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Musing on Economics
Japan’s Economy Shrinks – Close to Recession
February 23, 2020
Things are looking pretty bleak for Japan: data released on Monday showed the country’s economy shrank at its fastest rate in years last quarter. The world’s third-largest economy shrank at its fastest rate of decline since 2014, and far quicker than economists and investors were expecting. That deceleration may have something to do with a sales tax that arrived back in October: consumer spending saw an 11% drop in the last three months of 2019, dragging down the Japanese economy as a whole, which isn’t a first for Japan, with a 2014 tax increase having had a similar effect. So, the government did take some pre-emptive economy-boosting measures to help cushion the effects. But Monday’s data seems to suggest they didn’t work – and given that Japan's central bank has already lowered interest rates into negative territory, there’s not much it can do either. Even if investors brush off the sales tax hike as a one-off, it’s not like Japan’s outlook is particularly bright: the country’s economy is expected to suffer a fresh hit from the coronavirus outbreak. And if that leads the economy to shrink again in the first quarter of 2020, Japan would be in a recession. Chinese tourists’ money has become an important part of the Japanese economy, and there was some good news on that front on Monday, at least. China pledged to implement its own economy-boosting measures to help deal with the economic blow from the coronavirus outbreak, which could include lower taxes and interest rates. That, in turn, should increase Chinese citizens’ purchasing power at home and abroad.
Thirty years ago, many in the US were in fear that a rising power in Asia was on the verge of eclipsing the US. Now it's China, back then it was Japan.
Back in the late 1980s Japan had become the second largest economy in the world after the US and seemed like a juggernaut that couldn't be stopped. Many center-left economists thought that the post-World War II experience of Japan proved that industrial policy could work, with the government picking winners and losers and making sure favored industries and companies always got the credit they needed to grow. They were eager to bring that approach to the US.
History, however, had other plans. Japanese government policies bottled up capital in favored industries and pulled it away from widespread entrepreneurship. This meant the massive savings generated by Japanese workers were misallocated into a limited pool of domestic assets, with capital gains tax rates that favored listed stocks and drove up real estate prices. The result was dual massive bubbles, with stocks far more overvalued than US stocks were in 2000 while Japanese real estate was far more overvalued than the US was in 2005. As a sign of how large that bubble was, the Nikkei is still about 40% below the high set in 1989.
That peak in asset prices also coincided with a dramatic slowdown in economic growth that has lasted thirty years. To put an exclamation point on that, Japanese real GDP fell at a 6.3% annual rate in the fourth quarter of 2019. This was before any impact from the coronavirus and the largest quarterly decline in six years. While pandemics are serious and scary, the real cause of the drop was a national sales tax hike from 8% to 10%. Real GDP is now down 0.4% from a year ago.
It's deja vu. Japan keeps trying over and over again to boost economic growth with government policy – a combination of high government spending, high budget deficits, high taxes, quantitative easing, and, beginning in 2016, negative interest rates. Sounds exactly like what policymakers in Europe have tried, but more of it and for longer. None of this has worked, and it won't work in the US, either. In contrast to Japan, the US has lower taxes, lower (but still too high) government spending, a central bank that maintains positive short-term interest rates, and a much healthier economy, with equities at or near record highs while the jobless rate heads toward what could be the lowest unemployment rate since the Korean War. Japan could benefit from shifting the mix of policies toward the supply-side, with big tax cuts on business investment and profits, and ending negative interest rates like Sweden just did. And, given a falling population, this could be coupled with much larger tax deductions for parents. Meanwhile, instead of raising the sales tax, with long-term interest rates at essentially zero, Japan should take a page from Great Britain's history and convert their debt into "perpetual" securities (called "consols"), paying whatever interest rate the market demands (near zero!) but without the need to repay principal. But Japan looks poised to continue to muddle through continuing to believe that government can manage economic growth and not trusting entrepreneurs and freedom. Unless Japan starts trusting supply-side policies instead of demand-side fallacies, they will continue to be doomed to make the same mistakes. One of the causes of Japan’s falling economic growth is their population bust—a relentless, generation-after-generation culling of the human herd.” This trend is well under way in Japan, whose population has already crested, and in Russia, where the same trends, plus high mortality rates for men, have led to a decline in the population.
