Monday, August 06, 2012

The Japanese tragedy, causes and consequences

Ryan Avent has some new points in our debate over Japan's post-1990 economic performance (see my original post and Ryan's earlier post). I have some problems with the points he makes, but instead of getting into those things, I'd like to step back and take a look at the broader argument.

The original question was: "Why has Japan performed poorly relative to 1990-vintage forecasts?" My answer was: "Because 1990-vintage forecasts were overestimating Japan's ability to exceed the West in productivity." Ryan's answer is, basically: "Because Japan's monetary policy has been too tight."

In macroeconomics, it is very hard to generate a good "counterfactual" - in other words, it's very hard to know what would have happened if some policy had been different. History only happens once, after all. So what we usually do is come up with "stories", and then look to see how the evidence, informed by our theories, fits with each story. It's not exactly science, but it's what we have to work with.

So let me see if I can characterize the stories Ryan and I are telling about the Japanese economy.

Ryan's story: "Japan is (or was) a country with better institutions and/or technology than the West. In the absence of a demand shortage, Japan would be considerably richer than the larger nations of Western Europe, as it was in 1990."

My story: "Japan is (and was) a country with about the same quality of institutions and productivity as the West. In the absence of a demand shortage, Japan would be doing better than it currently is, but not significantly better than the larger nations of Western Europe."

It's essentially impossible to quantitatively measure the quality of a country's institutions. Hence, to evaluate these two stories, let's look at the notion that an aggregate demand shortage has caused Japan's economy to underperform for 20 years.

Here is a picture of Japan's employment-to-population ratio:

As you can see, about 4% of Japan's population stopped working over the period of 1995-2003. This resulted in an unemployment rise of about 3 percentage points, with the remaining 1 percentage point presumably being some mix of "discouraged workers", grad students, housewives, and kids deciding to play instead of work. In any case, suppose that proper monetary policy had prevented any of this decline from occurring. Japan's labor force would then be about 7% bigger than it currently is. Assuming productivity would be the same then as now, that would raise Japan's per capita GDP (PPP) by 7% from its current level. This would account for about half the gap between Japan and Germany that Ryan shows opening up since 1995, and a quarter of the gap between Japan and the United States.

What would account for the rest? Two things: 1) total factor productivity, and 2) hours worked by the employed. Let's assume for the moment that TFP is determined entirely by institutions, and so let's look at how Japanese work hours per employed person have changed over time:

The steady drop in working hours since 1988 (most of which, interestingly, happened before 1995) corresponds to a reduction in the Japanese workweek from about 47 hours per week to just under 42. In comparison, the U.S. workweek is just under 39 hours, and the European workweek is just under 38.

Whose story does this support? It depends on what you think Japanese people's work habits would be if monetary policy had been looser. If the Bank of Japan had circumvented the zero lower bound by doing a bunch more quantitative easing, would Japanese people still be working 47 hours a week? Maybe, maybe not. A somewhat related question is whether that would be a good thing.

But note that the graph of hours worked provides a very natural explanation for the question of how Japan was managing to outperform the West before 1990. The answer: they worked more. A lot more. The only way they could have continued to outperform the West was by continuing to work more.

(Side note: OK, so what if TFP isn't exogenous? It's hard to think of why this would be the case. Labor hysteresis isn't an explanation, because for skill loss to matter, unemployed people have to come back to work, which hasn't happened in Japan (except slightly in 2003-2007). And endogenous growth isn't the answer, since Japanese total R&D spending has strongly outpaced the West since 1995. So I don't find it plausible that persistently tight monetary policy caused Japan's TFP to stagnate.)

So was what happened to Japan a preventable tragedy? I think part of it was a minor preventable tragedy. More aggressive easing probably could have saved up to 3% of Japan's working-age population (over 2 million people!) from unemployment. And in fact, Japan's bright spot in the mid-2000s came after the BOJ did a bunch of quantitative easing. So I think Ryan's story is right.

But I don't think it is the whole story. Japan stopped outperforming the West in large part because they started working less (though still more than people in the West). That change mostly happened well before the zero lower bound was hit, and began even before the Japanese asset bubble reached its peak. So I suspect not all of it could have been reversed by quantitative easing. But even if some could have been reversed, I do not see the end of the 47-hour workweek as a tragedy. Knowing what I know of Japanese society, I see it as a minor triumph.

