The myth of Japan's "lost decade": taking the message to Washington
The leading American economic commentator Pat Choate last month hosted a working dinner for me in Washington at which I had a chance to meet several key U.S. politico-economic figures. I discovered that however astute these people are in other respects, many of them were seriously misinformed on Japan. Basically they had taken at face value the propaganda story of Japan's supposed "lost decade." Later by e-mail I continued the discussion with one of my most vocal opponents of the evening, a prominent Washington-based economist. Such was his state of misunderstanding that he maintained that during the 1990s Japan's manufacturing sector had suffered "the worst collapse of any country in the world (outside the former Soviet block)." In the key exchanges below, my counterpart is identified as XY. The exchanges are presented in reverse chronological order. (The discussion was, of course, lived forwards but, as with life generally, it is best understood backwards!) EF
EF
MESSAGE TO MR. XY
FROM EAMONN FINGLETON
November 5, 2002
Dear X:
I thought I heard you suggest last Monday that Japan's trade position was in secular decline. If I misheard, I apologize. But the important point is that media reports of a secular decline are propagandistic attempts by the Tokyo establishment to head off market opening pressure. On many occasions over the last 20 years, Japanese spokesmen have suggested that Japan's trade surpluses have been peaking. Typically such suggestions have been based on the way that temporary drops in the yen's exchange rate have induced similarly temporary reductions in the dollar-denominated value of Japanese exports.
Let's close on this subject by noting that after dipping sharply last year, Japan's current account has now recovered dramatically and is predicted to top Y15 trillion this year. This would be just shy of the 1998 record and the second largest total ever -- not bad given that most key markets for Japan's all-important capital goods exports are still sluggish. Compared to the peak "juggernaut" year of 1989, Japan's surplus this year will have increased more than 70 percent in yen terms, and considerably more in dollar terms.
You will forgive me if I press ahead with elucidating important misconceptions underlying the other points you made. I have chosen to focus on your points, rather than those of my other interlocutors of last Monday, precisely because you are the most economically sophisticated critic of my analysis. I respect your work and applaud your intellectual courage as an economic thinker prepared to stand up for commonsense on trade. It is no reflection on your abilities that you have been misled about Japan's economic health. Rather your misunderstandings are eloquent testimony to how sophisticated, pervasive, and almost undetectable Tokyo's propaganda efforts have now become. Frankly, most of the Japanese-economy experts you trust in Washington are either dupes of the Japanese system or, worse, are agents consciously and skilfully engaged in spreading propaganda.
These are the answers to the points you raised:
Manufacturing jobs
Last Monday you passed around a chart showing that there had been a large reduction in Japanese manufacturing jobs in the last decade. You took this as evidence that Japanese manufacturing is being hollowed out. It is nothing of the sort. This should be obvious to you now that you have understood that, all Tokyo propaganda to the contrary, Japan's current account surpluses have actually continued to burgeon in the last decade. How hollowed out can an economy be if it is running a current account surplus of 3 percent of gross domestic product? Correctly interpreted, the jobs trend shows that Japanese manufacturers have been highly successful in boosting labor productivity. And the task of boosting labor productivity is, of course, as I pointed out last Monday, the fundamental aim of Japan's non-capitalist brand of economics. Thanks to big improvements in Japanese manufacturing productivity, large amounts of labor have been freed up to increase the production of "good" services (the sorts of services that palpably improve the consumer's lot and that have always been disproportionately well represented in the richest economies and most successful economies). There has been strong growth in employment in particular in family restaurants, in recreational facilities such as sports clubs and ski resorts, in home cleaning services, and in health care. In the case of health care, only the most obvious benefit has been a 1.5 year boost in life expectancy in the last decade -- a boost that means the Japanese now outlive Americans by four years. (None of this is to gainsay the point that in America's case reductions in manufacturing employment in recent years have been a disaster. As a nation that has been running trade deficits for three decades, America's circumstances are, of course, quite different from Japan's.)
China's high-tech challenge
On Monday you suggested that China was on the verge of passing Japan in high technology. On the face of it, this would appear to be unlikely given that Japan enjoys a per-capita income more than 35 times that of China. This is a considerably greater gap than that between the United States and, say, Brazil. Even the richest parts of China boast incomes less than one-quarter of the Japanese average. Although you are right to be concerned about Chinese economic expansionism, China is still almost entirely an assembly economy and depends heavily on Japan for high-tech parts, materials, and machines. Essentially Tokyo's "basket case" propaganda has led you massively to underestimate the true state of Japan's technological sophistication. Elsewhere I have documented many dozens of high-technology products which Japan monopolizes and without which the world's high-tech industries would literally be unable to function. A little digging would undoubtedly unearth hundreds more such Japan-monopolized technologies. By comparison I am not aware of a single high-tech product monopolized by China. If you can cite some examples, please do so. As far as I can see, the area of technology where China is most advanced is semiconductors. But in that industry not only has it received much of its technology from Japan but it is still running six to ten years behind Japan's domestic capabilities (e.g. in SOC semiconductors).
