The mysterious Japanese economy

There’s been a lot of talk recently about how the debate over European economic problems is mostly playing out in the US blogosphere.  But if you really want to see an example of a country cut off from the econ blogosphere, go to Japan.  Let’s not forget that until recently Japan was the second largest economy in the world.  In this post I’d like to claim that Westerners don’t have a clue as to what is going on in Japan.  And I don’t mean “what’s going on” in the sense of why policy is conducted the way it is, we don’t even know the stylized facts about how Japan is doing.  I’ll present two hypotheses:

For the optimistic scenario, let’s start with a Martin Wolf interview of Paul Krugman:

We have already gone straight into the issues.  The conversation turns to the Japanese crisis of the 1990s. In retrospect, I suggest, the Japanese seem to have managed the aftermath of their crisis quite well.

He agrees. “What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model. They never had as big a slump as we have had. They managed to have growing per capita income through most of what we call their ‘lost decade’. My running joke is that the group of us who were worried about Japan a dozen years ago ought to go to Tokyo and apologise to the emperor. We’ve done worse than they ever did. When people ask: might we become Japan? I say: I wish we could become Japan.”

This is interesting, as Japan has had the most contractionary demand-side policy of any country in modern history.  Aggregate demand hasn’t just risen slowly; it’s been falling for two decades.  All of their growth comes from the supply side—it’s a sort of anti-Keynesian story.  Even worse for the Keynesians, they’ve had lots of spending on infrastructure, and big deficits, but it hasn’t boosted AD by a single yen.

I see two powerful data points that support Krugman; Japan has low unemployment, and their real GDP rose 15% between 1993 and 2011 (or 13% per capita.)  That’s not fast GDP growth, but then other countries aren’t doing much better, and of course have much worse unemployment (Japan averages around 4% to 5%.)

But I think there’s an equally strong argument for the pessimistic case.  I’ve always been a bit skeptical about the optimists, as I watch lots of Japanese films and occasionally read their novels.  I definitely get a sense that the economy has done poorly since 1993.  One film depicts a middle-aged man too proud to admit to his family that he’d lost his job, so he dresses in a suit and pretends to go to work each day.

Because of my blog I’ve had the opportunity to talk to two very well-educated Westerners who have spent lots of time living in Japan.  The most recent conversation was with someone extremely pessimistic–he suggested that Japan is very much a nation in decline, by all sorts of social and economic metrics.  When I mentioned the film, he said that sort of thing is very common, and was also skeptical of the official unemployment data.  Both said that when you get outside of Tokyo you really see a nation in decline. The young people often have no real opportunity at all, and just live with their parents.  Of course that’s also a recent trend in the West, my point is that it seems to have been going on much longer in Japan.

But that’s all anecdotal, is there any evidence to back it up?

I see one very powerful piece of evidence, the fall in NGDP.  The Japanese NGDP has fallen 4.6% between 1993 and 2011, indeed by 6.7% in per capita terms.  Just think about that, after 18 years the average person in Japan is making 6.7% less income than in 1993, even in nominal terms!  Of course people will immediately point to the fact that RGDP has done much better.  Yes, but recall that NGDP is much easier to measure than RGDP (which requires that one estimate a price index.)  So we can’t be confident about the change in RGDP/person, but we can be pretty confident that NGDP has been falling.

And here’s why that’s so worrisome–the CPI is almost unchanged since 1993 (down a total of 0.4%, to be precise.)  So the Japanese people are making considerably less money in nominal terms, and their cost of living (according to the official consumer price index computed by the Japanese  government), is basically unchanged.  If the CPI is even close to being correct, then living standards in Japan are falling significantly.

Because I speak English, I feel I have a pretty good understanding of how the economy is doing in Australia, Canada, and Britain.  I don’t speak Japanese, and despite my interest in Japanese culture, I don’t really have any sense of how the Japanese economy is doing.  I’d guess the pessimistic case is closer to the truth, but not just because of low aggregate demand, I suspect there are also structural rigidities.

I think it’s interesting that everyone talks about our global economy, and yet if I’m right most Western economists are like me, we don’t have a clue as to what’s really going on in the Japanese economy.  My sense is that you’d have to have lived there, and traveled around a bit, to really understand.  Maybe you’d have to know how to speak Japanese.  For the rest of us, Japan might as well be on the dark side of the moon.

PS.  Just to be clear, I realize my “pessimistic case” wasn’t exactly in opposition to Krugman’s point.  If you just take the last 4 years, then yes, it’s possible to argue we are doing even worse—so far.  But I expect our NGDP/person to rise faster than the CPI over the next 14 years.  Some people argue Japan has been doing as well as the US for several decades.  That’s completely conditional on the Japanese GDP deflator being right, and their CPI being wrong.  Those two indices are about 20% apart since 1993.


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42 Responses to “The mysterious Japanese economy”

  1. Gravatar of John Thacker John Thacker
    27. May 2012 at 12:13

    I speak and read Japanese. The pessimism about the economy (and the low birth rate, etc.) is indeed common in not just media aimed at middle-aged adults, but also that aimed at high schoolers and young adults. Things things are basically accepted commonplaces. Things outside of Tokyo are indeed worse; one of the few cities outside Tokyo that was a bright spot with a decent number of young people is Sendai. Sendai, however, as the largest city in the Tōhoku (north of Tokyo) region was directly affected by the earthquake and tsunami, more so than Tokyo itself. (Of course, the earthquake and tsunami would have been depressing no matter where was hit.)

