Japan’s fiscal and monetary boosts yield little

Over the last twenty three years Japan has tried stimulus after stimulus in a desperate bid to get back to the pre 1990 growth rates. Nothing has succeeded.

As a result Japan has gone from having a relatively low debt and deficit, to having the largest public debt as a proportion of GDP of all advanced countries. Japanese public sector debt is now over $12 trillion, and more than 230% of GDP. Money has been borrowed to boost current public spending, and to provide investment stimulus through large public capital projects.

Nor has Japan spared the monetary stimulus as well. Japan has tried liberal amounts of Quantitative easing, has run interest rates close to zero for most of the time, and has made clear it would prefer inflation to deflation. The latest programme of bond buying is just a larger version of what has gone before.

So why hasn’t the Japanese economy taken off? Crude Keynsian reflationists would predict that with this much fiscal and monetary stimulus combined the economy should be in overdrive. Some would accept that the extreme bubble created in the 1980s posed big problems whilst asset prices adjusted, and would agree that the banks remained broken by falling asset values and damaged loans for a long time. In retrospect maybe a sharper crash and more drastic bank write offs and recapitalisations might have speeded up the adjustment and the eventual recovery.

This to me is only part of the story. At about the same time as Japan’s bubble burst something else important happened. The Japanese model of incremental innovation in cars and consumer electricals and electronics which had spwaned a series of world beating companies suddenly met its match from competition elsewhere. The Japanese excellence at making things was copied by the US and Europe, adopting the Toyota type manufacturing systems. The US launched the digital revolution, which Japan found difficult to adopt and develop. Later, China and other Asian centres emerged capable of undermining Japanese competitiveness still further.

The truth is Japan’s era of supremacy making the world’s most competitive cars, tvs,cameras and the rest was undermined both by new products and services she did not develop, and by cheaper competition for the products she does still make. Japan needs a new industry or two and more world beating companies.

Commentators always think there is a simple monetary or budgetary fix. In the end earning a good living in a competitive world comes down to having better goods and services. Japan has lost her edge. In the UK the decline of finance and oil and gas, our two high value added lead sectors of the 90s and noughties, is the background to our current sluggish GDP performance. Spending a bit more in the public sector does not fix this, as Japan shows.

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60 Comments

  1. Posted April 23, 2013 at 5:18 am | Permalink

    “Spending a bit more in the public sector does not fix this, as Japan shows.”

    Not only that but this is the main cause of the failure to be able to compete. If governments are over taxing and wasting it on endless nonsense, like the renewable religion, HS2, pointless wars, the Olympics, expensive & conflicting multi-layer government, and countless other waste, then less is available to invest in things that produces a real return. Fewer things will actually make a real returntoo if government is destroying confidence, taxing and regulating things out of business.

    Confidence to invest has been destroyed too. Cameron, the EU (and the vision of the two Eds in two years) has destroyed confidence very effectively indeed. The IHT and EU ratting and Cameron’s tax borrow and tip down the drain is the clear source of the problem. Not helped by the dis-functional NHS, the poor education system, absurd regulatory systems, expensive and slow legal system and a lack of any sensible banking.

    • Posted April 23, 2013 at 4:44 pm | Permalink

      Corret. Wasteful investment doesn’t generate growth. Perhaps we should make some allowance for the destruction of capital from Japan’s frequent earthquakes: they’ve had around 20 significant ones since 1990.

      • Posted April 25, 2013 at 12:09 pm | Permalink

        Indeed and declining population. Nevertheless borrowing money to do daft and uneconomic things, quack greenery, propoganda, HS2, PIGIS loans, the EU, the Olympics, pointless wars ………. is not the way to prosperity. Nor are mad green subsidies over regulation, daft employment laws and a huge state sector that is mainly parasitic.

        As Cameron’s governments is showing in spades.

  2. Posted April 23, 2013 at 5:27 am | Permalink

    Correct, you do not stay in the lead for long in this World.

    Japan copied the wests products, added improvements and used cheaper labour (at the time) and robots.
    Now others have copied the Japanese, used cheaper labour, but the goods in many cases are not as good, but still deemed good enough by the masses, because they are cheap.

    What goes around comes around.

    Whilst the lovers of cutting edge technology say this will keep us ahead, it is only partly true, as cutting edge technology does not employ millions of people.

