Wednesday, February 25, 2009

Japan loves risk (Noah Smith)

In the past year, Japan's exports fell 45.7%. Exports to all regions were hit - down 52% to America, 45% to China, and 46.7% to Asia as a whole. Japan's mighty national champions, its automakers, have been hit the worst: Toyota's exports are off 56.2%, Honda's 46.3%, Nissan's 62.1%.

That's absolutely stunning. It is catastrophic. Words fail.

What this should demonstrate conclusively is that world economies are much more tightly linked than many economists had thought. The "decoupling" hypothesis — the idea that booming Asia could keep chugging along while America and Europe fell — has been decisively smashed (subscription required), at least in the short run.

(As an aside for the more technically minded, the "decoupling" idea rested on the same faulty assumption as the bubble in American mortgage-backed assets, namely the assumption of constant correlation. When times are good, they are unevenly good, so correlations are low and economies appear to be decoupled, but as soon as things turn bad everyone falls together and correlations shoot up.)

In any case, what does this mean for Japan? It means that being a "surplus" country has proven to be just as risky, if not more so, than being a "deficit" country. Relying on exports exposes you to big shock and wild swings. The myth that Japan, as a nation or as a people, is more risk averse than other countries should thus be exposed as the outdated stereotype that it is. Over-reliance on exports, as it turns out, is similar to playing roulette. For the LDP, it may very well have been Russian roulette.

The last time the dice came up snake-eyes for exporters was a very long time ago — the 70s, in fact. But Japan was still a fast-growing country then, still playing catch-up to the West in technology and capital. Japan responded to the world recessions of the 70s by moving up the value chain, developing global brands and launching headlong into high-tech industries like autos, electronics, and machine tools. The recession was sharp but brief, the party quickly resumed, and the LDP lived on.

Today, that scenario is more likely to befall China than Japan. The record of the last two decades should decisively show that Japan is a fully developed country — it has hit the frontiers of technology and capital. There is no more low-hanging fruit. And that means that recessions are much more likely now to expose the structural flaws in the Japanese economy...of which there are, sadly, still many.

After the LDP goes, the DPJ will have two basic choices: fix structural flaws (the Bill Clinton approach), or encourage bubbles (the George W. Bush approach). I'd advise leaning heavily on the first approach, of course, but the problem is that structural flaws are often politically motivated. Powerful construction, agriculture, and small- and medium-sized business lobbies will use recessions as an excuse to delay reform, and booms as an excuse to ignore the need for reform. Without electoral reform that decreases the clout of these lobbies, the DPJ may find itself forced to turn to more dubious strategies of economic revival.

Whatever happens, though, let no one in Japan now doubt that export dependence is a very high-risk strategy for any nation.

— Noah Smith


Anonymous said...

Excellent article! Very well written. I might suggest that Japan institute immediate import requirements and restrictions on all products produced in countries such as China. The long term dumping strategies of these types of countries has devastated domestic related production. The interrelated international economies have to operate with consideration for each other but that doesn't mean they have to accept eventual domination. Even-though that may be the case.

Gods bless the world.

Anonymous said...

nuff said!

Anonymous said...

I have to disagree with the comment above that Japan begin import restrictions on Chinese products especially agricultural products. There is a growing fear that the global economic downturn will tempt countries to impose protectionist policies that could lead to the beggar-thy-neighbor protectionism of the thirties. PM Aso just returned from Washington where he met with President Obama where they pledged to avoid protectionist policies. If Japan now decides to start protectionist measures against China, it will have little defense in arguing that its other trading partners resist similar temptations in the future. The economic downturn promises to be a multi-year one in duration so we are at the very beginning stages of a difficult period for the global economy. Japan above all will be hurt the most if protectionism spreads to the rest of the world.

OperationNorthwoods said...

Which structural flaws do you think Clinton worked to fix that should be emulated in Japan? Liberalizing the financial industry? Promoting outsourcing?

Anonymous said...

In fact Bill Clinton (I am assuming that you mean Bill and not Hillary), introduced new structural flaws by backing Treasury Secretary Robert Rubin's successful attempt to repeal the Glass-Stiegall Act which dates back to the New Deal (thirties) and which successfully kept banks from engaging in risky conflict of interest businesses like investment banking. The explosion of bank investment in securitized products like subprime mortgage backed bonds like CDOs could arguably have been avoided if Glass-Stiegall were still in effect during Clinton's successor George W Bush's presidency.