    None of that says that that means that pessimism is correct, merely that it’s the commonplace belief. (Probably irrelevant data point– my girlfriend’s native Japanese uncle took a job in Singapore recently and insists that there are few jobs in Japan. He’s a commodities trader in his late 40s.)

  2. Gravatar of John Thacker John Thacker
    27. May 2012 at 12:19

    Obviously not every piece of popular media pessimistic. But to the degree that the economy and social indicators are mentioned, they’re assumed negative in even optimistic works, much less those that dwell on the complaints of “freeters” (a term originally used by those who took freelance and part time work to avoid being a salaryman, but is now considered mostly involuntary), NEETs (Not in Employment, Education, or Training), “parasite singles,” (unmarried, live with and off of parents), or the worst case, “hikikomoris,” (young people who totally refuse to leave their house whatsoever and withdraw from all social contact, also surviving off parents– some are now in their 40s).

  3. Gravatar of Martin Martin
    27. May 2012 at 12:48

    “you really see a nation in decline. The young people often have no real opportunity at all, and just live with their parents”

    You might as well have been talking about Italy. I believe RGDP per capita there has been flat for about a decade.

  4. Gravatar of Steve Steve
    27. May 2012 at 13:46

    The NYTimes Magazine did an interesting piece on the hikkikomori back in 2006:

    http://www.nytimes.com/2006/01/15/magazine/15japanese.html?pagewanted=all

    The divergence between the GDP deflator and CPI is stunning. It’s even more dramatic than the divergences in the US and Europe. Is it driven by imported commodities vs. domestic technology? Or is it statistical gaming to make RGDP and inflation both look high?

  5. Gravatar of Dan Kervick Dan Kervick
    27. May 2012 at 14:00

    This is interesting, as Japan has had the most contractionary demand-side policy of any country in modern history. Aggregate demand hasn’t just risen slowly; it’s been falling for two decades. All of their growth comes from the supply side””it’s a sort of anti-Keynesian story.

    This is probably a case where I just don’t understand what these terms mean, but could you point to the statistics that explain them?

  6. Gravatar of Bryan Willman Bryan Willman
    27. May 2012 at 14:44

    I am perplexed that a society suffering from a declining and aging population can have high unemployment among the young. I don’t dispute or support the claim – I just wonder why, in such a condition, young people are not in high demand due to being relatively rare?

    Also, don’t we have a real problem with the numbers at hand – wouldn’t real gdp include the value of exports? So a very “supply for export” oriented economy could have good total production numbers, but have poor per capita consumption numbers?

    But again – if the population is aging, but the economy as a whole is growing and producing a lot of value of export, shouldn’t youngish people be in high demand? At least relative to supply?

    And averages and means are confusing too, don’t we really want 10 percentile, 50 percentile, 90 percentile objective living standards data? And how that’s changed over time? (Of course we argue about that in the US, where we can study the economy by looking out the window, so I don’t expect a clear view of Japan.)

    An additional challenge is that when I query people in industries I follow, or read queries by others, nobody EVER says they are doing “average” – in fact right now, people are either “totally over capacity” or “hiding from the bankruptcy bailif” with nobody in between. Does such a circumstance prevail throughout Japan as well?

  7. Gravatar of Bryan Willman Bryan Willman
    27. May 2012 at 14:48

    Scott may have partly answered by question with the observation that NGDP has been falling.

    Are wages not sticky in Japan?

    Given the things John Thacker and Steve talk about, one wonders if there’s a feast/famine effect. That is, some part of the population is employed for good returns, where others fine the returns to effort to be so low that they never leave their parents’ house.

    But again, if the population is aging, why aren’t the relatively young in high enough demand to find a productive live worth living, such they go into the world in the “normal” way?

  8. Gravatar of Negation of Ideology Negation of Ideology
    27. May 2012 at 14:50

    “Aggregate demand hasn’t just risen slowly; it’s been falling for two decades.”

    Isn’t the important point the stability of AD, not so much the growth rate? It seems to me if NGDP per person is flat (or even slightly declining) for two decades that’s fine as long as it’s not a sudden drop. Would expectations adjust and then you’d get that supply side real growth?

    I’ve heard the argument made that Japan isn’t doing as badly as the perception. Their unemployment is low and they have the largest savings pool is low. They’re an aging population, so a per capita increase of 13% in real GDP might be the best they can expect.

  9. Gravatar of Major_Freedom Major_Freedom
    27. May 2012 at 14:57

    The Japanese NGDP has fallen 4.6% between 1993 and 2011, indeed by 6.7% in per capita terms.

    and

    And here’s why that’s so worrisome-the CPI is almost unchanged since 1993 (down a total of 0.4%, to be precise.) So the Japanese people are making considerably less money in nominal terms, and their cost of living (according to the official consumer price index computed by the Japanese government), is basically unchanged. If the CPI is even close to being correct, then living standards in Japan are falling significantly.

