Thursday, November 13, 2008

Japan sinks?

Aso Taro has arrived in Washington for the G20 summit on the global economic crisis.

He leaves behind a country tottering on the brink of ruin. The OECD has announced that, like the reappearance of cancer after remission, Japan may once again experience deflation in 2009. Consumer confidence is at a record low. The question on the table now is not whether Japan will be able to avoid recession, but how long the recession will endure. The government's latest stimulus package is on hold until January, leading some within the LDP to wonder whether Mr. Aso has a handle on the situation. (The Economist summarizes the bad news here.)

The Japanese people, it seems, are battening the hatches. As Blaine Harden wrote in the Washington Post Thursday, Japanese citizens are not particularly enthusiastic about the government's announced tax cuts, an attitude that might change when they start receiving payments, but then again, it might not. The Japanese public has been through this before, and rather than wait for the government to do the right thing, it seems that citizens are preparing to take care of themselves, whether by stuffing yen under the mattress, deferring big purchases, or doing a bit more shopping at the hundred yen shop. Little surprise that there is little taste for structural reform or any other kind of shock therapy.

Mainichi has released the results of its latest annual survey of livelihoods. Mainichi surveyed 3371 respondents in the Kanto and Kansai areas, and found that the level of insecurity among those surveyed is the highest since 1998. More importantly, support for the institutions of "Japanese-style" capitalism has grown: respondents who favored the protection of the seniority system of compensation rose six points to 22.3%, and belief in the value of meritocracy fell nearly nine points to 41.4%. Citizens seem less interested in Nakagawa Hidenao's argument that Japan will be able to grow itself out of its problems than in being sure that they will have enough in their old age. They are not interested in promised handouts or, for that matter, talk of consumption tax increases to come. It seems that what they want is quite simple: some modicum of economic security and some acknowledgment on the part of the government that things have gone horribly astray, that the quality of life is withering. They will not be comforted by Mr. Aso's pep talks concerning the "latent power" of Japan or the DPJ's promises to put lifestyle first.

Mr. Aso may yet pull off an electoral victory next year — it is increasingly certain that the next general election will not be held before April 2009 — but a general election will not substantially alter the situation (even with a DPJ victory, although a DPJ victory would at least ensure that the same party controls both houses of the Diet for the next several years).

In case there was any lingering doubt, the Koizumi era is over.

Little wonder that Japanese are hoping for an Obama of their own: the political system is broken and the economy is faltering. Neither the LDP's nor the DPJ's performance in the face of crisis has been particularly impressive. The DPJ's greatest strength remains that it's not the LDP, and even that assertion is increasingly questionable. Japan looks increasingly set to decline steadily, unable to take decisive steps to restore national dynamism. This is the bakumatsu, but with few signs of a restoration to come, despite Ozawa Ichiro's determination to be the vehicle of that restoration.

Perhaps Japan should hold a lottery to pick a new ruling elite, choosing from among the eminently sensible housewives of Tokyo. I don't see how they could be worse than the status quo.

18 comments:

Anonymous said...

Hmm... your view seems somewhat so biased against Japan and not so for the US! Any reason why that is? So Japan has some problems - but they are no where as bad as what going on in the States. Lets wait and see first what Obama can do.. he is no miracle worker- remember that!

Japan will be just fine.. mark my fine for it. Clean up your own mess first before you speak about others.

Cheers!
Random thoughts

Tobias Harris said...

Why does everyone immediately turn to comparisons with the US?

Why can't I write a post looking at Japan in and of itself?

I had thought about appending a sentence noting, "Of course, the US has its own problems," but I'm not writing about the US!

And as for "my mess" — how is it my mess? I'm just a 'umble analyst.

And as for your claim that Japan's problems are nowhere near as bad as America's: I think that as bad as things look for the US right now, Japan's long-term future remains bleaker. The US remains in better shape demographically and the dollar remains the world's reserve currency (meaning that the US has some more time to reorder its finances). The near-time adjustment will without question be painful, but the US may emerge from this stronger than before.

Can we really say the same of Japan?

You call that "biased against Japan." Far from it. I am gravely concerned for Japan's future, because I have a hard time seeing how Japan will escape from the present trap of needing to maintain prosperity while fixing the budget to prepare for the aging of the Japanese population. I grieve for Japan; I do not celebrate its weakness.

Z said...

"respondents who favored the protection of the seniority system of compensation rose six points to 22.3%, and belief in the value of meritocracy fell nearly nine points to 41.4%."

hmm, this seems suspiciously like cryong for old days that will never come back.Or is it actually possible to rebuild the pre-90s economic system*?A sad story indeed...

Anonymous said...

"Why can't I write a post looking at Japan in and of itself?"

You didn't.

You write like Japan needs an Obama - as if he has already come in and cleaned things up stateside. So far, he's run a great campaign. Let's see if he can run a country before making him a global standard.

