And a peculiar new economic model
Well, the worst is over – but have people realized? Punch-drunk from bad news, it’s easy to overlook change. The latest economic figures show that the danger of a double-dip recession is receding. Add to that the prospect of the governing Democratic Party of Japan consolidating its hold on power in the summer upper house elections, and you have some grounds for optimism.
Let’s look at the macro figures. True, there was some upset about the GDP revision in the fourth quarter, reducing quarter-on-quarter growth from 1.4% to 0.9%. But the catastrophic decline which set in during the first quarter of 2009, and which continued for most of the year, has been halted. The scene is now set for some positive growth, even if it is modest (The Economist Intelligence Unit, the research arm of The Economist Group, expects 1.3% growth in 2010). The apocalyptic scenario has been averted.
It is noticeable how traditional the Japanese recovery has been, evidence of the huge challenge facing the DPJ. Once more, it’s the export sector that has dragged Japan out of its funk; up 45% in February compared with the same month a year ago. In a sense, that’s perfectly normal: the global market is far larger than the domestic market, so any recovery there will have a large swing effect on Japan’s growth rates. But the domestic (excluding the stimulus package) market is not even keeping up with the recovery in the export market.
What economists call a “self-sustaining recovery” is still hard to find. By this, they mean a recovery which sees top-line growth feed into more jobs and higher salaries, which in turn triggers a consumption boom, helping those sectors of the economy that don’t depend on exports – often the service sector and the construction sector, and other non-manufacturing areas.
Much of this domestic malaise has been blamed on deflation. As I mentioned in my last column, this is unavoidable when the machinery is lying idle as a result of the export slowdown. As exports pick up (spurred more by China and the rest of Asia than traditional markets in the US and Europe), machinery starts moving again, and deflation will slow. It may even turn positive at some point, if demand picks up sufficiently.
The other important thing to remember about deflation is that when it occurs as wages are coming down, it’s not necessarily a bad thing. In fact, if prices go down faster than wages, then the average person is actually benefiting from the equivalent of a pay rise. Is this the situation in Japan now? It’s hard to say, but genuine concerns about declining wages need to be balanced with the fact that prices are falling quite rapidly, too.
It sometimes seems to me that Japan has invented a completely new economic model, where real growth does occur, but is not translated into nominal growth. In other words, the volume of actual goods and services Japan produces is increasing, but is not reflected in the monetary size of the economy. This is very peculiar by standards in the West, where prices rise along with output. The Western process diminishes the value of debt, and encourages present consumption. One might expect the Japanese model to eschew debt (since debt becomes more onerous in deflation), and thus grow less fast.
It does, however, have the benefit of keeping asset prices extremely stable, preventing booms and busts. In addition, debt repayment costs are kept low, since interest rates only rise when nominal growth is rising (very slowly, in Japan’s case). The final piece of the puzzle is that savers put their money into government bonds, which are issued to fund the government debt. Bond prices go up under deflation, thus rewarding bond investors.
What will be really interesting is whether this Japan model is exported. Western economies have already adopted other Japanese “heresies” such as quantitative easing. Maybe they will learn to love deflation, too.