    You see folks? This is EXACTLY what is wrong with reasoning from NGDP. NEVER REASON FROM AGGREGATE SPENDING.

    Ever since Japan’s banking system imploded in 1990 or so, the Japanese central bank has kept the so-called “zombie banks” afloat. The drop in NGDP could very well have come primarily on the side of investment spending, whilst leaving the nominal spending on consumer goods more or less the same, or even leaving it increasing, if investment spending has declined enough in nominal terms.

    If the CPI index remains unchanged 1993 to 2012, then combined with unchanged, or even larger consumer spending, this means living standards has increased. This is consistent with increasing real GDP per capita corrected for PPP.

    Sumner is incorrectly treating a changing NGDP as meaning the same thing as a changing consumer spending, indeed the same thing as changing everything to exactly the same degree.

    Now, what would lead me to conclude that declining NGDP came mainly on the side of investment spending? Well, consider the fact that the Japanese stock market collapsed from a high of around 40,000 in 1990 down to 10,000 today, and yet, consumer prices have been virtually constant the whole time.

    That suggests INCREDIBLY strong evidence that the declining NGDP Sumner is citing is almost certainly the result of declining investment spending, and so the inference being made that a falling NGDP combined with unchanged CPI somehow means lower standard of living, is certainly incorrect.

    This is why one should never reason from an aggregate spending change. It masks and obscures changes WITHIN the aggregates. Too often I see logic like “NGDP increased by 5% this year, so that means every man, woman and child are individually spending 5% more this year than they each did last year.”

    Suppose NGDP collapsed by 10%, and the collapse is due ENTIRELY to a collapse in government spending on war machines like missiles and bullets. According to NGDP logic, we should believe the average person is worse off in their standard of living, because look everyone, CPI didn’t change much, but NGDP collapsed like a stone!

    Why doesn’t Sumner take his own advice and not reason from incorrect foundations like NGDP? He says over and over not to reason from interest rate changes, price changes, and on and on, and yet somehow NGDP is magic and somehow we can reason from NGDP changes.

  10. Gravatar of anon anon
    27. May 2012 at 15:08

    What I find weird is that a demand-side recession could even drag on for anything close to 20 years. Shouldn’t the price level have adapted by now to the lower NGDP and NGDP-growth rate? (Especially since the NGDP growth path has not been very unstable, since the BOJ has targeted stable consumer prices.) My rough guess is that Japan now suffers from mostly structural problems caused by a combination of population aging and hysteresis from the deep 90s recession.

  11. Gravatar of Major_Freedom Major_Freedom
    27. May 2012 at 15:24

    Here’s more evidence that living standards in Japan have increased, that doesn’t use NGDP logic:

    http://www.worldsalaries.org/japan.shtml

    Total consumption expenditures went from around 8,000 a year by 1990, to around 9,600 by 2005. Combine this increase with the fact that CPI hasn’t changed, and we can infer that while it isn’t a very big increase, it is still an increase in living standards as measured by quantity of consumption. A 1,600 increase over 8,000 is around a 20% increase, which over 15 years is about 1.3% per year.

    Just see the difference in conclusions. Sumner’s NGDP logic leads him to concluding that living standards have decreased. My logic above has shown that their living standards have increased.

    It’s a good thing Sumner (and myself mind you) are as far away from the money printing press as possible, because mistaken logic in the context of controlling an entire country’s money supply can destroy/hamper/disrupt the lives of MILLIONS of people.

    The main difference between Sumner and myself is that he is willing to risk harming the lives of millions of people if he’s wrong. I’m not, because I have far more compassion for other individuals.

  12. Gravatar of Major_Freedom Major_Freedom
    27. May 2012 at 15:27

    anon:

    What I find weird is that a demand-side recession could even drag on for anything close to 20 years. Shouldn’t the price level have adapted by now to the lower NGDP and NGDP-growth rate?

    In principle yes, but not if Japan’s central banking system (central bank plus commercial banks) continues to alter the money supply and interest rates according to non-market means, which brings about changes to the real economy that are not in line with market forces, which of course means market forces will continue to antagonize the central banking system’s actions, i.e. bring about correction as soon as they reduce the extent of their non-market actions.

  13. Gravatar of Evan Soltas Evan Soltas
    27. May 2012 at 15:36

    Scott,

    I believe Noah Smith may speak Japanese. In any event, he has a recent post about Japan here: http://noahpinionblog.blogspot.com/2012/05/in-defense-of-private-equity-japan.html

    – Evan Soltas

  14. Gravatar of dlr dlr
    27. May 2012 at 16:06

    i think you’re guilty here of using AD in almost as misleading a way as in many cases you so correctly criticize. I think it’s unhelpful to conflate long term real and nominal growth such that “all their growth has come from the supply side.” The fact is that even if Japan had grown NGDP by 30% over 18 years such that growth was “half AS and half AD” but there were anecdotal perceptions of weakness, you could equally speculate that the impossibility of measuring inflation precisely renders the real growth estimates unreliable. The only thing you add by pointing out that there has been no nominal growth is circular: your suspicion that zero or worse nominal growth is not enough in either Japan specifically or a generic economy to prevent monetary disruptions to AS.

