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Let’s cut the crap about Japan’s lost decade

Marshall Auerback, a Director of Institutional Partnerships at the Institute for New Economic Thinking (www.ineteconomics.org) Let’s cut the crap about Japan’s Lost Decade.

As Hill notes, we tend to use very narrow metrics to determine a nation’s economic success: “Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household” is the best way to measure national well-being. I admit that terms like “happiness” and “well being” can be somewhat amorphous, although it is only in the last 40 years or so that we have defined prosperity solely in terms of the metric of growth and of course, Japan always seem short-changed in that regard.

One shortcoming of investment-led growth is the traditional Harrod-Domar issue: it is difficult for aggregate demand to keep up with the additional supply capacities created by previous investment. This is probably less of a problem in underdeveloped economies where improvements in standards of living are badly needed (provided, of course, that the capacities of production are used for internal markets rather than exports to developed countries). But it is definitely a concern for mature economies.

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Japan’s Lopsided Financial Balances

by Rebecca Wilder

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

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Lost Decade, Redux

By general consensus, Japan’s “Lost Decade” (now in its Third Decade) begins in 1989.

The biggest growth difference appears to come from the U.S. period from the Second (1996) Clinton Tax Reform to the 2001 recession—a big if, I grant you, but one that the Gingrich/DeLay-led Republican Party predicted would produce mayhem, and the alternative-history is not difficult to imagine—I’m having trouble seeing where the losses are. Especially if you consider that much of that time was spent investing in increased infrastructure improvements and health care that have the country well-positioned going forward.

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The Most Important Set of Graphics You’ll Find in a BIS Speech

I’m still in catch-up mode, but I keep coming back to this presentation (PDF)—four times now. It’s a speech by BoJ member Masaaki Shirakawa in Tokyo on the 22nd of December last year to the Board of Councillors of Nippon Keidanren (Japan Business Federation), entitled “Globalization and population aging – challenges facing Japan.”

Go through the whole thing, but—most especially for U.S. readers—Chart 5.

Pay especial attention to Bank Lending and Housing Prices. Then Riddle Me This, as it were: If U.S. housing prices are stable or basically plateaued overall, then there isn’t a growing decline in credit quality from that sector (the way there was in Japan over the comparable period).

So why is bank lending in the U.S. so low and going lower?

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Japanese style economics…lifted from comments

Lifted from comments from Spencer’s post on Productivity and the stock market

Dan Becker:

Mike Panzer at Financial Armageddon has been on the issue that the “street” is missing all that is going on around them. From his blog: http://panzner.typepad.com/

However, I wonder if a new paper, From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer from the BlackRock Investment Institute,

If long-term leverage sustainability is assumed to reside near 1990 levels, then the bulk of the deleveraging process remains ahead of the American consumer, regardless of the income measure used…

We think that these trends, coupled with stubbornly high unemployment, higher commodities prices, and slower growth in wages and salaries, will likely contribute to a lower level of personal consumption growth over the next few years. Moreover, since consumer spending is a key component of the GDP growth rate, this would argue for generalized economic growth levels that are, at best, modest for years to come, and may in fact appear anemic when compared to pre-crisis growth rates.

Spencer

I have believed for years that the US is following the Japanese model.

But note that while the general belief is that the Japanese government policy has not stimulated the economy, the alternative might very well (be the) belief that Japanese policy may be preventing a depression.

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NIKKEI vs S&P 500



For years I’ve made it no secret that I thought the US was going to follow Japan into a so called lost decade — of course it’s now more than a decade.

With the US stock market now apparently in a free fall I though this chart I’ve been keeping for years would prove of interest. In particular, note how nicely the two stock market major peaks and troughs seem to coincide. Is it more than just an interesting coincidence?


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It’s lonely at the top: now it’s up to the Bank of Japan to hold the yen down

Wow, FX space is totally rattled this week: the yen hit 76.25 against the dollar at the end of the day on March 16 and has since rebounded to current levels 80.90 (1:50pm in NY on 3/18). What happened over this time span? Mass speculation on yen appreciation due to earthquake-related repatriation, followed by technical levels being hit that drove the yen up against the dollar, and a collapse of the dollar against the yen (spike downward in the chart below). And then yesterday the G7 central banks (the Bank of Japan, Bank of England, European Central Bank, the Federal Reserve, and the Bank of Canada) agreed to coordinate a weak-yen effort. Today the yen is off 2.7% against the dollar.

