Sunday, February 27, 2011

The Media Myth of Japan's "Lost Decades"

The chart above shows annual real GDP per capita for Japan and the U.S. (data here) from 1980 to 2010, where each series has been converted to an index, with a value of 100 for the year 1980.   Compared to 1980, Japan's real GDP per capita in 2010 was nearly 70% higher, vs. a 66% increase for US real GDP per capita over the last 30 years.  Japan had higher economic growth than the U.S. during the 1980s, slightly lower growth during the 1990s, about the same growth during the 2000s, and slightly higher overall growth during the entire  30-year period from 1980 to 2010. 

So what about Japan's "Lost Decades" and economic failure and stagnation that we hear so much about from the media? According to Tokyo-based Eamonn Fingleton writing in The Atlantic:

"After studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth.

Certainly anyone who visits Japan these days is struck by the obvious affluence even among average citizens. The cars on the roads, for instance, are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices, for instance, are more or less standard on many models).  Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest -- something like ten times faster on average than American speeds.

At the heart of my analysis is a story of extraordinary progress by Japanese manufacturing. The reason you don't hear much about Japanese manufacturers these days is that the best of them have moved from making consumer goods to concentrate on so-called producers' goods -- items that though invisible to the consumer happen to be critical to the world economy. Such goods include the highly miniaturized components, advanced materials, and super-precise machines that less sophisticated nations such as China need to make final consumer goods. The label on everything from cell phones to laptop computers may say "Made in China" but actually, via producers' goods, highly capital-intensive and knowhow-intensive manufacturers in Japan have quietly done much of the most technologically demanding work.

In the early years after World War II the United States utterly dominated the higher reaches of the producers' goods business. Under pressure from foreign competition, however, American players one by one have closed down or outsourced in the last quarter of a century. The competition has come principally from Japan, which now enjoys broadly as dominant and geopolitically important a position as the United States did in the 1960s."

MP: The writer feels so strongly about the "lost decades" myth that he has issued a challenge to numerous myth proponents to debate him this year on the 20th anniversary of the great Tokyo stock market crash (details here). 


At 2/27/2011 11:57 PM, Blogger PeakTrader said...

Japan's population was 123 million in 1990. Today, it's 127 million, because the rate of population growth decreased and then went into decline.

The population is projected to be 100 million in 2050 and then 67 million in 2100. So, Japan could have zero growth for a hundred years and real per capita GDP will almost double.

At 2/27/2011 11:59 PM, Blogger PeakTrader said...

In contrast, U.S. population was a little less than 250 million in 1990. Today, it's 310 million.

At 2/28/2011 12:18 AM, Blogger Buddy R Pacifico said...

Japan's government debt is at 204% of GDP. S&P and other rating agencies are cutting their ratings on Japan. The Lost Decades may be a myth but the burden of profligate spending seems to be real.

At 2/28/2011 12:32 AM, Blogger jeremy h. said...

The "lost decades" in Japan usually refers to the post-1989 period, I believe. So using the same ERS data, 1990-2010 growth rates look much different: 20% increase for Japan vs. 32% for the US. That's 1% per year for Japan. Seems reasonable to me to call that "stagnation."

In PPP terms, the stagnation is even more apparent. Using World Bank data for 1990-2009, Japan increases by just 13.6% (26,129 to 29,692), while the US increased by 30.8% (31,926 to 41,761).

In other words, by 1990 Japan was very close to "catching" the US in real terms, but by 2009 they were still below the US level of 1990!

At 2/28/2011 1:18 AM, Blogger Unknown said...

I need some clarification. How can Japan's large current account surplus and America's large current account deficit both be a sign of both country's wealth?

At 2/28/2011 2:07 AM, Blogger nasaki said...

All Japan need is stable inflation.
The real GDP growth is next to nothing in front of the years of deflation.

At 2/28/2011 2:30 AM, Blogger Michael said...

This comment has been removed by the author.

At 2/28/2011 5:33 AM, Blogger Michael said...

Yeah, I'm also thinking the relevant part of that graph starts at around either at '89, '90 or '91.

At 2/28/2011 6:09 AM, Blogger said...

there is a problem of population:

At 2/28/2011 6:30 AM, Blogger Lancelot du Lac said...

congratulations for your blog.

Some people mentioned Japan´s demography: for me this is the key.
If we take as correct the premise that GDP is generated mostly by workers (to be more accurated by people in working age), this curve should be more favourable to Japan (the amount of grey people in case of Japan is higher than in EEUU).

To be honest, I think the idea Japan suffering a stagnation is not a complete true.