    If we took a zero inflation or Selgin-esque productivity norm economy whose median age was worsening and which seemed to be long things where global and nearby supply was increasing (labor and process) and short things where demand was increasing (many commodities) and perhaps had some supply-constraining tax policies, it wouldn’t be surprising to see GDP per capita look exactly like it has in Japan without any impairment caused by an excess demand for money and resultant price dislocations. I agree with you that from the outside — but also from the inside, I think you are too confident in the ability to “know” an economy in many cases (some are admittedly more obvious than others) better than the best-effort statistics just because you live in it or speak the language — it is also possible that gdp per capital is poorly measured the storytellers are right and thus the age and tax adjustments could be moot.

    But when you say that the fall in NGDP is a “powerful piece of evidence” in addition to mere anecdotes, I think that is completely circular — or at least begs the question. Does Japan have an AD problem that has produced a persistent (or series of) output gap(s) which in turn has reduced long term AS? Or is it possible that the Japanese economy at some point adjusted to a much lower or even negative path of nominal output growth such that there haven’t been enough instances of an excess demand for money nor enough downward rigidity slash upward momentum in wages to cause important price dislocations? We wouldn’t be discussing it in the first place if NGDP growth wasn’t so low. Since the question is really whether the pricing game has adjusted to a new low or negative nominal path the mere existence of zero AD growth as you call it doesn’t really qualify as powerful evidence.

    I guess you can argue that if the impetus for the investigation was really just the anecdotes then low NGDP growth could be be considered additional evidence. But that seems far from accurate. Everyone is fascinated with Japan not mainly bc of the anecdotes, but because they first had a big bubble burst and then entered a very strange world for fiat issuers of near zero inflation and near zero interest rates, all while real growth (as measured) declined. But if we think that the real growth decline was actually expected given supply issues, then the NGDP growth is the question not the answer.

  15. Gravatar of Paul O Paul O
    27. May 2012 at 16:46

    If you’re curious about how depressed things look in some places outside the big cities of Japan there’s a great blog called Spike Japan written by a Brit who has lived in Tokyo for around a decade I believe. It’s sprawling and can be hard to navigate but I think it’s fascinating. This entry is probably a reasonable place to start although it gets NSFW about two-thirds down. It’s long, but there are lots of pictures if you’re not up to reading:

    http://spikejapan.wordpress.com/ugly-japan-2/

    Incidentally, I think “Tokyo Sonata” is the film featuring the man who lost his job and tries to hide it from his family, unless there is more than one of those. It won the Prix Un Certain Regard at the 2008 Cannes Film Festival.

    http://en.wikipedia.org/wiki/Tokyo_Sonata

  16. Gravatar of StatsGuy StatsGuy
    27. May 2012 at 17:02

    I’ve always wondered whether contractionary monetary policy is the mechanism by which population control is ultimately achieved – in combination with complete privatization, surely we have the ultimate in sustainability…

    As evidence, I present the medeival serf system. If a serf shot a deer on a noble’s land, he was executed. Thus, forests were preserved even as the serfs starved.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. May 2012 at 17:40

    Here’s the pre and post trend figures for the major currency areas adjusted for population:

    Average annual rate of change (%) 1998Q3-2008Q4

    Currency Area-NGDP-NGDPPC-RGDP-RGDPPC-GDPDeflator-CPI-Diff.
    Euro-17″”””—–4.09-3.58—2.04-1.53-“”-2.02″”””—–2.26″”0.24
    US””””””””——–4.99-3.81—2.48″”1.30—2.45″”””—–2.97″”0.52
    Japan””””—(-0.28)-(-0.37)-1.09-1.00-(-1.35)””—–0.00″”1.35
    UK””””””””——–4.93-4.46—2.61″”2.14—2.25″”””—-1.86-(-0.39)

    Average annual rate of change (%) 2008Q3-2011Q4

    Currency Area-NGDP””NGDPPC-RGDP-RGDPPC-GDPDeflator-CPI-Diff.
    Euro-17″”””—-0.57-0.30-(-0.38)-(-0.65)””0.94″”””—–1.57″”0.63
    US””””””””——–1.93″”1.08—0.56-(-0.29)-1.38″”””—-1.12-(-0.26)
    Japan””””-(-1.74)-(-1.76)-(-0.41)-(-0.43)-(-1.33)””(-0.87)-0.46
    UK””””””””——-2.03-1.35-(-0.30)””(-0.98)-2.34″”””—–3.15″”0.81

    Japan appears to have been least impacted by the Great Recession relative to trend in terms of NGDP and RGDP growth.

    Another feature is labor productivity (GDP per hour):

    Average annual rate (%)

    Nation–1997/2007-2007/2011
    US——2.0——-1.3
    Japan—1.8——-1.1
    Germany-1.7——-0.1
    UK——2.3—–(-0.4)
    France–1.8——-0.2
    Italy—0.4—–(-0.1)
    Spain—0.4——-1.6

    The only country to have an increase in the rate of productivity growth among these countries is Spain. But the rate of increase in Japan has suffered less than the other large eurozone members and less than the UK, and has fared no worse than the US.