Note: In the chart above, a decline in the USD/YEN is an appreciation of the Japanese yen and a depreciation of the US dollar. The chart above illustrates the daily fluctuation of USD/Yen since the Tōhoku earthquake on March 11.

The coordinated depreciation of the yen against its major trading partners is ‘concerted’, and such an effort has not occurred since September 2000 when the G7 bid up the euro. The yen effort is very different, as I’ll explain below. Furthermore, ongoing weakness in the yen against the rest of the G7 currencies depends on further actions by the Bank of Japan into next week and beyond.

Some thoughts:

* In 2000 the wedge between the eurodollar spot and its PPP estimate of fair value diverged throughout the year. The spot rate became increasingly undervalued, hitting a wide in October 2000 (according to Bloomberg estimates of PPP). This seems to be a traditional initial condition for intervention. In contrast, though, the USD/YEN spot is seriously overvalued according to a similar measure of PPP fair value. I should note that currency fair value is a contentious topic. (more after the jump)

* The NY Fed makes available balances through 1999 only, so I am unable to ascertain the impact on the Fed balance sheet of the coordinated efforts from the 1987 Louvre Accord nor the 1985 Plaza Accord . I digress. In the 2000 effort, the euro bottomed in 9/21 at 0.8460 in dollars during the day, reaching an intra-day high of 0.8992 on 9/22. The closing impact of the G7 coordination was roughly a 2.7% appreciation of the euro against the USD. Efforts, however, were quickly retraced (see chart below).

* We are already there in yen space: the yen is down 2.7% in just one 24-hour session. It’s likely that this effort lasts throughout next week, since (1) a retrenchment of the dollar would challenge global central bank credibility, and (2) the statement is more explicit in its mention of “readiness to provide any needed cooperation”.

* In 2000 the Fed purchased roughly 10% of its stock of euro holdings, or $1.3 bn worth of euros (see second table below). Using 2000 as a guide, this would imply that the Fed purchases roughly $2.3bn this time around. However, given the size of the ‘model’ trading flows and technical barriers, this time’s flows are likely to be bigger. We’ll see in coming months when the Fed releases its FX holdings update.

* There is a limit to the Fed’s buying of yen, since the Fed is selling yen assets. The Fed and the Treasury (the Fed manages two accounts of FX holdings, the SOMA and ESF account for the Treasury) hold $23 bn in yen-denominated assets (see second table below) – that’s an absolute upper bound on purchases, although FX swaps do allow some room for maneuvering (although I find it very unlikely that the Fed would print currency for this effort). In 2000, the Fed purchased roughly $1.3 bn euro – that number should be at least doubled this time around, given that FX markets are bigger now. In comparison, Wall Street estimates that the BoJ bought $12bn-$40bn..

If there’s going to be succes, it depends on the Bank of Japan’s flows, not those of the other central banks.

My take is that given the size of today’s move, the 2000 effort was not nearly as concerted as has been demonstrated thus far. Next week will be interesting. The goal, I guess, is to get the currency back into a range that will not be prone to technical bounces. I think that the BoJ’s going all in.

Rebecca Wilder

Chart and Table Appendix:

Eurodollar in 2000

FX holdings in 2000

FX holdings in 2010

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Japan: The Post-WW2 Rise, the 1980s Peak, and the Decline – A Simple Theory

by Mike Kimel

Japan: The Post-WW2 Rise, the 1980s Peak, and the Decline – A Simple Theory
Cross-posted at the Presimetrics blog.

A lot has been written about the disaster in Japan. I don’t have much I can add to that, except that like everyone else (or at least everyone civilized), I am so very sorry that it happened. (What is with the folks talking about Pearl Harbor? Seriously. What is that about?)

Still, in reading about the tragedy, I had a thought about Japanese economic history and I’d like to expand on it in this post. But I’d like to lead off by pointing out I am not an expert on Japan. That means y’all can feel free to correct me where I’m wrong, but it also means I started off by going to this website, which has some cool country studies. The website:

contains the on-line versions of books previously published in hard copy by the Federal Research Division of the Library of Congress as part of the Country Studies/Area Handbook Series sponsored by the U.S. Department of the Army between 1986 and 1998. Each study offers a comprehensive description and analysis of the country or region’s historical setting, geography, society, economy, political system, and foreign policy.

Let me start by quoting liberally from Japan country studym specifically the section on bureaucrats.

Although the United States occupation dismantled both the military and zaibatsu establishments, it did little, outside of abolishing the prewar Home Ministry, to challenge the power of the bureaucracy. There was considerable continuity–in institutions, operating style, and personnel– between the civil service before and after the occupation, partly because MacArthur’s staff ruled indirectly and depended largely on the cooperation of civil servants. A process of mutual co-optation occurred.