Maybe, they are going through something we will suffer in a few decades (In Spain this future is closer than for other countries).
And I think they are passing the exam with success. Something I´m not sure other countries will do...

At 2/28/2011 7:41 AM, Anonymous Anonymous said...

its be moreinteresting with debt curve.

At 2/28/2011 8:59 AM, Blogger PeakTrader said...

Johnster, the balance of payments between the U.S. and Japan represent two main factors:

1. Japan has to sell goods to the U.S. for dollars to buy commodities on the world market that are priced in dollars.

2. Japan has more trade barriers than the U.S. to protect employment.

So, this results in U.S. capital account surpluses and current account deficits, while Japan has capital account deficits and current account surpluses.

Both countries benefit from trade. However, U.S. gains-in-trade are larger than Japan's gains-in-trade.

Also, I may add, China's gains are less and U.S. gains are more, because China sells its goods too cheaply and lends its dollars too cheaply, which creates a virtuous U.S. cycle of consumption-investment.

Basically, China has become the world's low-cost producer, because of low labor costs, which takes market share from other poor countries.

U.S. multinationals and the Chinese elites, along with other foreigners, make huge profits between low prices and even lower labor costs.

The combination of low prices and high volume is why China's GDP growth rate is high, and why U.S. profit soared to all time-highs.

At 2/28/2011 9:14 AM, Blogger PeakTrader said...

The hidden downside of Santa's little helpers
December 21, 2002

"The Chinese toy factory workers are more exploited than before," said May Wong of the Asia Monitor Resource Centre.

"Wages have actually gone down, there is so much surplus labour," agrees Monina Wong, a researcher with the HK Coalition.

An investigation into the price of a Mattel Barbie doll, half of which is made in China, found that of the $10 retail price, $8 goes to transportation, marketing, retailing, wholesale and profit for Mattel.

Of the remaining $2, $1 is shared by the management and transportation in Hong Kong, and 65 cents is shared by the raw materials from Taiwan, Japan, the U.S. and Saudi Arabia.

The remaining 35 cents is earned by producers in China for providing factory sites, labour and electricity.

"We are not even sure the factory-owners are getting rich. Some complain that the unit price of the production order by big-name buyers is too low for them even to provide the basic wages and benefits for the workers they hire," said May Wong.

At 2/28/2011 10:19 AM, Blogger John Thacker said...

That last paragraph sounds like the author strongly disagrees with your comments about US manufacturing still being strong, though, Mark.

At 2/28/2011 10:32 AM, Blogger morganovich said...

i have to agree that the timeframe chosen for this is a pretty serious case of cherry picking.

no one has accused japan of missing the 80's.

however, if you start the analysis at 1990 instead to cover the decade people generally refer to, this index went from 145 to 170 in 20 years, a compounded growth rate of 0.79% per year.

that sure seems stagnant to me.

the decade from 1990-2000 is even worse at 0.67% compound growth.

At 2/28/2011 3:08 PM, Blogger Benjamin Cole said...

Japan is being crushed by tight money. the 200-2010 period is th worst of all.

At 2/28/2011 3:23 PM, Blogger morganovich said...

benji, no matter how many times you claim japan has had tight money, it will not make it true.

tight money how?

show me ANY data that japan has had tight money.

rates have been near zero for a decade.

nationally, they have pursued massive stimulus after massive stimulus accumulating the highest debt as a % of GDP (180%) of any developed country.

zero rates and endless keynsian bombardment have accomplished nothing because they have not reallocated capital away from zombie companies and allowed the needed failures to occur. this has been compounded by the demographics and aging of the population leaving more drains on resources and fewer producers of them.

japan's issue has nothing to do with tight money they have had perhaps the loosest long term interest rate and public spending policy in all of history.

if you stop and think about it, this will show you how limited monetary policy and stimulus really are.

At 2/28/2011 3:27 PM, Blogger morganovich said...


you are also wrong about the 2000-10 period being worst.

growth in per capita income in that decade (9.7%) was higher than in the 90's (6.9%)

At 2/28/2011 3:38 PM, Blogger VangelV said...

The label on everything from cell phones to laptop computers may say "Made in China" but actually, via producers' goods, highly capital-intensive and knowhow-intensive manufacturers in Japan have quietly done much of the most technologically demanding work.

About 15 years ago the US government was doing an investigation about an illegal technology transfer to China. The guy who ran the program that I was working on (a real a**hole but also a patriot type) was accused of letting the Chinese have a mill that could manufacture propellers for attack subs, which was a big no-no.