  18. Gravatar of Tommy Dorsett Tommy Dorsett
    27. May 2012 at 18:17

    I seem to recall that Japan NGDP fell about 9% if not a bit more between 2007 and 2009. That’s far worse than the U.S. Moreover, if you look at the performance of the Nikkei 225 Index over the last two decades, it reflects the pessimistic case.

    Some good news: Japanese breakevens have been rising and recently pushed through the mid 2008 highs despite the eurodebacle and falling breakevens in the U.S. The market appears to believe the BoJ really will deliver the 1% inflation target afterall. Not good enough, but a start.

  19. Gravatar of Steve Steve
    27. May 2012 at 18:21

    @StatsGuy

    “I’ve always wondered whether contractionary monetary policy is the mechanism by which population control is ultimately achieved”

    That’s a very Orwellian thought. Pegging the money supply to a desired level of people???

    Of course the Greens and central bankers in Europe would likely prefer pegging the money supply to a shrinking supply of CO2 emissions credits thereby preventing “CO2 emission credit inflation pass-through” It’s would be a very technocratic way of saying the people no longer have any rights.

  20. Gravatar of Nick W Nick W
    27. May 2012 at 18:44

    I’d just like to say that the blog Paul O recommends is a very great insight into the demographics of Japan from a Westerner living there. In particular, the author had a post attacking Eamonn Fingleton’s “The Myth of Japan’s Failure” from the NYT from early January.
    http://spikejapan.wordpress.com/2012/01/15/spiked-eamonn-fingleton/

  21. Gravatar of CA CA
    27. May 2012 at 19:43

    I want to echo Nick W’s comments and say that the blog Paul O links to up above is a must read. The first entry on the page “Kinugawa Onsen: You and me and the Devil make three” is utterly fascinating. I couldn’t stop reading it. There’s a side of Japan I never knew existed.

  22. Gravatar of Greg Ransom Greg Ransom
    27. May 2012 at 19:43

    Japan: how’s that MASSIVE Keynesian stimulus program working out for ya?

  23. Gravatar of Bonnie Bonnie
    27. May 2012 at 21:19

    Perhaps the political arrangement in Japan might make a difference in possible outcome. I think the government there is more centralized, making it a lot easier for them to do things on the supply side to make the best of bad monetary policy. It’s not so easy in the US, being a federal system, having 50 different states and countless localities all contributing to overall supply side effects, especially concerning the minimum wage. It really wouldn’t matter if the Federal government decided to lower the minimum wage since many states mirror Federal policies in their laws, with some going over and beyond levels set by Uncle Sam.

    This is one additional reason to question the wisdom of the Fed changing monetary policy to be like other countries when their governing structures might be entirely different and more able to respond to changes in monetary conditions of that magnitude.

  24. Gravatar of Bonnie Bonnie
    27. May 2012 at 22:30

    Just to add to my previous comment:

    If we were to entertain the idea that the Fed might somehow be engaging in a bit of political hardball regarding spending (which I have reason to doubt, but if it were) the kinds of spending cuts that might be demanded of the Federal level really wouldn’t make much difference to the aggregates the Fed looks at because Bernanke would also have all 50 states that would just make up the difference to contend with. It’s hard to imagine keeping something like that a secret when the political fallout will hit the states just as hard as congress. The Fed would end up as the path of least resistance in that or any case; it’s just that none of the politicians have found the courage yet to do what needs to be done and squish Bernanke and his ugly inflation targeting baby like a bug.

    It’s times like these that it would be nice to not have the 17th amendment because it would be much easier to have an impact and get the Fed straightened out.

  25. Gravatar of Simple Simon Simple Simon
    28. May 2012 at 01:03

    Treating the Japanese economy as a single, undifferentiated homogenous lump is very misleading. Take the CPI. In some sectors prices have not fallen at all. I pay the same on the trains as i did 10 years ago. The bus fare to Narita hasn’t changed in 15 years. Telephone tariffs are constant over the years unless one switched between carriers. But in the supermarket and drugstore sector, competition has been vicious and there have been sharp falls in many staples (while fruit and veg are of course volatile). And the readiness of Japanese to abandon premium stores and items is really quite shocking to someone who first visited the country in 1979.
    The administered (untraded) sectors are doing fine. Public officials work in offices so smart you could eat from the floor. But there are a lot of sectors doing badly. Only recently did the Gov begin publishing povery statistics. And they are shocking particularly the plight of the elderly and single mothers.
    Instead of wondering how Japan is doing, we need to ask who are the winners and who are the losers. Because there are winners from the slow deflation. Retirees at the big companies are laughing (unless, like JAL, the retiree burden has bankrupted the company).
    The economy is sclerotic. Terribly bureaucratic. No wonder young people feel stifled and hopeless. But when 13% of the electorate are females over the age of 70 (just think about that for a second) there is no voter impulse for change.
    This is political economy. Economics without the politics is nonsense.

  26. Gravatar of JP Koning JP Koning
    28. May 2012 at 05:23

    Krugman uses relative GDP per working age resident, not per capita.

    http://krugman.blogs.nytimes.com/2012/01/09/japan-reconsidered-2/

    It gives a sunnier picture.

