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February 15, 2005

Japan Is Back in Recession

From Reuters:

FT.com / World / Asia-Pacific - Japan’s GDP disappoints: Japan’s economy shrank 0.1 percent in the October-December quarter from the preceding three months, marking a third straight quarter of economic contraction, technically a recession.... Nominal GDP for the quarter was flat from the preceding three months, compared with a median market forecast of 0.1 percent growth.

Posted by DeLong at February 15, 2005 05:05 PM

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doesn't anyone pay attention to prices

how does one spell deflation.

we have billions of key strokes talking about Greenspan's "asset economy" and we already didn't know this

Posted by: Moe Levine at February 15, 2005 05:19 PM

Japan's first bond sales road trip in over a century


"Japan, the world's most indebted nation and issuer of the lowest-yielding bonds, is campaigning to draw overseas buyers to help finance future spending. The Finance Ministry forecasts that outstanding government bonds in the world's No. 2 economy will total a record $7.6 trillion next year, at a time when only 4 percent of its debt is held outside the country."

"Japan's debt soared during the 1990s as the government tried to offset three recessions by spending on roads and dams. The amount of outstanding bonds, including local government debt, will rise to 151 percent of gross domestic product in the fiscal year ending March 31, 2006, according to the Finance Ministry."

"The country had 664 trillion yen ($6.2 trillion) in marketable securities outstanding as of June 30. The U.S. is the world's second most indebted nation, with $3.9 trillion in securities outstanding, and Italy third, with 1.2 trillion euros ($1.6 trillion), as of the end of November."

Posted by: Movie Guy at February 15, 2005 05:24 PM

About six years ago, Morning Musume, a pop group of young Japanese women notable mainly for their almost horrific level of cuteness, put out a hit single promising that good economic times were just around the corner. Unfortunately, they lied. Nevver put your faith in the cutest economics forcaster. (Unless it's Brad of course.) I've lost count of the number of times it has been said that Japan's economy is just about to turn the corner. It's worse than the current U.S. occupation. I've read articles in Japanese newspapers that seriously stated that issueing a two thousand yen note to bridge the currency gap between the one thousand and five thousand yen notes, was something that was going to restore confidence and boost the economy. I'm afraid I can't see the situation improving until they decide to inflate their economy, which is something that no one seems willing to do or even seriouly discuss. I keep waiting for them to reach consensus and then forge ahead, maintianing Japan's position as an economic superpower, but they seem caught in a trap and I can't see them getting out of it. At least Japan still has the potential to surprise. Let's hope they surprise us all. (I mean as with the Meiji restoration and the post war boom, not in a nasty way.)

Posted by: Ronald Brakels at February 15, 2005 06:05 PM


By Paul Krugman

The state of Japan is a scandal, an outrage, a reproach. It is not, at least so far, a human disaster like Indonesia or Brazil. But Japan's economic malaise is uniquely gratuitous. Sixty years after Keynes, a great nation - a country with a stable and effective government, a massive net creditor, subject to none of the constraints that lesser economies face - is operating far below its productive capacity, simply because its consumers and investors do not spend enough. That should not happen; in allowing it to happen, and to continue year after year, Japan's economic officials have subtracted value from their nation and the world as a whole on a truly heroic scale.

The fault does not, however, lie merely with those officials. Japan has also been badly served by the economics profession, both in Japan and outside. The great majority of economists - including those who specialize in issues of economic stabilization and growth - seem oddly uninterested in Japan's plight, as if the failure of conventional macroeconomic policy in the world's second largest economy were a subject of merely parochial interest, with no lessons for the rest of us. Of those who do make pronouncements on Japan, many if not most have taken the easy way out: blaming the victim, absolving themselves of responsibility for proposing solutions by asserting that Japan's problems are deep, structural, beyond the reach of technical fixes. Well, maybe; but maybe not. Sometimes big problems have small causes; sometimes a simple technical fix can work miracles.

Last spring I decided to sit down and think seriously about Japan's ills, putting aside conventional wisdom and my own prejudices, following the logic of economic analysis wherever it led. And it led to a surprising conclusion: that there is indeed a simple fix for Japan's slump - and that the structural obstacles to a quick recovery lie not in the economy itself but in the minds of policymakers.

