Some business teachers and managing consultants still use their yellowed notes about Japan’s economic success, but that is way out of date. For decades, Japan’s economy has been in the doldrums. Why? And why hasn’t their economy ever bounced back? Economics columnist Robert J. Samuelson says the problem is that Japan has relied on government stimulus. Which is basically the strategy our government wants to follow.
You may recall that, in the 1980s, Japan was widely anointed as the next economic superpower, displacing the United States. It’s been a long slide since. In the 1990s, the “bubble economy” of high stock and real estate prices burst. The stock market is roughly a quarter of its high. Land prices have tumbled to 1975 levels. Since 2000, economic growth has averaged less than 1 percent annually. Government debt has ballooned to 214 percent of the economy (gross national product), about double the level of most advanced countries. Some superpower.
To get the economy moving, Abe has proposed a “stimulus” package of 10.3 trillion yen ($114 billion), about 2.2 percent of gross domestic product (GDP), and pushed the Bank of Japan (BOJ) — Japan’s Federal Reserve — to ease credit. This is familiar stuff. For years, Japanese governments have adopted stimulus plans. Since 1995, budget deficits have averaged 6 percent of GDP; that’s why debt (all past deficits) has exploded. The BOJ has repeatedly eased credit. In 1999, it cut short-term rates to near zero. It has had two episodes of “quantitative easing” — pumping more money into the economy — one from 2001 to 2006, the other from 2009 to now.
None of this has restored Japan’s glory days. . . .
“Japan’s [economic] dynamism was exaggerated,” says economist Adam Posen of the Peterson Institute. “In the 1980s, people focused on a few great companies and ignored how much of Japanese business was relatively backward.” Japan’s domestic-based businesses (retailing, distribution, food production and health care, among others) have not powered the economy the way exports did.
Stimulus policies have been the substitute. To combat deep recessions, they’re justified; President Obama’s 2009 stimulus was warranted. But stimulus is supposed to be temporary. It’s supposed to “jump-start the economy.” Expansion becomes self-sustaining. In Japan, this transition never really occurred. . . .
The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan. It’s caught in a trap. On the one hand, it needs stimulus to grow. On the other, the debt from past stimulus measures threatens future growth.