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. May 2012 at 05:54

    In considering the story of Japan, demographics does not say everything, but it does say quite a bit. At least, according to Paul Krugman:

    Japanese GDP per capita fell from 88 percent of US GDP per capita to 76 percent. That sounds bad, and it is. But about two-thirds of that decline can be explained by the aging of Japan’s population. According to the OECD factbook, in 1992 working-age adults were 69.7 percent of Japan’s population, compared with 65.5 in the US; by 2007, the Japanese number was down to 64, while the US number was up to 67.

    Demography is not the whole story; Japan has stayed depressed, deflation is a problem, labor markets are poor (although the trouble tends to show in rising numbers of freeters rather than high measured unemployment.) Still, when you look at Japan’s declining share of world GDP, and even its relative decline in per capita GDP, the biggest single cause is the declining number of working-age Japanese.

    http://krugman.blogs.nytimes.com/2010/09/08/japanese-demography/

    And, I would go that one further. It is not sufficient to merely look at NGDP or RDGP per capita. The percentage of the Japanese population over the age of 65 has increased from 12 percent in 1990 to 23.1 percent in 2010 (and is expected to steadily increase from there). Looking at the NGDP per person in the workforce might give a more complete picture of what is going on.

  28. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. May 2012 at 06:27

    JP Koning,

    thanks for the link. You beat me to it, but I had not seen your comment before posting. It makes a lot of sense.

  29. Gravatar of ssumner ssumner
    28. May 2012 at 06:28

    John Thacker, Thanks for the info.

    martin, Good observation.

    Steve, Yes, very surprising.

    Dan Kervick. Here’s the easiest way to see Japan. Draw an AS/AD diagram with a vertical LRAS (ignore SRAS). Shift LRAS to the right by 15%, and shift AD left by 5%. That gets you the 15% RGDP growth and the 20% deflation.

    Bryan, I’m pretty sure the Japanese Gini has become more unequal, so the median may be even worse.

    I was focusing on real incomes, not consumption, so none of my observations were distorted by exports. In any case, I doubt exports are changing much as a share of GDP.

    Negation, You said;

    “Isn’t the important point the stability of AD, not so much the growth rate? It seems to me if NGDP per person is flat (or even slightly declining) for two decades that’s fine as long as it’s not a sudden drop. Would expectations adjust and then you’d get that supply side real growth?”

    Maybe, but not according to the Keynesian/Krugman model.

    I agree about aging, but there’s also way fewer kids. And aging doesn’t explain why there are so few jobs for the young.

    MF, You said;

    “Sumner is incorrectly treating a changing NGDP as meaning the same thing as a changing consumer spending,”

    Yes, that would have been wrong, if I had said it.

    And your 1990 to 2005 comparison is irrelevant, there is no doubt Japan has grown over that 25 year period.

    anon, I mostly agree, but many argue that NGDP growth is not neutral at very low changes, due to downward wage rigidity.

    Evan Soltas, Yes, that was an excellent post.

    dlr, I think you misunderstood my points. The all supply-side growth wasn’t my claim, but rather an implication of the data if Krugman’s claim is to be believed. He implied they’d had substantial growth. I’m saying, OK, but the Keynesian model predicts they shouldn’t have.

    When I said NGDP was a powerful piece of evidence, I should ahve said “combined with the CPI data.” I agree that by itself it isn’t a powerful piece of evidence.

    I don’t have strong view son Japan, I was mostly throwing out data to see what others would say.

    Paul, Yes, that was the film. And thanks for the spike website, it looks excellent.

    Statsguy, I’m guessing that’s not the motivation, but who knows.

    Mark, That’s right, but keep in mind that the question at issue is the accuracy of those RGDP (and hence productivity) statistics. Again, using the CPI Japan is doing far worse than the US, it isn’t even close.

    Tommy, Let’s hope so.

    Nick and CA, Yes, that’s a great post.

    Bonnie, But Japan hasn’t done much on the supply-side.

    more to come . . .

  30. Gravatar of Left Outside Left Outside
    28. May 2012 at 07:17

    BOJ have said that they shouldn’t assume they will actually do anything to try to hit their new inflation target.

    http://www.reuters.com/article/2012/05/28/us-japan-economy-boj-minutes-idUSBRE84R01020120528

    We’re doomed.

  31. Gravatar of Floccina Floccina
    28. May 2012 at 07:43

    I agree that the central bank should push NGDP up but I am one of those who believe that CPI’s are grossly overstated.

  32. Gravatar of ssumner ssumner
    28. May 2012 at 07:46

    Simple Simon, You said:

    “And they are shocking particularly the plight of the elderly and single mothers.”

    And you said:

    “But when 13% of the electorate are females over the age of 70 (just think about that for a second) there is no voter impulse for change.
    This is political economy. Economics without the politics is nonsense.”

    When you claim it’s all about politics, and the old ladies dominate the process, and the result is a regime that produces poverty for old ladies, then I’d suggest that’s just lazy thinking, analysis only a Simple Simon could come up with.

