Japan’s lost decades found

SOMETHING doesn’t add up: The idea that Japan economically lost a few decades hardened into conventional wisdom long ago, yet Japanese living standards continue to improve rather than decline. Indeed, the Japanese stock market plunged 82% from its high after the collapse of the economic bubble–almost as far as the 89% that the Dow Jones fell in the U.S. after its 1929 high–but there are no breadlines, soup kitchens, or people on the street asking for spare yen.

Kel Kelly, a Wall Street trader, corporate finance analyst, and research director, offers a convincing explanation in an article titled The Myth of Japan’s Lost Decades:

“It is widely thought that Japan is in the 21st year of a recession, or at least of a muddle-through sluggish economy. Part of this poor performance, economists and the financial press habitually state, is that Japan has experienced a terrible deflation. Nevertheless, I claim that Japan’s economic state for the past two decades, up until the recent disasters, has in fact been comparable to that of most developed nations.”

Earlier this week we saw that China’s GDP figures are masking what seems to be a real-word case of paying workers to dig holes and fill them again. Mr. Kelly holds that Japan’s GDP figures are not a measure of the real economic activity of the country:

“(T)he official data are flawed, because they are based on bad economic theory and statistics trying to aggregate factors that can’t easily be aggregated. The core of the discrepancy is that (official) economic growth is being measured in money, and money is not wealth.

“The misleading measurement of growth in question is GDP growth, because it is practically the sole indicator used by professionals to assess economic output. The problem is that GDP is in fact not a measure of real, physical production of goods and services, as it is intended to be. It is primarily a measure of inflation, which it is not intended to be.”

Key to his analysis is his assertion that the Bank of Japan’s generally conservative money policy has been a wise choice:

“While GDP can increase only with more money and spending, it is obvious that the only source of an increase of money and spending is an increase in the supply of money itself, which in turn can come only from the central bank. Businesses do not create money; they create goods and services. Only the central bank and the member banks have the ability to create money.

“When central banks pump a lot of money into the economy, they boost GDP growth (along with corporate revenues and especially profits). Conversely, when they don’t, GDP does not grow very much. Thus, Japan’s GDP growth has been slow because Japan’s central bank, The Bank of Japan (BOJ), has intentionally engaged in a conservative monetary policy for most of the last 20 years, as seen in figure 1…Consumer price inflation, in turn, as shown in figure 2, has remained near flat.

“That last sentence is worth repeating: consumer prices have been mostly flat — not falling. The “deflation” Japan is supposed to have experienced over the last 20 years — as commonly stated by financial journalists and professional economists — really consists of prices periodically falling 1, 2, and sometimes 3 or 4 percent over a year or two before returning to slight positive growth rates. All in all, consumer prices have seen a slight increase, not decrease over the last two decades.”

Incidentally, that’s why the proposal to have bonds floated by the government and bought by the Bank of Japan to finance the reconstruction of the Tohoku region is a dangerous one. Printing more money has the potential to create more problems than it would solve.

“Prices have stayed mostly flat in Japan because the quantity of money has increased at about the same pace as the quantity of goods…Despite conventional opinion, Japan’s economy has not been stagnant; it has in fact been growing in real terms — although not in monetary terms. The crucial point is that monetary changes do not necessarily reflect real changes. Japan’s GDP growth has been slow because money-supply growth has been slow; it is mainly money growth which drives GDP numbers.”

Mr. Kelly is also not concerned by the Nikkei’s somnambulism:

“It is precisely because the money supply has not been pumped back up and directed into the financial markets that the Japanese stock market has remained dead for the last two decades. And unless Japanese consumers decide to forego consumer goods — including their houses — and buy stocks, it will remain dead until more newly created money from the BOJ pushes it higher. But, crucially, the “dead” stock market harms neither Japanese consumers nor the Japanese economy.”

Rather than straight GDP, he examines GDP per capita at PPP:

“(I)n fact, Japan’s GDP per capita at PPP (purchasing power parity) has increased consistently, as figure 10 shows.