Update: It has been brought to my attention that the "employment-population ratio" for Japan is not defined the same as in the U.S., where the denominator is as the population aged 16-64; in Japan there is no upper age limit for the denominator. So some of the decrease in Japan's employment-population ratio was from aging. However, the trough-to-peak unemployment change during the "lost decade(s)" was 3%, so there was definitely still some unemployment that might have been prevented by looser monetary policy.

Update 2: Matt Yglesias weighs in with a much better overview of the vagaries of PPP than I provided in my last post. But my argument applies perfectly well using PPP, which is why I didn't want to go there in this new post. Still, give Matt's post a read.

Update 3: Karl Smith weighs in as well. He points out that Japanese unemployment has mostly been youth unemployment, as Japanese companies are unwilling to fire older workers. He also shows that Japan's GDP per hour lags behind Italy's, something I did not know. That does not, however, mean that Japan's institutions and/or technology are worse than Italy's, however, since working more hours makes productivity/hour go way way down, as any grad student has experienced when finishing his or her dissertation. We should not expect GDP/hour to converge between countries whose work weeks are very different in length, even under the Solow model.


  1. Noah, I think you are all being too mathematical in your thinking and basically not doing enough thinking in its pure form.

    What happened after the 1990s. Japan got some real competition. Very real. Countries such as China, South Korea and basically the entire Asian continent started to liberalize their economies focussing on export led growth. Precisely competing in the same field that led Japan to become a developed country. Heck, Even my country started to liberalize in the 1990s and turned from a 98% socialist economy to a 85% socialist economy.

    I think the internals are a separate issue and maybe that's the only thing that interests you. But my point is that the external environment was such that whatever Japan did it was going to relatively slow down. And very drastically.

    1. Anonymous4:10 PM

      standard economist response:

      But why should that hurt Japan? If Korea and China and India have all become richer than those markets should absorb more Japanese goods! Mercantalism is dead baby!

    2. Kabir Gandhi Khan, are you related to Genghis Khan? And don't lie, like Tamerlane did. We can check the records, you know.

    3. @Anonymous "Economist"

      But really I don't get how causality seems to be derived from graphs so easily in Economics. I can understand how the predictions in 1990 would have been wrong but in 2012 can't we see every single asian country has seen a tremendous rise in exports competing in the same field as Japan. I mean I am no Economist but Why is no Economist in the discussions here even bothering to speak about it ? I am sure there are many non Economist Economics lovers who are thinking What I am thinking. I mean AD AS monetary policy fiscal policy blah blah but not a word about the 100X rise in competition? I mean the Government is not God right ?

      In Olympics speak Japan was competing in a 3 country world and always winning Gold/Silver. Suddenly now there are 30 countries and it is barely winning bronze and people are discussing all this is because of What ?

      I mean maybe a non Economist who understands my predicament, Please do care to elaborate.


      Kabir Gandhi Khan is my internet avatar and not my real name (as I intend to write about other things than just Economics and still keep a job :D ) I live in a left liberal's paradise remember (freedom and liberty only for cows) and this is the best I can do for now. When I have substantially changed the world I will reveal my name to people on the internet too :)

      Or just change my name to this ;-)

    4. Well in that case, let me say that the real Khan - i.e., Genghis - would trample a wimp like Gandhi under his horse's hooves!!

    5. In complete agreement with your thinking there. I would only add deservedly so.

    6. Anonymous9:45 PM

      Again, the standard reply is that it is not a zero sum game. All that extra competition employs people now who would previously be subsistence farmers, and now they can, in aggregate, buy more stuff than they could before.

      Is it possible that through clever economic policy the East can de-industrialize the West to such an extent that there are only three kinds of employees, the white collar banker-lawyer (the capitalist), the white collar-noah-smith-tenure-for-lifer (the court jesters) and the vast vast hordes of mcdonalds workers (the hopelessly doomed consumers of asian slave products)? Sure. Or at least it appears so.

      But manufacturing as a share of American production has stayed more or less the same, it just declined rapidly as a share of employment. Of course, the transformation of America into a Latin American country in terms of inequality is its own problem but its not based on trade with the vast host of Asia. To paraphrase Brad De Long, as long as the apocalyptic death cult, otherwise known as the Republican Party, continues to maintain its deadly grip on the throat of American public policy Americans will continue to get a sorrier end of globalization stick than they should be. But that is a political question, not an economic one.