    JP, Yes, but what is at issue is the accuracy of the RGDP data from Japan. As I said, if the data is accurate then Japan’s performance is bad, but not horrible. Why do I say “bad?” Because in 1990 Japan was much poorer than the US. If you’d polled economists in 1990, about 100% would have predicted that Japan would have gradually caught up to the US over the next 17 year, not fall even further behind.

    Vivian, See my response to JP.

  33. Gravatar of ssumner ssumner
    28. May 2012 at 07:48

    Left Outside, I’m not surprised.

    Floccina, I’m one of those who thinks all CPIs are highly subjective—there is no “true rate of inflation.’

  34. Gravatar of Tom Tom
    28. May 2012 at 07:52

    we don’t have a clue as to what’s really going on in the Japanese economy.

    The pictures of the ghost town love hotels are a big clue.
    Demographic neutron bomb.

    Shrinking population. (Not exactly Erlich’s Population Bomb scare, in fact the opposite.)

    Much, if not most, post WW II macro econ analyses will be “wrong” with respect to policy based on historical data if the demographics of the times of that history are different than the demographics of today.

    But, since no civilized groups have had such depopulation before, Scott is correct that we have no reliable data points with which to evaluate alternate theories.

    In pooling ignorance, at least we can look at Japan 1985 and the US in 2000 and see similar charts:
    http://www.doctorhousingbubble.com/japan-asset-bubble-real-estate-values-two-lost-decades-trade-deficit-us-home-values-track/

    The problem is not so much missing AD, as unexpectedly missing Lifetime Wealth — where those who “invested” in real estate have lost their investment wealth, and their future financial comfort.

    That housing wealth is unlikely to return, so the spending patterns of the wealth losers are unlikely to return to prior trends — and it seems silly to expect them to.

    More immigration of qualified English speaking doctors, nurses, and health workers, from all over the world, are among the most positive policies that could occur, tho with the too many illegals already here, immigration increases seem unlikely.

  35. Gravatar of Saturos Saturos
    28. May 2012 at 08:50

    Off topic – I just saw a really good Chinese film. Scott has probably seen it already. It’s called Not One Less (http://en.wikipedia.org/wiki/Not_One_Less). It’s about kids in a Chinese village primary school in Hebei province. The thirteen-year old replacement teacher goes on an adventure to the city to retrieve her missing pupil. I quite liked it, especially the children’s performances, I recommend it to everyone. It would have had the Western audiences cooing, but I was quite surprised by the relative *lack* of poverty (I’ve spent plenty of time in India) given that it was made in 1999. Then I read about the censorship, and I smacked myself for not having thought of that. Anyway, it won the Leone d’Oro in Venice. FTR, I agree with the director’s comments.

  36. Gravatar of Alex Godofsky Alex Godofsky
    28. May 2012 at 08:57

    Scott, I believe I once mentioned in the comments that your Japan story is ultimately different from your America story – Japan’s story is about the [non]super-neutrality of money at low rates of NGDP growth; America’s story is (so far) a more conventional story of the non-neutrality of money. Japan is a cautionary tale against introducing NGDPLT at too low a rate of NGDP growth.

  37. Gravatar of Major_Freedom Major_Freedom
    28. May 2012 at 09:32

    ssumner:

    “Sumner is incorrectly treating a changing NGDP as meaning the same thing as a changing consumer spending,”

    Yes, that would have been wrong, if I had said it.

    You definitely implied it. You inferred that consumer spending fell on the basis that NGDP fell.

    “The Japanese NGDP has fallen 4.6% between 1993 and 2011, indeed by 6.7% in per capita terms. Just think about that, after 18 years the average person in Japan is making 6.7% less income than in 1993, even in nominal terms!”

    and

    “And here’s why that’s so worrisome-the CPI is almost unchanged since 1993 (down a total of 0.4%, to be precise.) So the Japanese people are making considerably less money in nominal terms, and their cost of living (according to the official consumer price index computed by the Japanese government), is basically unchanged. If the CPI is even close to being correct, then living standards in Japan are falling significantly.”

    These two passages taken together leaves no room for the imagination. You clearly implied that Japanese citizens are worse off because of a combination of making less income and the CPI remaining unchanged.

    This logic presupposes a change in consumer spending. A fall in consumer spending is the ONLY possible way that your argument that standards of living for Japanese people could fall could be correct, in the presence of an unchanged CPI.

    Think about it. CPI index is 100 give or take in 1993 and it is 100 give or take in 2011. If consumer prices have remain unchanged, then if all else were equal, that would have meant unchanged standard of living. But no, you said standards of living fell in the presence of unchanged CPI. The ONLY way standards of living could fall in the presence of unchanged consumer prices, would be if the nominal demand for consumer goods fell.

    And why did you presume a fall in consumer spending took place? You made that inference from the fall in NGDP. In other words, you definitely did imply that a change in NGDP entitles you to say there was a change in consumer spending.

    You do this all the time, by the way. Every time you reason from an NGDP change, you infer that spending everywhere, for everything, from everyone, fell by the same degree as the fall in NGDP. You can’t even see that components WITHIN NGDP could rise and fall, despite NGDP rising, falling, or remaining unchanged. NGDP rising or falling does not mean, for example, that consumer spending rises and falls specifically, or that investment spending rises and falls specifically. Components of NGDP can move in opposite directions to the movement of NGDP itself. This is precisely why one should not reason from an NGDP change.

