Japan is not doing well
[Update: There is an important error in this post, which commented on a claim in a paper by Jesus Fernandez-Villaverde, Gustavo Ventura and Wen Yao. I assumed that the rise in the number of old people in Japan made the US/Japan comparison a bit misleading. But labor force participation among older workers in the US has risen faster than in Japan, so that adjustment would actually strengthen their results. Thus my second claim was wrong. They also looked at other starting dates. They found that if you start the clock in 1990, Japan goes from doing slighter better than the US to slightly worse. So my first claim has some validity, but the effect is relatively small. I still believe that Japan’s performance has been disappointing, as I think they should have continued catching up to the US after 1990, but that’s a separate question from the issues that their paper examined. Mea culpa for not reading the paper before commenting on a specific claim in the abstract. The rest is the original post, without changes.]
In the period up until 1991, Japan’s economy grew much faster than the US economy. Most economists (myself included) expected Japan to continue to close the gap in per capita GDP. Instead, Japan began losing ground after 1991.
Every so often, a revisionist comes along with the argument that if you look at the data in a certain way, Japan’s actually not doing that poorly. David Beckworth recently linked to one such example:
I’m not buying this argument, for two reasons:
1. Between 1991 and 1998 the US economy grew by 29%. Japan grew by only about 7%. Even in per capita terms the US growth rate was far higher. This is when Japan lost substantial ground against the US.
But Japan’s poor performance was due to a demand side recession, and hence you might have expected them to recover over the next few years. It didn’t happen. Japan never again regained its 1991 position relative to the US.
People that wish to make Japan look better take 1998 or 1999 as a starting date, not the early 1990s. But any country looks better if you start the clock from the trough of a recession. Thus the US looks better when you start the clock from 2009 rather than 2007.
2. I don’t like using working age population as the denominator. It sounds reasonable, until you consider that a fast growing share of Japan’s workforce is 65 or over. Thus lots of its GDP is being produced by workers that are not being counted in the comparison.
I don’t have the exact figures, but it seems that about 30% of Japan’s population is 65 or over. Another 55% is between 18 and 64, and roughly 15% is below 18. That means that about 35% of Japan’s adult population is 65 or over, and the share has been rising rapidly. And while only 26% of the older group is working, that share is also rising over time. Put those two facts together, and Japan has a rapidly growing number of older workers.
Even with all of these adjustments, I’d guess that Japan’s per capita growth rate since 1998, properly measured, isn’t much different from that of the US. But since 1991, Japan has lost ground against both the US and other highly developed countries such as Germany. In 1991, you might have expected most of the cutting edge East Asian companies in high tech to be located in Japan. Instead companies like TSMC and Samsung are in countries that were recently far behind Japan in technological expertise. Many Japanese offices still rely on things like fax machines.
Is Japan doing well compared to Argentina, Algeria or Myanmar? Of course. But Japan is not doing well relative to what one might have expected after the spectacular Japanese boom of 1950-1991. In recent years, I visited both Japan and Austria. Austria seemed far more affluent.
Japan is a nation of 125 million highly educated people with great social cohesion. In the past, it has shown great ability to innovate. It should be doing better.
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21. November 2023 at 10:11
But does it make sense to measure growth *per capita? By this measure a small country will naturally grow faster than a larger one, all things equal.
21. November 2023 at 10:31
maglop, I don’t see why that would be the case.
21. November 2023 at 10:39
Something like this:
Country A:
T0: Population 10, GDP 10,
T1: Population 10, GDP 20
GDP growth: 2, GDP growth per capita: 2/10
Country B:
T0: Population 100, GDP 100
T1: Population 100, GDP 200
GDP growth: 2, GDP growth per capita: 2/100
21. November 2023 at 11:41
The problem with GDP per working age population is that you are changing the denominator without changing the numerator.
To really be a good measure, you would need to subtract out the income generated by the non-working age population. I don’t know of any country that produces the data to enable that calculation.
21. November 2023 at 12:26
maglop. In both cases GDP per capita rose by 100%. I don’t see your point.
John. Yup.
21. November 2023 at 12:40
Ok, got it now, already from your first reply, gdp growth per capita = gdp per capita growth. (Still I think it’s a misleading formulation).
21. November 2023 at 12:54
Maglop, Yes, your wording is better.
