Economic Development of Japan

TRADE

YEN

OIL

No.11 Economic Maturity & Slowdown

Real GDP Growth (Fiscal Year April to March)

Average 1956-73 9.1%

Average 1974-90 4.2%

Average 1991-2010 0.9%

Source: The System of National Accounts site, Cabinet Office.

Growth Inflation (12-month change) MonetaryMonetary Growth andand Inflation (12-month change)
40% 30% 20% 10% 0% -10% -20%

P.187

M2+CD WPI CPI

1965Q1 1966Q1 1967Q1 1968Q1 1969Q1 1970Q1 1971Q1 1972Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1

Bubble Bretton Woods fixed dollar system ends 1st oil shock General float begins 2nd oil shock Bubble collapses

Plaza Agreement

Growth Slowdown in the 1970s-80s

Japans economic maturityincome reached the worlds highest level Oil shock and global stagflation General floating of major currencies
Catching Up: Real Per Capita GNP
(1995 dollars, conversion at actual exchange rate)
50000 40000 30000 20000 10000 0 1950 1955 1960 1965 1970 1975 1980
100 80

Per Capita Income at PPP (US=100, price-level adjusted)

US Japan

60 40 20

US W.Ger. France Japan UK Italy

1985 1990

1994
0 1955 1965 1975 1980

10582 12060 13046 15454 17310 18754 21392 23858 26744 28157 US Japan 776 1336 2127 3984 6962 11676 16486 15658 28912 40421

Speed of Catching Up: East Asia

Per capita real income relative to US
100% 90% 80% 70% Taiwan 60% 50% 40% 30% 20% 10% 0% S. Korea Malaysia Thailand Indonesia Philippines Vietnam China Japan Singapore Hong Kong

(Measured by the 1990 international Geary-Khamis dollars)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

2010

Latin America
Per capita real income relative to US
100% 90% 80% 70% Chile 60% 50% 40% 30% 20% 10% 0% Colombia Mexico Peru Urguay Venezuela Argentina Brazil

(Measured by the 1990 international Geary-Khamis dollars)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

2010

South Asia
Per capita real income relative to US
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% India Sri Lanka Pakistan Bangladesh

(Measured by the 1990 international Geary-Khamis dollars)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

2010

Africa
Per capita real income relative to US
100% 90% 80% Egypt 70% 60% 50% 40% 30% 20% 10% Uganda 0% Ghana Kenya Madagascar Nigeria South Africa Tanzania Tunisia Botswana Cote d'Ivoire

(Measured by the 1990 international Geary-Khamis dollars)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

2010

Zambia

Russia & Eastern Europe

Per capita real income relative to US
100% 90% 80% 70% 60% Hungary 50% Poland 40% Romania 30% Yugoslavia 20% 10% 0%

(Measured by the 1990 international Geary-Khamis dollars)

USSR Czeco'kia

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

2010

Productivity Slowdown
(estimated by labor-material Cobb-Douglas prod. func.)

Productivity Change by Industry (%/year)

Textiles

General machinery

Transport machinery

Food

Paper and pulp

Iron and steel

Ceramics etc.

Oil and gas

Chemicals

Electrical machinery

100 80 60 40 20

Japan (1969)

US (1972) (1997) chap.2 McKinnon-Ohno W. Germany (1973) France (1970) UK (1973) Italy (1969)

Income Distribution (Lorenz Curve)

OECD Economic Outlook, July 1976

Lowest 20%

--Postwar land reform --Agricultural subsidies (1955 Regime) --Labor migration to cities

Next 20%

Next 20%

Next 20%

Top 20%

Precision machinery

Wood products

Nonferrous metals

Metal products

12 10 8 6 4 2 0 -2 -4

1954-73 1974-90

Delayed Systemic Reform?

PP.190-91

After catch-up industrialization, Japan should have changed its system in the 1970s
Long-term relations Official intervention Open markets Private initiative

However, large macro shocks (oil shocks, floating, stagflation, trade disputes) diverted policy makers attention from structural issues. As a result, the Japanese economy continues to be over-regulated even today. Opposing view: Dont copy US financial capitalismstability, equity, patience, teamwork should be maintained.

The 1940 Regime: Farewell to the War Economy by Yukio Noguchi (1995)
I would like to advance the hypothesis that the key components of the Japanese economy today were created during the war. The 1940 Regime--(i) production-first; (ii) suppression of competition, (iii) social policies to reduce friction These alien systems were implanted to execute total war (enterprise system, finance, bureaucracy, land reform) and they continued as systemic core even after the war. They worked well for high growth, but not for coping with change. Deregulation and consumer-oriented society cannot be realized unless this regime is removed.

