Sunday, March 22, 2009

Conventional Wisdom Watch: The Failure of Japan’s Export-Oriented Economic Strategy

The latest piece of conventional wisdom that has been coming down the pike is that Japan must drop her export-oriented economic ways and increase domestic consumption in order to have any hopes of avoiding a national catastrophe in the face of the global financial/economic crisis. Now there’s a certain arithmetical truth to this line of thinking and I have a lot of respect for the people who had been warning us all the while of the risks inherent in what turned out to be a five-year export-reliant recovery. But I want some value-added from the Johnny-Come-Latelies, the people who are discovering post facto the follies of Japan’s export-dependent economic strategy (assuming there is someone/are people who answers/answer to the name of Japan to whom a “strategy” can be ascribed), a plausible proposal to raise Japan’s marginal collective propensity to consume. And if their answer is “a better safety net”, they have to explain why the United States, with arguably the worst social safety net in the OECD, had managed to live beyond its means for decades before the house of cards came crashing down. They also have to explain why a high external savings rate is wrong for country that is likely to go into a long period of structural external deficits in the not-too-distant historical future. There’s immigration, but do they think we haven’t heard about that already? My aunt is not going to grow wheels any time soon.

No, I didn’t see this coming either, though I had wondered out loud seven years ago how long the U.S. economy could hold itself up by building yet more homes. (Ask the people who were there at JETRO NY if you don’t believe me.) But, like Greenspan, I’d lost my sense of unease over the “irrational exuberance” when everything kept going up—that is, until the current crisis gave me a painful reminder. Incidentally, two other countries have had just as rough a fourth quarter in 2008 as Japan—Brazil and South Korea. The latter is even emulating Japan’s high suicide rates. Go figure.

Next up on Conventional Wisdom Watch: Japan’s Two-Tier Economy, tomorrow, hopefully, after I get over a hangover.


Ross said...

I don't think this is the latest CW. This one has been around for a long time. The external orientation of Japan's economy has real costs and risks but accepting those are Japan's choice. Same for China.

With global demand in decline Japan can choose to wait for external demand to again lift all boats. But that will take time. A long time. US consumption won't rise again soon. And neither will Europe's.

As for this "Japan" to whom a unified strategy has been linked, try looking at the $1 tn or so in foreign reserves. Sell the excess there off. It would strengthen the yen which is good for Japanese consumers, and it would push inflation, also much needed. Plus, it would generate demand that the rest of the world be grateful for. Take the lead. Any objections to that?

I agree with you on the safety net issue. That argument has always been shot through with holes.

Last, I can't imagine how anybody did not see the US housing market implosion coming. It was visible in west LA by 2002 and painfully obvious by 2004 across southern California. And that bubble drove so much recent consumption.

Now, knowing there was a housing bubble is very different from knowing that all those smart guys in investment banks would not only hold onto the questionable loans but would borrow in all sorts of foolish ways to lever up on them. I didn't think they were that insane. I figured the losses would be spread more widely across the range of financial asset holders. I got that wrong. I guess there weren't that many fools.

Janne Morén said...

I think that perhaps "safety net" is the wrong word; "sense of future security" is probably a better term. And stated that way, USA has offered it as well, though in the form of opportunity and flexibility rather than security - losing your job is/was not a big deal when the next one would be right around the corner. Denmark has been moving in that direction as well.

Of course, the expansion of consumption in the US has been built on shaky foundations; it has been a bubble and the question now is just how much that bubble will deflate. The large rate of consumption in the US may be not so much a repudiation of safety as a motivator as much as an illustration that you can't consume beyond your means indefinitely.

But also, I wonder just how cautious a consumer Japan really is. Are the Japanese really consuming less than, say, the OECD average, adjusted for income? Is that an actual fact, or another piece of conventional wisdom without solid data to back it up?

Jun Okumura said...

Ross is right. It’s actually an old saw that is being given new currency. Now I don’t want to see us end up with lots of unproductive concrete and an unretooled economy when it’s all over. So, if I had absolute power over Japan, I would wait it out until the global consumption map reorders itself into a more sustainable pattern, while borrowing/printing money to ensure that everyone is fed, clothed and sheltered and have their healthcare needs taken care of. Education is another area that can use more resources. This maintains social stability and is mainly about money that goes in and out of individual pockets quickly, and any infrastructure that this spending leaves behind is likely to be more useful to future generations than your generic piece of public works. If all this means that we have to make do in the short-term at a few GDP percentage points below what more spending on hardware will generate, so be it. But I’m not the one calling the shots, so I’ll leave it at that.

That brings us to the next question: How do we raise the money? Now Japanese (and Chinese) reserves, are essentially state-run carry trade operations (unlike the sizeable petroleum state reserves, which are essentially piggy banks). What Ross is suggesting is that the Japanese government sell off some of those foreign currency assets≑U.S. T-bills and, instead of paying down the short-term yen loans that financed those purchases, use the money to finance the budget deficit. Which begs the question: Do I want to finance more government borrowing in a way that could produce an international run on dollar-denominated debt instruments, while putting the hard-hit part of the Japanese economy under further stress? Frankly, government scrip is looking more attractive every day.