Japanese job creation
You say that Japan has created no net new jobs since 1992. True. But a glance at the substance of Japan's position is enough to show that this bespeaks no fundamental problem with the East Asian economic model. Rather it reflects Japan's unique demographics. A nation can create jobs only if there are workers to take them. Remember that Japan (a) allows virtually no immigration and (b) has one of the most top-heavy age structures of any nation. Japan's huge cohort of ageing baby boomers finds it hard to adapt to the new jobs created by the speed of Japan's technological innovation and hence there has been an unavoidable rise in recent years in Japan's traditionally ultra-low unemployment rate. That said, Japan's unemployment rate, as calculated on an authoritative OECD basis, remains one of the lowest in the developed world.
"Massive government deficit spending"
Here again you have unfortunately been led astray by dubious sources. The Japanese government's consistent propaganda position since the 1980s has been that it has been running massive budget deficits. In reality most of the time it has been running massive budget surpluses. The authoritative figures have been published each year in "OECD in Figures." (In 1998, for instance, the budget surplus was 1.6 percent of GDP, according to "OECD in Figures" -- and that in a year when the Western press uniformly reported Japan was supposedly running a budget deficit of 4 or 5 percent.)
Equity and real property values
That Japanese equity and real property values fell in the 1990s is merely a reflection of the fact that they reached ludicrously inflated levels in the late 1980s. The macroeconomic point I would emphasize is that while the crash impoverished many formerly wealthy Japanese citizens (and created serious problems for their bankers), it has not damaged the wider Japanese economy. Quite the contrary. (See my book Blindside, pp. 288-294.) If you check the record, you will find that I am unique among Tokyo-based commentators in predicting the stock market and real estate crashes as well as the consequent banking problems (see, for instance, "Why Japanese banks are shaky," a seven-page article I published in the September 1987 issue of Euromoney). The version of reality you appear to give credence to (that the crash has caused an absurdly prolonged consumer spending funk) is a fantasy created by long-time Tokyo-based commentators who are known to be disinformation agents of the Japanese system. Irrespective of what they say now, the record shows that these people were outspoken bulls of Japanese equities and real estate in the late 1980s -- and as such acted as key facilitators helping the Japanese corporate system to unload many tens of billions of ludicrously overpriced financial assets on unwitting Western institutional investors.
Per-capita GDP
You are right in suggesting that, on the official figures, Japan's GDP per capita has stagnated in the last five years. But even judged by GDP growth, Japan has hardly been doing as badly as it has been portrayed. As HSBC Securities' Tokyo-based economist Peter Morgan has pointed out, Japan's GDP growth in the 1990s was better than that of Switzerland and only fractionally less than that of Germany. That said, Japan's official figures clearly understate its GDP growth. Westerners forget that the task of calculating GDP growth, like that of calculating corporate profits, is highly sensitive to hidden and often highly subjective assumptions. If a nation chooses conservative assumptions, as Japan has done for more than a decade now, its perceived growth is low or even negative. If it chooses optimistic assumptions, the result is the sort of unrealistically strong numbers the United States reported in the late 1990s.
Japanese tourism
You write: "All the international travel figures I've seen show tourism from Japan has crashed over the past decade; numbers of travelers, spending per traveller, and distance of travel." According to the Japanese Ministry of Justice's passport control service, a total of 17,819,000 Japanese residents travelled abroad on vacation in 2000, up from just 9,663,000 in 1989, the last year before the Tokyo financial crash. Those who travelled to the United States and Canada totaled 5,448,000, up from 3,438,000 in 1989. Obviously the figures since September 11 are down -- but even the most trenchant proponents of the "collapsing Japan" story can hardly offer this as evidence of Japanese economic weakness. I would be interested to know who is the source for your numbers?
I could write at much greater length in addressing your difficulties. In fact I have already done so -- in Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000. It is implicit in your comments that you have not read Blindside. For your information I stand by virtually everything I wrote there.
If you think about it you will see that there is a strong parallel between the Japanese economic system's pattern of understatement and that of many of America's best managed private companies. In sharp contrast to their listed counterparts, U.S. private companies rarely see much point in making inflated claims about their performance. Rather they see good reasons to be as self-effacing as possible. Otherwise they risk inviting unwelcome attention -- wage demands from labor unions, sponsorship requests from community leaders, and even perhaps tax demands from the IRS. Similarly in Japan virtually every economic actor can be shown to have strong incentives to understate his own institution's individual performance as well as the nation's overall performance. Only the most obvious benefit has been a decade of peace in trade policy. The United States no longer even tries to open Japanese markets. Why is it so hard for even the most astute and capable of American observers to see the reality behind Japan's pose?
