More nonsense from the New York Times on Japan’s “lost decades”

The Times says Japan is “disheartened.” It hasn’t looked at Japan’s trade figures — or America’s.

The New York Times yesterday carried a major article headlined “Japan Goes from Dynamic to Disheartened.” Rarely has the truth of the Japanese economy been so completely misrepresented. This article is a highly selective pastiche of isolated hard-luck stories plus spin from propagandistic sources (as close observers have long understood, the Japanese establishment exaggerates Japan’s weaknesses and understates its strengths, the better to stay out of Washington’s sights on trade). Worse, key “facts” are indisputably wrong.

Take the only significant statistic cited: Japan’s GDP in 2009 was supposedly the same as in 1991 — $5.7 trillion in both cases, allegedly. In reality, as a check of the World Bank’s website will immediately confirm, the correct number for 1991 was a mere $3.45 trillion — and the figure announced at the time by the Tokyo authorities was actually even lower. The Times seems to have overlooked the fact that the yen was worth a lot less in 1991 than it is now. It is actually up 65 percent against the dollar since 1991 and fully 69 percent since 1989.

In its only reference to Japan’s trade performance, the Times states: “Its [Japan’s] once voracious manufacturers now seem prepared to surrender industry after industry to hungry South Korean and Chinese rivals.” The truth is that Japan multiplied its current account surplus more than three-fold between 1989 (the last year of the Japanese stock market boom) and 2008 (the last year before the present global slump). In the same period the US current account _deficit_ ballooned sixfold! Although its per-capita income is nearly ten times China’s, Japan is almost alone among major nations in running a surplus on its huge trade with China; by comparison America’s bilateral deficit with China was $166 billion last year (see the China page of the CIA Factbook).

An important omission is the significance of differing population trends for comparisons of GDP growth between Japan and the United States. In common with many of the richest nations in Europe, Japan has had remarkably low population growth in the last two decades — a cumulative rise of just 3 percent compared to 23 percent for the United States. The differing population experience is a fundamental factor in Japan’s apparently “disappointing” GDP performance. In reality, as Mark Skousen has pointed out, when Japanese GDP statistics are stated on a per-capita basis as opposed to as national aggregates, Japan has broadly kept pace with US growth. And that is taking US growth at face value. As some of us have long argued, much US growth — e.g. in financial services — has been completely bogus.

Even within the space of a single sentence the Times often manages to pile misstatement upon misstatement. Take, for instance, this: “Japanese consumers, who once flew by the planeload on flashy shopping trips to Manhattan and Paris, stay home more often now, saving their money for an uncertain future or setting new trends in frugality with discount brands like Uniqlo.” The fact is that far from declining since the 1980s, Japanese overseas travel has risen strongly. Even in the recession year of 2009, total international travel by Japanese citizens was up fully 49 percent over the peak bubble-era year of 1989 (and was up three times on the 1980s average). Moreover Japanese cities today are full of super-pricey luxury goods stores that were unheard of in the 1980s. In my immediate vicinity we have had three huge developments of luxury stores at Tokyo Midtown, Roppongi Hills, and Marunouchi Naka-dori. As revealed in a survey a few years ago, Japan accounted for 36 percent of the Burberry brand’s worldwide sales, 35 percent of Baccarat’s, and 30 percent of Louis Vuitton’s. Not bad for a nation with only 2 percent of the world’s population. As for “saving their money for an uncertain future,” the truth is that the Japanese savings rate has not risen since the 1980s but has actually fallen quite drastically, implying that Japan is far more of a consumer society now than previously.

Of the dozens of other similarly important points I could make, I will add just one. Whereas the yen is clearly reasonably valued vis-à-vis the yuan and other East Asian currencies, the same cannot be said of the dollar. The question the editors of the New York Times should be asking is this: how low will the dollar have to fall against the East Asian currencies for the United States to balance its trade again? A devaluation of less than 20 percent against the yen did it for Nixon in the early 1970s. Even a 60 percent devaluation today wouldn’t do it (because the US has virtually no advanced manufacturing industries left — even Boeing is a hollowed out hulk which depends on Japan for the 787’s wings and other super-advanced structures and components).

Quote from the Times: “In 1991, economists were predicting that Japan
would overtake the United States as the world’s largest economy by
2010. In fact, Japan’s economy remains the same size it was then: a
gross domestic product of $5.7 trillion at current exchange rates.
During the same period, the United States economy doubled in size to
$14.7 trillion, and this year China overtook Japan to become the
world’s No. 2 economy.”