21. November 2023 at 15:59
This is what happens when you outsource all of your manufacturing jobs.
Innovation comes from the assembly line, from supervisors, and factory managers who think they can do it better, and have practical knowledge and experience.
Ruminating is great. The world needs its Einsteins. But it doesn’t need someone with an I.Q. of 110 to sit around with their head in the cloud, because that head won’t accomplish much.
America and Japan didn’t just outsource low salary jobs over the last thirty years. They outsourced knowledge, and produced a generation of service workers with no tangible skills.
Japan is NOT educated. Like America and Europe, they have a surplus of paper pushers, entirely reliant on China to build everything for them. They cannot even replace a doorknob without importing knowledge from Mexico.
The only niche market they can compete in today is robotics.
Glorified secretaries with watered down B.A.’s can only do so much…
21. November 2023 at 16:06
Ricardo, why wouldn’t the same innovation happen in service jobs?
What’s so special about manufacturing?
The US has done reasonably well over the last 30 years. (And coincidentally, they are still doing a lot of manufacturing on a total value created basis.)
Both the US and Japan are a lot richer than eg China or Mexico.
21. November 2023 at 16:08
Japan’s slower economic growth did coincide with that nation’s offshoring of industry.
That said, any sensible person would prefer to live in Japan than the US, due to the much higher quality of life in Japan.
As for living standards, I think there is a huge question regarding residential rents.
When an apartment rents $400 vs.$2500 in Los Angeles…
Kevin Erdmann recently posted that America is becoming Los Angeles in terms of residential rents.
21. November 2023 at 21:57
Perhaps Japan should borrow Javier Milei.
They might get better results.
Milei’s victory proves that the right is winning this cultural battle against the neo-marxist left, and the globalist “elite”
Milei is just the beginning of a growing trend, towards more liberty and decentralization.
22. November 2023 at 03:48
Edward-
You may be right, but also I sense unhappy populations are simply voting out anyone who is in power, and ready to try unconventional candidates (who are routinely vilified by legacy media).
The West has a problem with declining living standards and quality of life.
The orthodox solutions–more globalism and immigration–ring like administering poison to a sick patient.
See Detroit, see Los Angeles, see London, see Paris, see Sweden. Where is globalism working?
BTW, I am pro-business and for smaller governments. But globalism has serious shortcomings.
22. November 2023 at 08:58
[…] 6. Scott Sumner on Japan. […]
22. November 2023 at 09:32
I’m with Ricardo, engineering and manufacturing have separated in the west and prototyping is extrordinarily expensive. It is difficult or impossible to train engineers who are not completely detatched from the physical realities of manufacturing.
In China I imagine a third of their engineers basically grew up with, or had access to machine tools. You can make decisions that are 10x smarter when you know and can control exactly how things are going to be made, and can talk to the machinists and ask for advice.
DJI drones and Bambu 3d printers have absolutely slaughtered their western competition, and China is untouchable in niche manufacturing (mechanical keyboards, watch movements, etc…) as well.
Soon China will producing machine tools at 10% of the cost of equivalent German machines, and the engineers who got there from zero will still be alive and in the workforce.
@Matthias Innovations in service jobs don’t propogate and scale the way knowledge and process does.
22. November 2023 at 10:07
What applicable lessons can be gleaned from all the Japanese films you’ve been reviewing over the years?
22. November 2023 at 10:10
“Where is globalism working?”
Where is the opposite of globalism working? Milei’s victory is *pro-globalism* because Argentina’s status quo has been anti-globalist Peronism. All you “anti-globalists” do is suggest the tired economic platform of Peronism that took Argentina from being a wealthy nation to an economic basket case.
The one brief period in the last 60 years when Argentina didn’t keep dropping down the list of per capita GDP is when they adopted some neoliberal and globalist reforms.
A lot of it is unhappy populations voting out whoever is in power because they dislike inflation, that is true, but “anti-globalist” nostrums would make us all much poorer, like it’s done to Argentina.
22. November 2023 at 11:45
@Matthias
A lot of service sector jobs are in healthcare, which is very regulated and also very constrained by the potential for lawsuits. A lot of service sector jobs are also in leisure/hospitality and restaurants/food service. There is more room for innovation there, but restaurants and hotels have been around a long time, and the good ones are already pretty well optimized based on centuries of accumulated knowledge.