    7. So Indeed I am right. I think. Assuming your answer is the standard Economist response again, the error in your argument then is the assumption that these new competitors began to be consumers of Japanese products. But What really happened is that nearly all Asian economies liberalized only their exports and not their imports. For example in India you cannot really import a car without paying double the price So nearly all car manufacturers setup plants here. Japanese cars sell the best in India but they are made in India. Infact just recently India has begun exporting Motorbikes to Japan because it is cheaper to manufacture them here.

      So broadly Japan faced 10X competition in the markets it served while the new competitors closed their economy to Japanese products made in Japan.

      I mean is there any other way to see this.

  2. Noah,
    Isn't some large part of the decline in employment-to-population ratio in Japan since 1990 because of the increase in retirees. The retirees are not unemployed. Aging population is a factor not related to monetary policy and perhaps overlooked by Ran Avent.

    1. DAVID FLATH!!!! It took you this long to comment on my blog?

      Did you know I'm in Tokyo now? Are you in Osaka?

      Anyway, employment-to-population ratio only counts people of working age. Some people probably started retiring early when the economy stalled, but I'm not sure that early retirees are so different from discouraged workers.

    2. Quick note - the employment-population ratio we're looking at defines "working-age population" to be everyone over the age of 16, so that it fails to adjust for dramatic increases in the elderly share of the population. I think that once this adjustment is made, Japan's recent performance actually looks pretty decent.

    3. Wow, OK, I totally failed on that one. Dang. Yes, Dr. Flath, you are correct. Thanks, Matt.

    4. Noah,
      Whatever the def of employment to (working-age) population ratio, I think that per-capita GDP is usually "per-person" so demographics must matter in explaining per-capita GDP. Japan is an outlier having gone from proportionately more young people than most other countries to more old.
      Your blog is terrific. If your travels bring you through Kansai let's meet.

    5. I didn't have time to come to Kansai this time, but I will probably come soon to work with Yoshiro Tsutsui. Let's definitely meet up then.

      Thanks for the vote of confidence re: the blog, too. ;)

  3. Anonymous7:46 AM

    It looks to me that Japan's decline roughly corresponds to its backing away from industrial policy and its turn toward liberalization. Japan embraced neoliberalism and lost the post-war national development drive that had sustained its economy and turned it into a powerhouse.

    Maybe the lesson is that there is no such thing as a "developed" country. There are only self-consciously developing countries, executing a national economic strategy that focuses market activities around government-established and government-subsidized goals, on the one hand, and stagnant countries on the other hand.

    Liberalization has been a plus for some of the old socialist countries that were practicing extreme forms of state direction, but for the countries of the West and Japan, extreme neoliberal repudiation of the state role in economic development and strategy has led to stagnation.

    1. Anonymous11:32 PM

      Nope -- there was no change toward liberalization from 80s to 90s to 00s.

  4. Just a simple arithmetic question. How many work weeks in a work year?
    From your numbers I get 42 which seems like a lot of vacation. Is that correct?

    1. You're going all the way past the recession, I'm just going to 2008.

  5. This is an interesting discussion, and I believe that what makes it that interesting is that it focuses on one concrete example.
    Though contradicting each other, analyses of both Smith and Avent makes sense, as do many of the comments.
    We see that in economics there may be more than one answer to a single question, probably because of the interactions between the various economic and political agents (and the resulting culture).
    This is something that does not show in models and abstract thinking.

  6. Anonymous10:33 AM

    Can you be more specific on the nature of Japan's "AD problem" that persisted over two decades? Long-term sticky wages? Why didn't the economy adjust over time? Arguably Japanese wages are, in aggregate, more flexible than their OECD peers' (due to supplier wage flexibility and widespread use of flexible bonus payments).

  7. Anonymous11:08 AM


    With the exception of the US, an important weakness of using Solow's growth accounting to explain a nation's economic performance is its complete ignorance of balance of payment and the benefit or damage resulted from sharp and persistent exchange rate changes. (As US dollar is the only international reserve). Japan has suffered from Yen's large appreciation since 1980s. More than 75 % against US dollar currently. No nation, not even Germany, can absorbe such a damaging appreciation againstan international reserve as far as i know. This has actually been pointed out by Raghuram Rajan of Chicago. If we compare national competitiveness in terms of appreciation against dollar, Japan is probably the world's most competitive country.

