some webpages useful for teachers of intermediate macroeconomics:

The Current Macroeconomic Situation: Japan

(2002-01-28)

The Japanese government forecasts no growth at all over the forthcoming fiscal year. The government may well be optimistic: private forecasters surveyed by the Economist predict a fall in GDP of 1.2%. Japanese prices have fallen for three straight years. Japanese retail sales have fallen for five straight years. The current recession is the third that Japan has suffered in a decade. It is hard for economists to understand how the Japanese macroeconomy can have been in such bad shape for so long. The days in the late 1980s when fashionable writers looked forward to a Japan-led "Pacific Century" and proclaimed "Japan as Number One" are but a dim and faded memory.

What is the likely short-term destiny of Japan's economy? The best thing on this I have seen is a recent article from the Economist:

IT IS hard to keep pace the with stream of gloomy statistics coming out of Tokyo. Government figures released on January 29th confirmed fears that unemployment reached a new peak in December: 5.6% is the highest level since records started in the 1950s. The latest data follows news of the fifth successive annual fall in retail sales (down 2.2% in 2001 compared with the previous year) and the third year of falling prices—unprecedented for a major industrial economy in modern times (and exacerbating the reluctance of consumers to part with their money). The Japanese government’s own forecasts show that the economy will not grow at all in the fiscal year starting in April. Forecasters polled by The Economist are even gloomier, predicting, on average, a further fall in GDP of 1.2% in the current calendar year. Given the latest figures, the government could be prove to be optimistic in assuming the jobless total will peak at 5.6%. It would be hard to exaggerate the extent of Japan’s economic problems.

Yet worries persist about the readiness of the government to tackle effectively the economic challenges the country faces. The current recession is the third in a decade and the scale of Japan’s economic decline since the heady days of the 1980s—when the world marvelled at the Japanese “miracle” and, largely because of it, looked forward to something called the “Pacific Century”—continues to amaze and puzzle economists. Instead of the world’s second-biggest economy acting as an engine of growth, it continues to stagnate, dependent for any upturn on an American economic recovery, as Heizo Takenaka, the Japanese economy minister, admitted on January 25th.

Japan’s problems are not principally cyclical, though, and placing too much faith in recovery elsewhere could once more encourage the country’s political leaders to shy away from the difficult structural reforms needed to transform the moribund economy. Last month, the Organisation for Economic Co-operation and Development (OECD) explicitly blamed the country’s difficulties on past failures to address the need for reform. When Junichiro Koizumi was elected prime minister in April last year, his political success owed much to his commitment to tackle these shortcomings. Initially, at least, he did appear to understand the need for quick and effective action. But now there are signs that some of the momentum is fading.

That is not how the government sees it. A report approved by the Japanese cabinet on January 25th noted that, of 450 measures promised for the current fiscal year which ends in March, about 70% were already being carried out, with the remainder being discussed or prepared for legislation. “We came to the conclusion that most of the issues are being dealt with appropriately,” said Mr Takenaka.

To many this attitude smacks of breath-taking complacency. It is widely agreed that one of Japan’s biggest problems lies with its banking system, which has been crippled by huge number of bad loans left over from the asset bubble of more than a decade ago. Banks have propped up many companies which are effectively bankrupt and which have then cut prices to stay in business while potentially more productive sectors of the economy are deprived of credit. This makes deflation worse. As prices fall the real debt burden of the banks’ customers rises; this, coupled with the rising cost of credit resulting from the record rise in bankruptcies brought on by the recession, simply increases the number of bad loans.

There are signs that the banking crisis may be coming to a head, with several of the largest banks promising to write down large amounts of bad loans in the current financial year. Mr Koizumi said on December 27th that he may inject public funds to boost banks’ capital bases and so prevent a run on the banks. But it is still too soon to be sure that the government will once again duck the challenge and prop up rather than clean up the banks.