Next quote:

In trying to discover “who’s in charge here,” many analysts have pointed to the elite bureaucracy as the people who really govern Japan, although they composed only a tiny fraction of the country’s more than 1 million national government employees. Several hundred of the elite are employed at each national ministry or agency. Although entry into the elite through open examinations does not require a college degree, the majority of its members are alumni of Japan’s most prestigious universities. The University of Tokyo Law Faculty is the single most important source of elite bureaucrats. After graduation from college and, increasingly, some graduate-level study, applicants take a series of extremely difficult higher civil service examinations: in 1988, for example, 28,833 took the tests, but only 1,814, or 6.3 percent, were successful. Of those who were successful, only 721 were actually hired. Like the scholar-officials of imperial China, successful candidates were hardy survivors of a grueling education and testing process that necessarily began in early childhood and demanded total concentration. The typical young bureaucrat, who is in most cases male, is an intelligent, hardworking, and dedicated individual. Some bureaucrats lack imagination and, perhaps, compassion for people whose way of life is different from their own.

The public’s attitude toward the elite is ambivalent. The elite enjoy tremendous social prestige, but members are also resented. They live in a realm that is at least partly public yet far removed from the lives of ordinary people. Compared with politicians, they are generally viewed as honest. Involvement of top officials in scandals such as the Recruit affair, however, had, to some extent, tarnished their image.

Japan’s elite bureaucrats are insulated from direct political pressure because there are very few political appointments in the civil service. Cabinet ministers are usually career politicians, but they are moved in and out of their posts quite frequently (with an average tenure of under a year), and usually have little opportunity to develop a power base within a ministry or force their civil service subordinates to adopt reforms. Below the cabinet minister is the administrative vice minister. Administrative vice ministers and their subordinates are career civil servants whose appointments are determined in accordance with an internally established principle of seniority.

In a 1975 article, political scientist Chalmers Johnson quotes a retired vice minister of the Ministry of International Trade and Industry (MITI) who said that the Diet was merely “an extension of the bureaucracy.” The official claimed that “the bureaucracy drafts all the laws…. All the legislature does is to use its powers of investigation, which for about half the year keeps most of the senior officials cooped up in the Diet.”

And now the change…

Administrative reform policies in the 1980s imposed ceilings on civil service staff and spending that probably contributed to a deterioration of morale and working conditions.

Still another factor limiting bureaucratic power was the emergence of an affluent society. In the early postwar period, the scarcity of capital made it possible for the Ministry of Finance and MITI to exert considerable influence over the economy through control of the banking system. To a decreasing extent, this scarcity remained until the 1980s because most major companies had high debt-equity ratios and depended on the banks for infusions of capital. Their huge profits and increasing reliance on securities markets in the late 1980s, however, meant that the Ministry of Finance had less influence. The wealth, technical sophistication, and new confidence of the companies also made it difficult for MITI to exercise administrative guidance. The ministry could not restrain aggressive and often politically controversial purchases by Japanese corporate investors in the United States, such as Mitsubishi Estate’s October 1989 purchase of Rockefeller Center in New York City, which, along with the Sony Corporation’s acquisition of Columbia Pictures several weeks earlier, heated up trade friction between the two countries.

The whole issue of trade friction and foreign pressure tended to politicize the bureaucracy and promote unprecedented divisiveness in the late 1980s and early 1990s. During the Structural Impediments Initiative talks held by Japan and the United States in early 1990, basic changes in Japan’s economy were discussed: reforms of the distribution and pricing systems, improvement of the infrastructure, and elimination of official procedures that limited foreign participation in the economy. Although foreign pressure of this sort is resented by many Japanese as an intrusion on national sovereignty, it also provides an opportunity for certain ministries to make gains at the expense of others. There is hardly a bureaucratic jurisdiction in the economic sphere that is not in some sense affected.

Repeatedly, internationally minded political and bureaucratic elites found their market-opening reforms, designed to placate United States demands, sabotaged by other interests, especially agriculture. Such reactions intensified United States pressure, which in turn created a sense of crisis and a siege mentality within Japan. The “internationalization” of Japan’s society in other ways also divided the bureaucratic elite. MITI, the Ministry of Labor, and the Ministry of Justice had divergent views on how to respond to the influx of unskilled, usually South Asian and Southeast Asian, laborers into the labor-starved Japanese economy.

