Sunday, October 24, 2010

Don't count Japan out yet

It is fashionable these days to speak of Japan as the "sick man of Asia," a country in severe and possibly irreversible
economic and social decline. The list of Japan's ills is both familiar and daunting: two "lost decades" of slow economic growth, persistent deflation, massive government debt, ultra-low fertility, a sclerotic political system, technological and social isolation (called "Galapagos syndrome"), and - as if all that weren't enough - wimpy "herbivorous" men. Typically, China is held up as the example of what Japan could be (and once was!), but isn't - a high-growth East Asian economic powerhouse.

Now, perhaps I'm a natural contrarian, or a natural optimist, or just a tubthumping Japanese nationalist, but I think that rumors of Japan's demise have been greatly exaggerated. Almost all of these problems are either overstated, misunderstood, or common to most rich countries.

First, let's take a look at those "lost decades." In the 1990s, Japan's economy did indeed slow, but not disastrously so - per capita, annual Japanese growth was only 0.5 percentage points lower than that of America, whose economy boomed during that decade. And in the years that followed - the "second lost decade" of the 2000s - Japan's per capita growth actually outpaced that of the U.S. It was only because of Japan's declining population that the countries' total GDP diverged so markedly.

Then there's that public debt. Although scary headline figures put the government debt at over 200% of GDP, much of that is held by the Japanese government itself. Japan's net government debt is only about 100% of GDP - still way too high, but not that different from Europe or the U.S.

The ultra-low fertility rate - 1.27 children per woman by the most recent count - is indeed a big problem, as it will strain the pension system and raise the dependency ratio. But it's not a problem that's unique to Japan. South Korea's fertility is 1.24, Germany's is 1.36, Italy's is 1.38. Few people are talking about the terminal decline of Germany or Korea. Low fertility is just something that all developed countries are having to learn to deal with.

Japan's political system is indeed sclerotic. Both major parties are weak, riven by internal discord and beholden to the powerful bureaucracy. But at least Japan has a two-party system now! When the Democratic Party of Japan was elected to power last year, it was the first time that an opposition party had won a popular majority in over 50 years of "democracy." If Japan's politics are sclerotic now, they were simply tragic back in the 60s, 70s and 80s; one perpetually-ruling party, deeply corrupt, divided into internal factions that doled out government protection and largesse to favored companies and constituencies. Japan's political system is one of the institutions that has most dramatically improved over the past 20 years.

As for Japan's isolation, here too the doomsayers overstate their case. It's true, as many lament, that few Japanese students study overseas; this deprives Japan's professionals and scientists of valuable connections, experience, and perspective. But French students study mostly in France, German students in Germany, and British students in Britain, and little is said of it. In fact, the only large rich country that does send a substantial portion of its students overseas seems to be South Korea.

Regarding the technological "Galapagos syndrome" that has supposedly deprived Japan's export industries of international competitiveness, I don't deny that some of this is happening, especially in mobile computing and communications. But Japan still runs a substantial trade surplus, despite its currency no longer being undervalued. And plenty of Japan's once-heralded industries - cars, construction equipment, machine tools, cameras, video game systems - are still just as world-beating as ever. Furthermore, small and medium-sized Japanese companies have increasingly captured market share in parts and components, the un-sexy back end of the value chain that nevertheless makes Germany an export powerhouse. Conclusion: Galapagos syndrome is an annoyance, but it is not bringing down the Japanese economy.

Deflation is a thornier problem. Here is one issue where I agree with the consensus view, which is to say that a long deflationary spiral has sapped much of the vitality from Japan's economy. This is the problem that is most unique to Japan, and is something that will continue to plague the country for a long time, as high-paid Baby Boomers retire and are replaced with lower-paid youngsters.

That about covers my list. As for the much-ballyhooed "herbivorous men," well, sorry to say this, but Japan, welcome to the club. Rather than some kind of collective loss of civilizational pride and will, I blame internet porn.

All this, I want to stress, is not to shrug at Japan's difficulties, or to claim that Japan is cruising along. The country has real problems. But look around - Europe and the U.S. are in much the same boat on many of these points, or else have equally vicious problems all their own. Japan needs serious reforms and bold experiments, but it does not deserve its reputation as a sick, exhausted society in a slow, terminal downward spiral.

Why, then, is this meme of Japanese decline so popular, both in the West and in much of Japan itself? I believe that the main culprit is expectations. After all, Japan was experiencing China-like levels of growth as recently as a few decades ago. And it is similar, in its economic model and (though few mention this aloud) its racial composition to countries like South Korea and Taiwan and China that have been on a tear of late. We look at the other Asian tigers, and expect Japan to be an Asian tiger too - and when it's not, we assume it must be some special sclerosis.

But Japan is not another "Asian tiger." It did its rapid catch-up growth a long time ago. Japan was the first East Asian country to join the ranks of the developed nations, and so it naturally was the first to hit the wall of slower growth that inevitably puts the brakes on any country that reaches the technological frontier. This is just economic destiny. In fact, don't look now, but Korea is hitting this wall as well, as is Taiwan.

So how well is Japan doing, really? Its per capita GDP, measured at purchasing power parity, is very close to that of Germany, the UK, and France - countries with roughly similar populations and natural resources - and a bit ahead of South Korea and Taiwan. It has nearly the lowest murder rate and the highest life expectancy of any country on the planet. On the downside, its suicide rate is extremely high, and its inequality is a bit worse than Europe's.

Not the best-off country in the world, therefore, but no slouch either, and in some areas still a world-beater. And those who claim Japan is a society in stasis should look again. In recent years, Japan has shown a (relatively) bold willingness to tinker with its institutions, instituting a jury trial system, for example. Once-respected (and thus deeply corrupt) institutions like prosecutors and police have deservedly fallen from grace. Service industries like retail, once the cozy sinecure of politically-connected firms, are being challenged by entrepreneurs like Tadashi Yanai of Fast Retailing. the flip side of Japan's "Galapagos syndrome" is that many Japanese customers are opening their eyes to the innovation and quality of foreign brands like the iPhone. Even Japan's famously paleolithic gender roles are changing.

Japan is not (yet) in the middle of a Renaissance, nor can it recapture the economic "miracle" of the 70s. It assuredly has a hard road ahead. But the country is neither as sclerotic nor as badly off as pessimists and critics allege. This is one country that may surprise you on the upside.

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