Japan’s Lopsided Financial Balances
Japan’s Lopsided Financial Balances
Tim Duy and Paul Krugman discuss the merits and failures of Japanese policy. The sectoral snapshot of the economic financial balances shows that Japanese policy was indeed a success but also a failure.
First, policy was a success, given the private sector was recuperating from the bursting of a credit and investment bubble.
The chart below illustrates the 3-sector financial balances model – read Scott Fullwiler on New Economic Perspectives for a detailed description of the 3-sector financial balances model. According to this identity, the capital account plus government net saving plus private net saving must equal zero. For a given level of the capital account (Japan’s capital account has been quite stable over the years), when the private sector increases net saving, aggregate demand declines and government net saving declines.
In the early 1990s, all sectors were roughly in balance. However, since then government debt surged in response to a like rise in the private sector desire to save. One could argue that the government deficits and accumulated debts were indeed required, hailing the government’s actions a policy success. However, I contend that this has been a missed policy opportunity rather than overall succes
es.
The second chart illustrates the same financial balances model, but broken down into 4 sectors: the capital account plus government net saving plus household net saving plus corporate net saving must equal zero – household plus corporate net saving equals private net saving in the chart above.
Household net saving has steadily declined with the ageing population. But the corporate saving rate has been positive every year since 1996, offsetting the stimulating effect an ageing population could have on domestic demand. So here’s the policy failure: the government missed the opportunity for structural reform targeted at the corporate saving rate.
Had the government created incentives for a reduction in the corporate saving rate, the returns could have/would have been filtered back into the domestic economy. Now they’re in a state of panic, watching the European debt crisis with an anxious eye. Why else would Noda be pushing so hard for a new tax?
Martin Wolf commented on this one year ago:
Japan’s aim now must be to achieve domestically driven growth. The most important requirement is a big reduction in corporate saving. Mr Smithers argues that this will happen naturally, since savings are largely capital consumption, itself the product of the history of excessive investment. I would add that if ever an economy needed a market in corporate control, to shift cash out of the hands of sleepy managements, Japan is it. Not being beholden to Japan’s corporate establishment, the new government should adopt policies that would change corporate behaviour, at last.
As with all credit cycles, the burden of debt falls on the government as the private sector recoups. However, in Japan’s case the government missed a great opportunity for structural reform before the crash associated with credit cycles in other major developed economies (the USA).
originally published at The Wilder View…Economonitors
Been looking at Japan’s situation from a currency perspective recently. Exports to China seem to be keeping their current fiscal situation on solid ground. Should that get disrupted, watch out (btw Japan’s balance of trade has been shaky recently – China slowdown and earthquake see chart link below).
Long term Japan is a mess. Currently, about 20% of the population are now over the age of 65. By 2050 it will be aboout 40%. If interest rates on bonds pick up, things could get ugly for them fast. So, domestic growth may be challenging with significant demand for goods coming from the aged population. Will those goods drive growth, especially as they consume health care, which further dings the governmnet balance sheet.
This could be a bigger problem for the US, as Japan has to sell foriegn currency reserves.
http://2.bp.blogspot.com/-cdKuOxgy4_w/TvAGGGHLMnI/AAAAAAAANog/cuNGV8tOPB0/s1600/japan%2Bbalance%2Bof%2Btrade.png
Currently, about 20% of the population are now over the age of 65
More work for women. They could use the work, they’re horrendously underemployed.
Old people need not consume much in an economy. They don’t need to buy stuff, all they need is vegetables, a working television, and maybe some medical care, all things Japan can provide themselves.
What really bugs me about economics discussion is that nobody is apparently cognizant of the immense drains that ground rents exact on any economy.
Japan blew themselves up in the 1980s chasing this ephemeral asset, and of course we did the exact same thing not too long ago.
People say Japan needs growth, I say Japan needs to pay less in ground rents.
But I don’t want to be a Pollyanna here, for all I know Japan is going to go worse than Greece. “A bug in search of a windshield” does seem apropos, but it should always be remembered that Japan owes this immense government debt to itself, which at some metaphysical level means their national savings and debt are equally fictional.
Which is OK, because it is impossible for a nation to actually “save” much of anything, since current consumption comes out of current production. (Exceptions, like the national oil reserve, exist I guess).
Whatever problems Japan has, I think the US’s are 3X as troublesome. At least their economy is in rough balance between consumption, export, and investments.
Their 2011 trade deficit was ¥2.5T, or $30B. Last time our MONTHLY trade deficit was that low was back in 2009 (you don’t want to know what it is now).
Given the yen-yuan cross, the minimum factory wage in Shenzhen works out to ¥100/hr for the Japanese — this daily wage in China is the Japanese hourly minimum wage — so I don’t see how Japanese corporations can afford to not invest in Chinese production and thus further hollow-out their domestic mfg sector.
I don’t know where all this is going, but I think I’d rather have Japan’s problems than ours.
Currently, about 20% of the population are now over the age of 65
More work for women. They could use the work, they’re horrendously underemployed.
Old people need not consume much in an economy. They don’t need to buy stuff, all they need is vegetables, a working television, and maybe some medical care, all things Japan can provide themselves.
What really bugs me about economics discussion is that nobody is apparently cognizant of the immense drains that ground rents exact on any economy.
Japan blew themselves up in the 1980s chasing this ephemeral asset, and of course we did the exact same thing not too long ago.
People say Japan needs growth, I say Japan needs to pay less in ground rents.
But I don’t want to be a Pollyanna here, for all I know Japan is going to go worse than Greece. “A bug in search of a windshield” does seem apropos, but it should always be remembered that Japan owes this immense government debt to itself, which at some metaphysical level means their national savings and debt are equally fictional.
Which is OK, because it is impossible for a nation to actually “save” much of anything, since current consumption comes out of current production. (Exceptions, like the national oil reserve, exist I guess).
Whatever problems Japan has, I think the US’s are 3X as troublesome. At least their economy is in rough balance between consumption, export, and investments.
Their 2011 trade deficit was ¥2.5T, or $30B. Last time our MONTHLY trade deficit was that low was back in 2009 (you don’t want to know what it is now).
Given the yen-yuan cross, the minimum factory wage in Shenzhen works out to ¥100/hr for the Japanese — this daily wage in China is the Japanese hourly minimum wage — so I don’t see how Japanese corporations can afford to not invest in Chinese production and thus further hollow-out their domestic mfg sector.
I don’t know where all this is going, but I think I’d rather have Japan’s problems than ours.
the burden of debt falls on the government as the private sector recoups
This really annoys me. Government can bear no debt burden, it does not operate any businesses that cash flow. It borrows and spends in its citizenry’s name.
The reason the private sector can “recoup” is that everyone is being undertaxed and people can lend the government money instead of it being taxed away.
This is all BS though. If they had nordic-level taxation they’d have a lot more boring economy, in a good way.