Meanwhile, much attention has been focused on the sharp depreciation of the yen in recent months. The Japanese government has persistently denied that it is deliberately pushing down the currency, although a weaker yen undoubtedly helps the economy by boosting exports. Japan’s Asian neighbours are naturally suspicious. The South Korean finance minister has warned about the risk of triggering competitive devaluations across Asia.

Now the American administration has come out firmly against any manipulation of the yen’s exchange rate. During a visit to Tokyo, Paul O’Neill, the American treasury secretary, called artificial depreciation of the currency protectionist. He went on to say that “the weight of historical evidence shows that those who have tried to fix underlying economic problems with protectionist measures actually weaken their economy”.

In public, Mr O’Neill just about stayed within the bounds of diplomatic niceties, saying that he had seen no evidence that Mr Koizumi himself believed in using exchange-rate policy as part of his reform programme. But his remarks were interpreted as a clear warning from the Bush administration, which is already hearing complaints from American manufacturers objecting to what they see as unfair competition from a weaker yen.

The ultimate source of Japan’s economic problems is political, and the Bush administration will not want to undermine Mr Koizumi’s efforts to push through reforms. If he is to succeed, the Japanese prime minister must confront and overcome the reluctance of Japan’s political class to acknowledge the need for widespread change, not only among the banks, but in the political world as well—especially the traditionally close links between big business and the ruling Liberal Democratic Party.

At the same time, neither the Americans, nor any of Japan’s other economic partners, want to see reforms postponed yet again. Anne Krueger, first deputy managing director of the International Monetary Fund said during a visit to Tokyo on January 25th that she did not see a crisis looming in Japan. But perhaps this is not really good news. Given Japan’s longstanding inability to respond effectively to chronic stagnation, it may take a crisis to get Japan’s politicians to take the painful and inevitably unpopular steps needed to pull Japan out of the mire.

(2001-10-20) In 2000 Japanese real GDP grew at 1.8%. In the first three quarters of 2001 Japanese real GDP probably declined. The shock to consumer and business confidence produced by the September 11 terror attack on New York's World Trade Center is likely to inflict a further blow on the Japanese economy: Japan today is in recession.

The start of the 1990s saw the collapse of the Japanese stock and real estate markets, the end of the so-called "bubble economy." The 1990s as a whole saw the breakdown of the Japanese model of economic growth, as the economy stagnated for much of the decade. Now there is a general recognition that Japan faces a structural economic crisis. But there is no political consensus on what is to be done, and the major political steps that need to be taken to restore growth--restructuring the Japanese financial system, and deregulating transportation and distribution--are not being taken. By now there is a very large amount of unused capacity in the Japanese economy.

The Bank of Japan is now pursuing a policy of making short-term safe nominal interest rates as close to zero as it can. But U.S. short-term safe nominal interest rates were zero in the Great Depression, and that did not help the U.S. economy recover and did not boost U.S. investment. What matters for investment spending is not a low short-term safe nominal interest rate but a low long-term risky real interest rate, and that remains high as long as bond traders fear that (i) the low interest rate policy will not last very long, (ii) many companies may go bankrupt and never repay the money they borrow, and (iii) prices may decline, turning low nominal interest rates into high inflation-adjusted real interest rates.

Moreover, Japan's banking system is now further underwater than at any time in the decade since the collapse of the Bubble. According to the Economist, Japan's big banks today have ¥5 trillion in capital, with loans to "problem borrowers" amounting to some ¥61 trillion out of their ¥340 trillion of loans. In banking crises like the American savings and loan crisis of the late 1980s, a simple but effective model was adopted: nationalize the private problem banks, clean them up by having the government taking over the bad loans, and then reprivatize the banks by selling them on to investors. Some banks are shut. Others are recapitalized and then resume their vital economic task of credit creation and allocation. But in Japan this approach has not been tried.

