I’m going to Japan soon, and have been putting some numbers and thoughts together, both about Abenomics and the longer-term lessons from the Japanese experience. Here are some notes on the way.
First, can we stop writing articles wondering whether Europe or the United States might have a Japanese-type lost decade? At this point the question should be whether there is any realistic possibility that we won’t. Both the US and Europe are approaching the 7th anniversary of the start of their respective Great Recessions; the US is far from fully recovered, and Europe not recovered at all. Japan is no longer a cautionary tale; in fact, in terms of human welfare it’s closer to a role model, having avoided much of the suffering the West has imposed on its citizens.
Part of the impression that Japan has been a bigger disaster comes, of course, from Japanese demography: if you look at total GDP, or even GDP per capita, you miss the fact that Japan’s working-age population has been declining since 1997. I’ve tried to update the numbers on real GDP per working-age adult, defined as 15-64; I start in 1993 because of annoying data problems, but it would look similar if I took it back a few more years. Here’s a comparison of the euro area, the US, and Japan:
So even in growth terms Japan doesn’t look much worse than the US at this point, and is actually slightly ahead of the euro area. That doesn’t mean Japan did OK; it just means that we’ve done terribly.
What about Abenomics? The decision to go ahead with the consumption tax increase — which some of us pleaded with them not to do — dealt a serious blow to the plan’s momentum. There has been some recovery in growth:
But losing momentum is a really bad thing here, since the whole point is to break deflationary expectations and get self-sustaining expectations of moderate inflation instead. For what it’s worth, the indicator of expected inflation I suggested, using US TIPS, interest differentials, and reversion to long-run purchasing power parity, is holding up:
But I still worry that Japan may fall into the timidity trap.
The whole business with the consumption tax drives home a point a number of people have made: the conventional view that short-term stimulus must be coupled with action to produce medium-term fiscal stability sounds prudent, but has proved disastrous in practice. In the US context it means that any effort to help the economy now gets tied up in the underlying battle over the future of the welfare state, which means that nothing happens. But even where that isn’t true, talking about fiscal sustainability when deflationary pressure is the clear and present danger distracts policy from immediate needs, and can all too easily lead to counterproductive moves — as just happened in Japan. When I see, say, the IMF inserting into its latest Japan survey (pdf) a section titled “Maintaining focus on fiscal sustainability” my heart sinks (and so, maybe, does Abenomics); it’s hard to argue against sustainability, but under current conditions it means taking your eye off the ball, and Japan really, really can’t afford to do that.
More notes as my cramming for the coming quiz continues.