As for the bubble, I remember a fairly well-known economist—a Republican—telling me in private—this was in late 2002—that Greenspan would keep easy money going long enough to float the U.S. economy in time for the 2004 election. So there were also other people who saw the artifice behind the extended housing boom. But when something goes on for a while, people stop paying attention, I guess.

I see Janne’s point about flexibility taking the place of security in the United States, but job prospects in post-1979 China has looked pretty flexible to me and they’ve been saving like mad. There’s too much storytelling and too little hard reasoning going on here.

And if I remember correctly, Japanese post-WW II household savings have been high, but has been falling in recent years. You should be able to mine the data from Japanese government websites. The OECD is likely to have comparative data.

Per said...

I think Janne makes a good point about the need for a safety net. The US has a growing population and everybody have expected it to continue beeing the economic powerhouse of the world. In other words, opportunities was expected to abound, and safety net was not an issue. Japanese has a decreasing and aging population, economic decline is expected. In such a situation, social safety net is equired to keep some hope in the future. As for Denmarks case, what you have is a combination of flexibility that provides new opportunities, and a social safety net. That is maybe the way for Japan as well (and it might even be good ide for the US in the current situation, a good safety net actually improves the flexibility of the labour market).

Jun Okumura said...

I see your point, Per, and I’m tempted to agree with you. Then I see Canada, which is in many ways culturally and demographically similar to the United States but has a more comprehensive safety net, but whose people have never been accused of spending like their cousins to the south.

Per said...

Well, I don't think a safety net is going to make Japanese spend as the Americans have done the last years. Neither have the Danes. That the American spending over the last years has been based on a bubble and unrealistic optimism is without doubt. In addition, the global financial dependence on dollars has enabled it (Canada never had this). None of this exits in Japan.

I guess the point should be to get people to spend more appropriately, not to wallow in debt. A more level playing field and social safety net could make people of modest means able to spend a little more, rather than the pattern of luxury spending in Tokyo and nothing outside that we have seen over the last years.

Janne Morén said...

I think mine (and Per's) point basically is that comparing Japans with US' consumption is flawed since US has indeed been spending beyond their means for a number of years. Due to a series of bubbles inflating the perceived current and future earnings - and in the end due to a form of personal-economy "irrational exuberance". It's not the Chinese and Canadians saving more than would be rational; it's the Americans saving less. They're an outlier, and not a good basis for comparison.

Ross said...

"Do I want to finance more government borrowing in a way that could produce an international run on dollar-denominated debt instruments, while putting the hard-hit part of the Japanese economy under further stress?"

US debt is now significantly overvalued. Tokyo could ease out and make a great deal of money. And the dollar has strenthened in the face of the implosion of domestic US consumption so the fear of a run is not significant. But even if there was one Japan could pile back in and make another bundle. (And anyway, the run on the dollar is the eventual, near inevitable result of the large public and private deficits in the US over decades.)

The hard-hit part of the Japanese economy has had plenty of time to adjust to the eventual fall in the value of the dollar. It seems to me they don't expect to have to adjust. They think the government will come to their aid. Can you say moral hazard? (Japan will have to get used to a much weaker dollar at some point, or just hand over lots more cash to Americans as Beijing has done.)

Finally, there is no need to continue pouring concrete everywhere. Japan's problem is that labor gets a relatively small share of national income. Shift that and you move the world. Try enforcing overtime payments with serious overtime pay. Then either more Japanese have more money or more Japanese have evenings off (as businesses have to figure out how to use those workers more efficiently). Either way private consumption rises.

Jun Okumura said...

Sorry, no time tonight to do justice to the most recent comments. My bad.

Jun Okumura said...

Per, Janne: I also intuit that a better healthcare system and a more generous income supplement will better incentivize people to save less and spend more. But it will also incentivize them to choose leisure over work, leaving them with less to save—but maybe that’s just me :) Seriously, it’s easy to look at a nation’s savings rate at any given point in time and find ex post facto reasons why it should be just so. The trick is in finding an explanation that is consistent across borders and over time. I’m not making the claim that conventional wisdom doesn’t fit the Japanese case; I’m merely making the much weaker case that it remains to be proven and that the people who repeat it are consequently not even wrong..

Ross: Yes, MOF could make a lot of money for the Japanese government easing its way out from under the weight of all those T-Bills. The trick is to do it before China, petro-states and any other holders of large amounts of dollar-denominated assets catch wind of our actions. Otherwise, we’ll not only create a global run on dollar-denominated assets, we’ll have to string up the people who dreamed up the exit strategy in the first place, blaming them for the short-term overcorrection and the write-off on all the T-Bills we never managed to sell off before the sh!t hit the fan. Speaking of sh!t, Is there a top Japanese bureaucrat or political leader willing to go down for this on behalf of the rest of us? It looks like America has Japan up the creek w.o. a paddle. China, Japan… is this a Bizarroworld version of the collective action problem or what?

I know too little about “the hardest hit part of the Japanese economy” to formulate a response to that part of your comment.

As for my concrete riff, your explanation indicates that we’re more or less on the same page—give money directly to the people who need it most. I don’t think it’s predominantly an enforcement issue though. That rarely works by itself. I think that your idea requires an overhaul of the labor laws and regulation and may actually be unnecessary once other reforms are instituted.