What is particularly remarkable about the debate over Japan is that it is a case where straightforward economic analysis and policy orthodoxy are in direct conflict. If you apply the most conventional of macroeconomic models to Japan's unusual plight, you come up with recommendations that are anathema to central bankers and finance ministers. And in this case, I am firmly convinced that the models are right and the officials are wrong....

Posted by: anne at February 15, 2005 06:18 PM

And it seems that Germany and maybe Italy are in recession too. So there is one aspect of the global economy that makes Bush look good (not that he deserves it).


Posted by: P O'Neill at February 15, 2005 07:01 PM

Mr. Brakels –

According to IMF figures, the BOJ/MOF undertook unsterilized currency interventions equivalent to 6.4% of GDP in 2003. The BOJ/MOF intervention in 2004 probably matched the 2003 effort. It is not as if they are not trying to reflate the economy.

Anne –

And, when you open up his Japan page, you find that Krugman, with all his pepper and sassafras, gave up on Japan five years ago. The problem proved to be too intractable.

As a permanent resident of Tokyo since 1994, I have good reason to be such a mugwump in discussions about future rates of U.S. GDP growth, U.S. productivity and “Silicon Valley’s next big thing.” I have seen what happens when you combine a sclerotic, uncompetitive political system with asset inflation—officials incapable of contemplating anything except ways to retain power, citizens baffled at the lack of progress in their lives, a procession of snake-oil salesman each with a special economic elixir to sell and debt—always more debt.

Posted by: MTC at February 15, 2005 08:10 PM

The U.S. economy grew at a brisk 4.4% clip last year, but it was not until last month that the number of jobs recovered to the levels of early 2001. The Labor Department pegs the unemployment rate at 5.2%, the lowest in four years, but the share of people who have stopped hunting for work is the largest it has been since 1988. Today's job growth is more than twice as slow as it was after the 1990-91 recession, and slower than during any recovery since World War II, analysts say.


Looks like our economy isn't doing that hot either.

Posted by: Don Quijote at February 15, 2005 08:17 PM

They jacked up the price of real estate to the point that people couldn't have children long ago in Japan. Now the chickens have come home to roost. Demographics is one area where there are no excuses. You know how many kids were born last year, and to whom they were born. You don't like the results, don't blame their overtaxed and overzoned parents, change the tax and zoning laws.
If they had spent the amount of money that they spent on boondoggle construction over the last fifteen years on subsidising solar power, hybrid cars, and gas cooled fast breeder reactors instead of bridges to villages and tunnels to hamlets, they could be energy independent and in far better economic shape than they are now.
Demographically they should have kept real estate prices down starting in 1975. 1990 was really too late.

Posted by: walter willis at February 15, 2005 08:38 PM

And I have to wonder - are the Japanese people really doing so badly?

Surely, $28,200 in per capita GDP is enough to get by. They have a trade surplus. It seems like they have a reasonable distribution of income. Unemployment is pretty low. They seem to have a high quality education system.

So the economy is "not growing", so what?

Posted by: Read Greg at February 15, 2005 10:05 PM

"And it seems that Germany and maybe Italy are in recession too." The Netherlands also announced negative growth for Q4 yesterday. Are we seeing the effects of the weaker dollar?

Posted by: Andrew Boucher at February 15, 2005 10:13 PM

anne: I have just started on Richard Koo's "Balance Sheet Recession". I think Koo knows a lot more about Japan's economy than Krugman, and from what I've read so far I do not think he would agree with PK. Koo, a former FRB economist and for many years the Chief Economist of the Nomura Research Institute, is highly respected in Japanese business and economic circles.

Posted by: jm at February 15, 2005 10:37 PM

Not too surprising. The GDP figures serve mostly a political purpose, both in the U.S. and Japan. If Japan wanted a booming economy all they would have to do is adopt U.S. measurement conventions. Instead these dismal Japanese figures function to scare investors away from what was a rapidly rising yen, making life easier for their manufacturers. The pollyanna U.S. inflation/GDP figures serve many purposes, attracting foreign investment even in the face of massive current account deficits is certainly one of them.

Posted by: walker at February 15, 2005 10:52 PM

Dear MTC,

But lots of stuff still keeps getting cheaper, so I can't see any inflation. Maybe they haven't unsterilized inventioned enough. I've asked people to suggest this to Mr Koizumi, but no one ever listens to me.