The Cause of 1970s Stagflation

Supply shock view
OPECs oil price hike was the main cause. Aggressive wage hikes also contributed. Expansionary fiscal & monetary policy accommodated and softened the blow.
P

PP.188-90
AS

AD Y
World Money Growth

Global monetarist view

As US lost monetary discipline, the fixed rate regime collapsed in 1971-73 and USD fell. 14 % 12 Major central banks expanded money to 10 counter appreciation pressure, causing global 8 liquidity glut in the early 1970s. 6 4 Oil shock was the result, not the cause, of 2 global inflation. 0
1960

1962

1964

1966

1968

1970

1972

Source: McKinnon (1979), p.264

1974

Mercantilist Pressure on Surplus Countries

Komiya (1994), McKinnon-Ohno (1997), McKinnon (2005) When a country emerges as a new industrial power, it is often criticized for unfair trade and undervalued currency. Trade and exchange pressures mount. But the trade gap cannot be eliminated by currency appreciation or trade liberalization.
Japan-US and China-US Bilateral Trade Balances
2.5 2.0 1.5 1.0 0.5 0.0 -0.5
China's trade surplus with US (US data) Japan's trade surplus with US (US data)

(In percent of US GDP)

Sum of two surpluses

Ronald McKinnon

55

60

65

70

75

80

85

90

95

00

05

10

PP.191-94

Elasticities Approach vs. Absorption Approach in Financially Open Economies

Conventional view (elasticities approach)
Exchange rate adjustment can reduce Japans trade surplus and US trade deficit.
Fred Bergsten, W. Cline (IIE, Washington) Krugmanthe Mass. Ave. Model: Imports = f (yt, rert-2) Friedman, Krugman daylight saving time argument for currency float

Our unconventional view (syndrome of the ever-higher yen)

Thanks to wrong economics and Washington lobbying, the yendollar rate is manipulated for mercantile purposes. But yen appreciation cannot reduce Japans surplus and US deficit, because they are structural (US savings < US investment). The real solution is increasing US savings. Current account = Y A = S I Intermittent yen appreciation only destabilizes the Japanese economy through recession, deflation and depressed interest rates.
1971-73, 1977-78, 1985-87, 1993-95 Japans surplus with US

American responses
Pressure to appreciate yen Bilateral trade negotiations Persistent trade gap

Reinforcement through failure

Exchange Rate Impacts Are Complex...

Subject to M-L condition & J-curve Relative price effect

Yen appreciation

Competitiveness

(+/?) (-)

Price channel

E
Engineered

Passthrough

Inflation

offset

Trade balance
Quantity channel

Reverse absorption effect

Absorption Monetary expansion

LM curve shifts

(-)

Endaka fukyo or high-yen induced recession

Japan-US and China-US Bilateral Trade Balances

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 55 60 65 70 75 80 85 90
China's trade surplus with US (US data) Japan's trade surplus with US (US data)

(In percent of US GDP)

Sum of two surpluses

95

00

05

10

--Countries with large F/X inflows often buy up USD to resist currency appreciation --However, having too much foreign reserves may cause: --Excess liquidity and bubbles --Unbalanced asset position --Exchange risk

USD billion 3000 2500 2000 1500 1000 500 0

International Reserves
China

Japan

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Original sin (inability to borrow in home currency) Developing countries that borrow in USD face exchange risks in trade and debt payments. This may lead to higher risk premium, higher interest rates, balance-sheet mismatches, and the possibility of currency crisis. Conflicted virtue (inability to lend in home currency) Any high-saving country that lends in USD faces (i) exchange risk on accumulated foreign assets, both private and public; and (ii) accusation of unfair trade and pressure to appreciate the currency by deficit countries (esp. US) If the leading economy (US) is the largest lender, this problem does not arise. In fact, it is now the largest borrower.

Uncovered interest parity: ijp = ius + E() + E() --expected dollar appreciation (negative) risk premium for holding dollar assets (negative) As more dollar assets are accumulated, the second component rises.
% 25.00
US Interest Rate Japan Interest Rate Yen/Dollar Exchange Rate Trend

Long-term Interest Rates (10-year Govt Bonds)

1000
357.68

20.00

15.00

118.48

100 10.00
7.80 7.14

4.72 1.63

5.00

Source: McKinnon (2007), originally IFS.

0.00 Jan-70

10 Jan-76 Jan-82 Jan-88 Jan-94 Jan-00 Jan-06

Exchange Rate, Log Scale

Interest Rates

Estimates of Japans Net Liquid International Asset Holdings

(% of GDP)
40% 30% 20% 10% 0% -10% Private Official
USD 1.17 trillion

Source: R. McKinnon, Japans Deflationary Hangover: The Syndrome of the Ever-Weaker Yen, April 2007.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

The 1955 Regime (LDP dominance)

P.178

The Liberal Democratic Party (LDP) formed in 1955, held power until 2009 (except 1993-96). Securing rural votes by subsidizing agriculture and building rural infrastructure (firmly established by PM Kakuei Tanaka 1972-74) LDP had many factions and zoku-giin groups (politicians promoting subsidies in particular fields) Opposition parties were too weak LDP to challenge LDPs rule. Reform movement inside LDP Factions & zoku-giin Koizumi reformhow successful? Other parties Abe, Fukuda, Aso: weak PMs

Democratic institution (Form)

Constitution Laws Parliament Election Court

Full democracy
US rule Showa2 2009
LDP dominance Lack of policy debate Military rises

1960

1945-51
Democratization New constitution

1931 Democracy
1937
Defeat

War Showa1

movement, Party cabinet

Male suffrage 1925

Taisho
Constitution 1889 Parliament

Fascism 1937-45 Edo Meiji

Political fights

Pure dictatorship

(Content)
Political competition

Reform vs conservatism, big vs small government, other policy debates