PART FOUR
Life after Growth
7
Japan as Number Three
The envelope was stiff with ice. It sat in the icebox of the Tokyo house I moved into in the winter of 2001. On it, in neat, handwritten characters, were the words ‘Cat Money’. Inside, as crisp as the day they were printed, were three Y10,000 notes, at the time worth around $250. The envelope in question had been left by the previous residents of the house in Higashi Kitazawa, a lovely, upper-middle-class neighbourhood of little lanes, topiary pine and walled-off homes in central Tokyo. Sometimes, when they were gone for the weekend, they would ask neighbours to look after the cat. The money was for anything the indulged feline might require while they were away.
Two things occurred to me about the cat money. The first was how expensive it appeared to be to feed a pet in Tokyo. Many people in the capital, even in those supposedly straitened times, maintained an extravagant attitude towards money. Certainly, well-to-do Higashi Kitazawa, known for its artists and authors, was not typical of Tokyo living standards, let alone those of Japan’s more economically depressed regions. Still, I had been struck by how willing even ordinary people – secretaries, students, telephonists and office workers – were to spend quite large sums on little luxuries. Some seemed happy to splash out $200 per head on an exquisitely prepared meal or $400 a night per person for a room at a hot-spring resort. Luxury goods makers such as Louis Vuitton had made a killing in a country where young women would line up for hours just for the privilege of purchasing an overpriced handbag. Naturally, such outlays were only occasional. Naturally, too, many Japanese – including the increasing number without work, those retired on meagre pensions or people in the new category of ‘working poor’ – could never afford such items. Japan felt much more economically divided than before. Even so, though I arrived in what was said to be the midst of a deep recession, many Japanese appeared to have a lot of money. A visiting MP from northern England, on seeing the bright lights of Tokyo and throngs of people waiting outside overflowing restaurants and bars, remarked, ‘If this is a recession, I want one.’
The second thing that occurred to me was less obvious, but more important. Although the cat money lay forgotten in the refrigerator, it was actually appreciating in value. Because of the deflation that had been gnawing at prices since the mid-1990s, the crisp notes could acquire more goods the longer they remained in their frozen vault. If, for example, someone had stashed Y100,000 in the fridge in 1995, by 2012 its purchasing power would have risen to Y112,000. By contrast, if that money had been invested in the Japanese stock market, it would have halved in value to just Y50,000.1 At the time I moved to Higashi Kitazawa, the interest rate on a typical Japanese savings account ran to a derisory 0.01 per cent. That made the refrigerator a better bet than the high-street bank, since the refrigerator had neither withdrawal charges nor account fees.
I came to think of the cat money as a metaphor for the strange, almost Alice in Wonderland state into which the economy had slipped since the burst of the bubble. Because of prolonged deflation, normal economic assumptions no longer applied. Companies didn’t want to borrow money even if they could do so for free. A worker’s wages might fall, but he or she could still feel better off. In a normal economy, it made no sense to hoard cash. Besides the risk of theft – admittedly negligible in Japan – the value would be constantly eroded by inflation. In Japan it was the reverse. The longer you held cash the more it was worth. For years, the central bank had kept interest at zero in a losing effort to get prices moving. They kept edging downwards anyway. ‘We’ve been suffering deflation for twenty years and no doctor has diagnosed it,’ one frustrated Bank of Japan official told me. The Japanese had a similar concept to my cat money, though they spoke not of the icebox but of tansu savings, named for the traditional wooden chests in which they kept their kimonos and family heirlooms. One economist calculated that by 2003 as much as $300 billion – roughly the annual output of Denmark – had simply vanished into people’s cupboards and under their futon mattresses.2