“Japan’s GDP per capita in 1987…was just about completely in line with Germany’s and France’s, the countries directly above and below Japan in this ordered ranking. Twenty years later in 2007…Japan still had GDP in line with the same two countries — just slightly below Germany’s and just slightly above France’s. The proportions are unchanged!…So, if Japan has been in a recession the last two decades, then so have Germany and France and other developed countries. In fact, Japan, after all its supposed lack of growth, still ranks above the OECD average.”

He thinks the yen’s appreciation is a good sign:

“The currency has risen precisely to adjust for relative prices, because Japan has had less price inflation due to having created less money and credit (in fact, the rise of the yen really reflects the fall of other currencies). The currency changes have kept the GDP measurement accurately adjusted.

“Had Japan printed no money at all over the last 20 years, it would have seen its currency rise even more. Additionally, domestic prices would have fallen. This would not have been deflation, which is falling prices due to a contraction of the money supply. It would have been falling prices due the fact that goods and services were being created faster than was money. Unlike deflation, falling prices help everyone.”

Finally, he includes an important qualifier in the footnotes:

“(N)one of this is to say that I put a lot of faith in the accuracy of the charts I’m using, as inflation indices, price deflators, GDP calculations, and the very concept, data collection, and methodology of GDP itself is more than questionable. But I’m using the best formal data I can find; I’m analyzing on the terms used and provided by mainstream economists.”

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Other people are also aware of the problems with the GDP metric, but not all of them are as intellectually rigorous as Mr. Kelly. Some favor the application of the Gross National Happiness concept devised in Bhutan in the early 1970s, or similar ideas. Lest you think that last sentence is too absurd to be taken seriously, know that French President Nicolas Sarkozy is among them.

Though it passed largely unnoticed at the time, the idea also appealed to Hatoyama Yukio’s first DPJ government. Early last year, the DPJ rogue’s gallery of Mr. Hatoyama, his successor Kan Naoto (then handing out business cards on which the title Finance Minister was printed), and Sengoku Yoshito agreed at a meeting to survey “the people’s happiness” and thereby determine a growth strategy by June 2010.

If that isn’t a non sequitur, I don’t know what is.

Said Mr. Sengoku after the meeting:

“We are considering how we can conduct a survey at the present time to get a real sense of what the people are feeling, and what they are thinking.”

He did not explain what standards would be used to quantify the extent of people’s happiness. How could he? Objective standards don’t exist; one doesn’t replace a yardstick with a joystick. Any criteria would be nothing more than the ingredients for a sky pie recipe.

Fortunately, as with most of the DPJ’s bright ideas, nothing came of it at the time because the Hatoyama government collapsed. As long as Mr. Kan and Mr. Sengoku remain in government, however, the potential for economic fatuity remains.

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One might well ask how happy the people of Bhutan are, or what they consider happiness to be. The Bhutan GDP per capita at PPP is $US 1,400, life expectancy is 54 years, one child in 10 dies before age five, and only 56% of males and half that number of females can read and write. Mr. Sengoku wanted to conduct a survey of the Japanese people to find out how happy they were. A similar survey in Bhutan found that many in the rural population were worried about their safety because of concerns of wood spirits and wild animals.

But in 2006, Business Week reported on another survey that showed Bhutan was the happiest country in Asia and the eighth-happiest in the world.

Prime Minister Jigme Y. Thinley was interviewed by the Inter Press Service when he visited Japan in 2009.

JYT: Economic growth is necessary to eliminate poverty. That said, we do not have a shortage of food in the world, but people are going hungry and there is poverty in one part of the world. We know there is so much waste and excessive consumption in another part of it. We also have medicine, but people are dying for lack of access to it.

IPS: How can we get it distributed?

JYT: Fiscal policies to tax the rich would ensure equal distribution. I think the rich will be willing to pay taxes to help others.

Jigme Y. Thinley is the DPJ’s economic guru? Who knew?

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The longer the DPJ stays in government, the more likely we’ll all turn a shade of blue.