  8. Noah,

    one trait of the Japanese culture revealed to me is that women are expected to stop working after they get married, but they are also expected to have an education (to make good wives). Isn't this inefficient use of resources a likely reason why Japan would not have overtaken Western Europe? It may also explain why those employed (men with familes) work so long. They have to! I am not sure that this is still the case, but I do know that women now get married later, so maybe this explains some of the decline in working hours of employed persons. Then of course, you have an increase in the portion of retirees as the population ages. Has that had any impact on tax rates, and and therefore the incentive to work? I don't know. But the point is that there are a lot of things going on on the supply side also. Until one is able to identify all and formally quantify their effect, I do not see how we can make any claims about the importance of demand shocks. Or am I wrong?

    1. Anonymous5:56 PM

      I wonder. Female labor participation is 50% in Japan, which is only 1-2% behind countries like France and Germany, though relatively far behind United States' 60%. While higher participation could have helped boost GDP, I think it fails to explain the gap against the EU. A minor effect maybe, as lower unemployment in Japan means that the ratio of male to female workers is not as flattering as in Europe.

      Shorter working hours might be due to cash-strapped employers realizing that workers who do long hours are not very productive. Why pay for overtime if employees are constantly tired and only do eight hours worth anyway? Henry Ford discovered there was no gain in forcing long hours on employees when he measured productivity, which is one among many reasons the eight hour day became the international standard.

    2. Yes, CA, I think you're right, but when comparing Japan with, say, Germany, there's not a huge difference in women's labor force participation...

    3. Hmmm, for ages 15-64 it is about 3 points higher for Germany, much higher for Scandinavian countries. It is not huge, but how big does it have to be to make a difference? I suppose one could calculate the difference in GDP, then get a hypothetical GDP per capita for Japan, but I am too lazy to do it so I am throwing a bait in case anyone wants to take it, lol.

  9. You might want to re-update your update #1. The employment-population ratio in the U.S. uses the same base as does the labor force participation rate--the non-institutionalized population age 16 and over. Here's the specific descriptive text from the BLS website when one accesses the EPR data:

    Series Id: LNS12300000
    title: (Seas) Employment-Population RatioLabor force status: Employment-population ratio
    Type of data: Percent or rate
    Age: *16 years and over*

  10. "What would account for the rest? Two things: 1) total factor productivity, and 2) hours worked by the employed."

    Aren't you leaving out something terribly important? How about the contribution of capital deepening to labor productivity?

    According to Conference Board data the contribution of capital deepening to Japanese real GDP growth fell from an average of 1.80% per year in 1989-95 to 0.53% per year in 1995-2011. Whereas Japan led Australia, Germany, the UK and the US in the contribution of capital deepening to real GDP growth from 1989-95, it lagged all four nations during 1995-2011:

    Capital deepening is highly dependent on the level of nonresidential investment, and it's well known that private investment is highly sensitive to negative monetary policy shocks. Japanese gross fixed capital formation peaked in real terms in 1991, over 20 years ago. Between 1991 and 2006 US gross fixed capital formation nearly tripled while in Japan it fell by 12%:

    So it would appear that tight monetary policy can be hugely detrimental to long run economic growth.

    1. Well, a lot of that capital investment may have been wasted. Japan built a LOT of "bridges to nowhere", and large banks encouraged/allowed a lot of corporate investment during that period that probably didn't have a positive ROI. IIRC, Japan had more capital/person than the West at the start of the '89-'95 period.

      So yes, you're right, but I suspect looser monetary policy would not have changed the wasteful nature of a lot of Japanese investment. It's worth looking into, though.

    2. Then again, why was the significant monetary shock of Volcker's dissinflation not as detrimental, despite being a primary factor in the savings and loans crisis?

    3. Noah,
      The ROI on capital investment was probably much lower in Japan for years prior to the late 1980s. Nevertheless capital deepening was still contributing more to real GDP growth than in nearly all other advanced countries through the early 1990s. That changed dramatically in the mid-1990s, when gross fixed capital formation as a percent of GDP fell sharply, and that's something that's easily related to monetary policy.