    Yes I know Germany is the exception……at the monent……. but for how long ?

    Many western Companies now only survive because they out source manufacturing to lower cost areas abroad.

    • Posted April 23, 2013 at 7:39 am | Permalink

      Germany has been helped by its membership of the euro, providing access to EZ markets without the currency appreciation risk it faced if it had retained the DM. This is the German dilemma – does it now share the costs of EZ membership or exit the EZ and risk the inevitable appreciation of a new DM. You can see why German politicians are keen to keep kicking the can down the road.

    • Posted April 23, 2013 at 5:55 pm | Permalink

      Japan copied the wests products, added improvements and used cheaper labour (at the time) and robots.

      Japan’s products were popular because they were higher quality, not cheaper. For example at a time when the price of oil was rising quickly Japanese cars were preferred because they were more fuel efficient than their American counterparts.

      Whilst the lovers of cutting edge technology say this will keep us ahead, it is only partly true, as cutting edge technology does not employ millions of people.

      The pharmaceutical industry is constantly producing new products and they employ millions of people. Any industry that requires high level of research, development, and testing will employ millions of people.

      Yes I know Germany is the exception……at the monent……. but for how long ?

      Germany isn’t an exception. Any country that wishes to produce high quality products requires a highly trained and well paid workforce to produce them.

      Many western Companies now only survive because they out source manufacturing to lower cost areas abroad.

      What is your point? As long as these companies in low cost countries are incapable of creating new products they will remain dependent on work coming from Western companies.

      Your whole post is a catalogue of error that shows a lack of understanding regarding how countries that produce high quality products are able to compete with countries that produce cheaper knock-offs.

      • Posted April 24, 2013 at 4:36 pm | Permalink

        unamine5

        Think you should read my post again Uni as you seem to read between the lines not tha actual words.

        First point, I stated that they Copied and IMPROVED products, SO YOU SEEM TO AGREE WITH THAT ONE.

        Second point.
        You suggest that the Pharmaceutical industry employes millions.
        Exactly how many millions of people do you think are employed by them in the UK ?

        Point three.
        You say Germqany is not an exception, really who else in the EU has a better manufacturing industry, indeed how many other countries in the World are better.?

        Point four.It is a known fact that many western businesses outsouce manufacturing to so called third world countries because it is too expensive for them to be made in the West.
        You really must have you head in the sand if you do not recognise this fact.

        Having worked for a couple of major motor manufacturing PLCs for more than a decade, had many years of experience in the construction industry, some again with a worldwide PLC, I think I have a very good idea of what is going on, as I have seen the affects at first hand over the last 50 years.

        Your experienece is exactly in what ?

  3. Posted April 23, 2013 at 5:44 am | Permalink

    John, You are certainly right about there being no simple (or complex for that matter) monetary or budgetary fix. Japan (and Germany) started from low bases after WWII and did not have the burden of what had gone before to worry about. Also they made some correct and far-reaching real decisions in the real world that made a lot of difference. One of the simplest was to concentrate on small cars instead of our Rolls Royces and the “boats” that America used to make, that won’t fit in to car parking spaces. And of course they put huge effort in to copying anything worthwhile that moved anywhere in the World. Further “stimulus” in this context just gives employment to economists without whom we would be much better off. What exactly would happen, except fewer bad headlines and less demotivating self-depreciation, if we stopped talking about the useless GDP numbers–numbers that could not care less whether what they include is useful or not?

  4. Posted April 23, 2013 at 5:55 am | Permalink

    Yes and you need to consider the demographics too. At the moment adult nappy sales outstrip the sale of baby ones, so who is going to keep underwriting the government’s bills if Mrs Wanatabe is cashing in her JGBs to fund her retirement (its extremely rare for the average Japanese to have exposure to shares) It’s their own fault if they do not want to open their gates to immigration to replenish the pool of taxpayers. (contrasts open approach to migration of UK with very restrictive Japanese approach-ed)

  5. Posted April 23, 2013 at 5:59 am | Permalink

    I have just read that the Archbishop of Canterbury has said that……..

    ……..[the banks] had made two “slightly unsophisticated” errors……which were to “borrow short and lend long” and to lend “very, very large amounts of money to people who could not pay them back”.

