Japanese Economic Malaise

Once upon a time, Japan was a poor country.

While the Japanese’s cultural history makes for very interesting stories for Hollywood and learning, pre 20th century Japan, due to lack of rule of law, was unable to match the industrial capabilities of it’s western counterparts. As a result, well into the 1860s, Japan still lagged behind in terms of health, development, education, military and science.

Japan did however get things together thanks to two important events. The first, was the influence of the Dutch: 蘭学 (Rangaku), during which the Dutch brought all kinds of technology to Japan, helping them invent better weapons, and more efficient technology, effectively helping Japan become the most dominant country in the East, if not all of Asia. The second, was the industrialization effort of the emperor Meiji, who ascended the throne in 1868 and placed industrial development as the key priority for the nation. By the turn of the century, Japan was booming, and ever since, has been THE model for Asian developmental success.

However, while Japan still does very well today relative to the 189 countries in the world, it has still been marred by poor GDP growth. The years 1990-2010, commonly known as “the lost period”, marked by a dramatic slowdown in the Japanese economy, as well as deflation, has been a subject of interest for many economists- particularly, the reason as to why Japan’s slump lasted for as long as it did. One of the world’s more prominent economists, Paul Krugman, stated that Japan from the 1990s suffered from what was known as a liquidity trap: a situation where stimulation by the central bank through lowering lending rates (similar to the current quantitative easing policy in the United States post ’08) failed to get the economy going due to excess credit being trapped at the banks, which saw no good investment opportunities. Instead of monetary policy, Krugman, as well as many economists, posited that a government spending policy- fiscal action- would have been the solution to the Japanese’s deflationary woes.

This time around, Shinzo Abe, Japan’s prime minister, has vowed to not make the same mistakes: learning from Keynesian suggestions, the central bank of Japan aggressively cut interest rates in an attempt to raise inflation since December, when Shinzo Abe’s party, the Liberal Democrats, came into power. In addition, the Japanese government has issued several stimulus packages, and continues to approve more government spending on public works and research. With this concerted attempt to expand both the monetary and fiscal, Austrians all across the world are feeling indignant as ever.

However, whether or not you believe in Keynesian economics, I believe that Abe’s government stimulus, though providing a momentary boost, will not lead to long term success. The reason, I believe, lies in household psychology.

The Japanese people, as well as other people in east Asia, have always been notorious for saving money. It is estimated that while the average American spends 87% of his per annum salary on consumption of personal goods, mortgages, insurances- Japanese only spend about 60% on the same items. Alternatively, Japanese on average save 19 cents on every dollar earned. While there are many reasons Japanese can afford to spend less money (due to government assistance), the bottom line is that Japanese save most of the money that they have left over, while Americans spend it. From a standpoint of external debt, Japanese debt is only 45% of their GDP- America’s is 106%, Norway’s is 141%, France’s is 182%, and Iceland’s hovered around 1000% just a few years back. When only looking at external debt, Japan is actually more similar to Samoa or Gambia, rather than the league of industrialized nations it has always been associated with.

The truth is that without the Japanese people actually willing to spend more, the government’s initiative to boost spending will fail. Unlike macroeconomic policy, cultural ideas ingrained in a society are not so easily changed. The Japanese, along with many Asian societies, are unlike western societies, who have always been quite rich- east Asia has a long memory, and remembers the days of being poor- as a result, this obsession with saving has persisted.

Long story short: Unless the Japanese are willing to change the way they spend, this latest initiative by the government, will too, fail.