      Downward nominal rigidities mean that the real costs of disinflation get progressively greater the closer one gets to 0% inflation. That's why the Cowen/Tabarrok version of the AS curve gets highly elastic at the zero lower bound. When Volcker's disinflation ended in 1986 the U.S. GDP implicit price deflator was still rising at well over 2% a year. In Japan on the other hand, the GDP implicit price deflator has been falling every year since 1995 with the exception of 1997.

    4. Sure, but the point is, if ROI goes negative, "capital deepening" is just another word for "waste". See Michael Pettis for more on this subject.

    5. Mark,

      but after 15 years of the same, why would such rigidies exist? As someone pointed out earlier, none of the popular explanations (menu costs, money illusion, etc.) can justify 15 years of rigidies.

      Moreover, if capital deepening depends on the cost of funds on one hand and the ROI (or MPK) on the other, then it is not clear why monetary policy is responsible for the decceleration of capital deepening. Since 1995 the real prime lending rate in Japan has been lower than that in the US or France, and quite lower relative to Germany's. So it must be the case that the low lending rate is met by an also low ROI. This is consistent with Noah's hypothesis of wasteful investment. It is also consistent with his Solowian hypothesis. Capital deepening may have slowed down simply because, as Japan approached its steady-state, the ROI shrunk.

    6. Noah,
      You'll have point me to what Michael Pettis is saying about negative Japanese ROI. I can't find it.

      If prices keep falling then additional downward adjustments must take place. There's no question that nominal rigidities exist. Just because price adjustments may not be necessary doesn't make them go away.

      The Solow steady state is a separate factor from the negative ROI. The Solow steady state is dependent on the savings and depreciation rate. Note that in the typical Solow model MPK is always positive. But it is still possible for ROI to be negative.

      The principal problem I see with the negative ROI hypothesis is its circularity. Tight money also lowers the ROI.

    7. Mark,

      a low ROI is consistent with a Solowian steady state with a high saving rate (as Frances points out below, perhaps reflecting an aging population preparing for retirement). The wastful investment described by Pettis (see his Big in Japan piece) could have pushed it in negative territory. Even in Solow, the ROI can be negative; while MPK is positive, MPK minus the rate of depreciation need not be. With a depreciation rate of about 8%, any MPK below that will lead to a negative ROI.

      Also, what is the mechanism by which tight money acts? If it is the real interest rate, then it is not clear why Japan did worse than Germany or France, given that its lending rate has been lower than theirs even after accounting for the mild deflation. And how can one justify nominal rigidities in the presence of deflation? Japanese firms went from raising prices by about 3% in 1991 to lowering prices by half percent in 1995 and 1996 to increasing prices by half percent in 1997 and 1998 to lowering prices from 1999 until now. Isn't that proof that prices are not sticky over reasonably-long time-horizons? I mean, even with adaptive (and not rational) expectations, it shouldn't take more than half a decade for firms and workers to adjust their price setting to the new reality.

    8. CA,
      Tight monetary policy not only functions through expected rates of inflation and consequently expected rates of real interest it also functions through nominal wealth and income expectations which affects MPK and hence ROI. That's the circularity problem.

      Nominal rigidities have a greater effect in a low inflation/deflationary environment precisely because it is easier to decrease a rate of increase in nominal wages or prices than it is to lower them. And nominal rigidities are much more of a factor with wages than with prices. I suppose with enough experience the Japanese will adapt but until I see evidence of a truly successful deflation there, or anywhere, I doubt it.

    9. "it also functions through nominal wealth and income expectations which affects MPK..."

      Can you be more specific?

      And nominal rigidities are much more of a factor with wages than with prices

      But then wages would be counter-cyclical. However, empirical research suggests otherwise about Japan:

      And, once again, rigid for how long?

    10. If nominal wealth and income expectations rise individuals will tend to increase their consumption. The increase in consumption will raise demand for products. Since capital stock cannot adjust instantaneously existing capital earns rents and so MPK will rise.

      Aggregate wages are procyclical, but the wages themselves are not. Solon, Barsky and Parker amply addressed the issue of compositional bias in estimates of wage cyclicality nearly 20 years ago:

      The ECB paper you linked to even mentions the compositional bias problem in the introduction.

      The issue of whether there are nominal rigidities in wages is, in my opinion, such a settled empirical fact I'm astonished we're even debating this. See for example this recent paper by the Fed:

      For papers dealing specifically with Japan:

      As for how long, probably as long as there is deflation. People don't like having their nominal wages cut.