OperationNorthwoods said...

Let's hope the "near-time adjustment" the US will go through isn't worse than what the USSR went through. The end of an empire can be pretty rough.

But, it sure seems like Japan is sinking. Outside of Kanto, the country has been visibly sinking for quite some time.

Tobias Harris said...

I think I need to clarify: I did not say that Japan needs an Obama. Nor for that matter am I convinced that Obama will be able to fix that which must be fixed.

A country should be so lucky as to be able to fix all of its problems by changing the leader at the top.

The point is that while Japanese elites are weary of Obama, there appears to be some hope for a Japanese "Obama," i.e. a figure who appears capable of transcending the current political stalemate and appeal directly to the people. After Japan's experience with Koizumi, the Japanese people should know better. Japan had "kaikaku" years before America had "change." It's not that Koizumi was a complete failure — far from it. It's that an individual leader can only do so much to transcend structural impediments.

Note that in the original post I argued that the Japanese elite needs to be replaced wholesale. That's a bit more radical than arguing that Japan needs an Obama.

Is there anyone willing to argue that the Japanese public has been well served by elected officials and bureaucrats over the past two decades?

Anonymous said...

"Is there anyone willing to argue that the Japanese public has been well served by elected officials and bureaucrats over the past two decades?"

How do you define well served? Compared to hom?

MTC said...

anonymous -

Let us say, as compared to the other major industrialized nations with a national debt at 150% of GDP.

Ooops! There are none. Darn.

By practically any measure one might choose, the performance of Japanese government over the last 20 years has been at the bottom of the league tables. Somebody is to blame for this...and for some reason I cannot say it is the voters. Indeed it requires a special sort of genius to take a well-watered, fertile, multiple-harbored, temperate-climate compact landmass inhabited by a hardworking, educated, obedient and technologically adept citizenry producing goods and designs admired the world over and still drive the whole shebang into the ditch.

I believe that this is what Mr. Harris is making reference to.

Tobias Harris said...

MTC,

Precisely. As usual you put it far better than I ever could.

In short,despite the "latent power" that Aso Taro believes the Japanese people have, Japan is in perilous straits today.

Is it the fault of the people, for failing to use their latent power?

Hardly.

Anonymous said...

"Is there anyone willing to argue that the Japanese public has been well served by elected officials and bureaucrats over the past two decades?"

The compared to whom idea is an important one here.

If we look at the last 30 years Japan has - developed socialized healthcare that supports some of the world's longest lifespans, education that is at least "good" by G-8 comparison with some very strong research going on in the upper echelons, far less violent crime than other developed democracies, low rates of AIDS infection, teen pregnancy, and drug abuse, has avoided getting involved in messy foreign wars or irresponsible arms races, has undergone a complete environmental turnaround from one of the world's most polluted ashtrays to one of the best of the G-8 in the area of per capita emissions, etc., Japan has massive investment in public infrastructure such as libraries and museums and community centers, etc.

Not all of this is due to officialdom, but at least they have not gotten in the way.

While things are not all swell, I think that you would have a hard time arguing that Japan has been a complete disaster.

BTW, the 1.5 GDP debt figure includes prefectural debts, does it not? When we see figures for other countries, it is often only the debt held directly by the central government. This is a big deal, the New York State debt, for example, is $250,000,000,000. Also, the point that most of Japan's debt is held domestically while America and others are in the can to China and Japan and others is often made. Apples and oranges?

I'm not sure that you can argue that Japan has really been "well served", but with most countries being run into the ground by their elites, Japan seems to be a still a pretty civil place to live.

Anonymous said...

Sorry, one more thing that I want to add - Japan's debt is financed at around 1%, right? This is because interest rates in the country are rock bottom.

The US national debt is financed at a variety of rates but I have seen suggestions that the average is around 4%.

This may not seem like much of a difference, but interest compounds and this means that the US national debt would double solely based on interest in about 8-9 years while the Japanese debt would take 25 years plus to double. In effect, the Japanese government can easily get away with borrowing a lot more and not face a crushing debt financing spiral. The USA, UK, France, etc. who also have huge debts can't afford to do this. Japanese politicians are up on this - they aren't as stupid as you think so let's at least give them a tiny bit of credit....

Tobias Harris said...

Anonymous,

Thank you for both additions. Points taken.

Also, as for Japan "still [being] a pretty civil place" to live, I agree wholeheartedly. Perhaps the old saying should be modified: seikatsu ichiryu, seiji sanryu. That said, I imagine for many Japanese (those who have seen their pensions vanish, for example), Japan feels less civil than it once did.

Anonymous said...

Same anonymous.

Cheers Tobias. I like your stuff, BTW.