    These are two of the stupidest and naive comments I have ever read, without exception. Banks necessarily have to borrow short (it’s called taking deposits and running demand current accounts, and borrowers don’t want to have to repay short term else there would be no point in borrowing in the first place). And I thought the pressure was on these days for banks to lend independently of whether borrowers are credit-worthy (in the prevailing economic climate) or not.

    Reply I went to hear him and also was surprised that a member of the banking commission does not understand that a bank’s business is based on borrowing short and lending longer.

    • Posted April 23, 2013 at 7:22 am | Permalink

      Indeed, but one would never expect much sense bishops, even if they do have interesting purple robes and hats to wear and impressive building to speak in.

      The main point of a normal bank is to be a buffer between short term depositors and longer term borrowers and to spread the risks. Otherwise why have a middle man and his large margins at all.

      Then again with many banks as hopeless and expensive as they are now, then why have the middle man anyway?

      • Posted April 23, 2013 at 10:14 am | Permalink

        Off-topic I know, but it was amusing to see our Old Etonian Archbishop of Canterbury lecturing our Old Etonian Prime Minister about poverty the other day.

    • Posted April 23, 2013 at 9:14 am | Permalink

      The Archbishop should read this website so as to inform himself on economic matters, if he is going to comment on them. If he is reading this and looking for anoher time-saving recommendation, I suggest Allistair Heath’s daily comment in Cityam.com. It could be he does read this site, as I hear he picked up on the idea of a break-up of (at least one) bank. He hasn’t quite understood it though as he wants a bank broken up into regional lenders. What we need is a break-up which recognises balance sheet losses and restructures the market so there is competition. Regional oligopolies wont help.

    • Posted April 23, 2013 at 10:05 am | Permalink

      Comment on Reply–Perhaps the Archbishop wants the banks always to lend on overdraft (repayable on demand and at will) which would shorten their lending OK but cause the public to hate them even more. And while we are at it, again according to the Archbishop, perhaps banks should always take security, in particular a debenture (fixed and floating charges) because that would certainly make lending safer. Totally uninformed twaddle.

    • Posted April 23, 2013 at 6:02 pm | Permalink

      The problem with borrowing short and lending long is that you may run out of capital if you can’t continue borrowing short.

      Lending large amounts of money to people who couldn’t pay if back was a major cause of the 2008 financial crash, so I’m not sure why you’re criticising this. other major causes involved being entirely reliant on turning mortgages into assets that could be sold to investors and owning too many of these assets.

      • Posted April 24, 2013 at 9:47 am | Permalink

        unanime–Yes lending long and borrowing short has its (very well known) problems and concerns but as ever what’s your solution? Knowing your communistic dreams I imagine you favour loans funded by unlimited taxpayer funding perhaps with lending to the workers never having to be repaid and why not negative interest rates while we are it so they have money in their pockets as is their human right and which can be spent to crank up demand blah blah. You may indeed get the tax payer more involved what with the Government’s ill-conceived rather naive funding schemes.

    • Posted April 23, 2013 at 11:49 pm | Permalink

      I understood that banks create money out of thin air to lend to borrowers with interest added. This accounting for 97% of our money creation.

      Some argue cash deposits are found to balance allowed ratio’s, after, not before the loans are made.

  6. Posted April 23, 2013 at 6:12 am | Permalink

    Maintaining ultra-low interest rates for year after year didn’t help the Japanese economy shake off its torpor either. Another lesson that Mr Carney needs to take on board.

  7. Posted April 23, 2013 at 6:23 am | Permalink

    Japan has been wrecked bu government. It happened to the Soviet Bloc in the past and is happening to the US, the EU and the UK now. Japan has maxed every credit card it possesses, taken out mortgage after mortgage and spent money like a drunken sailor in a red light district and the result is stagnation and suffocation by government. They are number one when it comes to debt as a proportion of the economy.
    Guess who is number two. —————-Us.

    • Posted April 23, 2013 at 12:19 pm | Permalink

      Our debt is supposedly around £1 trillion.

      Japan’s is around £8 trillion (converted).

      Their population is around 127 million and falling whilst ours is (according to some estimates) 70-75 million and rising.

      The worrying thing is that with figures such as these, some may be looking at the situation in Japan and believing that we still have plenty of “wriggle room” before the messy stuff really hits the fan.

      Action needs to be taken yesterday.

