Yes, Japan Lost a Decade. So Did U.S.
Here is a myth: Japan is now in its third lost decade.
Here is another myth: Japan never lost any decades at all.
These are both wrong, because Japan actually lost one decade, then did well for a decade and is still doing OK. Notice that the truth is more complicated and less fun than the myths -- it usually is. But the truth is helpful in figuring out what Europe and the U.S. should do in the present.
The first myth -- that Japan has lost 2 1/2 decades -- is popular for two reasons. First, Japan was growing very quickly in the 1980s, and many people expected that to continue, leading Japan to overtake the U.S. as the largest economy. “Lost decades” are often implicitly measured relative to that past expectation. Second, Japan’s population has been in decline since 2007 and was little changed before that, meaning that even if Japanese people are getting richer at a faster rate than Americans -- as was true during most of the 2000s -- the U.S.’s total gross domestic product will tend to grow faster than Japan’s. When you look at GDP per working-age adult, as Paul Krugman has pointed out, Japan looks quite a bit better:
Looking at Krugman’s graph, we can see three things. The first is that Japan has done better than the U.S. -- and much better than Europe -- since 2012, reflecting the moderate success of Abenomics. That means that, so far, Japan is winning the Great Recession recovery.
The second thing you can see on the graph is that Japan did better than the U.S., and about the same as Europe, from about 2002 to about 2007. This was the boom that coincided with the leadership of Prime Minister Junichiro Koizumi. The reasons for the boom are still being debated, and might or might not include:
1. The removal of bad debts from the balance sheets of Japanese banks
2. An increase in trade with China
3. A short program of quantitative easing in the early 2000s
4. Cuts in government spending on wasteful projects
5. The belated adoption by Japanese companies of information technologies they had ignored in the 1990s
But whatever the reason, the fact is that during the 2000s, Japan was among the best-performing economies in the developed world.
Now for the third thing we can see from Krugman’s graph. Japan did terribly in the 1990s. Where Japan had been converging with U.S. and European living standards until 1990, it suddenly stopped and started diverging. Via University of California, Berkeley economist Brad DeLong, here is a stunning graph of Japanese per-capita GDP as a percentage of the U.S. level:
This is biased, or course, by the aging population, but Japanese people did not suddenly get old in 1990. Something bad happened to Japan’s economy, and it took a long time to recover.
That brings us to the second myth. Some people say that Japan never had any lost decades. For example, Matthew C. Klein of FT Alphaville makes this claim. He writes:
There were a few years in the late 1990s when the US and Europe pulled ahead but we can easily attribute that to a combination of the Asian Financial Crisis and the temporary boost to investment and consumption from the tech bubble.
That’s an awful lot to ignore! But in any case, as Krugman’s graph makes clear, Japan underperformed not for a few years, but for the entire decade from 1993 to 2002.
That lost decade is even clearer if we look at productivity. Here, from a 2011 paper by economists Takeo Hoshi and Anil Kashyap, is a graph of Japanese total factor productivity:
As you can see, productivity soared in the '80s, then suddenly flatlined in the '90s, before resuming growth in the mid-2000s. If that’s not a lost decade, what is?
But if Japan managed to catch up in the 2000s and 2010s, doesn’t that mean that the 1990s weren’t really lost at all? If a stagnation is eventually reversed, who cares?
The answer is that Japan’s catch-up is more about U.S. and European stagnation than about Japanese resurgence. Japan’s 1990 stagnation was sparked by a gigantic financial crisis -- one that didn’t reach beyond Japan’s shores, since most Japanese assets were owned domestically. But the 2008 financial crisis that clobbered the U.S. and Europe mostly spared Japan, whose banks had been too shell-shocked from their earlier crisis to gobble up the exploding mortgage-backed assets that U.S. financial firms were selling to eager European buyers. Since 2008, it has been the U.S.'s turn to suffer for its financial sins, and Japan’s turn to sit high and dry.
But even during the 2000s, Japan’s outperformance relative to the U.S. was partly due to a slowdown in the latter. The growth during the presidency of George W. Bush, which began and ended about the same time as Japan’s Koizumi boom, was simply much more anemic than its Japanese counterpart. Despite the U.S.'s growing population and its unsustainable construction boom, America had growth that was slower than in the 1980s and 1990s.
In other words, Japan lost one decade. But the U.S. lost a decade as well. We shouldn’t focus only on diagnosing other rich countries’ stumbles, but also our own.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Noah Smith at firstname.lastname@example.org
To contact the editor on this story:
James Greiff at email@example.com