    11. Mark,

      Wealth rises and falls all the time. By itself a temporary crash (e.g., Black Monday) does not have significant real impact. Unless we are talking about the bursting of a bubble, which implies the mallinvestment Noah has been talking about. So what is the appropriate monetary policy response to such corrections? When the price of overvalued real estate collapses what should the central bank do, reinflate it? How? Force people to buy something they no longer think is worth what they were paying for, and are therefore unwilling to buy it at the same price despite lower interest rates? And does the resulting drop in the ROI reflect a drop in the actual MPK, or in the perceived MPK towards the actual one? If people are not as wealthy as they thought they were (this by the way is a drop in real wealth), because capital is not as productive as they thought it is, continuing to build bridges to nowhere is hardly a remedy for success despite the capital deepening. Soviet Union, where high capital intensity was accompanied by exceptionally low TFP, is a good example. This is not to say that, as Noah points out, monetary easing shouldn't have been more aggressive.

      Second, doesn't the paper you cite state that due to composition bias the real wage is MORE procyclical than in aggregate statistics? It is not an issue of whether there is some rigidity at all, but rather which is more sticky (prices or wages) and for how long. So what I gather from the existing evidence is that prices are not stuch forever, or they wouldn't have gone from rising to falling, and wages are even less rigid than prices, since the real wage is procyclical. The other article you cited also states that despite some stickiness in wages, "Japanese wages responded flexibly downward to the recession of 1997–1998, but with a lag".

      But again, you are using tools meant to describe the behavior of the economy during the business cycle to explain a 15-year period. If one is to take your hypothesis at face value then they should conclude that over the last 15 years the real wage has been rising(since prices are falling but wages are not, or at least not as fast). So Japanese workers should have seen a significant increase in their real income, and the share of aggregate income paid to labor should have risen. Is there evidence of that? And how on earth were firms able to survive such an increase in labor costs without significant job cuts (unemployment did not rise all that much)?

    12. Several of the nine monetary transmission channels enumerated by Frederic Mishkin act through asset prices, which monetary policy has the ability to affect. The appropriate thing for monetary policy in all cases is to stabilize the growth of nominal GDP. This does not however imply that the central bank should target asset prices.

      "And does the resulting drop in the ROI reflect a drop in the actual MPK, or in the perceived MPK towards the actual one?"

      There is only one MPK, and that is the MPK that results from a given level of aggregate demand or nominal GDP. And since the central bank controls nominal GDP they control the MPK.

      The decline in fixed investment in Japan is more due to the decline in private sector investment, not investment in "bridges to nowhere." Although the Soviet Union also engaged in a high level of capital investment, little of it was by anything one could construe as private.

      True, the paper I cited doesn't directly address the issue of *wage* cyclicality but it's not hard to tell a story where the wages themselves are countercyclical and individual earnings are procyclical based on compositional bias. If nominal wages are fixed and prices rise due to an expansion, real wages fall. However as individuals get promoted and others enter the labor force, their earnings rise. So in aggregate real wages may rise.

      It's true that many New Keynesians theorize that the reason why real wages are procyclical is that wages are less rigid than prices, however I think the evidence for that is weak.

      My hypothesis only states that real wages are countercyclical, not that aggregate real wages are countercyclical. Uemployment may not have risen much in Japan, but there is significant underemployment.

  11. On Avent's AD shortage....the household savings rate has been persistently high over the last two decades. This might be because of thrifty Japanese housewives holding the purse-strings, but it is also of course consistent with an ageing workforce preparing for retirement. I think Japanese demographic trends have a lot to answer for.

  12. Out of curiosity Noah Smith, what is your opinion of the Taiwanese economist Richard Koo? He comments a lot on the Japanese economy, and follows Irving Fisher and Hyman Minsky in the "debt deflation" tradition.

    1. I am a pretty big Richard Koo fan. I haven't read as much of his stuff as I'd like, but what I've read really impressed me. His idea of balance sheet recessions has had arguably more influence on thinking about this recession (and recessions in general) than any other economist in the post-2008 period, including even Krugman, Roubini, etc.

    2. If you don't mind me asking, what of Richard Koo's work did you read? Did you read The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession? I have that book, but I have yet to finish reading it.