22. November 2023 at 11:48
I really dislike the term ‘globalist’ because it muddies an important distinction.
There are partisans of free trade and a liberal economic order: basically, they are in favours of commerce across national boundaries — being agin both trade barriers and various permit rajs. (Me, with some caveats.)
Then there are the internationalists, who want things decided in supranational authorities via networks of the connected. (Not me.)
Some folk are in both camps (e.g Soros, WEF), but these are different dynamics, with different implications.
There are supporters of the EU who see it as manifesting the first while ignoring or downplaying how much it manifests the second. Though, between trade diversion and its supranational institutional dynamics, the economic advantages of the EU seem to be oversold.
Especially as the dynamics of the EU are encouraging national populism, rather than being a solution to it.
https://www.notonyourteam.co.uk/p/the-revolt-of-the-somewheres
22. November 2023 at 12:37
@Ryan, I worked in China in manufacturing for about 7 years, and I don’t think your assertion is quite right. China lacks the entrepreneurial and capital funding systems that help countries like the US excel across many dimensions. Someone might have worked with machine tools their whole life, but they aren’t setting up a garage shop or even staying after work to tinker with a new idea. The incentive structure just isn’t there to make it worth their while.
The people I knew who went off to start their own factories just replicated the processes and technology at the origin firm, and got started by poaching a few existing customers. I know entrepreneurs obviously do exist in China, but in the manufacturing space, the urge to innovate is pretty tepid.
China today has basically replicated a Taiwanese model of being absolutely solid on a few key high tech industries. But they still struggle enormously with legacy industries like aerospace, drug development, and even automotive. It’s stunning to me still that there are millions of Korean cars on the road in the US and practically zero Chinese ones.
Until the incentive structure changes that rewards risk takers and encourages tinkering with these machines after work, I don’t see China ever reaching a US-level of competence across many industries.
22. November 2023 at 14:01
Curt, I’m not sure. Each film is different, so I wouldn’t want to generalize.
22. November 2023 at 14:50
This seems mostly a question of what counterfactual you are comparing to?
The ‘revisionists’ point is to push back against the claim Japan has experienced ‘two lost decades’, for which it seems fair to state that productivity growth has actually been decent.
Your counterpoint is comparing actual performance against your ex-ante expectations around 1990 and the USA’s economic performance since then. Which I’m sure makes sense from your perspective – you were there – but for many people (maybe up to 35-40) the only narrative they remember is ‘Japan is on the decline’.
So, can’t everyone be basically in the right here!?
22. November 2023 at 15:00
Rob, I agree that it’s a matter of perspective. As I mentioned in my update, my argument is weaker than I first thought. I still think Japan’s performance has been a bit disappointing, but not as much as I first thought.
22. November 2023 at 15:16
Scott,
Take a look at the numbers. I haven’t checked recently but nearly all of the growth came from an increase in LFPR for women, which has now reached about the same level as the LFPR for men.
So unfortunately the tank is now empty and there will not be any further growth.
22. November 2023 at 15:32
Scott,
And BTW – I already explained this to you a year ago….
https://www.themoneyillusion.com/the-myth-of-japanese-policy-ineffectiveness/
22. November 2023 at 15:45
Maybe Japan is less innovative because the share of young people has fallen in recent decades. My guess is that firms make changes like giving up fax machines when there is a big enough coalition of workers who push for change, but that is less likely to happen if the majority of the firm’s workers are middle-aged or old people who didn’t grow up with technology and are set in their ways.
22. November 2023 at 16:38
Most people would have deleted the post, then pretended they never made the error.
At least you have integrity.
Unfortunately this is not just one error, but your modus operandi. And your political comments are front and center when it comes to cursory reading, then, as if you actually read the totality of information, forming an abrupt conclusion.
Your claims that we ought to send more money (after sending a 100B) to corrupt Ukraine, because we were “winning” is just one of many examples — too many examples — where you reached a poor conclusion.
Russia was never losing that war, predominately because they have the support of the people living in Donbas, many of whom want nothing to do with Kiev. Indeed, the state department finally admitted that Russia won, which was the inevitable outcome.
And lo and behold, Russia winning the war, didn’t mean the end of Europe or imminent threats to American security, which was your bizarre justification for funding the civil war in the first place.
It only means that Donbas is now a part of Russia, which they wanted anyhow.
