Oh no! Another Japanese “recession”.
Will the press ever learn? Here’s Reuters:
Data released before the Tokyo market opened showed that Japan’s economy slipped back into recession in the July-September quarter, contracting at a 0.8 percent annualised rate, compared with the median estimate for a 0.2 percent contraction.
Last year I had fun mocking press reports of a 2014 “recession” in Japan, which I believe was the 4th in 6 years. And now another. However the more sophisticated press is finally beginning to catch on. Here’s the FT:
Bright and early on Monday morning, expect to hear some gloomy news — that Japan is in recession, for the fourth time in just five years. Doom will be mongered; foes will declare it a fresh blow to Prime Minister Shinzo Abe’s “three arrows” of economic stimulus. And I will not believe a word of it.
That is not because the cries of recession will be false — even though the unemployment rate is low and falling, the corporate mood is one of cautious optimism and Japan is manifestly not entering a slump. Output is expected to fall by 0.1 per cent in the third quarter after a 0.3 per cent decline the quarter before — and, on the standard definition, two consecutive quarters of contraction equals a recession.
The trouble is this definition of a recession is anachronistic and misleading. It is an idea that no longer means what we think it does — that is, a significant decline in activity. Even worse, the way we use it causes harm, not just in Japan but also in an increasing number of advanced economies. The R-word needs a rethink.
Japan keeps entering “recessions” because its population is falling and so the economy has little potential to grow. The Bank of Japan puts trend growth at 0.5 per cent or less, compared with the US Federal Reserve’s estimate of 2 per cent for America.
Actually those are both too high; trend growth is zero in Japan, and 1.2% in the US. But at least the press is starting to figure it out. That’s progress.
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15. November 2015 at 20:02
Sumner is wrong again. Why would trend growth pre-2008 be higher than post-2008? Few things in nature are so abrupt (the Pacific Decadal Oscillation comes to mind, though it’s an ongoing pattern; Old Faithful in Yellowstone is another example). More likely, as the Keynesians say, the abrupt slowdown is due to lack of aggregate demand holding back investment, and/or, as Koo points out, a temporary balance sheet recession. Further, Rogoff et al in their book point out that financial panics take about 15 years to work out, so that’s 2007 + 15 = 2022.
In other news: researchers going back to 1969 show there’s no correlation (actually a slight negative correlation) to GDP growth and real interest rates, the opposite of theory. See TC’s Sunday link or my comment in the last post.
15. November 2015 at 20:13
Anyone have any idea when Italy will start growing faster than Japan? Didn’t I show its trend rate of growth to be lower than Japan some posts back, due to extremely weak productivity?
15. November 2015 at 20:23
Ray, You do know that if money is neutral then AD does not affect output, don’t you. . . .
Just asking.
You said:
“In other news: researchers going back to 1969 show there’s no correlation (actually a slight negative correlation) to GDP growth and real interest rates, the opposite of theory.”
Since when did “theory” begin reasoning from a price change?
E. Harding, Yes, I recall that, but it’s no longer correct. Japan has recently slowed sharply.
15. November 2015 at 23:12
Sumner: “Ray, You do know that if money is neutral then AD does not affect output, don’t you. . . . ” – yes I know that, but that’s why I said “as the Keynesians say”. I am not a Keynesian. Further, AD being pumped up by government spending is Keynesian, but government spending to put to work unemployed is not Keynesian but just common sense, agree? Hence the calls to “spend on infrastructure by borrowing” now that interest rates are cheap, see more here: http://www.voxeu.org/article/restarting-global-economy (though this piece is Keynesian, since the author assumes such government spending will prime the pump and increase AD, see: ‘The unbridged gap between investment needs and sources of finance also lowers investment, which in turn lowers aggregate demand in another twist of the spiral, contributing to slower growth now and headwinds for productivity in the medium and longer term.’)
16. November 2015 at 04:09
Wouldn’t it make more sense to measure GDP per capita then? How is GDP/capita doing in Japan? Growing? Falling?
And why not some really huge public spending? Maybe in cooperations with the private sector.
There are huge projects that might be promising: Fusion reactors, CRISPR applications, a Human Brain Project, Mind uploading. Just to name a few. Or most important: A NGDP future market.
Google and Apple like to hoard cash but they don’t like to take huge risks. They won’t set up a future market also. Not to mention really basic research. They just won’t do it. Right?
