[Japan has been at the vanguard of technology for some decades, and has suffered for it: it has had virtually no growth, and payments surpluses it had no use for. This column was published in Business Standard of 22 May 2000.]
Is Japan
recovering?
Japan was a miracle
economy. Immediately after World War II it began to grow at a rate unmatched by
other countries. Whilst the European countries sank into low growth and high
unemployment after the oil crisis, Japan continued to have unbelievably low
unemployment of 3 per cent. By the 1970s, other East Asian economies were
beginning to match it in growth; but the 1980s were still a decade of strong
growth for Japan.
Then disaster
struck. In 1989, the Nikkei melted; in 1991, Japan’s astronomical property
prices collapsed. As they declined, the equity of borrowers against property
and shares turned negative, and banks began to accumulate bad debts. As growth
slowed down, the balance of payments surplus soared, and the yen strengthened;
in 1995 it came below 100 yen/dollar. With it, the yen value of loans given
abroad by Japanese banks fell, and they made losses. As their balance sheets
worsened, the banks became cautious and ceased to lend to industry. Since
industry was highly dependent on banks, industrial investment declined. The
growth rate fell below zero by 1998. Unemployment began to mount; for the first
time since World War II, Japan’s unemployment rate exceeded that of the US.
Although there have
been signs of a revival in the past few months, growth still remains anaemic,
and the Japanese government continues to look for ways of stimulating the
economy. Not that it has been idle. It has run deficit budgets throughout the
1990s. Today, its gross liabilities exceed GDP. On paper its assets exceed
liabilities. But it has invested heavily in infrastructure in the belief that
it would benefit the private economy; such investment has no market value, and
yields no monetary return.
So in reality Japan
seems to be hurtling towards a debt crisis. It is still far from one; but
American credit rating agencies have been downgrading Japanese paper. The
crisis is not insurmountable. The Japanese government has run deficits most of
the time in the last fifty years. In 1979 too its fiscal deficit reached 7 per
cent of GDP, and it got worried about debt; it reined in expenditure, and
reached a position of near-zero deficit in 11 years. However, there is a
difference: the 1980s were a period of robust growth, now Japan is in a state of
precarious stagnation.
There are also
doubts about the effectiveness of a fiscal stimulus. Given Japan’s savings rate
close to 40 per cent, the multiplier should be 2.5. But government borrowing
crowds out private investment; and then there are imports. Taking all these
factors into account, the multiplier is probably no more than 1.2.
Anyway, the heavy
debt burden has started the government thinking of reducing the deficit. It
could do so by cutting expenditure or raising taxes. Some economists have argued
in favour of the latter on curious grounds. They say that the government should
announce that there will be progressive increases in sales tax over the next
three years. Then consumers would expect prices to rise as the tax increases,
and would buy now rather than later. That would stimulate consumer spending and
lift the economy out of its stagnation. But the trick may backfire. Consumers
may expect that prices will rise and their real incomes will fall; in that case
they may save even more. So the Japanese government has been locked into
indecision.
Meanwhile, Paul
Krugman has been giving it rather different advice. He has been asking it to
finance its deficit by printing money instead of borrowing. Doing so would save
interest. And if money supply increases beyond what people want to hold, they
will spend the surplus cash; that will stimulate the economy. If it causes
inflation, it may have the same effect as an expected rise in sales tax: it may
lead people to spend more today. But that argument, as I said above, is
suspect. People have been known to spend more in periods of inflation, but that
is when inflation is very high. Such hyperinflation is unlikely in Japan; in
any case, no Japanese government would like even to think of it for fear of
public backlash.
Quite a few central
banks do money supply targetting; Bundesbank is the most prominent amongst
them. But one voice in Japanese government has been advocating inflation
targetting: in his view, Bank of Japan should aim at a certain minimum rate of inflation,
and raise money supply growth so as to achieve it. He sees the same merit in
such a policy as in preannounced tax increases – it would induce consumers to
spend more. In addition, such a policy would be transparent and easy to
monitor.
Bank of Japan is
resisting this argument with all its might. It sees itself as a guardian of
financial probity and soundness, and considers deliberate stimulation of
inflation as irresponsible. It says that the interest rates are as close to
zero as it is possible, and they cannot come down any further. Once inflation
starts, there is no stopping it. In other words, it is inventing every possible
argument to avoid inflation as a policy.
What do I think?
The rate of growth depends on growth of productivity; Japan’s productivity
level is so high that it is difficult for it to raise it any further. It is at
the frontier of technology, and has found it difficult to shift the frontier
outwards. Britain and US grew strongly in the 1990s because they had reserves
of unemployment to absorb; Japan has had no unemployment to speak of. But that
has been partly because of lifetime employment practices and labour hoarding.
These practices may be on their way out; it is possible that workers would be
squeezed out of embattled industry. If it does, unemployment may create scope
for growth. But otherwise, Japan must look for a technological revolution to
rescue it from its plight.
