Economic Development of Japan

TRADE

YEN

OIL

No.11 Economic Maturity & Slowdown

Real GDP Growth (Fiscal Year – April to March)

Average 1956-73 9.1%

Average 1974-90 4.2%

Average 1991-2010 0.9%

Source: The System of National Accounts site, Cabinet Office.

Growth Inflation (12-month change) MonetaryMonetary Growth andand Inflation (12-month change) 40% 30% 20% 10% 0% -10% -20% P.187 M2+CD WPI CPI 1965Q1 1966Q1 1967Q1 1968Q1 1969Q1 1970Q1 1971Q1 1972Q1 1973Q1 1974Q1 1975Q1 1976Q1 1977Q1 1978Q1 1979Q1 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 Bubble Bretton Woods fixed dollar system ends 1st oil shock General float begins 2nd oil shock Bubble collapses Plaza Agreement .

France Japan UK Italy 1985 1990 1994 0 1955 1965 1975 1980 10582 12060 13046 15454 17310 18754 21392 23858 26744 28157 US Japan 776 1336 2127 3984 6962 11676 16486 15658 28912 40421 . price-level adjusted) US Japan 60 40 20 US W.Ger.Growth Slowdown in the 1970s-80s • Japan’s economic maturity—income reached the world’s highest level • Oil shock and global stagflation • General floating of major currencies Catching Up: Real Per Capita GNP (1995 dollars. conversion at actual exchange rate) 50000 40000 30000 20000 10000 0 1950 1955 1960 1965 1970 1975 1980 100 80 Per Capita Income at PPP (US=100.

the Central Bank of the Republic of China. 2003. OECD Development Centre. The World Economy: Historical Statistics. World Economic Outlook Database. April 2010 (for updating). Korea Malaysia Thailand Indonesia Philippines Vietnam China Japan Singapore Hong Kong (Measured by the 1990 international Geary-Khamis dollars) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: Angus Maddison.Speed of Catching Up: East Asia Per capita real income relative to US 100% 90% 80% 70% Taiwan 60% 50% 40% 30% 20% 10% 0% S. and IMF. 2010 .

and IMF. World Economic Outlook Database. 2010 . 2003. OECD Development Centre. the Central Bank of the Republic of China.Latin America Per capita real income relative to US 100% 90% 80% 70% Chile 60% 50% 40% 30% 20% 10% 0% Colombia Mexico Peru Urguay Venezuela Argentina Brazil (Measured by the 1990 international Geary-Khamis dollars) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: Angus Maddison. April 2010 (for updating). The World Economy: Historical Statistics.

April 2010 (for updating). and IMF. World Economic Outlook Database. 2003. the Central Bank of the Republic of China. 2010 .South Asia Per capita real income relative to US 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% India Sri Lanka Pakistan Bangladesh (Measured by the 1990 international Geary-Khamis dollars) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: Angus Maddison. The World Economy: Historical Statistics. OECD Development Centre.

April 2010 (for updating). 2003. World Economic Outlook Database. OECD Development Centre. 2010 Zambia . and IMF. The World Economy: Historical Statistics. the Central Bank of the Republic of China.Africa Per capita real income relative to US 100% 90% 80% Egypt 70% 60% 50% 40% 30% 20% 10% Uganda 0% Ghana Kenya Madagascar Nigeria South Africa Tanzania Tunisia Botswana Cote d'Ivoire (Measured by the 1990 international Geary-Khamis dollars) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: Angus Maddison.

and IMF. 2003. World Economic Outlook Database.Russia & Eastern Europe Per capita real income relative to US 100% 90% 80% 70% 60% Hungary 50% Poland 40% Romania 30% Yugoslavia 20% 10% 0% (Measured by the 1990 international Geary-Khamis dollars) USSR Czeco'kia 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: Angus Maddison. OECD Development Centre. April 2010 (for updating). 2010 . the Central Bank of the Republic of China. The World Economy: Historical Statistics.

