Chapter 56 – Japan’s Economic Dilemma


1. Failure of  Hashimoto Restrictions
2. A Chronic Lack of Domestic Demand
3. High Savings Harmful?
4The Unbalanced Post-1973 Economy
5. The Bicycle Economy 
6. The Self-Standing Economy 

My impudent belief that I could tell Japan how to solve its economic problems began with my being asked to join a small committee organized by Takashi Hosomi back in the mid nineties.

Hosomi was an economist-consultant with Nippon Life Insurance, and had a long career in the bureaucracy behind him. 

We had previously been together on the Finance Ministry committee for trade problems.

Now he had been asked by the Cabinet office to organise a top-level group to discuss economic policies – in particular, how to revive the economy from its post-Bubble collapse.

For several years we would meet at intervals, with our views reported back to people who mattered, or so we presumed since someone from a Cabinet committee would sit in attentively at our meetings. 

1. Failure of Hashimoto Restrictions

For much of that time the economy was suffering from the restrictive fiscal policies of the Hashimoto administration (1997-99) – policies urged on the administration by US supply-side economists, Japanese big business (mainly Keidanren), the media and the commentators.

They all claimed strong concern over the high levels of public debt.

But the cuts in government spending they had urged had thrown the economy into a tailspin. 

The Hashimoto regime was to lose popularity and bow out, ungracefully.

Richard Koo, myself and one or two others on the committee pushed the line that the weakness of post-Bubble demand meant government still had to rely on spending to fill the demand gap –a Keynesian solution.

Hosomi seemed to agree.

As for the public debt problem, that still was not out of hand. Besides, government stimulatory spending into a depressed economy can often generate enough tax revenue to pay for the spending

Cutting government spending can easily cut tax revenues as much if not more than the savings from spending cuts – if they generate downward economic spirals.

(We were still not into MMT theory (which I accept) that says government can borrow as much as it needs so long as (a) it is in their own currency, (b) there are unused resources in the economy, and (c) the spending is stopped immediately there are signs of inflation.)

Our advice may just possibly have contributed to the mild recovery under the expansionist economic policies of the Obuchi and Mori administrations in the late nineties.

2. Chronic Lack of Domestic Demand 

Even more than the others in the committee I was worried about the weakness of consumer demand.

At the time the Anglo economies (the US, UK, Australia and New Zealand) were all enjoying strong growth rates, around four percent.

The Europeans were muddling along with two-three percent growth rates.

Only Japan seemed to be in serious trouble, and not just because of Bubble collapse.

Continued deflation, continued close to zero growth rates despite near zero interest rates, was abnormal.

Something seemed seriously wrong with the economy.

At the time, the good growth rates of the Anglo economies had led many to assume that their supply-slider economic reforms, including government spending cuts, were the key.

This then would be the answer to Japan’s problems too, it was argued.

But there was, I thought, another and very different possibility. This said that weak consumer demand, rather than lack of economic reform including government spending cuts, was the key to Japan’s economic growth problems.

This seemed to be shown clearly when comparing household savings rates in the advanced economies, with Japan’s high savings rates. 

This indicated  weak household consumption.

We Anglos had by far the lowest savings levels – one or two percent and even zero or negative at times. But we had the strongest growth rates.

The Europeans had much higher savings rates – around eight percent or more – and weaker growth rates.

Japan at around 12 percent had by far the highest savings rates, and the weakest growth rates.There seemed a clear negative correlation between savings rates and economic growth rates. 

In other words, might not high savings rates be bad for an advanced economy?

3. High Savings Harmful ?

At the time the conventional wisdom still said that high savings were good for an economy, any economy.

Indeed, the then editor of the London Economist, Bill Emmott, had just put out a book warning of future growth problems for Japan since the ageing of the population could lead to a fall in Japan’s high savings levels.

But while high savings were important for a developing country, in an advanced economy there was a little-realised Catch 22 dilemma.

High savings were only useful if they were returned to the economy, ideally in the form of increased investment. In a developing economy this is no problem. There is any number of development projects to absorb excessive savings.

Or, people save to buy the basic consumer goods and services they need. Confident of future demand, investors borrow those savings to produce those goods and services.

The economy operates on a beneficent cycle.

But if high savings were a result of weak consumer demand – consumers preferring to save rather than spend – investors would rightly be reluctant to invest. No one wants to put money into a project that cannot sell its output due to weak demand.

In this situation the economy could well be knocked into a downward spiral – lack of consumption leading to lack of investment leading to further cuts in consumption…

(Supply-siders like the Economist seem to work on the assumption that there are always consumer demands that need to be satisfied, in any economy.

(The idea that in an advanced economy like Japan’s many consumers might be quite happy with what they have and prefer saving rather than spending seems hard for many – us Anglos in particular – to grasp.)

In any case, there seemed to be a clear negative correlation between savings levels and growth rates in the main advanced economies. From this it followed that Japan needed policies that focused heavily on encouraging people to spend. 

Failing that, government had to do the spending.

If there really was a public debt problem (something which under MMT theory could be disputed, as I came to realize later), then Japan needed tax policies that increased tax revenues without harming consumption – sensible commodity taxes for example.

