A Lost Decade? We Should Be So Lucky
A growing number of economists seem convinced that the U.S., European Union and China are all headed for a prolonged period of sluggish growth -- secular stagnation, in the words of former Treasury Secretary Larry Summers. A close parallel would seem to be 1990s Japan. There, too, the bursting of debt-funded asset price bubbles gave way to multiple rounds of fiscal stimulus, massive monetary easing and rock-bottom interest rates. Rescue efforts stabilized conditions but couldn't spark a sustainable recovery, leaving the economy mired in low growth, low inflation and high debt.
In some ways, this outcome might not seem so terrible. (One visiting English politician dazzled by Tokyo’s Ginza noted that if this was a recession, he wanted one too.) When Japan entered its downturn, however, the country had several advantages both internally and externally that nations today don't. For many, a Japan-style slump may be the best-case scenario.
First and foremost, at the onset of its crisis, Japan enjoyed modest levels of government debt -- around 20 percent of GDP -- as well as strong domestic savings and an abnormally high home bias in investment. Even now, around 90 percent of government bonds are held by Japanese buyers. This has allowed successive Japanese governments to run large budget deficits and finance their spending domestically, assisted by an accommodative central bank that's kept the cost of servicing debt low.
By contrast, many problem economies today suffer from high levels of government debt -- around 80 percent to 100 percent of GDP -- as well as total debt. China's official government debt is lower, around 55 percent of GDP. But that number doesn't take into account borrowing by large banks and other state-owned enterprises, which is backed up to varying degrees by the government. Some countries also have low domestic savings and are reliant on foreign capital, limiting their ability to finance budget deficits.
Second, Japan's downturn at least unfolded during a period of strong global growth. Exports thus partially offset the lack of domestic demand, while healthy international markets allowed Japanese to invest abroad in search of returns. Now, sluggish demand and gloomy markets mean countries can't look outside their borders for help. To make matters worse, cross-border trade and capital flows increased throughout the 1990s and 2000s. Today, globalization is under pressure, further limiting the ability of individual nations to tap external demand and funds.
Third, over the last quarter century, Japan has intermittently been able to weaken the yen in order to boost economic activity; the currency's plunge after the Bank of Japan began its massive bond-buying program in 2013 led to record corporate profits among big exporters. Today, the fact that everyone is suffering means that any attempt to gain competitive advantage by weakening one's currency is likely to provoke swift retaliation.
Fourth, by the time its bubble economy collapsed, Japan was already relatively rich and technologically advanced, with world-class automobile, consumer electronics and advanced manufacturing industries. Countries such as China aren't anywhere near the same stage of development. At the beginning of the 1990s, Japan’s GDP per capita was around $29,000 (in current dollars), about 20 percent greater than that of the U.S. at the time. China’s GDP per capita today is around $7,500, approximately 15 percent of that of the U.S. China is still in the early stages of shifting from low-cost manufacturing to more advanced industries. A slowdown now threatens to cast the country into a middle-income trap and endanger the government's efforts to raise incomes.
Fifth, even though Japan's aging population is now complicating efforts at rejuvenating the economy, its demographics at the beginning of the crisis were helpful. An older population had accumulated considerable wealth. Declining birth rates meant fewer workers who needed to be absorbed into the labor force, which kept unemployment low. By contrast, high unemployment or underemployment rates in many countries today, especially among younger workers, pose a major social and political challenge.
Finally, Japan is an insular, homogenous society. It's also de facto a one-party state, where the ruling Liberal Democratic Party is able to pursue its policies with little political opposition. Japan’s culture is based around a strong national consciousness and stoicism shaped by the experiences of World War II and the hardship of the immediate postwar period. Citizens have accepted the sacrifices made necessary by their country's economic woes.
China possesses some of these characteristics as well. But more diverse and politically volatile societies may not so easily accept the measures required to manage their economic challenges. The political polarization and resistance to austerity policies evident in Europe and elsewhere underscores just how messy a prolonged economic downturn is likely to be.
Japan's experience is instructive, not predictive. Unfortunately, as Brazilian writer Paulo Coelho once observed, "Every time we repeat the same mistake, the price goes up."
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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