Setting Sun
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?
Inefficiency? 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.
There 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 ) 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?
If you
missed Krugman's assessment of Kazuo Ueda, click .