    And your 1990 to 2005 comparison is irrelevant, there is no doubt Japan has grown over that 25 year period.

    15.

    And it is relevant, because it gives us a clue on whether or not there was an increase in the amount of wealth produced, which I am sure you will agree increases people’s standard of living. How can you say there is no doubt Japan has grown over that period, but at the same time say living standards have fallen by reasoning from an NGDP change?

  38. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. May 2012 at 10:31

    “Yes, but what is at issue is the accuracy of the RGDP data from Japan. As I said, if the data is accurate then Japan’s performance is bad, but not horrible. Why do I say “bad?” Because in 1990 Japan was much poorer than the US. If you’d polled economists in 1990, about 100% would have predicted that Japan would have gradually caught up to the US over the next 17 year, not fall even further behind.”

    And those economists who made that prediction probably did not have a good eye on the demographic trends. And, if the reason Japan’s situation is “bad” is due to the fact that they did not live up to those unrealistic expectations, then I would not agree to that as a measure. That is not to say the situation is not “bad”, but that it is “bad” for an entirely different reason than the one given here. It is pretty tough to keep NGDP and RGDP growth level with other countries if the demographic situation is that they have a much higher percentage of the population that is non-working age than those it is being compared with. From this perspective, it is not only the accuracy of the data, but the comprehensiveness of relevant data as well.

    Eventually, every country will face the same demographic issues Japan is now, and has faced for the last couple of decades. From perspective of an aging population and one at least levelling off in numbers, I’d say that Japan has done pretty darn well. They may even be held up as a model of how to make the transition from a growing population to a steady state one. There is an object lesson here for other countries whose fiscal imbalances are justified on ever-growing populations and work forces. That might work for a large country such as the US, at least for a while, but I don’t think it is a realistic option for the island of Japan.

    I rarely agree with PK, but on this rare occassion when the issue is relatively free of his politics, I think he’s hit the nail on the head.

  39. Gravatar of Alexander Hudson Alexander Hudson
    30. May 2012 at 10:01

    Scott, why is there such a wide divergence between the CPI and the GDP deflator? I’ve always preferred the GDP deflator myself, because it’s so simple and straightforward to calculate. You just take nominal GDP and divide it by your estimate of real GDP. When talking about price levels, that strikes me as the best way to go, because you don’t have to worry about getting the “basket of goods” correct. If the deflator is wrong, does that mean our estimate of real GDP is wrong?

  40. Gravatar of ssumner ssumner
    30. May 2012 at 12:37

    Tom, Those factors should not affect NGDP/inflation, which is controlled by monetary policy.

    Saturos, Yes, I saw that film when it came out. I wish all American schoolchildren could see it.

    Alex, I agree, it suggests that money may not be superneutral at very low NGDP growth rates, like zero.

    MF, No, the question of whether people choose to save more or less of their income is completely separate from the question of what happens to the buying power of their income if they chose to spend it all.

    If next year my income rises to a million dollars and my consumption falls by 10% I’m still way better off. I agree that lifetime consumption is a reasonable measure of well-being, but not always annual consumption.

    Vivian, You seem to have misinterpreted what Krugman said. He did not say Japan has been catching up to the US if you take demographics into account, he’s saying they’re still been falling behind, just not as quickly as the raw figures show. That was my point. It has nothing to do with the question of whether economists in 1990s did or did not understand Japan’s demographics, because I am looking at the GDP per working age population.

    Alexander, There is no right or wrong price index, it depends on the purpose. If the purpose is to measure living standards, then the CPI may be better. If the purpose is to provide a target for the central bank, then the deflator is probably better.

  41. Gravatar of Major_Freedom Major_Freedom
    1. June 2012 at 21:16

    ssumner:

    no, the question of whether people choose to save more or less of their income is completely separate from the question of what happens to the buying power of their income if they chose to spend it all.

    When I save, and I consciously do so to raise my purchasing power and reduce my consumption, and when I spend, and I consciously do so to reduce my purchasing power and raise my consumption, I am doing something that to you is impossible?

    I am not talking about what happens to the buying power of money in general when you spend. I am talking about you implying that the Japanese are somehow worse off because total money spending fell, while CPI remained unchanged, as if consumer spending had to have fallen.

    If next year my income rises to a million dollars and my consumption falls by 10% I’m still way better off.

    But you said living standards is connected to consumption.

    You said:

    “So the Japanese people are making considerably less money in nominal terms, and their cost of living (according to the official consumer price index computed by the Japanese government), is basically unchanged. If the CPI is even close to being correct, then living standards in Japan are falling significantly.”

    I agree that lifetime consumption is a reasonable measure of well-being, but not always annual consumption.

    You specifically said consumption is the measure for standard of living. It isn’t about lifetime versus annual.

  42. Gravatar of Major_Freedom Major_Freedom
    1. June 2012 at 22:41

    If we look at total consumption spending in Japan, it went up. Combine that with unchanged CPI, and Japan are consuming more, and using your standard of consumption to denote standard of living, we can say that the standard of living of the Japanese in increasing, not decreasing.

    Never reason from an aggregate spending change.

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