Japan’s Economy Shrinks – Close to Recession
February 23, 2020
Things are looking pretty bleak for Japan: data released on Monday showed the country’s economy shrank at its fastest rate in years last quarter. The world’s third-largest economy shrank at its fastest rate of decline since 2014, and far quicker than economists and investors were expecting. That deceleration may have something to do with a sales tax that arrived back in October: consumer spending saw an 11% drop in the last three months of 2019, dragging down the Japanese economy as a whole, which isn’t a first for Japan, with a 2014 tax increase having had a similar effect. So, the government did take some pre-emptive economy-boosting measures to help cushion the effects. But Monday’s data seems to suggest they didn’t work – and given that Japan's central bank has already lowered interest rates into negative territory, there’s not much it can do either. Even if investors brush off the sales tax hike as a one-off, it’s not like Japan’s outlook is particularly bright: the country’s economy is expected to suffer a fresh hit from the coronavirus outbreak. And if that leads the economy to shrink again in the first quarter of 2020, Japan would be in a recession. Chinese tourists’ money has become an important part of the Japanese economy, and there was some good news on that front on Monday, at least. China pledged to implement its own economy-boosting measures to help deal with the economic blow from the coronavirus outbreak, which could include lower taxes and interest rates. That, in turn, should increase Chinese citizens’ purchasing power at home and abroad.
Thirty years ago, many in the US were in fear that a rising power in Asia was on the verge of eclipsing the US. Now it's China, back then it was Japan.
Back in the late 1980s Japan had become the second largest economy in the world after the US and seemed like a juggernaut that couldn't be stopped. Many center-left economists thought that the post-World War II experience of Japan proved that industrial policy could work, with the government picking winners and losers and making sure favored industries and companies always got the credit they needed to grow. They were eager to bring that approach to the US.
History, however, had other plans. Japanese government policies bottled up capital in favored industries and pulled it away from widespread entrepreneurship. This meant the massive savings generated by Japanese workers were misallocated into a limited pool of domestic assets, with capital gains tax rates that favored listed stocks and drove up real estate prices. The result was dual massive bubbles, with stocks far more overvalued than US stocks were in 2000 while Japanese real estate was far more overvalued than the US was in 2005. As a sign of how large that bubble was, the Nikkei is still about 40% below the high set in 1989.
That peak in asset prices also coincided with a dramatic slowdown in economic growth that has lasted thirty years. To put an exclamation point on that, Japanese real GDP fell at a 6.3% annual rate in the fourth quarter of 2019. This was before any impact from the coronavirus and the largest quarterly decline in six years. While pandemics are serious and scary, the real cause of the drop was a national sales tax hike from 8% to 10%. Real GDP is now down 0.4% from a year ago.
It's deja vu. Japan keeps trying over and over again to boost economic growth with government policy – a combination of high government spending, high budget deficits, high taxes, quantitative easing, and, beginning in 2016, negative interest rates. Sounds exactly like what policymakers in Europe have tried, but more of it and for longer. None of this has worked, and it won't work in the US, either. In contrast to Japan, the US has lower taxes, lower (but still too high) government spending, a central bank that maintains positive short-term interest rates, and a much healthier economy, with equities at or near record highs while the jobless rate heads toward what could be the lowest unemployment rate since the Korean War. Japan could benefit from shifting the mix of policies toward the supply-side, with big tax cuts on business investment and profits, and ending negative interest rates like Sweden just did. And, given a falling population, this could be coupled with much larger tax deductions for parents. Meanwhile, instead of raising the sales tax, with long-term interest rates at essentially zero, Japan should take a page from Great Britain's history and convert their debt into "perpetual" securities (called "consols"), paying whatever interest rate the market demands (near zero!) but without the need to repay principal. But Japan looks poised to continue to muddle through continuing to believe that government can manage economic growth and not trusting entrepreneurs and freedom. Unless Japan starts trusting supply-side policies instead of demand-side fallacies, they will continue to be doomed to make the same mistakes. One of the causes of Japan’s falling economic growth is their population bust—a relentless, generation-after-generation culling of the human herd.” This trend is well under way in Japan, whose population has already crested, and in Russia, where the same trends, plus high mortality rates for men, have led to a decline in the population.
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