I am not a very smart guy so when I noticed a guy I did not know ask a lot of questions I had no problem answering him. The investigator wanted information about the capability of the Chinese factory that I was working in and was talking about the risks of providing the Chinese with our modern technology. Needless to say he was somewhat pissed off when I laughed at a few of the comments that he made. After asking what was so funny I offered to take him to the machine shop that made the parts for the military and civilian lines and show him that he was full of BS.
When we got there he was told that the machine was not there. The company had sold it to a tooling plant in some village a few hundred kilometers away. As his eyes light up I asked the shop planner why they did that. She pointed out that the machine that we had been using was crappy and took him to a Japanese made next generation machine that was far better than what we had sold them. As we went through the shops I pointed out a number of other machines that were far superior to the crap that we were using in or own shops.

The posting is partially correct; the Japanese have moved on to the tool manufacturing business and are now selling very sophisticated and very expensive machines to China, India, and other countries that are developing manufacturing capacity. Many great American companies are doing the same thing.

At 2/28/2011 4:05 PM, Blogger Benjamin Cole said...


If you read Milton Firedman, you will know that low interest rates are a sign that tight money has been in place for a long time. Loose money (too loose) leads to higher inflation and interest rates.
The BoJ, despite 20 years of recession and deflation, has issued pettifogging sermonettes about the need for "price stability."

Actually, that is what Nipponistas in the USA are also doing--posturing and issuing pettifogging sermonettes about inflation. They should move to Japan.

BTW, wages have beenm falling for 20 years in Japan. This post just does not square with the facts, and may be skewed by exchange rates.

At 2/28/2011 5:06 PM, Blogger morganovich said...


"If you read Milton Firedman, you will know that low interest rates are a sign that tight money has been in place for a long time."


what on earth have you been reading and misunderstanding?

is this some sort of reference to king's discredited ideas around a rational expectations model?

in searching for this phrase, all i come accross is scott summer's deeply flawed misquotes.

friedman said that low nominal rates are not necessarily a sign of lose money (as a reference to the point that it is real interest rates that matter more) but japan did not stop at going to zero nominal rates. they also undertook the largest extended stimulus program (as a % of GDP) of any developed country in modern history.

to argue that that is "tight" is ridiculous.

when zero rates and massive stimulus still cannot drive growth, then you are clearly looking at a problem whose roots and solution do not lie in monetary policy.

in fact, such monetary policy can make problems like bad banks, zombie companies, resource misallocation, and a crowding out of investment and private expenditure considerably worse, as they are doing in the US now.

your comment on wages is tangential. wages are not the same as per capita GDP, so your criticism of the facts is inaccurate. you are confusing two different concepts.

also note that a drop in nominal wages can still yield an increase in real income in a deflationary scenario.

japans decline is a function of capital misallocation and demographics.

no amount of liquidity can fix that.

At 2/28/2011 5:09 PM, Blogger morganovich said...


you keep missing one glaring fact:

price stability and deflation may be a good thing for many japanese. japan has the oldest population in the world. many are on fixed incomes and live on savings as a result.

why would such people want inflation? deflation benefits them, not price increases.

At 2/28/2011 5:16 PM, Blogger Mr. Econotarian said...

The comparison is a bit misleading. From 1991 to 2001, Japan GDP per capita only went from $29.7K to $31.7K. This indeed was a "lost decade".

Meanwhile, in the US from 1991 to 2001, GDP per capita went from $31.6K to $39.8K.

Since 2001 Japan has done better, but 2010 GDP per capita is still only $34.6K, compared to the US at $42.5K. In other words, Japan's growth in GDP per capita since 2001 looks like that of the US from 1970-1980 in dollar terms.

Meanwhile, from 1969-1991, Japan GDP per capita went from $13.5K to $31.6K, a huge increase.

It is amazing that in 1991, US and Japanese GDP per capita were only about $2K different, now they are $8K different.

At 2/28/2011 6:07 PM, Blogger Benjamin Cole said...


Friedman said too tight money would lead to zero interest rates and deflation. He called for QE in Japan (see his Hoover Institution paper on this topic).

BTW, John Taylor wrote a gushy piece on Japan's fleeting success with QE in 2006, see his blog page. Unfortunately, Japan's BoJ ceased QE while pettifogging about price stability.

You are right in that bondholders have become the most powerful constituency in Japan, another reason for that nations decline.
Even more important than bondholders are equity-holders--who have lost 74 percent of their portfolios in the last 20 years, along with property holders. Tight money in Japan has crushed their stock and property markets.

I concur with you that their deficit spending is a bad idea. Unless such spending is "accommodated" by an increase in the money supply, it just siphons money out of the private sector. Richard Koo argues the private sector was not going to spend the capital anyway.