No economy can function properly when all the incentives are to hoard cash. ‘The most significant fact about Japan is that prices are falling,’ Martin Wolf, a celebrated economics commentator, once wrote. For him, deflation was the root of all Japan’s post-bubble evil. Deflation was ‘a sorcerer’s apprentice of debt – a machine for making a bad situation worse’.3 If prices are falling, past debts – including the national debt – get progressively larger relative to current income. That is the opposite of what happens in a normal economy when mild inflation steadily erodes the value of past borrowings, making it easier to pay off a mortgage, a business loan or government borrowing. With deflation, debts incurred in the mad bubble years became increasingly hard to repay, clogging up the banking system with the detritus of long-forgotten exuberance. Companies stopped borrowing to invest, concentrating instead on paying back loans. Besides, if future revenues were to be continually worn away by the drip-drip of deflation, debts taken on today would inevitably become harder to repay in the future. Deflation was sapping what economists call ‘animal spirits’, the expectation of future growth that encourages investment and risk-taking. ‘If Japan cannot ever get out of deflation,’ says Takatoshi Ito, an economist at Tokyo University and former government adviser, ‘that means stagnation and slow death, right?’4
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Deflation may be the underlying cause, but the litany of economic woes now associated with Japan does not stop there. While thirty years ago the country inspired awe as an economic trailblazer, today it is more likely to elicit a sorrowful shaking of the head. Among bankers and businessmen especially, ‘What has happened to Japan?’ has become a common refrain. So low has its economic reputation sunk that Japan has even become a verb. Like Americanization, we now have ‘Japanization’, at least on the pages of the business press. But unlike Americanization, which carries both positive and negative connotations, Japanization is all bad. It means to stagnate, to shrink, to stop competing, to lose one’s entrepreneurial and industrial edge and to be crushed by a mountain of debt. It means to suffer permanently falling prices. It means a stock market that hasn’t budged for years and property prices that make the US housing market look buoyant. It means a shrinking population, fading international visibility and domestic policy drift. It means lack of innovation, insularity and a broken political system. Ultimately, it carries with it, as Ito says, an intimation of death. An economy that cannot grow surely must eventually die. One so indebted must eventually default. Japanization is a disease that no other nation in its right mind would wish to catch.
Such an interpretation – the strong consensus – is overblown. Japan’s policymakers have undoubtedly made many mistakes and its economy has fallen into a rut. High public debt and rapid ageing do, as pessimists suggest, make the future uncertain and, quite possibly, not all that rosy. But Japan’s economic performance has not been as grave as the economic obituaries make out. As we shall see, measured in per capita terms and accounting for deflation, Japan’s growth compares reasonably well with that of other rich nations. It has also managed to maintain a level of social cohesion, reflected in fairly low unemployment and extremely low crime, that contrasts with the social friction in supposedly more successful economies. Certainly, the go-go years of the 1980s, when the Japanese were living a credit-fuelled fantasy, are gone. Its economy overshot, crashed and has paid the price in subdued growth ever since. That much is true. Before long, though, we could be saying much the same thing about the once credit-enhanced economies of the US and Europe, still struggling several years after the 2008 financial crisis.
In one sense, Japan’s slowdown tells an obvious story. It is much easier to catch up with rich countries than to overtake them. Predictions in the 1980s that Japan’s economy would outstrip that of the US were always implausible. Now that Japan has fallen, there is a hint of Schadenfreude in seeing an upst
art challenger brought low. The Japanese compounded the problem by believing the hype themselves. The drunken salaryman giving the western visitor a bar-stool lecture on Japanese superiority is a cliché for a reason. Edwin Reischauer, a scholar and former ambassador to Japan, once said jokingly that Japan as Number One, the 1979 book proclaiming Japan’s formidable strengths, should be required reading in the US – and banned in Japan.
If we take a longer-term view, Japan’s post-war economic performance remains impressive. Its income per head5 jumped from a fifth of US levels in the 1950s to nearly 90 per cent in 1990, a spectacular, indeed unprecedented, catch-up. Japan is the only Asian economy, outside the city-states of Singapore and Hong Kong and the smaller countries of Taiwan and South Korea, to break out of what economists call the ‘middle-income trap’. By comparison, China is still at about one-fifth of US income per head, roughly where Japan was in the 1950s. It is commonly heard today that China’s leaders are desperate to avoid Japan’s post-bubble catastrophe. The truth is that China will be lucky if it can engineer the same standard of living, quality of life and social wellbeing that exist in Japan today.