  13. Anonymous6:19 AM

    Hoshi & Kashyap 2004, JEP suggest an explanation for low TFP: misallocation caused by the malfunctioning financial system.

    1. Yes, I think that probably showed up in slow TFP growth, but I didn't want to get into that in this post.

    2. Anonymous11:20 PM

      Hoshi & Kashyap are absolute crap. They don't even know what a liquidity trap is.

  14. Anonymous7:44 AM

    Noah wrote:
    "The steady drop in working hours since 1988 (most of which, interestingly, happened before 1995) corresponds to a reduction in the Japanese workweek from about 47 hours per week to just under 42. In comparison, the U.S. workweek is just under 39 hours, and the European workweek is just under 38.

    Whose story does this support? It depends on what you think Japanese people's work habits would be if monetary policy had been looser. If the Bank of Japan had circumvented the zero lower bound by doing a bunch more quantitative easing, would Japanese people still be working 47 hours a week? Maybe, maybe not."

    There was a revision to the Labour Standards Law in 1987 that changed the maximum work-week from 48 to 40 hours. That revision also stipulated that overtime pay must include a premium. So, looser monetary policy by the BoJ would not have preserved the 47-hour work-week. It had already been legislated out of existence.

    1. Wow, I didn't know that!! Do you have a link for a source? I want to post that.

  15. Anonymous1:44 PM

    No specific source. I recall only because I was working for the man in Japan at the time. Here's a link to the Ministry of Health, Labour and Welfare's Chronological Table. Refer to the Measures column in 1987.

    In looking for this link, I was reminded that the workweek changes were phased in between '88 and '93. Although this surely wasn't what policy makers had in mind in the mid-80s when they were contemplating this legislation, I wonder to what extent these changes slowed the increase in the unemployment after the Bubble burst - almost like an accidental job-sharing program. Didn't save my ass, however...

  16. Noah:

    Here is the Japanese Labor Standards Law

    Section 4 describes the work week limitations. The last change here was in 1995, but it's possible that this change was made previously. Not sure if there is any way to tell on this particular page.

    1. And here is a summary paper of Hayashi=Prescott(2002), which is a famous - at least in Japan - study related to this topic.

      Guy Sorman once wrote an article about it.

  17. It occurs to me--and I'm trying to dig into the data--that the aging of the Japanese population has probably contributed to the slowdown there, in ways that are not true in (for example) the US or Germany. The population has aged in the US, and in Germany, but I suspect it has done so at a much slower rate, that the proportion of the population age 55 and over is smaller than in Japan. And I suspect that this has occurred not because birth rates have fallen more in Japan (although they might have fallen somewhat further), but because the US and Germany remain much more open to immigration than Japan does. That greater immigration would allow the prime-age part of the labor force to grwo faster, and thus to enhance productivity growth. We'll see what I find when I actually have some numbers.

  18. Anonymous11:47 PM

    A couple comments:

    1. The decline of the average Japanese workweek means you have more people not working/working part time and the people who are working are working the same amount they always have. Although I think Japanese should relax more this is not what this measure indicates.

    2. The decline in hours and employment-to-pop are both endogenous to monetary policy.

    3. In 1990, economists knew full well about the Solow model's prediction that Japanese growth would slow. In fact, Japanese growth had already slowed from it's rapid growth in 1950s and 1960s.

    4. To be balanced, you should at least acknowledge that the Bank of Japan should not have raised interest rates in 2000 when they had 1 percent deflation. That's what you call grossly negligent central banking. You should also show evidence that you actually understand what a liquidity trap is. You also might point out that they should have gone all the way to zero in '94 or '95 rather than waiting until '99.

    5. Go read Obstfeld's very readable "Time of Troubles"

  19. I'm just going to throw this out here, just out of curiosity:

    I'm still studying Wallace 1981 AER when I can make time. Here's a puzzle:

    For the example of section IIe, the economy has no abilty to produce other than its annual endowment of Y; that is the gross return vector, X, has a geometric average of 1. So why is the lifetime consumption in his proported equalibrium greater than the endowment, and for all time? Each individual h, and this is true of every generation, only gets a lifetime endowment of y, yet his expected lifetime consumption is y/2 + .5(3y/8) + .5(3y/4) = 8.5/8y?! And there's no way for him, or his fellow identical clones, or the government, or anyone else, to invest or produce with a positive expected return?