Japan should stop deficit spending, cut taxes, and run heavy QE for a long time, and pay any woman $100,000 to have a baby.

At 2/28/2011 6:59 PM, Blogger Unknown said...

I think the Lost Decades refers to the NI225 which is still well below its 1989 peak and about where it was 25 years ago.

At 2/28/2011 10:36 PM, Blogger morganovich said...


you keep making appeals to authority to friedman and others and ascribing ideas to them that are devoid of causality and logic.

wasn't it you recently railing against appeals to authority?

i suspect that you are not fleshing these ideas out because you do not understand them.

how about laying out an actual argument instead of repeated appeals to authority that largely miss the point?

QE cannot offset a demographic collapse. how does loose money make up for fewer workers and more retirees and the medical costs that come with them?

you cannot drive real growth through monetary expansion, only inflation. go ahead, lay out the mechanism for me. how can you drive real growth with loose money?

you cannot create investment through the creation of government debt. each dollar borrowed and spent crowds out another dollar of investment. if it didn't, where did the money to buy the bonds come from?

freidman was very bright and insightful, but he was not a deity. he was a monarist with all the flaws and blind spots that come with it.

not everyhting is a monetary phenomenon, nor does the causality always work that way. to my knowledge, he never looked at japans demographic issues in any serious way. far from being exogenous, such an issue is the primary driving factor in the japanese economy.

i recommend this paper:

which rigorously lays out and demonstrates than money supply growth in japan has had no predictive value in terms of future output.

the relationship you posit is simply absent from the data. if anything, money supply seems to be driven by output, not the converse.

you also seem to fail to realize that in a society with a high proportion of retirees, price stability becomes more desirable.

to those on fixed incomes, deflation is the same as income growth and inflation will rapidly drive them into poverty and further stress an already overwhelmed federal budget.

At 2/28/2011 10:42 PM, Blogger morganovich said...

"I concur with you that their deficit spending is a bad idea. Unless such spending is "accommodated" by an increase in the money supply, it just siphons money out of the private sector"

this doesn't make any sense at all.

creating money to spend in excess of government receipts is still deficit spending.

i don't think you understand what money supply is or how monetary expansion is accomplished.

"accommodated"? what does that even mean?

increasing money supply is intended to increase the funds at banks that can be borrowed for productive purposes. this is not japans problem.

their problem is that they never let the zombie companies and banks die, thus such money as is created goes to fund these unproductive assets and never drives any growth. thus, monetary stimulus is just pushing on a string.

this is compounded by the demographic collapse that yields fewer workers and businessmen who would want to borrow it. that is a demand issue, not one of supply.

At 2/28/2011 10:49 PM, Blogger morganovich said...


wasn't it you who was recently railing against appeals to authority?

these seem to be the only arguments you are making.

you cite and misquote a number of "authorities", but how about laying out an actual argument?

you cannot drive real growth with money supply, just inflation.

so lay it out for me: how do you believe you can overcome demographics with money supply?

further, the relationship between money supply and output that you posit ought to exist in japan has been shown to be absent.

read this:

it lays out quite rigorously the relationship between money supply and output in japan since 1990 and definitively concludes that money supply growth has no predictive value in terms of future output.

this is a change from the pre 1990 period?

what could cause such a change? a non monetary phenomenon, that's what.

it was the zombies sucking up capital for useless purposes and a lack of demand for money driven by demographic shift.

no amount of money can address those issues in real terms.

At 2/28/2011 10:57 PM, Blogger morganovich said...


if you don't want to wade through all the statistics in that admittedly dense paper, just work through the results of table 2 and you will see the result emerge, particularly in the johansen maximal eigenvalue testetc in which the null sets for cointegration are always best supported and no support emerges for coincident relationships in the variables.

At 3/08/2011 11:50 PM, Blogger VangelV said...

this doesn't make any sense at all.

creating money to spend in excess of government receipts is still deficit spending.

Why exactly are you arguing with someone who is as ignorant of economics as Benji? He is as clueless a person as I have ever read or talked to but is more dangerous than most because he thinks that he actually knows something about economics.

On that front I have a recommendation for you. I just picked up a copy of The Global Debt Trap, by Claus Vogt and Roland Leuschel. I am about 20% into the book and could not recommend it highly enough given what I have read so far. These guys got the housing bubble, crash, and response story right even when Benji's favourite commentators were oblivious to what was going on. They were able to make the predictions because they use the Austrian Economics approach to economic reality and have a good understanding of what incentives will mean on the political front.


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