One thing is sure: the rise of the basket case story of Japan has induced many key Americans to conclude that the East Asian economic model is self-limiting. They could not be more wrong. Given that the policy implications concern not only Japan but, even more importantly, China, the consequences of the misunderstanding are hard to exaggerate.
All the best, Eamonn
MESSAGE TO EAMONN FINGLETON
FROM XY
Date : Fri, 1 Nov 2002 18:23:28 -0500
Eamonn,
I spoke from notes at the dinner on Monday which I would be happy to fax to you. Either I misread my notes badly then or you are misremembering my remarks now.
Whatever - I believe the reputable data on Japan are overwhelmingly other than you state.
But I do wish you good luck with your crusade.
XY
MESSAGE TO XY
FROM EAMONN FINGLETON
November 2, 2002 (Chronological note: Although this was sent on Saturday Tokyo time, it was still Friday in Washington. Hence XY's immediate reply above dated November 1.)
Dear X:
Although you do not say so explicitly, it is implicit in your message of October 31 that you misspoke on Monday in suggesting that Japan's exports and current account surpluses weakened markedly in the latter half of the 1990s. I am grateful therefore for your frankness in acknowledging your error. As you indicated at the time, your remarks on Monday were based on short-term trends in dollar-based statistics. On reflection, you clearly agree with me that such trends are highly misleading and that, from the point of view of assessing how Japanese exporters are doing, the appropriate approach is to look at the yen-based numbers. And these, of course, showed continuing growth in the latter half of the 1990s.
While your message acknowledges that the growth trend in Japan's current account surpluses continued in the latter half of the 1990s, you now suggest, however, that the growth between the cyclical peaks of 1993 and 1998, at 8 percent on your new numbers (and 9 percent on mine), was poor. Not true. Remember the yen is an ultra hard currency whose internal purchasing power in Japan has actually grown considerably over the years (not all of this growth incidentally is captured in the official data but it is palpably obvious to anyone who lives here). Remember too that the growth in Japan's trade surpluses was from a very high base of 3.1 percent of GDP in 1993 (a base indeed that at the time was pronounced unacceptably high by U.S. policy-makers). Certainly, even without going into the complexities of transfer pricing (which have clearly been used to reduce the apparent size of Japan's current account surpluses in recent years), it is clear that Japan's trade position is extremely robust.
Indeed, the fact that Japan boasts current account surpluses at all at this stage should be considered remarkable given that as far back as 1989, Japanese spokesmen (and their mouthpieces in such Western media as The Economist magazine) began arguing that Japan's trade surpluses were set to disappear entirely during the course of the 1990s. The story was that this outcome was predetermined by the rapid ageing of the Japanese population and the consequent contraction of the working-age cohort.
I note in passing that there is an element of self-contradiction in your position. On Monday you suggested that a putative secular decline in Japan's current account performance in the latter half of the 1990s represented evidence that the economy was weak. Now that we have established that the decline did not take place, you suggest that the strength of Japan's current account surpluses is indicative of weak consumer and investment demand. In reality the large size of the surpluses reflects Japan's relentless policy since the 1880s of focusing on boosting the trade position as a fundamental measure of economic success. All the evidence is that Japanese policy-makers have not changed their stance and that, irrespective of whatever self-deprecating absurdities they may utter for Western consumption, they could not be more delighted by the consistently huge surpluses of the 1990s.
One further point: you suggest that America's relatively faster growth rate in total exports vis-a-vis Japan's in the last decade represents evidence of a superior economic performance by the United States. But we all know that America's export numbers these days are full of water. To take a typical example, American companies import laptop computers from East Asia, stuff them in cardboard boxes in California, throw in appropriate instruction books, and export the finished product to Europe. Any nation can goose its export numbers by such tactics but, given the even faster speed with which America's import numbers have concurrently risen, America's export performance hardly bespeaks a strong economy. Any comparison of the two nations' true export performance should start by stripping out imported content.
I note with total astonishment your statement that Japanese manufacturing industry has undergone a "collapse" in the last decade. On the basis of 17 years of watching the Japanese economy on the spot in Tokyo, I can report that this statement could not be further from the truth. In reality Japanese manufacturing industry is stronger than ever. Remember that Japanese manufacturers pay some the highest wages in the world (20 percent or 30 per cent higher than their American counterparts); yet they lead or indeed dominate world markets in virtually every category of product in which they choose to compete. Before I comment further, I would like to know what evidence you have to support your contention. I will then deal with it and I will at that stage also address the various new points you have now introduced in your message of October 31. All these points are based on misconceptions and blindspots created by your reliance on the Western media for your understanding of Japan.
