Some recent economic developments in Japan

By David Andolfatto.

Most economic commentators seem to agree that the Japanese economy has been languishing for a very long time.  What is it about Japan that gives this impression? In this post, I suggest that while Japan certainly has its share of difficulties, the common impression of stagnant economic performance seems overstated.

For some people, almost everything you need to know about Japanese macroeconomic performance is encapsulated in this diagram:

This chart tells us that the Japanese economy produced about the same total yen value of goods and services in 2016 as it did in 2000. By way of contrast, the U.S. economy increased the total dollar value of its production by 80% over the same period of time.

But of course, our material living standards do not depend on the amount of dollars or yen an economy produces–these are just units of measurement. The diagram above would be fine to use as a comparison of macroeconomic performance if the purchasing power of dollars and yen remained stable over time. The following diagram shows that this has not been the case.

The general price level (a measure of the cost of living) rose by about 40% in the U.S. since 2000, while it declined by over 10% in Japan over the same period of time. (Note: the consumer price index behaves similarly in the U.S., but is flat for Japan over this sample period.) To put things another way, the U.S. economy has experienced inflation, while the Japanese economy has experienced deflation.

If we correct for the falling (rising) purchasing power of the dollar (yen), the first diagram above is altered as follows:

That is, since 2000, real income (nominal income adjusted for the cost of living) has risen by 35% in the U.S. and by 13% in Japan. That’s still a big gap between the two countries, though not nearly as big as the gap in nominal GDP.

But there’s something else to consider as well. The total income of a country also depends on population size. How much of the difference above is accounted for by different population growth rates? The following diagram provides the answer:

Real per capita income in both the U.S. and Japan is up about 13% and 10%, respectively, since 2000. That’s not a highly significant difference in my books, especially if we take the following into consideration. First, the recession in 2009 seems to have hit Japan much harder than the U.S. Second, in the middle of a sharp recovery dynamic from the 2009 recession, Japan suffered a severe earthquake/tsunami shock in April 2011. And third, just as the economy appeared to be recovering from this latter disaster, the Japanese government increased the consumption tax in April 2014.

There are a couple of other things I’d like to mention about the comparison above. The growth in per capita RGDP in Japan in the early 2000s largely coincided with the Koizumi era. I’ve written about this here: Another Look at the Koizumi Boom. This growth episode was driven largely by a boom in private investment. It occurred at time of declining government investment spending, a sharp reversal of the the Bank of Japan’s QE program in 2006 and, of course, continued deflation. In the U.S. in the meantime, per capita RGDP grew by almost 9% over the three years 2003-2006. That’s a pretty high rate of growth by historical standards–did people really believe this to be sustainable? (Related post here: Secular Stagnation, Then and Now).

A big concern these days has to do with productivity growth. The value of production per employed person rose at more or less the same rate in both countries from 2000-2008. But labor productivity in Japan has lagged the U.S. since then.

I suspect that some of the divergence since 2008 might be explained by composition bias. That is, in a recession, the average quality of labor rises because it is the less-skilled that are let go. We know that the employment to population ratio declined sharply in the United States in 2009 and has not yet recovered, while it declined only slightly in Japan and has since then recovered.

Here is what the picture looks like in terms of production per hour worked (data only available until 2014):

It’s interesting to compare this labor productivity dynamic with real wage rates. Here, I report two measures of real wages, each of which tell the same basic story:

Note: I’m not entirely sure whether bonuses or non-wage benefits are included in the compensation measures used to compute real wages above. Assuming that these measures are roughly comparable, the divergence between the two series is really quite striking. In Japan, in particular, while labor productivity has generally been rising, the compensation to labor has essentially flat lined. I suspect that some of the post 2014 productivity and wage dynamic for Japan may be related to the increase in the employment of low-wage workers.

Prime Minister Shinzo Abe’s policy reforms (Abenomics) are motivated by a desire to increase long-run economic growth (RGDP or per capita RGDP). It’s not clear to me how monetary policy is supposed to help in this endeavor. I do not believe that achieving the 2% inflation target will have any significant consequences for real economic growth. (And in any case, I do not think the target is even feasible given present circumstances, see: The Failure to Inflate Japan.) On the fiscal policy front, I think the April VAT increase was a mistake–I do not think Japan’s fiscal situation is as dire as many make it out to be (see previous link). The third of Abe’s arrows–structural reform–seems like the only real hope. Some of these reforms are evidently targeted at relaxing restrictions on immigrant labor. But it’s unlikely in my view that this will do much to mitigate the effects of Japan’s aging (and declining) population. And it’s not entirely clear what effect the proposed reforms will have on Japan’s stagnating real wages.


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