Posted by: Ronald Brakels at February 16, 2005 12:37 AM

MTC and JM

Though Paul Krugman has not recently added to the Japan discussion, I am still convinced the analysis is correct. An alternative commentary comes from Morgan Stanley, and emphasizes competitive structure reforms for Japanese business. Also, there should be discussion of lack of population growth and aging. Please add to the ideas. I will read Richard Koo.

Posted by: anne at February 16, 2005 02:40 AM

Just goes to show that economic statistics these days are mostly bulldust. Go to Japan, look around and decide for yourself if it is in terminal decline. If it is so awful why is Toyota killing the competition, why are the moving away from ADSL to Fibre to the home (FTTH) when we are just switching to it and why are they extending their lead in longevity (which surely has a value, how much would you pay to live an extra ten years). I live in Britain which supposedly has a wonderful economy with low inflation and low unemployment; whilst I do fine it is apparent that both these numbers are rubbish inflation is vastly understated and the fall in the unemployed is matched by the growth in long term sickness. The only conclusion one can draw is that in a world increasingly dominated by asset prices measurement of GDP has become extremely difficult mostly due to errors in calculating the deflator. This problem is further exacerbated by countries fiddling the books to suit their own purposes. In the UK generally to make things sound better, in Japan (where power is unlikely to change hands at an election) to make it sound worse in order to reduce trade friction. Do'nt forget the numbers are produced at the order of the same people that brought you the WMD lies.

Posted by: Tim Bassett at February 16, 2005 04:23 AM

What has happened to Japan should give us pause, and should be cause for extensive analysis, for I can not believe the problem is so intrinsic to Japan that Europe and America should be immune. If Japan is in a liquidity trap, can we become so trapped? Paul Krugman speaks to this matter convincingly to me.

Posted by: anne at February 16, 2005 04:24 AM

Gosh, where to begin...

Mr. Willis -

The price of real estate is only a minor limiting factor on the size of families. Far greater is the impact of the liberation of women. To bear and raise children in Japan is to commit oneself to a lifetime of toil. It is not surprising that many educated women have simply opted out of motherhood.

JM and anne -

Richard Koo, despite his bonafides, had an unfortunate side career of seemingly telling Japanese that their problems were really not their fault. Not the message he should have been spreading--but that was his choice.

anne -

As regards Morgan Stanley, do not get me started on Robert Alan Feldman. His channeling of
the twisted S&M fantasies of Finance Ministry bureaucrats should be kept off the Internet. Thank goodness for Stephen Roach and Andy Xie.

Mr. Bassett -

Venture outside Tokyo or Nagoya to the rural communities in the mountains, or the small towns facing the Japan Sea. The backcountry of Japan is dying, if it is not already dead.

Mr. Brakels -

Yes, the whole point is that despite the BOJ's coming to its senses (was there ever a worse central banker than Hayami?)and its flooding the credit markets with liquidity, prices are not rising and nominal GDP continues to plummet. Indeed the flood of credit has led to a boom in the apartment (manshon) construction market that will, over this year and next, inundate the real estate market with tens of thousands of spanking new living spaces, only a fraction of which will find buyers or renters. Deflation will spike the economy's heart again and we will be back to square one.

Posted by: MTC at February 16, 2005 06:18 AM


Is the health of rural communities the appropriate measure of a country's economic health? Iowa and Saskatchewan and numerous other places that were flooded with immigrants in the 19th century no longer need that level of population. I'm not sure what that means, except that the 21st century is not the 19th.

Posted by: sm at February 16, 2005 06:28 AM

SM -

A decent point, in a country with one person-one vote. Japan is not such a country. A single vote in Tottori is worth five votes in Saitama (the Supreme Court recently ruled that this disparity is not unconstitutional). With such an extraordinary electoral advantage, it is inconceivable that a Tottori village would ever lack a budget subsidy to keep its local fish processing plant open or fail to have government officials staying in their ryokan at the public's expense...and yet we have our Inigo Montoya moment, where the inconceivable indeed does not mean what we think it means.

Posted by: MTC at February 16, 2005 06:53 AM


As for Japan urban and rural, increasingly my friends and I have begun to speak to the difference. Rural Japan is well developed in infrastructure, increasingly green, increasingly treed, increasingly isolated, and old.