  8. Posted April 23, 2013 at 6:37 am | Permalink

    I think you have hit the nail on the head.
    We are kidding ourselves if we think our education system is world class and unless we fix it we are doomed to the same fate as Japan. There is no quick fix to the UK’s woes. We need to change the business environment dramatically to favour entrepreneurs.

    Labour quick fix via a Keynsian approach just wont work they are living in the past.

    • Posted April 23, 2013 at 6:06 pm | Permalink

      Given that Japan’s problems aren’t cause by its education system changing the UK’s education system won’t prevent the UK becoming like Japan.

  9. Posted April 23, 2013 at 6:45 am | Permalink

    “Spending a bit more in the public sector does not fix this.”

    For the life of me I cannot understand why any adult would think otherwise.

    • Posted April 23, 2013 at 7:26 am | Permalink

      Perhaps because they are spending tax payer’s money on themselves, their friends or just buying votes with it?

    • Posted April 23, 2013 at 3:37 pm | Permalink

      In reality it tends to be the groups dependent on tax payers money i.e state sector employees, students brainwashed by tutors with long beards and sandals, those with a sense of benefit ‘entitlement’ and businesses that rely on grants/tax funding that tend to lean this way.

      Half the country?

  10. Posted April 23, 2013 at 6:56 am | Permalink

    Britain is different to Japan in that we have a booming population. Schools, hospitals and transport are becomimg more overcrowded.

    Extra spending in the public sector may be necessary just to stand still.

    • Posted April 23, 2013 at 8:30 am | Permalink

      Extra spending in the public sector!!??

      We are already borrowing £150 billion a year to pay for the current public sector.

      We are already in debt to the tune of a TRILLION pounds.

      We already pay sixty, thousand, million pounds in debt interest.

      Where is the money to come from to spend ‘in the public sector’.

      No! No! and thrice No! If we spend money it must be on things that make our economy more globally competitive. We can afford no more Diversity Co-ordinators and their ilk.

      • Posted April 23, 2013 at 6:08 pm | Permalink

        Without more doctors, nurses, hospitals, teachers, schools, police officers, courts, etc the UK’s infrastructure will collapse. As long as the population continues to increase state spending will have to increase as well.

        • Posted April 24, 2013 at 3:24 pm | Permalink

          Given that you regularly tell us that the several hundred thousand new citizens who arrive here each year are all making a valuable contributions to the economy and are therefore paying lots of tax and NI into the Treasury then we ought to have plenty of money to pay for all these extra State employees you say we need as a result Uni.

      • Posted April 23, 2013 at 7:43 pm | Permalink

        MW – In which case we can’t even stand still.

        (I’m not arguing with you btw)

  11. Posted April 23, 2013 at 7:22 am | Permalink

    Most flowing entities move from the particular to the general or are in a cycle whereby a particular is taken from the general only to commence again. It is destroy and rebuild.
    I for one don’t think there is any quick fix as there has to be an element of sustenance as well as a spark to ignite a new development. This is why negative competition does not work. A new company or venture is commenced with outlay ,recruitment agencies getting large amounts of money ,staff , time , energy and along comes Joe Bloggs who feels threatened by the potential success of another and organises his lads to bring it down. The only thing these negative competitors understand is destruction and so their own companies usually fall in the same category. Healthy competition is where superior products are developed and sell well due to their newness and excellence and continue to grow until better takes over.
    We all have our own take on how we can make ourselves financially successful ….it is the ‘if only stance’ and so analyse our individual circumstance and attempt to contextualise it into the bigger picture, however we realise that there are many factors , variables, tensions and conflicts all counter to each other. There are no two poles in economics as far as I can understand and by comparing the likeness of one countries circumstances and how their economy has not worked I believe, but naivety may be preventing me fully understanding, is difficult to align.

  12. Posted April 23, 2013 at 7:43 am | Permalink

    Japan physically rebuilt its economy after World War2. For example Japan’s 1950s shipyards soon bankrupted Britain’s Victorian shipyards.

    By 1990 Japan had the older industries and was like Britain in the 1960s.