16. November 2015 at 05:37
Well…I agree but. Labor forces are malleable to demand. LFP rates can rise. Healthy AD spurs capital investment, thus boosting productivity. Japan needs a more-aggressive monetary policy, as seen by low inflation rates.
I fear Market Monetarists joining the “lower the bar” camp.
16. November 2015 at 06:10
Ray, You said:
“yes I know that, but that’s why I said “as the Keynesians say”.”
Actually you said:
“More likely, as the Keynesians say, . . . ”
If only you had left off the “More likely” Now you are trapped in a corner. Poor Ray.
Christian, Precisely what is the “problem” that more government spending would solve? They don’t have high unemployment, and government spending can’t fix productivity problems.
Ben, I oppose all attempts to set monetary policy based on “bars”, it should stabilize NGDP growth.
16. November 2015 at 06:52
@Sumner –
Sumner: stating that Japan and US trend growth is slowing due to demographics.
Ray: (rebutting Sumner) “Why would trend growth pre-2008 be higher than post-2008?”
Hence, I disagree with your assertion that Japan’s malaise is necessarily due to demographics, or declining trend growth, as in the USA. It could well be lack of AD due to excessive debt (Koo’s thesis; and Koo is a Keynesian) or simply lack of AD, as the Keynesians say.
Get it now?
16. November 2015 at 06:53
It would be nice if someone did the Japanese version of this post:
http://libertystreeteconomics.newyorkfed.org/2015/05/us-potential-economic-growth-is-it-improving-with-age.html
16. November 2015 at 06:53
> and government spending can’t fix productivity problems.
I wouldn’t be quite so bold. Government spending could under very limited circumstances fix productivity problems, if poor productivity is due to a lack of some traditionally-public physical infrastructure or social service.
This is unlikely to be the case in Japan.
16. November 2015 at 07:03
Ray, You do know that if money is neutral then AD doesn’t matter, don’t you?
16. November 2015 at 07:28
Dear Sumner Critics,
I think I might know about a secret weapon for you. Look up what happened to stock prices when investors found out the 2009 Obama stimulus was going to get enough votes to pass in Congress…..
16. November 2015 at 08:28
Infrastructure investment spending of the government will increase both the marginal product of labour and capital [New Keynesianism and Aggregate Economic Activity by Assar Lindbeck – Economic Journal, 108, 1998 pp167-80]
16. November 2015 at 10:13
Until and unless women are as integrated in the Japanese workforce as they are in the British or Canadian workforce, Japan will not get out of this hole.
Their current prosperity is based on the menfolk working absurdly long hours. In terms of hourly productivity, Japan is behind Italy(!) and 36% behind the United States.
Japan needs a women’s liberation movement of some kind.
16. November 2015 at 11:37
@Cooper
According to the Washington Post your theory might be wrong:
“Sixty-four percent of working-age women in Japan are employed, compared to 63 percent of American women.”
https://www.washingtonpost.com/news/wonk/wp/2015/10/07/how-american-women-fell-behind-japanese-women-in-the-workplace/
Or does the US need a women liberation movement, too?
Canada is even worse according to the Huffington Post:
“Over 80,000 women left Canada’s labour force in 2014, bringing their labour force participation rate down to 61.6 per cent from 62.2 per cent in 2013.”
16. November 2015 at 20:19
Ray’s comment on aggregate demand is hilarious. Great nightly entertainment!
17. November 2015 at 13:54
“Christian, Precisely what is the “problem” that more government spending would solve? They don’t have high unemployment, and government spending can’t fix productivity problems.”
I’m reading your blog for quite some time now and I don’t remember you describing a situation in which government spending could fix something. In times of high employment I assume you would advise a monetarist approach. But I wasn’t talking about unemployment and I guess I wasn’t talking about all aspects of productivity either.
I was talking about two comparatively special problems. The first problem concerns also you. Until this day very there’s no NGDP future market. There seems to be no private sponsor that sets up such a market. I assume not having such a market is a problem for Japan, too. Japan would be better off with a NGDP future market, right? So one way of solving this problem would be public funding for such a future market.
In my eyes the other huge problem in Japan aging. I assume the private sector is not solving this problem either. So the government might need to address this problem, too. Again one solution might be more public spending: A big enough monetary reward for every Japanese child that is born and birth rates should raise again.
Of course there are other approaches, too. To raise the birth rate you could establish huge tax deductions. Like in France for example. In case of the NGDP future market the reduction of regulations might help, too.
17. November 2015 at 18:03
Christian, I agree with you that it’s worth spending some public money on a NGDP futures market.