My take on Morgan Stanley's Japan analysis is as poor as yours, but I have long needed to hear another such comment.

Posted by: anne at February 16, 2005 06:55 AM

anne -

Yes, green and treed.

If you like cedar.

A lot...

Posted by: MTC at February 16, 2005 07:06 AM

At what point do we decide to look at values other than GDP in pronouncing on the health of a country such as Japan? There is less wrong with Japan, which afterall, signed up to do something about global warming, as opposed to the U.S. which has a President that said not one job would be sacrificed in the name of fighting global warming.

Posted by: t at February 16, 2005 08:41 AM

This is no doubt a cultural impossibility, but they could clean up, at least financially speaking, by selling that peace and quiet to well-off foreigners.

I bet the roads in their rural communities beat the road in front of my house.

Posted by: sm at February 16, 2005 08:42 AM

MTC: Though Koo may have been more apologist than we like, his analyses seem to me to be basically correct, at least as far as they go. Where they don't go far enough, in my opinion, is that I believe that Japan's refusal to abandon mercantilism in the '80s and move toward balanced trade is _the_ _primary_ _cause_ not only of all the problems he describes, but of most of the current major distortions in the world economy. By disabling the macroeconomic mechanisms that should have balanced the trade flows, they subverted world markets at a fundamental level, and sent the development of their own and other nations down wrong paths, from which it is now very difficult to return. (Some might blame Reagan's dingbat policies, but without the Japanese as enablers, I suspect they'd have been stopped.)

Posted by: jm at February 16, 2005 09:14 AM


Silent Lament for a Japan Still Scarred by the War

In Shomei Tomatsu's astonishing retrospective at the Japan Society, a man, his back to the camera, peers from inside a ship out to sea. The picture is vaguely amusing, or it is not, just as it is an obvious metaphor, or not, depending on how you choose to look at it. Japan is a country isolated and protected by the sea at the same time that the sea, bidden and unbidden, has carried the world to Japan's shores.

The man in the photograph, whoever he is, looks as if he has suddenly noticed something in the water, something out of the picture frame, either toward which he is inclining or from which he is withdrawing - it's impossible to tell. "The sea," Mr. Tomatsu once said, "is a phantom mother living deep inside of me. My sea is not blue. It is dyed the color of blood. And it envelops me with the depth of its silence."

This exhibition should come as a revelation to many people. Japan's pre-eminent photographer of the postwar era, Mr. Tomatsu is a master of a kind of redolent ambiguity that speaks both to his subject, which is life in Japan, and also to the nature of photography, which always shows tantalizingly more than it can explain. As photographers like William Klein, Garry Winogrand and Robert Frank defined their era in America, Mr. Tomatsu has defined his in Japan, but the work does something more than that, too.

It is difficult to encapsulate. It is both capricious and severe. It is about the aftereffects of war, which can be nearly imperceptible on the surface but which, if you look more intently, can be seen to have made a wreckage of everything, past and present.

The German writer W. G. Sebald titled a novel after the rings of Saturn, which look orderly and elegant from far away but are in reality the detritus of some immense catastrophe - shards from an act of violence that continue to drift endlessly through time.

Mr. Tomatsu's photographs are, in part, a visual equivalent: a requiem or lament for what he perceives as a nation of the walking dead, still damaged by war, animated by the corrupting but magnetic influence of Americanization....

Posted by: anne at February 16, 2005 09:50 AM

But Japan is not Americanized ...

Posted by: jm at February 16, 2005 01:41 PM

Dear MTC,

So I'll be able to get a cheaper apartment soon? Cool! Maybe someday we'll beat South Korea on living space per person.

Posted by: Ronald Brakels at February 16, 2005 03:38 PM

"Is the health of rural communities the appropriate measure of a country's economic health?"

They're surely a part of the equation, as are cities and suburbs. Tied to the decline of rural communities in America (244 of the 250 poorest counties in America are rural) is the rise of ecologically destructive and ultimately probably unsustainable corporate agriculture, all manner of social pathologies (from domestic violence to methamphetamine abuse) and political extremism (from neo-nazi to militia movements.) We ignore the health of rural communities at our own peril. Too bad neither party in America seems to care.

Posted by: Robin the Hood at February 16, 2005 09:34 PM

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