Best wishes,
Eamonn Fingleton
MESSAGE TO EAMONN FINGLETON
FROM XY
October 31, 2002
Eamonn,
It was nice to see you at Pat's dinner. I suspect that we agree on so many things, it's too bad to get off on points of disagreement. Particularly when the case is so clear and so overwhelming.
As you know, the only point I had time to emphasize at the dinner was the fact that Japan's manufacturing sector has had the worst collapse of any country in the world (outside the former Soviet block) during the 1990s. The entire manufacturing sector in Japan has experienced contractions similar to that of the Textile industry in the US during the 1990s.
Unlike the US, Japan has created NO net new jobs in the entire economy since 1992. This, despite massive government deficit spending that has sent the central government deficit to near 7% of GDP - equal to over $700 billion in the US.
Of course equity and real property values in Japan are down -80% over the past 12 years. Per capita real GDP has been stagnant for five years. All the international travel figures I've seen show tourism from Japan has crashed over the past decade; numbers of travelers, spending per traveler and distance of travel.
On the exchange rate point you raise in today's note, my use of dollar figures in my cursory comments on Japan's sharply declining trade performance were meant to put your case as strongly as possible. For example, you seem pleased to note that when measured in Yen, Japan's exports were up 34% between 1989 and 2000. But when measured in US$$, Japan's exports were up 75% during the period!
By the way, US exports were up 115% during the same period; what does that tell you?
You note that Japan's Current Account surplus peaked in 1998 at a level 72% higher than in 1989 when measured in Yen. When measured in US$$, the 1998 peak was 91% above the 1989 levels.
In US$$ terms, Japan's trade deficit peaked in 1993 &'94 and has now fallen by more than half; the current account deficit has fallen by one-third. You are correct that when measured in Yen, Japan's current account peaked in 1998 - five years ago - before falling by one-third now. But even this might be considered misleading since the Yen denominated Current Account peak in 1998 was only 11% and 8% above Yen levels of 1992 and 1993.
Unlike the 1980s when Japan had soaring trade surpluses even as their GDP was also soaring. It presents no mystery to economist now, to find that a country with very little consumer or investor demand growth for a decade has a trade surplus.
The danger, as I see it, is that by pretending that Japan has not failed - indeed, by pretending that it is doing well - you fall into the same trap that people like Les Thurow fell into with Europe and that the "new economy" types have in the US today.
Japan, as the world's second largest economy, is clearly a vital and much misunderstood part of the world economy. The West, and Japan itself, has much to learn. I hope you will turn all your terrific experience and insider knowledge to these more productive pursuits.
Best regards,
X
MESSAGE TO PAT CHOATE (COPIED TO MR. XY)
FROM EAMONN FINGLETON
October 31, 2002
Dear Pat:
It was a great pleasure to see you on Monday and thank you again for putting together that superb evening.
I came away surprised at the nature of the misunderstandings and blindspots that obscure the truth of the Japan story from key people in Washington. The friendly and informal nature of the format did not allow for a rigorous discussion and I therefore did not try to address on a point-by-point basis the issues raised by XY and the others. Their difficulties, however, can easily be cleared up.
Several of X's points revolve around definitions. Take Japan's trade position, for instance. He relied on the dollar-denominated series to suggest that Japan's trade position weakened in the latter half of the 1990s. But, given that the yen-dollar exchange rate has continued to yo-yo irrationally in the last decade, dollar-denominated numbers for Japanese trade have to be treated with considerable caution. For the record, as measured in yen, the all-time high for Japan's merchandise exports was hit as recently as 2000 with a total of 52 trillion yen. That was up 34 percent on 1989 (which was, of course, the last year before the stock market crash and as such was the peak year for juggernaut scare stories). As for the current account, in yen terms the all-time high was in 1998. At 15.2 trillion yen, the 1998 surplus represented an increase of nearly 72 percent on 1989. This performance too hardly offers much support for the "lost decade" thesis.
As for the decline in the surpluses since 1998, this is indicative of weakness not so much in Japan as in the United States (where, particularly since 2000, demand for Japan's crucial capital equipment exports has collapsed).
I would add that any rigorous discussion should take account of several other qualifications, most of which would tend to strengthen my point (e.g. because of the huge proliferation of Japan Inc.'s overseas export platforms, transfer pricing is now rampant and increasingly understates both Japan's exports and surpluses).
One final point: although the yen's short-term movements are largely meaningless, the long-term trend continues unmistakably strong. At Y123 to the dollar recently, the yen has risen nearly 17 percent from its end-1989 close of Y143.4.
I would like to send Z some stuff and would be very grateful if you could let me have his contact details.
All the best, Eamonn
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