  13. Posted April 23, 2013 at 8:08 am | Permalink

    Japan excelled while it had a powerful comparative advantage, remained very adaptable to the needs of its export markets and rebuilt its reputation as a maker of reliable products. (Toyotas first post WW2 exports to the USA were extremely unreliable – they went away, learned the lessons and returned to be very successful). But there are limits to the scope for exporting mass produced products – importing countries want them built in their own backyard to provide jobs and to correct an imbalance of trade. The global Japanese businesses therefore expanded manufacturing operations outside Japan to fuel their growth.

    Today China is in the position once held by Japan – a formidable exporter accumulating a huge balance of payments surplus (most of it, it seems, with the USA). China is different in that it is more than ready to accept foreign imports, but in return China too is insisting that importers set up operations in China. This is especially true of the motor industry where all the major manufacturers are, effectively, required to set up operations if they want to continue to export to and operate in China. JLR is the latest example – spurred on by the fact there are limits to the profits it can remit from China; these are being reinvested in a new joint venture factory in China. So far China has been fairly successful in holding the value of the renminbi down versus the US$ – but I have a sneaking suspicion that part of the reason for the US QE programme is a deliberate attempt to devalue the $. Over the next years, no doubt, the pendulum will have swung the balance of comparative advantage once again.

    If you want an economy based on sustainable exports, you need to think very carefully about how you attempt to nurture that outcome. It seems to me that is better left to the entrepreneurs and businesses; ministers and civil servants do not exist to “pick winners” but to create an environment in which businesses can flourish. They should stick to the job for which they exist, not for poking their noses into everyone else`s business.

  14. Posted April 23, 2013 at 8:13 am | Permalink

    The big mistake Japan made was in 1994; listening to the conservative Chicago school economists, telling it a major austerity programme was needed to reduce the national debt. Since then those same economists have been predicting the collapse of the Japanese economy every year since; and it still ain’t happened. (90% of Japanese debt is owned by its own citizens).

    “You can bash public works all you want, but in this type of recession, where companies and individuals have stopped spending, government expenditures become absolutely essential … We need speed more than anything in responding to this crisis … Our unemployment rate never went above 5.5 percent … Public works was an extremely effective fiscal stimulus, even though a few projects were really stupid.” (HT Billy blog)

    “All the spending has made Japan’s infrastructure the envy of the world. It has a public transportation system that is unrivaled for convenience and ubiquity. Its fiber-optic broadband infrastructure enables the world’s fastest Internet connections, delivering more data at a lower cost than anywhere else. And not to mention that it largely avoided a major recession after its property market boom burst in the early 1990s and it kept its unemployment largely from rising during that period.” (HT Billy blog)

  15. Posted April 23, 2013 at 8:21 am | Permalink

    Now you’re talking. This makes perfect sense. We have to stop copying the daft Japanese monetary policies here, before we lose 2 or more decades of economic growth.

    The difference between us and Japan, is that they started off their monetarist/Keynesian experiment nearly 25 years ago debt free with a monster manufacturing sector, we start mired in debt with a monster financial sector..We won’t make 2 decades, we will be economically finished long before then.

  16. Posted April 23, 2013 at 8:30 am | Permalink

    How on Earth does a country get to the stage where it is $12 trillion in debt? At what point does a country stop and think “This isn’t working?”

    According to figures I have here, Japan has a population of just under 128million so I make that a debt per person of just under $100k.

    If public spending is an attempt to enrich the people then this is clearly not working – the establishment has somehow managed to place every one of its citizens more in hock than they could ever have managed by themselves.

    Unbelievably irresponsible.

  17. Posted April 23, 2013 at 8:54 am | Permalink

    Just heard Osborne’s speech on Scotland’s monetary options on independence.

    He talks of all fractional reserve, fiat currency options, but fails to mention once Scotland adopting a new gold backed, sound currency. Under a sound currency ,Scotland would attract so much capital from a world buffeted by wild currency speculation, that it would not even need North Sea Oil. Of course, the unsaid subtext of Osborne’s speech was oil.

    Reply Mr Salmond has ruled out a new Scottish currency and is apparently now against joining the Euro.

    • Posted April 23, 2013 at 12:32 pm | Permalink

      Unfortunately, there is not enough gold to back such a currency, with the consequence that gold is liable to bubbles. That is not a sound basis for an economy.

      • Posted April 23, 2013 at 5:05 pm | Permalink

        If Scotland is not going to adopt its own currency , then my point is moot.

        BTW : gold is not rationed by weight but by value, and there is no upper limit to value.

