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Japanisation: the economics of extended stagnation

Neologism of the week award goes to the Financial Times for coining the term ‘Japanisation’ as a shorthand description for current economic trends in Europe and North America.

You can read just what various commentators intend by the word here, but if you want it in plain English, the underlying idea is that the rest of the first world is set to repeat the extended period of stagnation that has beset the world’s third-largest economy since the early 1990s.

The most interesting part of the article was the parallels drawn by Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, who ‘point[ed] to eight characteristics he feels contributed to Japan’s inexorable decline: stock market and property crashes; zombie banks; deflation; zero interest rates; political stalemate; poor demographics; and a high debt-to-GDP ratio.’

No other country is an exact match for this profile, as the article rightly insists. Yet the other way of looking at this is that many countries do display the majority of these traits. So there is a prima facie case that we would do well to look and learn from across the Sea of Japan, as George Osborne might put it.

Throughout the post-war long boom, Japan saw sustained growth comparable to that seen by China since Deng Xiaoping’s turn to capitalism. From 1950 to 1973, GDP rose at an average rate of 7.4% per annum. Even after the oil shock of the mid-1970s, it still came in at a respectable 4% a year.

All that was to change in the early 1990s, after the property bubble of the previous decade burst. From 1992 to 2002, average annual growth fell to less than 1%. While obviously not on a par with the Great Depression, total output is now over 30% smaller than it would be if the performance of the previous period had been maintained.

Policy makers have tried everything in the Keynesian playbook. Nominal interest rates were cut to zero, taxes were cut, billions of yen was spent on infrastructure and money in even greater quantity was pumped into the economy.

As a consequence, the ratio of government debt to GDP from 13% in 1991 to 90% in 2006. It now stands in excess of 225%, or more of less three times the 76% seen in the UK right now.

Yet despite doing everything that leftwing economists recommend that countries like Britain should do now, nothing worked. Moreover, since 1995, Japan has even had to contend with deflation, a phenomenon not previously experienced anywhere else in the OECD.

The mainstream explanation is that Japan became the victim of a so-called ‘liquidity trap’, a situation in which the rate of interest is so low that nobody in their right mind wants to hold interest-bearing assets.

That being the case, expansion of the money supply can have no impact on aggregate demand, and does not stimulate investment. With British interest rates at just 0.5%, that is a point the Bank of England would do well to ponder.

Stagnation is a very different proposition to economic collapse, of course. Even after two decades of relatively poor performance, Japan’s GDP per head is only fractionally behind that of the UK after Gordon Brown’s famous 63 consecutive quarters of economic growth.

Unemployment – on official figures, which like everywhere else understate the case – has fluctuated between between 4%-6%. That is high in comparison to what was seen in the past, but minimal when seen in the light of the 20%-plus rate currently experienced in Spain.

Lefties should note that the extended period of ‘neither boom nor recession’ did not lead to any radicalisation at the political level. Although the ruling Democratic Party of Japan can at a stretch be described as centre left, the stress would strongly be on the first of those two adjectives. In any event, prime minister Naoto Kan has just quit. Meanwhile, once powerful trade unions remained quiescent.

If Japan does point the way ahead, the scenario is not that of an apocalyptic final collapse of capitalism that still implicitly underlies the analysis of some commentators that no doubt consider themselves sagacious Marxists. It will instead just feel like endless hard times.

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