Japan, Germany and the challenge of excess savings | Financial Times https://www.ft.com/content/4caca374-9907-43f4-9ea0-edaaee932776?a...

for almost three decades and yet remain worried about weak demand and low
inflation?

This is clearly a deep-seated structural phenomenon. So what has caused it? The
answer is chronic excess savings. Japan is not the only large market economy with a
strong manufacturing sector and structural excess savings. The other is Germany. But
Germany has had an answer Japan does not have: the euro.

Japan’s private sector gross savings averaged an extraordinary 29 per cent of GDP
between 2010 and 2019 (before the shocks of Covid and the Ukraine war). This was
well above Germany’s 25 per cent and far above the 22 per cent of the US and the
absurdly low 15 per cent of the UK. Japan’s private sector also invested a (quite
probably) excessive 21 per cent of GDP. Yet this still left surplus savings of 8 per cent
of GDP. Germany’s private savings surplus averaged 6 per cent of GDP, that of the US
5 per cent and the UK’s close to zero.

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In the economy as a whole, savings must equal investment once one includes the
government and foreigners. The question is how that balance is achieved and
crucially, as Keynes taught us, at what levels of economic activity. With a big enough
recession, profits (and so corporate savings) would presumably collapse. But it would
have to be an enormous collapse. In every year from 2000 to 2020, including
recessions, Japan’s corporate retained profits exceeded 20 per cent of GDP. Similarly,
with a big enough recession, household savings would collapse. But if such a recession
were to occur, investment would collapse, too. The outcome would be a dire
depression.

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No sane policymakers would try to eliminate excess savings via a slump. Instead, they
would choose policies aimed at either absorbing the savings in productive
investments or reducing the country’s propensity to save.

A sensible way of thinking about what Japanese policymakers have been doing since
the end of the high investment phase of Japan’s postwar catch-up economy in the
early 1990s is this: they are trying to sustain aggregate demand in the context of the
huge surplus savings of the private sector. This is another way of saying that they are
trying to escape from deflation, which would, in the absence of their efforts, probably
have been far deeper than it was.

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Ultra-low interest rates are, for example, intended to raise private investment and
reduce private savings. But in practice, the private savings surplus, especially the
corporate surplus, has remained huge. Loose monetary policy has facilitated crucial
absorption (and offsetting) of surplus private savings via the excess of government
investment over savings. These deficits averaged 5 per cent of GDP from 2010 to
2019. Finally, an average of 3 per cent of GDP went into net acquisition of foreign
assets via Japan’s current account surpluses.

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Were there other ways of managing the structural surplus savings problem from
which Japan has been suffering for a decade (and, not coincidentally, China has been
suffering increasingly, too)? Yes, there were three alternative ways.

One is Germany’s: its net acquisition of foreign assets averaged 7 per cent of GDP
from 2010 to 2019. This allowed both private and public sectors to run saving
surpluses, while balancing aggregate supply and demand at reasonably high levels.
There are two reasons why this approach would have been hard for Japan to copy.
One is that the trade surpluses would have run head on into US mercantilism. The
other is that there would have been fierce upward pressure on the yen exchange rate,
compounding the deflationary forces on Japan. Indeed, if the euro had not existed,
currency crises in the exchange rate mechanism would surely have forced huge
revaluations of the D-Mark, pitching the German economy into deflation and ultra-
easy monetary policy, whatever the Bundesbank wanted.

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The second alternative is structural policies aimed at lowering the extraordinarily

high share of retained corporate earnings (or corporate savings) in the economy. This
is essentially a distributional problem: wages are too low and profits too high. The
simplest way to fix this is to raise the rate of tax on corporate profits, while allowing
full expensing of investment. Other ways could be found, such as distributing profits
to employees. But the goal would be clear: to shift excess profits into consumption.

The third alternative would be to leave the structural problems untouched, tighten
monetary and fiscal policies and leave the Japanese to pick up the pieces. This is
“liquidationism”. It is becoming fashionable nowadays. It is also irresponsible
nonsense. So long as Japan continues to run huge excess private sector savings, policy
has to find ways of either reducing or offsetting them. Japan’s economy is still
trapped. It also has no easy way out.

martin.wolf@ft.com

Follow Martin Wolf with myFT and on Twitter

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