    • Posted April 23, 2013 at 1:33 pm | Permalink

      If an independent Scotland foolishly decided to go down that road it would first have to get itself enough gold to convince the world that its currency was solidly backed by gold.

      As I pointed out recently, even if Gordon Brown hadn’t sold off more than half of our gold at very low prices then even at current bubble prices its value would be equivalent to only about a week’s GDP, and if the UK government wanted to hold gold reserves with a current value equivalent to a year’s economic production then it would have to acquire nearly a third of all the gold ever mined.

      Assuming a split of the UK reserves between Scotland and the rest of the UK close to that of either population or GDP, the same kind of considerations would apply to Scotland after independence.

    • Posted April 24, 2013 at 12:01 am | Permalink

      What’s the recent history of countries which have moved away from gold constrained / backed currencies?

    • Posted April 24, 2013 at 8:30 am | Permalink

      There is a viable option for an independent Scotland, with low taxes, small govt and a hard currency. It could have a free trade zone with the UK, and perhaps even join NAFTA and do a Switzerland type deal with the EU. But I doubt there’s a majority for that in Scotland given voting patterns the last 50 years. So they’ll go for high taxes, big govt, subsidies from wherever they can be got. Seeing that the population will vote to stay in the UK.

  18. Posted April 23, 2013 at 9:16 am | Permalink

    It would be good to hear from a ‘Keynesian’ economist blogging on this website as to why borrowing and spending and QE has’t worked in Japan these last 20 years.

    • Posted April 23, 2013 at 1:46 pm | Permalink

      It works for the political elite. Allows the show to keep going, printing to pay its own bills, even when the tax take is falling…

    • Posted April 23, 2013 at 6:12 pm | Permalink

      It would be good to hear a neoconservative explaining why low taxes in the USA didn’t improve the US economy.

      • Posted April 24, 2013 at 8:32 am | Permalink

        What are you talking about?! The US with its relatively low taxes is among the most prosperous and competitive economists in the world. The tax cuts which took place eg under the Kennedy and Reagan administrations did boost growth.

        • Posted April 24, 2013 at 11:57 am | Permalink

          Firstly the US’s tax rates are comparable to the UK’s tax rates. US tax rates are not low by the standards of any developed country and are high compared to the tax rates in developing countries.

          Secondly tax cuts under George W Bush didn’t help the economy, which is why Obama cancelled them and increased taxes for the wealthy.

          • Posted April 24, 2013 at 3:27 pm | Permalink

            Uni,
            One minute you say USA tax rates are low, then in the next breath you say they are the same as the UK ie not low.
            Hilarious!

          • Posted April 24, 2013 at 7:00 pm | Permalink

            You are wrong as so often. Tax / GDP in the US is approx 10 % points below the UK’s and lower than any EU country. Only Switzerland (in Europe) is comparable. Low rates in the US such as 15% CGT are a huge incentive. Bush was a profligate president and Iraq was a major error. But his tax cuts led to increased receipts and the US is among the most entrepreneurial societies in the world.

            As ever the facts destroy the leftist argument. I note you had no response to my comment on the Kennedy and Reagan tax cuts.

  19. Posted April 23, 2013 at 11:07 am | Permalink

    To paraphrase Akio Morita, founder of Sony:
    Wealth is created by farmers when they grow crops, miners when they extract raw materials, and manufacturers when they transform raw materials to useful products.

    Other activities promote wealth creation to the extent that they enable or make more efficient these primary activities. They do not in and of themselves create wealth.

    Central bankers stumbling around in the dark with QE etc. only help if they enable wealth creating activities to proceed that would otherwise stall for lack of finance.

  20. Posted April 23, 2013 at 11:59 am | Permalink

    “Commentators always think there is a simple monetary or budgetary fix.”

    …and economists and politicians, in fact anybody with no understanding of how added value is created.

    Japan still has many world class businesses. Even in the field of IT, Fujitsu which absorbed ICL, Tony Benn’s brainchild, our putative contender to rival IBM, is a major player. It is perfectly true that the names that adorned our consumer electronic goods a generation ago are conspiculous by their relative absence in the newer consumer electronics technologies. However, Japanese businesses made decisions which transpired to be damaging for the country. Several of the larger companies owned banking subsidiaries thus becoming embroiled in the country’s asset bubbles. Too many consumer electronics companies competed with each other in producing essentially identical products, but all requiring unique investments in r & d, thereby mutually inhibiting each others’ profitability and growth. Both of these factors were in contradistinction to that of e.g. Samsung, one of several chaebols picked as winners by the South Korean government.

