Wednesday, February 18, 2009

Martin Wolf on Lessons from Japan's "Lost Decade"

The graphic above accompanies Martin Wolf's latest Financial Times column, ("Japan’s lessons for a world of balance-sheet deflation"), and he uses it to make the point that, although the balance sheet deflation in the U.S. is a lot shallower than Japan's, the crisis is a lot broader today because it's global, i.e., Japan was still able to increase its exports (and thus ameliorate its economic situation) during its "lost decade" because there was healthy demand for those exports in countries with strong economies.

Another point Wolf makes is about the relative effectiveness of Japanese fiscal policy during its "lost decade":

[T]hose who argue that the Japanese government’s fiscal expansion failed are, again, mistaken. When the private sector tries to repay debt over many years, a country has three options: let the government do the borrowing; expand net exports; or let the economy collapse in a downward spiral of mass bankruptcy.

Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph. The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.

Something to consider when reading comments on various blogs about how Japan spent a lot of expensive infrastructure and still had a "lost decade".


Sivaram Velauthapillai said...

You are more centrist than I thought Dave ;) Anyway...

If Japan was more shareholder-friendly (i.e. more capitalist,) it would recover far more easily.

Although Japanese companies are getting whacked hard by the current collapse of exports, people don't realize how good the balance sheets of Japanese firms are. Many are overcapitalized with huge cash holdings--way beyond working capital or expansion need. The autocratic culture also probably hurts their business. For instance, Japan has many technologies and products that doesn't leave the shore. I always wonder why such technology couldn't be commercialized overseas. If there were activist investors in Japan, I doubt such R&D would sit stagnant.

DaveinHackensack said...

I'm not dogmatically opposed to fiscal stimulus, Sivaram, although I think we could have used a better one than what President Obama signed yesterday (e.g., one that would provide the bulk of its stimulus this year, when its needed most).

Regarding Japan, that's an interesting point about the technologies they use domestically but don't seem to export. Perhaps there's not as much of a market for some of them in countries with plentiful cheap labor, but it might be something that more empowered shareholders would explore, as you suggest. The other issue Japan has is that it needs to stimulate more domestic consumption.