Authors

Economics

Is Japan heading for another lost decade?

Recently various commentators have been warning the Euro-zone to boost its stimulus policies in order to avoid a Japanese-style lost decade. By this they refer to the years 1991 to 2000. The average growth of real GDP in Japan during that period stood at 1.2% versus the average growth of 4.7% during 1980 to 1990. In terms of industrial production the average growth stood at 0.1% versus 4.1%.

According to many experts such as the current Fed Chairman Ben Bernanke an important factor behind this sharp weakening in Japan’s economic growth is the strong decline in the yearly rate of growth of the consumer price index (CPI). During the 1980 to 1990 the average rate of growth of the CPI stood at 2.6% against 0.8% during the 1991 to 2000 period. Note that since 1999.2 to 2000.12 the CPI rate of growth displayed persistently negative growth i.e. price deflation.

Bernanke and other commentators such as Paul Krugman have been blaming the Bank of Japan for not aggressively countering price deflation by means of massive monetary pumping. As a result, they hold, Japan fell into a prolonged period of subdued economic growth. Observe that on account of a strong increase in the Nikkei stock price index from 13,024 in January 1986 to 38,916 in December 1989 – nearly 200% increase, the BOJ had tightened its monetary pumping. The yearly rate of growth of the BOJ balance sheet fell from 15.2% in February 1989 to 9.1% by October that year. The policy interest rate was lifted from 2.5% in April 1989 to 3.75% by November that year. This triggered a fall in the Nikkei of 42% to 22,455 by November 1990 from December 1989.

Bernanke has been blaming the BOJ for not responding fast enough to the collapse in the Nikkei, which he viewed as an important factor in triggering deflation and an economic slump. It is overlooked by various commentators, including Bernanke that the foundation for the slump was set by the previous massive monetary pumping of the BOJ. The yearly rate of growth of the BOJ balance sheet jumped from minus 0.5% in November 1986 to 15.2% by February 1989. The BOJ policy interest rate fell from 4.5% in February 1986 to 2.5% by February 1987 and was kept at this level until April 1989.

On the contrary, the tighter stance by the BOJ that triggered the collapse of the Nikkei had arrested the destruction of the wealth generation process. Is it true that the BOJ didn’t do enough to prevent the economy falling into a severe economic recession thus contributing to a lost decade?

The BOJ policy interest rate had been lowered from 6% in June 1991 to 0.25% by December 2000. The yearly rate of growth of the BOJ balance sheet jumped from 6% in June 1991 to 46.6% by March 1998. So how in the world could anyone call it a non-aggressive loose monetary stance?

Contrary to Bernanke and other commentators, the lost decade in Japan occurred on account of the loose monetary stance of the BOJ. The economy fell into a slump on account of a severe destruction of the machinery of wealth generation. Instead of allowing a quick cleansing of the system the BOJ enforced massive pumping. This has prevented the elimination of the non-productive bubble activities and prolonged the economic agony.

A much greater monetary pumping as suggested by Bernanke and Krugman would have inflicted even more severe damage. In fact, on account of the aggressive monetary stance of the central bank, Japan had been in an economic slump until 2010. This means that Japan has lost not one but two decades of economic growth. Contrary to Bernanke, the key cause for that is in fact the aggressive stance of the BOJ.

We suggest that the recent policy of the BOJ to aggressively inflate the economy, which was praised by Krugman as an act of courage and wisdom, is going to further damage the wealth generation machinery and runs the risk of denying Japan yet another decade of growth.

Summary and conclusion

Recently various commentators have been warning the Euro-zone to boost its stimulus policies in order to avoid a Japanese-style lost decade. By this they refer to the years 1991 to 2000. The average growth of real GDP in Japan during that period stood at 1.2% against an average growth of 4.7% during 1980 to 1990.

Most experts, including Fed Chairman Ben Bernanke, have been blaming subdued economic growth on the Bank of Japan’s (BOJ) failure to aggressively counter price deflation.

Our analysis shows that the key factor behind Japan’s subdued growth is actually the loose monetary policies of the BOJ. These policies have severely damaged Japan’s wealth generation process.

We suggest that the recent policy of the BOJ to aggressively counter price deflation is going to further damage Japan’s economy and run the risk of denying Japan another decade of growth.

4 comments to Is Japan heading for another lost decade?

  • Paul Marks

    I thought Japan might have a little boomlet in the summer – before economic decline.

    Now even the summer boomlet appears to be unlikely.

    In the longer term Japan is finished.

  • Craig Howard

    I’m still not convinced that Japan had a second decade of no-growth. The money supply was held very stable by the BOJ and, as a result, there was virtually no price inflation.

    Now, GDP increases are nothing but price inflation; if there is no increase in money, there can be no increase in GDP. So we would have to look deeper to understand Japan’s economic situation during this period. I would think that its unemployment rate of ~4.5% might indicate a fairly healthy economy.

    I think the BOJ is inflating because someone has to pay the mounting fiscal deficits and the Japanese are getting too old to keep buying it all.

  • George Doughty

    Mr Howard:”if there is no increase in money, there can be no increase in GDP”. Sorry sir, this is utterly false. The fact that so many believe it to be true does not change the fact. For millenia everyone knew the sun orbited the earth. They knew it because it was so obvious. I think in the near future the truth about money supply will be realised. Painfully.

  • Paul Marks

    The economy can get better without any increase in the money supply – people can get better off their wages can buy more goods and services.

    However that is the dreaded “defaltion” which mainstrean economists treat as some sort of monster.

    If producion increases and the money supply does not – this is (to mainstream economists) is “defation” (I must stress that I am NOT talking about a sudden collapse of prices with the bursting of a credit-money bubble, just things-getting-BETTER) the “mainstreamers” (even before Keynes – going back to Irving Fisher and so on) insist tha the “price level” must be maintained (not allowed to fall) by inreasing the money supply and handing out the new money.

    The economic distortions that their “keep the price level stable” policy causes (which get worse-and-worse) those in the tradition of Irving Fisher (such as the late Milton Friedman) ignore (just as the Keynesians ignore them). The work of Frank Fetter and others is disregarded by the “mainstream”,

    This is why (for example) Alan Greenspan did such harm.

    The obsession with “GDP” and (especially) a “stable price level” and avoiding gradually falling prices.

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please leave an intelligent and civil reply in your own name.