Perhaps it is time for the Japanese government to pursue a policy of thorough-going inflation to boost demand that has been extremely sluggish for nearly a decade. But the conventional wisdom is that Japanese demand and production is unlikely to pick up until ongoing "structural" problems--in particular the fear of lenders that those who want to borrow from them are really bankrupt--are resolved. Requiring businesses to declare the true value of their real estate holdings is commonly pointed to as the key blockage to investment, higher demand, and economic recovery.

Moreover, Japan's public finances are becoming unstable. The budget deficit is huge, officially-reported public debt is more than annual GDP and rising, and there are many unfunded pension and other liabilities of the Japanese government that are not on the official balance sheet. A government that has obligations that it cannot meet from its normal tax revenue is a government that is likely to resort, at some time in the future, to high inflation to balance its finances.

(2001-04-30) Japan ended 2000 with an annual real GDP growth rate of 1.8%. This is an astonishingly low growth rate given the large amount of unused capacity in the Japanese economy and the extraordinarily low levels of nominal short-term interest rates in Japan. One reason for the low growth rate is that people are unsure whether prices have further to fall: Japan is actually undergoing deflation, with prices falling by 0.7 percent in 2000. Real GDP growth in Japan for 2001 is projected to be only 1.4%, certainly less than the rate of growth of potential output.

The start of the 1990s saw the collapse of the Japanese stock and real estate markets, the end of the so-called "bubble economy." The 1990s as a whole saw the breakdown of the Japanese model of economic growth, as the economy stagnated for much of the decade. Now there is a general recognition that Japan faces a structural economic crisis. But there is no political consensus on what is to be done, and the major political steps that need to be taken to restore growth--restructuring the Japanese financial system, and deregulating transportation and distribution--are not being taken.

The Bank of Japan is now pursuing a policy of making short-term safe nominal interest rates as close to zero as it can. But U.S. short-term safe nominal interest rates were zero in the Great Depression, and that did not help the U.S. economy recover and did not boost U.S. investment. What matters for investment spending is not a low short-term safe nominal interest rate but a low long-term risky real interest rate, and that remains high as long as bond traders fear that (i) the low interest rate policy will not last very long, (ii) many companies may go bankrupt and never repay the money they borrow, and (iii) prices may decline, turning low nominal interest rates into high inflation-adjusted real interest rates.

Perhaps it is time for the Japanese government to pursue a policy of thorough-going inflation to boost demand that has been extremely sluggish for nearly a decade. But the conventional wisdom is that Japanese demand and production is unlikely to pick up until ongoing "structural" problems--in particular the fear of lenders that those who want to borrow from them are really bankrupt--are resolved. Requiring businesses to declare the true value of their real estate holdings is commonly pointed to as the key blockage to investment, higher demand, and economic recovery.

Moreover, Japan's public finances are becoming unstable. The budget deficit is huge, officially-reported public debt is more than annual GDP and rising, and there are many unfunded pension and other liabilities of the Japanese government that are not on the official balance sheet. A government that has obligations that it cannot meet from its normal tax revenue is a government that is likely to resort, at some time in the future, to high inflation to balance its finances.

(2001-02-01) Japan ended 2000 with an annual real GDP growth rate of 1.8%. This is an astonishingly low growth rate given the large amount of unused capacity in the Japanese economy and the extraordinarily low levels of nominal short-term interest rates in Japan. One reason for the low growth rate is that people are unsure whether prices have further to fall: Japan is actually undergoing deflation, with prices falling by 0.7 percent in 2000. Real GDP growth in Japan for 2001 is projected to be only 1.4%, certainly less than the rate of growth of potential output.

Perhaps it is time for the Japanese government to pursue a policy of thorough-going inflation to boost demand that has been extremely sluggish for nearly a decade. But the conventional wisdom is that Japanese demand and production is unlikely to pick up until ongoing "structural" problems--in particular the fear of lenders that those who want to borrow from them are really bankrupt--are resolved. Requiring businesses to declare the true value of their real estate holdings is commonly pointed to as the key blockage to investment, higher demand, and economic recovery.

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