Now a bit from Japan’s Administrative Elite by B C Koh(see pages 259, 260):

A decline in elitism can be seen in a number of trends: (1) a strong showing of universities other than Todai and Kyodai in the higher civil-service examination, (2) a notable increase in the proportion of private-university graduates who enter the higher civil service, and (3) advancement of “noncareer” bureaucrats to elite administrative positions.

Although Todai and Kyodai have consistently maintained their positions as the first- and second-largest sources, respectively, of successful candidates in the higher civil-service examination throughout the postwar period, their combined share of the total has frequently fallen short of 50 percent. In the eighteen-year period from 1970 to 1987, for example, the two top universities’ share fell below the 50-percent mark eleven times (see table 9 in chapter 4). This means that the majority of successful candidates in the higher civil-service examination came from other institutions of higher learning in those years. In the 1980s, private universities surpassed the 10-percent mark for the first time, reaching 12.6 percent by 1986 and 13 percent in 1987. In the ten-year period from 1976 to 1985 the number of private-university graduates who passed the higher civil-service examination increased 3.5 times.[6]

If we examine the situation at the hiring stage, we find the same trend: a steady increase in the proportion of private-university graduates. Since 1980, private-university graduates who passed the higher civil-service examination had a greater probability of being hired than graduates of national universities. In 1983 and 1984, six in ten of the former, as compared with four in ten of the latter, were hired. In the ten-year period from 1976 to 1985, the number of private-university graduates who entered the higher civil service quadrupled.[7]

A slight decline in the elitist character of Japan’s higher civil service is suggested by a steady increase in the number of “noncareer” civil servants who advance to elite administrative positions. As we saw in chapter 4 (table 8), graduates of the intermediate civil-service examination began to appear in grade-1 positions (assistant bureau chief, division chief, and senior-level section chief) in increasing numbers since 1974; in 1981, a graduate of the lower examination attained grade 1 for the first time, and a small but growing number of others followed in his footsteps in subsequent years. By 1986, the National Personnel Authority disclosed that two in ten civil servants at the rank of section chief or its equivalent and above in the national government had not gone beyond junior colleges, implying that they were “noncareer” bureaucrats.

So… a decade before the end of Japan’s economic miracle, the fabled bureaucracy that drove Japan Inc. started to erode – more of its members started coming from lower quality, private universities, it stopped being held in as high esteem by the public, it lost its ability to impose its will on the economy, and to boot (or perhaps I should say on a related note), it started to adopt new policies and philosophies being pushed by the Reagan administration. How long do you think it takes for something like that to have a long-term, possibly irreversible effect on an economy that used to be the envy of the world?

As an aside… ever notice how countries that adopt policies favored by right wing or libertarian think-tanks tend to have a few very successful years (with much crowing by those think tanks) followed by disaster? Be it Japan, Argentina, Russia, much of Eastern Europe, Ireland, Iceland, etc., it does seem that there’s a pattern. Heck, that pattern even applies to the US. I think even some of the promoters of those policies are starting to see that pattern. Its to the point where a lot of folks in those circles are trying to convince the public that Singapore, a country where the government’s role in the economy is larger and more intrusive than in most other countries, is an example of a libertarian paradise.

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Currency Markets and the Disaster in Japan


I’ve been receiving questions about this week’s rather dramatic appreciation of the yen. Central banks around the world have been intervening today to prevent further volatility in exchange rates, but that still doesn’t explain exactly why currency traders have been so eager to buy yen this week.

There are rarely easy answers to questions involving exchange rate movements. However, I have shared a few thoughts on the subject over at The Street Light.

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Japan May Have Reached Point 7

I give up. It was perfectly obvious what was happening at Fukushima on Saturday afternoon, when I posted bullet points at Skippy: there was going to be a major cleanup cost and the live reactors were not salvageable, but nothing fatal to many was loose in the atmosphere yet.

Which is why I followed up here on Sunday with “use saltwater as the best option.” Once you accept that you’re doing damage control, do it efficiently and don’t worry about the sunk cost.

But evacuation and problems with all three plants that were offline at the time of the earthquake moves to stage seven, which was summarized by Pink Floyd:

Though even that may be pessimistic; Al Jazzera English (via their Twitter feed) reports that the heroes of this entire episode—the unnamed workers who are trying to avert serious leakage into the environment—are back at work after having temporarily been evacuated to a bunker.

Medicins Sans Frontiers (Doctors without Borders)

Shelterbox

Global Giving

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