    Japan is also suffering to an extent from the same fiscal problem as the USA, which is that in order to maximize profitability in manufacturing, businesses offshore to China, but in doing so, they land the government with additional costs of supporting displaced workers. Of course, the higher the costs of support, the more taxed or indebted a nation becomes until local manufacturing becomes prohibitively expensive because of the burden of government, as in the UK.

    Japan, historically, fed off Chinese cultural and technological developments so there is no precedent for it to be significantly more advanced than its neighbours. In recent times, it simply had longer to recover from being devastated either by the USA or Bolshevism.

  21. Posted April 23, 2013 at 12:50 pm | Permalink

    The size of the debt:GDP ratio has been explained as being caused by government preferring borrowing to taxing – clearly the road to ruin (which would have been apparent but for domestic savers (including pension funds) investing in government bonds). This may be coming to an end as pension funds need to make payments to ageing population. 232 % GDP is clearly a catastrophe waiting to happen.
    Although Japan’s monetary base is smaller than US, UK & EZ the size of the increase may produce hyperinflation.
    Clearly economies are base on selling into the market & thus your analysis is right.

  22. Posted April 23, 2013 at 1:26 pm | Permalink

    You are quite right . Japan took its eye off the ball in its foreign markets . Having established its foothold with excellent innovative competitively priced products , it then failed to put in place the follow up organisation to monitor and control . By the time it realised what was happening , others – particularly Korea , jumped in . I am confident Japan will make it back , but , ten years is the likely time scale .

  23. Posted April 23, 2013 at 1:36 pm | Permalink

    The Welfare State is no longer viable – if it ever was? – and a complete revision of the nations purpose is required. Certainly ‘Defence of the Realm’ is a priority, but after that?. Surely the ability to feed and employ one’s citizens is a primary need and our efforts should be employed on that – the expansion of agriculture and the restoration of basic energy facilities as a starter. The rejection of the AGW scam and the development of a restored coal industry would boost our chances, and the switch of ex public employment from cost to profit columns would also make a good start.

  24. Posted April 23, 2013 at 1:57 pm | Permalink

    Japan previously had a very rapid increase in population and is now entering a phase of a declining and increasingly elderly population, and wisely it has declined to be sucked into the folly of supposing that problems with the dependency ratio can be permanently solved by allowing and encouraging mass immigration.

    I read that the working age population peaked around 1995, with that year’s census giving 87.17 million for the 15 – 64 age range, falling to 86.38 million by 2000 and expected to fall back to about the same size as in 1950 by 2050, while the total population has also peaked and is now declining.

  25. Posted April 23, 2013 at 3:31 pm | Permalink

    Your analysis in my view knocks the nail on the head. If you can’t produce something to the required quality, cost and timescale in adequate quantities then you need to look at what others are doing and work out where you are going wrong – it really should be that simple

    This is why I have never understood the Keynesian economic approach by left wing economic experts and politicians (I wonder how many Treasury or wanabee treasury staff read this blog?) I can see how printing and borrowing money and building something might help slightly very short term but in reality can never be a long term answer.

    We are told that the Olympics added to ‘growth’ but its also added to debt and left a hangover – if large public spending projects worked as well as we are told by the BBC and Labour party, we surely would all be rich by now and Japan would have also cleared its debts.

    Its interesting to note Germany’s success though. Their business environment has so much red tape and everything is so expensive that I am sure (I have had friends do this) if you set up a new business most people quickly become crippled. I guess they are be kept going by large scale manufacturing like trains and motor vehicles which others have not been able to replicate.

    I can see how the likes of South Korea can make small electrical goods cheaper than Japan but the challenge in large scale manufacturing is a different ball game – that is also evidenced in the excellent cars the likes of Honda and Toyota make which China so far has been unable to replicate.