Note that I am not saying that Japanese elites have been wonderful or anything. I am of the opinion that all governments do a disastrously inefficient job of running countries - just that some do a better or worse job than others. Let's hope that the LDP can find those pensions. They seem like they want to try and the Minshuto has been baring its fangs on the issue.

In a way, I think that the Japanese public DO have to take some blame for the debt problem and a general lack of vitality. The other day, Aso said something (shockingly) lucid - that the public can have northern European social spending AND northern European taxes or they can have the US style and lower taxes. They can't have both. Right now, most Japanese want both and that has, in a way, tied the hands of politicians and contributed to rising debts.

On the "sinking" issue and debt, I just wanted to run a little simulation to show how Japan is "laughing" on this issue -

2008 -
Japanese debt - 10 trillion
US debt - 10 trillion
(both approx.)

Assuming that interest rates remain constant (1% for Japan, 4-5% for the USA) and the following scenario - both countries run a BALANCED budget from next year - no more deficits (science fiction, I know) and make no effort to pay down the existing debt, allowing the interest to compound.

In 2040 it looks like this -
Japan - 24 trillion
USA - 160 trillion

In 2060 it looks like this -
Japan - approx. 50 trillion
USA - approx. 1280 trillion (does anyone know what comes after a trillion?)

That's not even counting state and municipal debts. Shocking, shocking stuff.

I hope everyone sees why the Japanese elite are epically unworried. And since much of that US debt is financed in Japan....

MTC said...

anonymous -

If I understand your "24 trillion in 2040" scenario correctly, investors will somehow sit on their hands and demand only 1% ad infinitum as the debt-to-GDP ratio soars past 200%, 300%, 400%...

Cute but not plausible.

Anonymous said...

"Cute but not plausible."

No, not plausible. But the demand for higher rates as the debt rises works for the US case as well. In any case, the major point - that Japan's "debt crisis" is not as bad as it seems because of the low interest rate and that lower pre capita debts like that of the USA are more serious because of the high interest rate, should still stand.

Japan is like a guy who has borrowed $10,000 from his uncle at 5% interest. The USA is like a guy with $5000 on his credit card at 20% interest. Given no cash in the hand and years to pay off the debt, who would you rather be? Not saying that Japan is in wonderful shape or anything, but the debt issue is exaggerated. It is especially rich to hear about it coming from US officials who seem to have slept through the "interest" class in Economics 101.

www.japaneconomynews.com said...

Anonymous,

First of all, Japan's national debts are priced higher than 1% - you need to do your research into this before spouting figures that have no connection to reality.

Second, the US is still the world's largest economy and will recover just fine, since it is in the interest of the rest of the world for that to happen. By February we will see US equities at their proper bargain price, and you better be ready to buy.

Anonymous said...

"Japaneconomicnews", so the rate on the most popular medium term Japanese bonds (6-10 year) has typically waved betwen 1-2% forand I used a low figure. The Japanese government also issues a lot of short term stuff at less than 1%. And with Tobias talking about Japan staring another period of deflation in the face, it does not seem as though there will be a huge hike in floating interest rates any time soon. I was trying to make a basic point - yes, Japanese bond rates have been up lately (when GDP growth was increasing for a change, perhaps artifically high) but what about when growth slows down?

Much of the US debt is above 5%, BTW, but you do not seem to have a problem with figures that have no connection with reality as long as they support whatever case it is that you are trying to make.

If you use a number of debt figures together, you will have to agree that the interst rate that the United States pays on its debt is at least 3 times that of Japan, no?

"the US is still the world's largest economy and will recover just fine, since it is in the interest of the rest of the world for that to happen."

Predictive nonsense. This amounts to saying that - no matter what abuses take place in the United States, it will always be okay! This is an irresponsible attitude. American elites have been taking this attitude throughout the Bush years - we can keep borrowing more money because American is naturally, essentially, and rightfully the strongest country in the world and nothing will change this. If economists could make accurate predictions, we would not have seen the current crisis, right? Can anyone see a major paradigm shift coming? The answer is no and as a result, some degree of caution is needed, not the "buy, buy, buy", "lend, lend, lend", "borrow, borrow, borrow" cheerleading that got us into this mess in the first place.

"By February we will see US equities at their proper bargain price, and you better be ready to buy."

So what if your prediction does not come true?

Anonymous said...

Sorry, in my last comment I did not explain why I am so opposed to the predictive tendencies of American politicians and those involved in the market.

Here is a clear example - A US government report in August 2001, just weeks before 911, predicted a 1.3 trillion dollar budget SURPLUS from 2002-2004. This is the type of fortune telling fantasy that has guided the American government in the past. It is this type of hubris that is leading some to suggest that what has happened recently is an aberration, not an indication of profound structural flaws in the United States (yes, Japan has them too, just at lower interest).

So "japaneconomynews" thinks that the US will be given a free pass this time because it is in everyone's best interests. I actually think so too. But what about the next time? Time after that?