22. November 2023 at 20:24
Scott,
I did like that paper in spite of some limitations. It does not perfectly attribute productivity but it does it better than simply GDP or GDP/total Capita. It echoes the 90s era Krugman observation that much of the extra GDP growth of Asian countries simply came from expanding the working population – both through total population growth (initially boosting working age pop growth) and by adding women to the workforce.
All this said: I loved this observation “In recent years, I visited both Japan and Austria. Austria seemed far more affluent.” I recently visited Japan for the first time and yes, yes, yes. Though I absolutely love Japan, it seemed to me as if all construction and innovation there had stopped ca. 1990. Especially infrastructure. And the state of dereliction of rural towns and even simply the overgrown curbs of every country road – something to behold.
But more puzzling still. Forget the numbers, GDP or otherwise – if you look at it holistically, in some important ways, Austria seems more affluent than Singapore too. The way we measure economics and well-being is just very crude.
22. November 2023 at 21:00
Scott – I’m actually surprised you say that Austria seemed far more affluent. Tokyo is one of those places that – to me – “feels” far more richer than it actually is. There is a huge cultural dividend that comes from near-zero crime and total law and order that you can only get in Japan. Going to Shibuya is like going to Times Square, minus all the filth and crazy people. You can actually feel comfortable on the subway because there isn’t someone blasting music at best or smoking crack at worst. It’s all these minor mental things that make Tokyo incredibly peaceful for me.
23. November 2023 at 09:36
People can’t wrap their heads around the fact that banks don’t lend deposits. I.e., people can’t evaluate banks from a system’s standpoint.
Japan’s banking system is unique. Its customers save more and keep more of those savings inside their banks. That’s the sole reason for Japan’s “lost decade”.
23. November 2023 at 10:08
dtoh, Yes, I’m aware that labor force participation of Japanese women has increased, that’s consistent with my hypothesis.
mbka, Yes, it’s the smaller towns where Austria’s advantage really jumps out at you. They seem far more affluent than in Japan.
sd0000, Japan is one of my favorite countries, but I agree with mbka. Metro Tokyo has nearly 40 million people, so no surprise that the fashionable areas seem affluent. But the average person in Japan lives at the level of southern Europe. I visited the home of two middle age professionals in Kyoto and was shocked by how far behind the US they are. It was a very small and very basic apartment in an ugly concrete mid-rise apartment building. The same family would be in a 3000 sq foot McMansion in the US.
But again, Japan’s a wonderful country. Many (intangible) things about Japan are far superior to the US. (Better food, more polite, less crime, cleaner, etc.
24. November 2023 at 08:14
Am wondering why no discussion of the banking sector woes during the period of 191-1998 and the huge number of write-offs that needed to be taken but were not and how a banking sector stuck with unrealized losses was constrained from making new loans as an issue to contributing to suboptimal economic growth in Japan?
And yes, I do not have data at hand to see what loan growth was like and so just a guess that a constrained banking sector was an issue.
Most of the unrealized loan losses were with regard to commercial real estate and all was before securitization really took hold.
I say this having dealt with any number of troubled loans back then and went to Japan and examined some portfolios; the banks just kicked the can down the road; the opposite of how for the most part US banks dealt with their commerical real estate loans during that time period.
24. November 2023 at 09:12
SK, Banking problems were a factor, but keep in mind that banking problems were made much worse by the huge drop in NGDP growth (i.e. tight money.)
24. November 2023 at 18:03
I’ve lived in Japan for the last four years, and actually things are pretty good.
The yen doesn’t go as far abroad, and people are naturally concerned about the debt, but life is a lot better than in the U.S..
People are not at each others throats over here.
Japan basically rejected calls to increase their birth rates by importing immigrants, which is what the U.S and Europe chose to do, and it’s worked out beautifully for them.
Hardly any crime.
Real estate prices are still climbing, but are expected to fall as the older generation sadly departs. Some reneging on the debt is probable. Haircut is desperately needed, actually, but once that debt is reduced things should rebound quickly.
There is no burning down buildings here, or fear that some Islamic radical will stab teachers in the classroom, and the media doesn’t artificially fuel rage between races by highlighting all white on black crime and ignoring all black on white crime.
