Saturday, January 8, 2011

Japan Inc.

The other day, the FT ran a comment that put a very different spin on the last 20 years in Japan:

Is Japan the most successful society in the world? Even the question is likely (all right, designed) to provoke ridicule and have you spluttering over your breakfast. The very notion flies in the face of everything we have heard about Japan's economic stagnation, indebtedness and corporate decline.

Ask a Korean, Hong Kong or US businessman what they think of Japan, and nine out of 10 will shake their head in sorrow, offering the sort of mournful look normally reserved for Bangladeshi flood victims. "It's so sad what has happened to that country," one prominent Singaporean diplomat told me recently. "They have just lost their way."

It is easy to make the case for Japan's decline. Nominal gross domestic product is roughly where it was in 1991, a sobering fact that appears to confirm the existence of not one, but two, lost decades. In 1994, Japan's share of global GDP was 17.9 per cent, according to JPMorgan. Last year it had halved to 8.76 per cent. Over roughly the same period, Japan's share of global trade fell even more steeply to 4 per cent. The stock market continues to thrash around at one-quarter of its 1990 level, deflation saps animal spirits – a common observation is that Japan has lost its "mojo" – and private equity investors have given up on their fantasy that Japanese businesses will one day put shareholders first.

Certainly, these facts tell a story. But it is only partial. Underlying much of the head-shaking about Japan are two assumptions. The first is that a successful economy is one in which foreign businesses find it easy to make money. By that yardstick Japan is a failure and post-war Iraq a glittering triumph. The second is that the purpose of a national economy is to outperform its peers. 
If one starts from a different proposition, that the business of a state is to serve its own people, the picture looks rather different, even in the narrowest economic sense. Japan's real performance has been masked by deflation and a stagnant population. But look at real per capita income – what people in the country actually care about – and things are far less bleak. 

In a thought-provoking article in The New York Times last year, Norihiro Kato, a professor of literature, suggested that Japan had entered a "post-growth era" in which the illusion of limitless expansion had given way to something more profound. Japan's non-consuming youth was at the "vanguard of the downsizing movement", he said. He sounded a little like Walter Berglund, the heroic crank of Jonathan Franzen's Freedom, who argues that growth in a mature economy, like that in a mature organism, is not healthy but cancerous. "Japan doesn't need to be No 2 in the world, nor No 5 or 15," Prof Kato wrote. "It's time to look to more important things.

Devoted regular readers (allow me to briefly flatter myself) will realize that this idea that the state is not primarily about economic growth is an idea close to my heart.  I'm sure an interesting intellectual history could be written about the transition from Adam Smith's classic liberal critique of the state, to our current situation, where the rhetoric of endless growth has gotten deeply baked into all politics, regardless of where it locates itself on the left-to-right spectrum.    However, I won't bore you now with another rant about how growth is an outcome of functioning government, not a goal of it.  Come back tomorrow.

Today, I'm more interested in the way Japan is leading the rest of us.  This is the first big, developed economy to actually start facing up to a population that is past the steepest part of the S curve, and in fact even declining at this point.  And given that something about Japan's culture causes it to act as a closed system, which of course the earth ultimately is (excepting sunlight and the occasional meteor), I think it pays to look at their experience as a precursor.  As Kato puts it in that linked op-ed:

Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake. In a world whose limits are increasingly apparent, Japan and its youths, old beyond their years, may well reveal what it is like to outgrow growth.

When you put things this way, you can actually start to see Japan as a success story, which turns out to be one of Richard Koo's points. He argued that the ability to manage a bust of the scale of the bubble economy in 1990 without ending up in a depression should be counted as a major victory.  While his point was strictly macroeconomic, I think you can extend it a bit and see it as a political and social victory as well.  It's hardly a daring hypothesis to see their bust as, at least partially, a lagged effect of the dramatic step change in birth rate that happened in 1974, which would mean that what they really had to handle, at bottom, is the transition from an economy predicated on continual growth to one where a main driver of economic growth has flattened out.  In my mind, it's obvious that increasing debt makes perfect sense in the first system, but will only have a very limited role in the second.  But this deleveraging is just the macroeconomic indicator that gives a number to a much more profound transition.

If you keep going with this thought, you start to wonder whether the other obvious ways in which Japan is leading the rest of the world are related.  For example, is it all but inevitable that technology increasingly reigns supreme in a flat-population world?  The Japanese have long been leaders here, especially with the mobile stuff, and their fascination with robots fits into the same theme.  I don't want to engage in too much armchair sociology, and of course there are cultural differences that clearly play a role (ex hypothesi if we're trying to get at what happens in general to a closed system).  Still, we might consider it hopeful that those who have preceded us have, for all the difficulties encountered, been managing reasonably well if you look at the big picture and consider the scale of the problem.

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