It is true, though, that, when the bubble imploded, Japan’s convergence on American living standards went into reverse. By 2010, its per capita income had fallen to about three-quarters of US levels. It is not hard to make the case, then, that Japan entered the economic wilderness in 1990 and has stumbled about in the dark ever since. It has suffered, by this account, not one but two ‘lost decades’ in which its economy has barely grown and its industry has lost its competitive edge. A few data points appear to settle the case. In nominal6 terms, Japan’s gross domestic product – the total value of its output of goods and services – has been treading water since 1991. To be exact, Japan’s economy grew from Y476 trillion in 1991 to Y477 trillion in 2012, an increase of a staggeringly low 0.2 per cent in two whole decades. By comparison, the US economy – again measured in nominal terms – grew from roughly $6 trillion in 1991 to $15.6 trillion in 2012, an increase of 160 per cent. Britain’s economy, which went from £600 billion to £1.5 trillion, did nearly as well, expanding 152 per cent.7
Those nominal figures don’t tell the whole story. But they do explain why Japan is diminished internationally. In the mid-1990s, its share of global GDP was 17.9 per cent, a proportion that had halved to 8.8 per cent by 2010.8 Over roughly the same period, its share of world trade has fallen just as steeply to around 4 per cent. The fact that Japan’s economy has stood still while others have raced ahead (in nominal terms) has a real impact. It affects Japan’s global visibility and influence. It is the reason that, in 2010, China surpassed Japan as the world’s second-largest economy.9 Japan was Number Three. In terms of international prestige nominal GDP clearly counts.
Another measure of Japan’s decline can be found on the stock market pages of any business newspaper. As we have seen, the Nikkei 225 average, which tracks the share performance of Japan’s largest listed companies, peaked in December 1989 at 38,916. By July 2012 it was around 9,000. The fall of share prices, coupled with an equally precipitous collapse of land values – now roughly 60 per cent below their 1991 peak10 – has destroyed wealth, or at least the illusion of wealth, and sapped confidence. If we measure an economy’s performance in terms of returns to investors, again Japan’s performance has been catastrophic. The fall in asset prices also crippled companies and banks, both of which bought shares and property in the 1980s when prices were in perpetual upward motion. Banks extended loans to companies in return for collateral backed by overvalued land. When prices collapsed, the fantasy was exposed. As well as being saddled with bad loans, many banks owned huge portfolios of near-worthless shares. Since those shares were counted as capital, it left banks effectively bankrupt. Rather than owning up, most maintained the fiction their loans were good. Some even lent money to indebted companies so they could repay interest. The banks and their borrowers were like two drunks leaning up against each other for support. As a result, banks virtually stopped lending to new businesses. That made sense for individual institutions. For the economy as a whole it was disastrous. In the ten years from 1995, total bank loans shrank by a third.11 By 1997, the crisis bubbled into the open and some large institutions started collapsing.
Even if banks had wanted to lend, companies were in no mood to borrow. When they realized the good times were over – and many assumed for years that the stock market crash was a blip – they battened down the hatches. Companies cut overtime, bonuses and even wages. That took money out of the pockets of consumers, exacerbating a chronic lack of demand. Today, businesses hire far fewer permanent staff, taking on lower-paid part-time workers instead. As a result, nearly one in three Japanese employees is now temporary, compared with one in five in 1990. The creation of a labour underclass is hardly unique to Japan. But it has wounded Japan’s sense of having an egalitarian society and put a cap on consumer spending.
Tadashi Yanai, president of the clothing company that makes the Uniqlo brand and a specialist in provocative statements, told me, ‘Japan is shrinking. It will become like Greece or Portugal.’ In their comfortable affluence, the Japanese were living a fantasy, he said. ‘People who believed that they were middle class will realize they are poor. Japan has been in a slump for twenty years. So that day will come soon.’12 Many outsiders agree with his assessment. Not untypical was the prognosis of Nicholas Eberstadt, a political economist at the American Enterprise Institute in Washington, who went so far as to suggest that Japan’s young and old alike should consider abandoning their blighted archipelago altogether. ‘Given the cost of ageing, Japan might establish “health care colonies” in places like India or the Philippines, spots where large populations of elderly Japanese could enjoy a good quality of life at a fraction of the cost at home,’ he wrote cheerily. ‘Younger Japanese, for their part, might find it attractive to embrace new opportunities abroad, rather than stay in a shrinking, dying Japan.’13
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Viewed through a different lens, Japan’s post-bubble experience has been less ghastly. First, let’s look at growth on a real basis, adjusted for inflation and for population. That is a sensible thing to do if we want to know how individual Japanese have fared. Adjusting for inflation – or in its case deflation – makes Japan’s numbers look better. That’s because deflation means people can afford to buy more with the same amount of money. Japanese incomes may have been falling, but the price of everything from newspapers and haircuts to housing and sushi have been stuck at 1981 levels.14 Likewise, Japan’s population has not grown much in the past twenty years. Since 2007, it has even started shrinking, albeit still very slowly. Some countries look ‘richer’ in aggregate merely because their population has grown. But unless growth outstrips population increase, individuals don’t feel better off. So, if we’re interested in standard of living rather than investor returns, we should look at growth on a per capita basis.