    This all leads us to wonder where we are all going. We know the EU won’t change until its forced to once they have made everyone bankrupt, we see the USA going in a state dependent direction and the UK? – I suppose a lot depends on whether we get saddled with the 2 Eds in 2015 – then its back to the 70s

  26. Posted April 23, 2013 at 3:40 pm | Permalink

    Crude Keynsian reflationists would predict that with this much fiscal and monetary stimulus combined the economy should be in overdrive.

    Perhaps the problem is that it’s unclear what to invest in to make the economy grow. After all no one predicted how computers, mobile phones, and tablets would change society.

    Another possibility is that the industry is currently trying to improve itself to the point where it can outperform its competitors. For example Japanese car makers needed decades of protectionism and investment before they were capable of competing with American companies such as Ford.

    The Japanese excellence at making things was copied by the US and Europe, adopting the Toyota type manufacturing systems.

    While some things have been copied many things have not.

    1) Toyota is a type of company known as a keiretsu, which is basically a group of small suppliers that almost entirely provide parts for one company. This system of management hasn’t been copied by any of Japan’s competitors.

    2) In Japan it’s considered a good thing to have never takes a day off work (not even to go on holiday) and many Japanese employees consider working as important as their personal life. This occurs mainly because Japanese companies tend to offer jobs for life. Japan’s competitors’ haven’t been able to copy this because they can’t change their country’s culture.

    It’s probably for the best that other companies cannot copy everything Japan does as their employees tend to have very poor moral and some even work themselves to death (karoshi).

    The US launched the digital revolution, which Japan found difficult to adopt and develop.

    If Japan found it so difficult to adopt and develop why were companies such as Sega and Nintendo able to produce video games consoles throughout the 1980’s? Why were Sony able to make electronics?

    Later, China and other Asian centres emerged capable of undermining Japanese competitiveness still further.

    Here is a list of major South east Asian countries and their exports.

    China: electrical and other machinery, including data processing equipment, apparel, radio telephone handsets, textiles, integrated circuits.
    Indonesia: oil and gas, electrical appliances, plywood, textiles, rubber.
    Malaysia: semiconductors and electronic equipment, palm oil, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, chemicals, solar panels.
    Philipeans: semiconductors and electronic products, transport equipment, garments, copper products, petroleum products, coconut oil, fruits.
    South Korea: semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals.
    Taiwan: electronics, flat panels, machinery; metals; textiles, plastics, chemicals; optical, photographic, measuring, and medical instruments.

    Here is Japan’s main exports.

    Japan: motor vehicles 13.6%; semiconductors 6.2%; iron and steel products 5.5%; auto parts 4.6%; plastic materials 3.5%; power generating machinery 3.5%.

    So other than semiconductors the other South Asian nations and Japan don’t seem to be competing with each other.

    https://www.cia.gov/library/publications/the-world-factbook/wfbExt/region_eas.html

    • Posted April 23, 2013 at 4:36 pm | Permalink

      The truth is Japan’s era of supremacy making the world’s most competitive cars, tvs,cameras and the rest was undermined both by new products and services she did not develop, and by cheaper competition for the products she does still make. Japan needs a new industry or two and more world beating companies.

      This is more to do with the product life cycle than any sort of Japanese decline. According to the product life cycle new products are first made in developed countries for the wealthy, then made in developing countries for the general population of developed countries, and finally made in developed countries for the general population of the developed countries while the people in developed countries enjoy the latest innovation.

      Japan also remain competitive in various electronic markets. For example in the console market the only rival for the Japanese Nintendo Wii U and Sony Playstation 3 is American Xbox 360 by Microsoft.

  27. Posted April 23, 2013 at 11:01 pm | Permalink

    You can see how Japan has lost its edge with the expamples of Honda and Sony. Honda has failed to innovate in recent years and Samsung has trounced Sony. Sony is now on the way back with a new CEO but it has gone a long way down in quality.

  28. Posted April 24, 2013 at 2:13 pm | Permalink

    Japan would benefit from many years of severe fiscal consolidation and a couple of years of easy money. Japanese commercial banks have always been weak; the Japanese state pressured them into lending at low interest rates in order to help their industries build up market share in export markets. Japan has an elderly nation and innovation comes from the young; the adverse demographics won’t last for ever.

    We need to get things into perspective. Japan’s per capita income is still getting on for ten times that of China. We should be cautious of thinking that large federations like China and India are the wave of the future. Large populations help to create military might but the downside is limited internal cohesion (multiple languages, geography and climate).

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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