the United
States. Then it turned out the Japanese were human, after all, and everyone
lost interest. Western pundits, having once placed Japan on a pedestal,
now either prefer not to discuss the subject or see Japan's failures mainly
as an occasion for smug self-congratulation.
But the new story
is much more interesting than the old one. How could a wealthy, productive,
sophisticated country have gone from enviable growth in the 1980s to stagnation
in the '90s, and now be slipping into a downward spiral of recession and
deflation? True, Japan is not a country on the edge of chaos--as Indonesia
or Russia is--but that only adds to the mystery. Japan isn't a place where
the state is weak, unable to collect taxes or convince investors that their
property rights are secure. Nor is it a country at the mercy of skittish
foreign investors who must be persuaded to roll over its debt: Japan is
still the world's largest creditor. So what's the explanation?
Japan has many inefficiencies that limit its productive capacity--too many
mom-and-pop stores, not enough computerization in the office, and so on--but
inefficiency per se is not the immediate problem. What Japan lacks right
now is not supply but demand: Japan's consumers and investors just aren't
spending enough to keep the country's shops and factories busy.
And the usual remedies for inadequate
demand aren't working. Interest rates have been pushed down almost as far
as they can go. Like the Fed, the Bank of Japan normally targets the interest
rate on overnight loans that banks make to each other. The difference is
that this rate is more than 5 percent here, but basically zero there. The
big public spending projects the Japanese government launches every now
and then do create some jobs, but they never seem to yield enough bang
for the yen: The economy keeps relapsing, while government debt keeps mounting.
here
are three common explanations for Japan's plight.
Explanation 1 is that it is mainly
a financial problem. Japan's corporations are too burdened with debt, its
banks too burdened with bad loans that have never been acknowledged. On
this view, what Japan needs is a long, painful financial housecleaning.
Explanation 2 is that the problem
is mainly psychological. When the "bubble economy" of the 1980s
(remember when the square mile under the Imperial Palace was supposedly
worth more than all California?) burst, goes the story, consumers and investors
went into a funk that has depressed the economy, and the depressed economy
has perpetuated the funk. On this view, what Japan needs is a jump-start--say,
a massive but temporary round of tax cuts and public spending programs
that will restore confidence and get people spending again. (Although it
is tactless to say this, the model everyone privately has in mind is the
way wartime spending jolted the United States out of the Great Depression.
Thank you, Adm. Yamamoto!)
Explanation
1 doesn't make sense to me. If Japan's problem is demand, not supply, how
do corporate debt and bad loans cause that problem? You might say that
the answer is obvious: Overindebted companies can't borrow more, and the
banks are in no position to lend anyway. But Japan's investment as a percentage
of gross domestic product is the highest among major advanced economies.
And banks have been lending, too--after all, where do you think those excessive
debts and bad loans came from? The problem is that even these high rates
of investment aren't enough to absorb the huge sums that consumers apparently
want to save.
Until recently I was more sympathetic
to Explanation 2. But lately I have started to wonder whether the stubborn
unwillingness of Japan's economic engine to catch is, as many foreigners
seem to think, merely because the jump-start hasn't been big enough or
sustained enough. And so (like a small but growing number of people, including
at least one influential
Japanese economist and I have started paying attention to Explanation
3--that Japan's troubles really stem from a subtle but deadly interaction
between demography and ideology.
Here's
the story: Japan, like the United States only much more so, is an aging
society. Thanks to a declining birth rate and negligible immigration, it
faces a steady decline in its working-age population for at least the next
several decades while retirees increase. Given this prospect, the country
should save heavily to make provision for the future--and lacking
the kind of pay-as-you-go Social Security system that allows Americans
to ignore such realities, it does. But investment opportunities in Japan
are limited, so that businesses will not invest all those savings even
at a zero interest rate. And as anyone who has read John Maynard Keynes
can tell you, when desired savings consistently exceed willing investment,
the result is a permanent recession.
If this is the problem, there is in
principle a simple, if unsettling, solution: What Japan needs to do is
promise borrowers that there will be inflation in the future! If it can
do that, then the effective "real" interest rate on borrowing
will be negative: Borrowers will expect to repay less in real terms than
the amount they borrow. As a result they will be willing to spend more,
which is what Japan needs. In short, this explanation suggests that inflation--or
more precisely the promise of future inflation--is the medicine that will
cure Japan's ills. The trouble--the other half of the Japanese trap--is
that while the conclusion that Japan needs inflation emerges from what
looks like impeccable economic logic, we live in an era in which central
bankers believe (and are believed to believe) in price stability as an
overriding goal. The peculiar result of the credibility of modern central
bankers as inflation hawks is that no matter how much money the Bank of
Japan prints now, it doesn't matter: It can't lower the nominal
interest rate, because that rate is already zero, and because people don't
believe that it will allow inflation to break out any time in the future,
it can't lower the real interest rate either.
This
theory is offensive to many people. Deep economic problems are supposed
to be a punishment for deep economic sins, not an accidental byproduct
of swings in the birth rate. Inflation is supposed to be a deadly poison,
not a useful medicine. Above all, it seems implausible that the proposed
solution to such severe difficulties could involve so little pain. And
while I think logic and evidence are on my side--that demography, not crony
capitalism, is the villain, and inflation is the answer--it is certainly
possible that I am wrong.
But Japan worries me. It's not just
that we are talking about a huge economy here, an economy whose woes can
drag down a lot of smaller countries with it. What really disturbs me is
this: If we don't really understand what has gone wrong in Japan, who's
to say the same thing can't happen to us?