Matt Yglesias thinks that Japan did indeed have two lost decades (1990-2007). But I disagree with the arguments he makes. I believe that 2002-2007 were good years for Japan.
First of all, Matt cites the fact that Japan's employment-to-population ratio fell steadily from 1990. However, this must be weighed against the fact that Japan is aging extremely rapidly. In particular, the retirement of Japan's baby boomers began in 2005, since the retirement age for many Japanese workers is 60, not 65 as in the U.S.
Next, Matt cites a fall in Japan's hours worked per employed person, from about 2,100 in the late 80s to about 1,750 in the late 2000s. However, a reduction in hours worked can be part of a long-term trend toward more leisure. In fact, as Matt himself pointed out in a post about the Great Depression, the U.S. experienced a long-term fall in hours worked during the period from 1920 to 1980, most of which were good years economically:
(Note that this graph shows something slightly different than the graph Matt shows for Japan, so the levels can't be directly compared.)
In fact, given Japan's legendary culture of overwork, a fall in hours - if it is real, and not simply a reflection of an uptrend in unpaid, unreported overtime - is probably a good thing.
The fact is, despite the trends that Matt cites, Japan's real per capita GDP growth did slightly better than that of the U.S. (and about as well as Europe) during the period from 2000-2007:
Paul Krugman also points this out. Actually, I lived in Japan in 2004 and 2005, and I remember how well everyone said the economy was doing (including the econ professor I worked for).
If Japan had a "lost decade" in the 2000s, then the whole developed world had one as well. And given the variety of policies being enacted around the world (historically low interest rates and high budget deficits in the U.S., for example), it seems a bit of a stretch to conclude that the whole world suffered a simultaneous lost decade resulting from a simultaneous policy mistake that led to a worldwide aggregate demand deficiency. (Not that AD wasn't an issue in Japan; in fact, Japan's period of robust growth in the mid-2000s followed a policy of quantitative easing and an uptick in inflation.)
So I agree with Krugman. Japan had one lost decade (the 90s), but not two.
Update: Krugman also argues that Japan could have done a lot more and recovered a lot faster than it did. I agree with that. But I think that the success of the Koizumi years (early- and mid-2000s) should not be ignored, since it represents probably the best policy experiment we have regarding the effectiveness of quantitative easing.
Update: Krugman also argues that Japan could have done a lot more and recovered a lot faster than it did. I agree with that. But I think that the success of the Koizumi years (early- and mid-2000s) should not be ignored, since it represents probably the best policy experiment we have regarding the effectiveness of quantitative easing.
it seems a bit of a stretch to conclude that the whole world suffered a simultaneous lost decade resulting from a simultaneous policy mistake that led to a worldwide aggregate demand deficiency.
ReplyDeleteReally? Look at all the austerian groupthink going on in Europe now in the midst of crisis. Here, too, of course.
Given the ascendance of neoliberal dogma over the last decase, it doesn't strike me as bing much of a stretch at all.
I'm not sure Japan had even one lost decade. The state of the Japanese economy on the eve of 1991 was crazy in the extreme (Tokyo's real estate valuation had it being "worth" more than the whole US), and at least some of the 1991 to 1995 or so pain was correction of said insanity. But arguing that Japan had a lost decade requires starting in 1990. Seems dizzy to me.
ReplyDeleteSurely the whole developed world did have a lost decade in the 2000's. And, as it happens, it did result from a simultaneous policy mistake (one that is still going on), namely the emergence of a consensus for a too-low inflation target (and its interaction with the high world saving rate along with random shocks to investors' risk tolerance).
ReplyDeleteJapan (and the world) did have a recovery in the mid-2000's, but it was hardly a full recovery in Japan's case. (Your demographics and reduction in the culture of overwork can't explain why the unemployment rate at its 2007 trough was still well above what had been a 40-year high in the mid-1990's.) When we date the Great Depression for the US, we don't say it ended in 1933, even though there was a very dramatic recovery from 1933 to 1937. Given that Japan had just had a lost decade, while the US had not, the fact that Japan's real per capita GDP did only slightly better than the US during 2002-2007 should be considered a failure. (Should one expect Japanese real GDP to have a unit root?)
Even if Japan had returned to full employment (as it apparently did not), the Japanese recovery shouldn't have been considered complete until the inflation rate rose back into the normal range. The Bank of Japan sealed the fate of Japan's second lost decade when it started raising interest rates in 2006 despite a still much-too-low inflation rate. At the time, I was shocked that the BoJ would make such an obvious mistake.
Japan's mid-2000s recovery was, I fear, largely due to the temporarily-buffed (via borrowed money) US consumer being able to buy more of their desirable export goods.
ReplyDeleteYou can measure any economy by how pleasant the job economy is for young women entering it. In the 1980s Japanese companies were levying vast numbers of women into career positions, but since the bubble women are largely persona non grata in Japan.
I happened to have lived in Tokyo 1992-2000. I didn't understand economics then and I still don't now but I do think Japan is a very complicated picture. I can't tell if they're better off than us or not.
"But I think that the success of the Koizumi years (early- and mid-2000s) should not be ignored, since it represents probably the best policy experiment we have regarding the effectiveness of quantitative easing."
ReplyDeleteI agree with this. (It needs the caveat, though, that the rest of the developed, and developing, world was recovering during this period without having to resort to QE, and Japan's success was largely export-driven. It's not clear how the result would generalize to a situation where the entire developed world appears to be in a liquidity trap.)
I still disagree with both you and Krugman about Japan reaching its potential by 2007. You make labor supply arguments, which, if anything, would suggest a lower unemployment rate at potential than in earlier cycles, rather than a higher one.
Just wanted to say that the first link is wrong. It points to the Krugman blog.
ReplyDelete"Matt Yglesias thinks that Japan did indeed have two lost decades (1990-2007)."
@Anonymous:
ReplyDeleteThanks, fixed!
The behavior of Japan's youth unemployment rate over the ('good years' of) 2002-2007 period doesn't paint a particularly rosy picture.
ReplyDelete