A blonde and blue eyed person in Tokyo can walk the street at night, and not have to worry about being stabbed to death. They can raise their children, send them to school, and not worry that they might be shot by a black nationalist, somone yelling abdul akbar, or a distressed Trans whose been brainwashed by critcal race theory propagandists and radical physicians who make a literal fortune prescribing hormones.
The Japanese know what they’re doing, and the west should take notes.
24. November 2023 at 19:11
Scott, did you see the tweet comparing countries including Japan on productivity per worker? Japan did very poorly in that measure over this time period.
25. November 2023 at 07:19
A few days ago I was going to make one of my typical dimwitted comments along the lines of “why have one lost decade when you can have three.” Noah Smith (in a tweet I can’t find) pointed out that the mistakes of the 1990’s concentrated a combination of bad real estate decisions and bad monetary policy in a way that reset GDP growth in the aughts. We might have suffered the same fate after the Great Recession if the Fed was fixated on zero inflation. We’ll see if China can have a redux of Japan.
25. November 2023 at 09:59
Anonymous, Yes, I saw it.
Ty, That’s a horribly confused post, on two points. First, you correctly point out that Japanese culture has many positive features, but I was discussing their economy, not their crime rate.
Second, you seem to think America’s crime rate is due to immigration. Here in immigration rich Orange County we have very safe neighborhoods. In cities with few immigrants, like Detroit and St. Louis, the crime rate is extremely high. Immigrants are not the problem in America, indeed they may be the solution, as they tend to have lower crime rates than native born Americans.
26. November 2023 at 11:36
Scott,
You’re missing the significance of the point. The Japanese economy is terminally ill. There’s been almost no productivity growth over the last two decades. Female LFPR has peaked. The working age population is declining. The only way Japan can continue to grow under its current policy regime is to bring back child labor or the six day work week.
26. November 2023 at 11:53
Dtoh, You said:
“You’re missing the significance of the point. The Japanese economy is terminally ill.”
By “you’re”, do you mean Jesus Fernandez-Villaverde, Gustavo Ventura and Wen Yao, who wrote a paper arguing Japan is doing better than people think? Or me, who wrote a post criticizing that claim entitled, “Japan is not doing well.”
Who is missing the point?
26. November 2023 at 13:02
Scott,
You’re missing the point of how strongly the data on female LFPR support your claim that Japan is not doing well.
27. November 2023 at 10:01
How strongly do I think it supports my claim?
27. November 2023 at 10:02
So you’re saying that I’m clueless because I just don’t realize how correct I am?
27. November 2023 at 11:44
Precisely. You don’t realize how right you are! 🙂
27. November 2023 at 13:26
“The only way Japan can continue to grow under its current policy regime is to bring back child labor or the six day work week.”
Or how about some immigration for a change. I’m all in favor of controlled immigration, but Japan has almost no immigration at all. This is just wrong. In my view, this also explains why Japan has hardly any innovation. There is too little input from the outside.
In Western countries, too, a lot of innovation (if not most) comes from immigrants. Just think of Steve Jobs or Elon Musk in the US. Or Germany, even more extreme: the biggest innovation in the last decades (mRNA, Biontech) came from two immigrants from Turkey. After that? Not too much. The foundations of mRNA technology also came from a female migrant from Hungary.
If you live in a country for too long, then, as in my case, it’s often just about managing your assets, rentseeking, and maintaining your status. Oftentimes it’s mostly immigrants who still have the ambition to work really hard to make an actual change.
27. November 2023 at 14:50
Christian,
Japan is about the easiest OECD country to which to immigrate, and the number of foreign residents is growing rapidly, but the problems are: wages are not that great, the tax regime is confiscatory for entrepreneurs and innovators, and with the current relative economic growth rates, a lot of potential immigrants from poorer countries correctly calculate that in 5 to 10 year they will have been better off staying in their native countries.
28. November 2023 at 14:44
@dtoh
Naturalization and permanent residency seem absurdly low, especially for for a high-tech country of this size. Maybe it’s taxes, maybe it’s that in Japan you will always be a foreigner if you look different. Okay, that’s the case in many countries, but in Japan it seems extreme.
29. November 2023 at 13:31
@Chistian List
Definitely low, but…
– Starting from a very low base
– Increasing very rapidly
– Very easy to immigrate/naturalize
– IME very open and civil to foreigners
– Not a lot of economic opportunity (but that’s true for Japanese as well.)