This was the gist of the article I wrote for Nikkei I mentioned in an earlier chapter.

And while my efforts to persuade Nikkei and some others were not very successful, in the process of making my arguments I began to realise that this problem of high savings and therefore inadequate demand was not just a post-Bubble problem.

In fact it had been around long before the Bubble years – ever since the early seventies to be precise.The lack of domestic demand in Japan was chronic. It was the key reason for Japan’s unbalanced economy, and the problems that had occurred over the years.

4. Unbalanced Post-1973 Economy 

I had long felt that since the early seventies there had been something fundamentally unstable about the Japanese economy.

The earlier boom that had carried Japan into the early seventies was, as in China later, sustained by demand for basic goods and services – housing, white goods, TVs, transport, etc.

High savings by individuals, as in China, provided the funds needed by the firms making the goods and services. Individuals then used those savings to buy those goods.

In the case of China, and to some extent Japan, foreigners had also been very willing to buy some of those goods.

The Japanese had called it their kodo seicho jidai – the high growth period. Annual growth rates of seven-eight percent were common.

It ended around 1973 – the date of the first oil shock, which is seen as the reason for the ending.…

In fact, not just the oil shock was involved in ending the high growth economy. For what happens to an economy when demand for basic essentials is fulfilled?

Replacement demand is hardly enough to keep the economy turning over. Like it or not, new demands have to be created.

As already mentioned, in the Western economies – in the Anglo economies such as the US, the UK, Australia and New Zealand especially – that has been no problem.

Demands for leisure, lifestyle and status-symbol goods/ services did much, or even more, to fill any demand gap. Indeed, as we were to see, they may have done too many demands. They led many consumers into serious debt.

But in Japan similar demands were very slow to emerge. Most Japanese were very happy with their very modest middle-class lifestyle.They did not need expensive cars, yachts, second-houses, swimming pools or luxury tours abroad to keep them happy. 

Neighbour-boasting spending is weak in Japan.  A standard house is fine.They had little need to spend heavily. They continued to save heavily, despite very low returns on savings. * 

They kept much of their savings in cash and deposits, which did little to stimulate demand in the economy even if it did make them feel safe.If they sent their savings abroad, as the less risk adverse did, there was even less stimulation.

5. The Bicycle Economy

I had always liked the Hicks theory I had learned back in university days when post-Great Depression memories were still fresh in the collective memory.

This said that an economy is like a bicycle, with the two pedals, demand and supply, working in tandem to keep balance. But if one pedal outpaces the other – in this case, if demand does not match supply – the bicycle can easily topple over.

If your identity is decided mainly by where you work, you may be willing to spend heavily on the education and other details needed to gain entry to that group. But from then on your identity and prestige depend mainly on your willingness to cooperate and fit in with that group.

For that you do not need expensive cars, houses and so on. Ostentatious spending could even harm your status within the work group. Ostentatious leisure spending would almost certainly be a negative.

Most of us non-Japanese tended to see identity and status more in terms of ‘attributes’.These can include conspicuous spending and possessions. They help tell us, and others, who we were.

We might be willing to spend heavily to gain those attributes.

We Anglos were the worst offenders, possibly because of the weaknesses in our cultural identities. I spend, therefore I am.

The exception of the Canadians for some reason.

(The example I liked to use were the retired couples living in the hills around Los Angeles.We discovered them after each bush/scrub fire in the area.Each had an enormous house, often flanked by a pool or tennis court and with several well-furnished and equipped bedrooms. All that, just for the pair of them.

(With each bushfire several hundred of them would be flushed out and shown on the TV news screens, leaving me if not others to wonder how and why they needed to live like that. The answer, one presumed, was that it was to satisfy egos, organise home parties and impress friends.)

In Continental Europe people could rely more on the attributes of class, religious, education, professional rank or family for status and identity – areas where spending demands were more limited.

In north Europe, Germany especially, there was also the Protestant-ethic frugality factor at work, pushing savings levels closer to the Japanese level – yet another Japanese-German similarity.

Meanwhile Japan was even more conspicuous for its lack of big-ticket, life-style spending.

True there were occasional spending fevers, manly on fashion goods and mainly by young women who lacked other forms of identity, corporate identity especially.

But none of this small-ticket spending even began to add up to the demand-stimulating effects needed to move an economy.   Expensive country houses, yachts and golf courses were much more effective.

Curiously, conspicuous yacht owning in Japan, an allegedly maritime nation, is close to zero.The besso, or country house, was the preferred form of countryside leisure and entertainment.

Boom periods would often see yet another rush to develop besso resorts. But many would be left to gather weeds and rubbish until the next boom came along.

And by that time few would be interested in the former abandoned developments anyway.

6. The Self-Standing Bicycle 

But that raised another problem.

For if the lack of demand problem had been around since the early seventies, why in that case did we have to wait till the mid-nineties for the Japanese bicycle to begin to topple?

What was holding it up in the intervening two decades?

The short answer: exports, oil shocks, and mini-bubbles.

With Sydney friend Pawl Denton at Nakadaki