In nominal terms, you’ll remember, Japan’s economy has barely budged in two decades, while the UK and US economies have grown 152 per cent and 160 per cent respectively. Much of that increase, it turns out, is down to the simple fact of rising prices and a growing population. Adjusted for both, Japan still underperforms, but not by nearly as much. If the size of the three economies in 1989 is rebased at 100, Japan’s economy reached 127 by 2013, compared with 137 for the US and 144 for Britain.15
Japan had a genuinely lousy 1990s. But it turns out that, relative to other rich countries, the last decade has not been quite so bad. As we shall see in the next chapter, during the years Junichiro Koizumi was prime minister (2001–6), the country actually went through a mini-growth and productivity boom. Even after the Lehman shock, which devastated Japan’s export markets, and the tsunami, which destroyed production and hit the energy supply, remarkably Japan has done marginally better than either Britain or the US on a real per capita basis in the past decade. Expressed as an average growth rate, Japan’s
real per capita income has risen 0.9 per cent a year since 2002. That compares with 0.8 per cent for the US and 0.7 per cent for Britain and 0.5 per cent for Norway. If we are to describe Japan’s past decade as ‘lost’, perhaps fairness dictates that we do the same for both the UK and the US.16
Other numbers also suggest Japan has not done quite as badly as widely assumed. Unemployment, 4.1 per cent at the end of 2012, never rose above 5.5 per cent even in the dog days of recession. That is much higher than the full employment Japan is used to, but it compares favourably with other advanced countries. According to statistics from the Organisation for Economic Co-operation and Development, in March 2012 the US had a jobless rate of 8.1 per cent, France 10 per cent and Spain a massive 24.1 per cent.17
Sceptics, pointing to overstaffed Japanese construction sites and department stores, argue that headline numbers hide underemployment. That is true. In more market-oriented societies, excess workers might indeed have been sacked. Instead of the company paying them, they would then have needed support either from the state or from their family. Japan’s low unemployment is, then, arguably achieved at the cost of suppressing productivity or, to put it another way, subsidizing work. One can disagree with such a policy. Shareholders would undoubtedly prefer companies to increase profits by laying off workers. But Japan’s ‘stakeholder’ capitalism, which has similarities with continental Europe, is a legitimate policy option. The Anglo-Saxon model, which favours capital above labour, has sometimes helped investors at the cost of higher unemployment.
Economists might counter that the reluctance to sack workers hampers creative destruction. Only by allowing uncompetitive businesses to fail can labour be directed to more productive parts of the economy. There is some truth to that. Japan’s ‘zombie banks’ have indeed propped up ‘zombie companies’. But different economies reorganize in different ways. In Japan, there has been more corporate restructuring than is widely recognized, often behind closed doors and with less resort to bankruptcy or hostile takeovers. This may be slower and less efficient than in more market-oriented economies. Yet persistently high, and long-term, unemployment may be the inevitable price of the creative destruction process in many western countries – certainly if sacked workers are not properly retrained to move into new industries. In Japan, the industrial re-engineering process, though slow, and perhaps inadequate, is more likely to take place within a large company, at least for those fortunate enough to have a full-time job. Thus Canon shifted its emphasis from cameras to photocopiers without being taken over by a rival company or private equity firm and broken up as might have happened in a more aggressively capitalistic country. Japan’s low unemployment figures, sceptics will point out, also mask ‘discouraged’ workers, who do not bother looking for non-existent work. Nor do they tell the story of high youth unemployment, now at 8 per cent. Such phenomena, though, are hardly unique to Japan. The headline unemployment numbers may disguise the true picture, but they are broadly comparable across nations. However you make the comparison, Japan has lower unemployment than most advanced economies.
Bending Adversity: Japan and the Art of Survival Page 16