July 1976 0 Lowest 20% --Postwar land reform --Agricultural subsidies (1955 Regime) --Labor migration to cities Next 20% Next 20% Next 20% Top 20% Precision machinery Wood products Nonferrous metals Metal products 12 10 8 6 4 2 0 -2 -4 1954-73 1974-90 .Productivity Slowdown (estimated by labor-material Cobb-Douglas prod.) Productivity Change by Industry (%/year) Textiles General machinery Transport machinery Food Paper and pulp Iron and steel Ceramics etc. Germany (1973) France (1970) UK (1973) Italy (1969) Income Distribution (Lorenz Curve) OECD Economic Outlook. Oil and gas Chemicals Electrical machinery 100 80 60 40 20 Japan (1969) US (1972) (1997) chap.2 McKinnon-Ohno W. func.

stagflation.Delayed Systemic Reform? PP. Opposing view: • Don’t copy US financial capitalism—stability. large macro shocks (oil shocks. the Japanese economy continues to be over-regulated even today.190-91 • After catch-up industrialization. . Japan should have changed its system in the 1970s Long-term relations Official intervention Open markets Private initiative • However. floating. • As a result. patience. trade disputes) diverted policy makers’ attention from structural issues. equity. teamwork should be maintained.

(ii) suppression of competition. • They worked well for high growth. finance. (iii) social policies to reduce friction • These alien systems were implanted to execute total war (enterprise system. .The 1940 Regime: Farewell to the War Economy by Yukio Noguchi (1995) • I would like to advance the hypothesis that the key components of the Japanese economy today were created during the war. land reform) and they continued as systemic core even after the war. but not for coping with change. • The 1940 Regime--(i) production-first. Deregulation and consumer-oriented society cannot be realized unless this regime is removed. bureaucracy.

• Expansionary fiscal & monetary policy accommodated and softened the blow.188-90 AS AD Y World Money Growth Global monetarist view • As US lost monetary discipline.The Cause of 1970s Stagflation Supply shock view • OPEC’s oil price hike was the main cause. not the cause. 6 4 • Oil shock was the result. Aggressive wage hikes also contributed. 0 1960 1962 1964 1966 1968 1970 1972 Source: McKinnon (1979). causing global 8 liquidity glut in the early 1970s.264 1974 . the fixed rate regime collapsed in 1971-73 and USD fell. 14 % 12 • Major central banks expanded money to 10 counter appreciation pressure. P PP. of 2 global inflation. p.

Japan-US and China-US Bilateral Trade Balances 2.Mercantilist Pressure on Surplus Countries Komiya (1994).5 1. But the trade gap cannot be eliminated by currency appreciation or trade liberalization. Trade and exchange pressures mount.5 China's trade surplus with US (US data) Japan's trade surplus with US (US data) (In percent of US GDP) Sum of two surpluses Ronald McKinnon 55 60 65 70 75 80 85 90 95 00 05 10 . McKinnon-Ohno (1997).0 1.0 -0. it is often criticized for unfair trade and undervalued currency.5 0.0 0. McKinnon (2005) When a country emerges as a new industrial power.5 2.

Cline (IIE. Washington) Krugman—the Mass. Krugman— ―daylight saving time‖ argument for currency float . rert-2) Friedman. Absorption Approach in Financially Open Economies Conventional view (elasticities approach) • Exchange rate adjustment can reduce Japan’s trade surplus and US trade deficit. W. Model: Imports = f (yt. Ave.191-94 Elasticities Approach vs. Fred Bergsten.PP.

1971-73. because they are structural (US savings < US investment).Our unconventional view (syndrome of the ever-higher yen) • Thanks to wrong economics and Washington lobbying. 1985-87. The real solution is increasing US savings. • But yen appreciation cannot reduce Japan’s surplus and US deficit. 1993-95 Japan’s surplus with US American responses Pressure to appreciate yen Bilateral trade negotiations Persistent trade gap Reinforcement through failure . the yendollar rate is manipulated for mercantile purposes. Current account = Y – A = S – I • Intermittent yen appreciation only destabilizes the Japanese economy through recession. deflation and depressed interest rates. 1977-78.

