Before I left for Winter holidays, I gave the keynote address at the annual fundraiser for the Japanese Chamber of Commerce In New York. I reproduce below the text of my talk.
What Japan’s Lost Decade(s)
Can Teach the West
Thank you – it is a great pleasure for me to be here today. When I was approached to deliver this keynote address I readily accepted because I feel a great debt of gratitude toward Japan and the Japanese people.
Let me explain why. My wife Maarit and I lived in Japan for the better part of the year 1989. It was a very special time for us. Let me remind you what was going on during this period.
The bubble had not yet burst;
The Nikkei was over 38,000;
Emperor Akihito was about to take the Chrysanthemum throne;
The Yomiuri Giants had just won the Nippon World Series;
Chonofuji was the reigning Sumo champion.
And, most importantly for our family, the American law firm, Davis Polk, decided to send me to their Tokyo office.
Now for the lawyers in the room, you know that one of the many healthy aspects of Japanese society is that lawyers, while respected for their learning, are not exactly seen as productive members of the business establishment.
I was treated with great kindness and generosity, and Maarit and I were fortunate to be adopted by a circle of curious Japanese friends who took great pride in showing us the splendors of the country, from the smallest shrine in Tokyo to the giant Buddha in Kamakura, with Kyoto, Mt. Fuji, Nikkō, and other attractions thrown-in along the way.
We learned a great deal from our gracious hosts, as I did in all my business interactions then, and across the next two decades when I travelled frequently to Japan for my next employer, Reuters Group PLC. And it is this theme of learning from Japanese experience which I have chosen to make the core of my talk today.
After the financial bubble broke in Japan in 1989/1990, the country entered a challenging period of deleveraging, restructuring and adjustment to low growth and deflation. These have been called (mostly by western pundits), Japan’s “lost decades” – although I always found the term inaccurate and somewhat disparaging, since many of my Japanese friends continued to live well and enjoy the fruits of a prosperous and culturally rich nation. I will come back to this point later.
Nonetheless, the title stuck, so I adopt it today with a twist:
“What can the West Learn from Japan’s Lost Decade(s)”
Since Western Europe, and in all likelihood the US as well, has entered a period of prolonged low growth, low interest rates and low inflation or deflation, and all these countries must tackle challenging deleveragings, it seems to me they have much to learn from Japan.
Let me read you what one prominent economist has written:
“We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress [which characterized the nineteenth century] is over; that the rapid improvement in the standard of life is now going to slow down [at any rate in Great Britain]; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.”
[JM Keynes, 1930, Economic Possibilities for our Grandchildren]
The author was not talking of the EU, US or Japan today, but of the United Kingdom in 1930 – and it was the great economist JM Keynes.
So why do these great deleveragings/recessions repeat? First a little economic theory.
Deleveragings in a given economy occur when the level of debt to income exceeds an amount that can be serviced. Fortunately, for all of us, such events do not occur often – the collapse of the Weimar Republic in the 1920s; and the Great Depression of the 1930s in the US are prominent examples. Unfortunately, we have entered such a period again, as can be seen in Japan during the last two decades; in the US post 2008 and in the Southern tier of Europe today.
While these dramatic deleveragings occur only once a generation, the lesson of how to overcome them is reasonably well understood, even if not universally practiced. In general, there are four tools which can and should be used to restore the debt to income ratio of an economy.
2. Debt reduction (through default or agreed restructuring)
3. Wealth transfers from rich to less rich; and
4. Debt monetization
Since I’m not a trained economist, I will not go further into the theory, but turn instead to the experience in Japan.
While private sector debt has been reduced in Japan and the overall economic conditions have improved slightly, government borrowing and deflation have caused total debt to rise toward 500%. Thus Japan has remained stuck in a difficult deflationary deleveraging for some 20 years, with nominal growth (real GDP plus inflation, or in this case minus deflation) trailing nominal interest rates. What I believe is needed is a healthy dose of debt monetization – or the printing of money – to reflate the Japanese economy and begin to bring the debt to income level into balance.
This, perhaps, is the one lesson Japan could take from the actions of the US Fed under Ben Bernanke. And the decisive election on Sunday of Shinzo Abē, who campaigned on a platform of looser monetary policy and stimulative works projects, is an indication that this lesson is being applied.
But let me turn now to the more numerous lessons which the Japanese experience can teach the West.
1. First, I would list the importance of social harmony or at least social cohesion. Sadly, I saw this at work when I visited Japan in the weeks following the Tohoku earthquake and resulting Tsunami. I have always been impressed by the willingness of the Japanese people to unite for a collective goal.
2. Second, and closely related, a more narrow (some would say more equitable) distribution of income, education, healthcare and other core social goods. For example, the Gini coefficient for Japan averages about 10 points more favorable than the US across World Bank, UN and CIA measures.
3. Third, a savings culture which has largely internalized the national debt. While this dampens consumption and therefore income, it means the Japanese are not beholden to the debt-purchasing whims of foreign powers – unlike Greece, Spain and, indeed, the US.
4. Fourth, an advanced manufacturing base which has the power to compete globally while maintaining good jobs domestically. Modern Japan’s success here owes much to the historic cultural traits of Monozukuri (or making things) and Kaizen (continuous improvement).
5. Fifth, world class public infrastructure from Shinkansen bullet trains to bridges, ports and roads that support a very integrated supply chain.
6. And sixth, in my view, a more human and humane conception of the purpose of economic growth and its relationship with the common good of the nation and of the environment.
It is this last point I would like to develop a little bit further and then conclude with.
In a remarkably prescient article in the Fall 1995 edition of Foreign Affairs, Eisuke Sakakibara, a prominent MOF official, questioned the West’s obsession with economic growth as an end in itself. Noting the tendency of what he termed “Progressivism” to pit one nation against another to drive economic activity beyond the capacity of the environment to support it, Sakakibara questioned the accepted model of unlimited consumer-driven growth. Since the end of the Cold War and the defeat of communism as the only significant rival to Western Progressivism, the logic of pursuing economic growth for its own sake has gone largely unchallenged.
However, what if the two “lost” Japanese decades are not so lost after all. What is wrong with a country which has an unemployment rate of 4.5%? A per capita wealth greater than the US and a positive balance of payments?
So to conclude I would emphasize two core lessons which Japan can teach the West:
First, the importance of social cohesion and national unity at a time when we see daily news videos of violence caused by the economic restructuring in Europe.
And second, the need to reflect more broadly on what should be the goals of contemporary society: (i) economic growth at any cost or (ii) the greatest good for the greatest portion of society consistent with peace among neighbors and the protection of the environment.
As with all my visits to the country, I find that Japan has much to teach us.
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