Subject to M-L condition & J-curve Relative price effect Yen appreciation Competitiveness (+/?) (-) Price channel E Engineered Passthrough Inflation offset Trade balance Quantity channel Reverse absorption effect Absorption Monetary expansion LM curve shifts (-) “Endaka fukyo” or high-yen induced recession ..Exchange Rate Impacts Are Complex..

5 1.5 0.Japan-US and China-US Bilateral Trade Balances 2.5 2.0 1.0 -0.5 55 60 65 70 75 80 85 90 China's trade surplus with US (US data) Japan's trade surplus with US (US data) (In percent of US GDP) Sum of two surpluses 95 00 05 10 --Countries with large F/X inflows often buy up USD to resist currency appreciation --However. having too much foreign reserves may cause: --Excess liquidity and bubbles --Unbalanced asset position --Exchange risk USD billion 3000 2500 2000 1500 1000 500 0 International Reserves China Japan 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 .0 0.

both private and public. . this problem does not arise. higher interest rates. and (ii) accusation of unfair trade and pressure to appreciate the currency by deficit countries (esp.“Original sin” (inability to borrow in home currency) • Developing countries that borrow in USD face exchange risks in trade and debt payments. US) • If the leading economy (US) is the largest lender. In fact. “Conflicted virtue” (inability to lend in home currency) • Any high-saving country that lends in USD faces (i) exchange risk on accumulated foreign assets. balance-sheet mismatches. and the possibility of currency crisis. it is now the largest borrower. This may lead to higher risk premium.

48 100 10.80 7. originally IFS. the second component rises.00 7.00 118.72 1.68 20.00 US Interest Rate Japan Interest Rate Yen/Dollar Exchange Rate Trend Long-term Interest Rates (10-year Gov’t Bonds) 1000 357.00 Source: McKinnon (2007).00 15.14 4.00 Jan-70 10 Jan-76 Jan-82 Jan-88 Jan-94 Jan-00 Jan-06 Exchange Rate.Uncovered interest parity: ijp = ius + E(ė) + φ E(ė) --expected dollar appreciation (negative) φ—risk premium for holding dollar assets (negative) As more dollar assets are accumulated.63 5. 0. Log Scale Interest Rates . % 25.

―Japan’s Deflationary Hangover: The Syndrome of the Ever-Weaker Yen. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 .‖ April 2007.17 trillion Source: R.Estimates of Japan’s Net Liquid International Asset Holdings (% of GDP) 40% 30% 20% 10% 0% -10% Private Official USD 1. McKinnon.

• Reform movement inside LDP Factions & zoku-giin Koizumi reform—how successful? Other parties Abe. Aso: weak PMs . Fukuda. • Securing rural votes by subsidizing agriculture and building rural infrastructure (firmly established by PM Kakuei Tanaka 1972-74) • LDP had many factions and zoku-giin groups (politicians promoting subsidies in particular fields) • Opposition parties were too weak LDP to challenge LDP’s rule.178 • The Liberal Democratic Party (LDP) formed in 1955.The 1955 Regime (LDP dominance) P. held power until 2009 (except 1993-96).

Party cabinet Male suffrage 1925 Taisho Constitution 1889 Parliament Fascism 1937-45 Edo Meiji Political fights Pure dictatorship (Content) Political competition Reform vs conservatism. big vs small government.Democratic institution (Form) Constitution Laws Parliament Election Court Full democracy US rule Showa2 2009 LDP dominance Lack of policy debate Military rises 1960 1945-51 Democratization New constitution 1931 Democracy 1937 Defeat War Showa1 movement. other policy debates .

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