For the correct figure for Japan in 1991 paste this address into your
browser window:

From the New York Times
October 16, 2010
Japan Goes From Dynamic to Disheartened
OSAKA, Japan — Like many members of Japan’s middle class, Masato Y.
enjoyed a level of affluence two decades ago that was the envy of the
world. Masato, a small-business owner, bought a $500,000 condominium,
vacationed in Hawaii and drove a late-model Mercedes.

But his living standards slowly crumbled along with Japan’s overall
economy. First, he was forced to reduce trips abroad and then
eliminate them. Then he traded the Mercedes for a cheaper domestic
model. Last year, he sold his condo — for a third of what he paid for
it, and for less than what he still owed on the mortgage he took out
17 years ago.

“Japan used to be so flashy and upbeat, but now everyone must live in
a dark and subdued way,” said Masato, 49, who asked that his full name
not be used because he still cannot repay the $110,000 that he owes on
the mortgage.

Few nations in recent history have seen such a striking reversal of
economic fortune as Japan. The original Asian success story, Japan
rode one of the great speculative stock and property bubbles of all
time in the 1980s to become the first Asian country to challenge the
long dominance of the West.

But the bubbles popped in the late 1980s and early 1990s, and Japan
fell into a slow but relentless decline that neither enormous budget
deficits nor a flood of easy money has reversed. For nearly a
generation now, the nation has been trapped in low growth and a
corrosive downward spiral of prices, known as deflation, in the
process shriveling from an economic Godzilla to little more than an
afterthought in the global economy.

Now, as the United States and other Western nations struggle to
recover from a debt and property bubble of their own, a growing number
of economists are pointing to Japan as a dark vision of the future.
Even as the Federal Reserve chairman, Ben S. Bernanke, prepares a
fresh round of unconventional measures to stimulate the economy, there
are growing fears that the United States and many European economies
could face a prolonged period of slow growth or even, in the worst
case, deflation, something not seen on a sustained basis outside Japan
since the Great Depression.

Many economists remain confident that the United States will avoid the
stagnation of Japan, largely because of the greater responsiveness of
the American political system and Americans’ greater tolerance for
capitalism’s creative destruction. Japanese leaders at first denied
the severity of their nation’s problems and then spent heavily on
job-creating public works projects that only postponed painful but
necessary structural changes, economists say.

“We’re not Japan,” said Robert E. Hall, a professor of economics at
Stanford. “In America, the bet is still that we will somehow find ways
to get people spending and investing again.”

Still, as political pressure builds to reduce federal spending and
budget deficits, other economists are now warning of “Japanification”
— of falling into the same deflationary trap of collapsed demand that
occurs when consumers refuse to consume, corporations hold back on
investments and banks sit on cash. It becomes a vicious,
self-reinforcing cycle: as prices fall further and jobs disappear,
consumers tighten their purse strings even more and companies cut back
on spending and delay expansion plans.

“The U.S., the U.K., Spain, Ireland, they all are going through what
Japan went through a decade or so ago,” said Richard Koo, chief
economist at Nomura Securities who recently wrote a book about Japan’s
lessons for the world. “Millions of individuals and companies see
their balance sheets going underwater, so they are using their cash to
pay down debt instead of borrowing and spending.”

Just as inflation scarred a generation of Americans, deflation has
left a deep imprint on the Japanese, breeding generational tensions
and a culture of pessimism, fatalism and reduced expectations. While
Japan remains in many ways a prosperous society, it faces an
increasingly grim situation, particularly outside the relative
economic vibrancy of Tokyo, and its situation provides a possible
glimpse into the future for the United States and Europe, should the
most dire forecasts come to pass.

Scaled-Back Ambitions

The downsizing of Japan’s ambitions can be seen on the streets of
Tokyo, where concrete “microhouses” have become popular among younger
Japanese who cannot afford even the famously cramped housing of their
parents, or lack the job security to take out a traditional
multidecade loan.

These matchbox-size homes stand on plots of land barely large enough
to park a sport utility vehicle, yet have three stories of closet-size
bedrooms, suitcase-size closets and a tiny kitchen that properly
belongs on a submarine.

“This is how to own a house even when you are uneasy about the
future,” said Kimiyo Kondo, general manager at Zaus, a Tokyo-based
company that builds microhouses.

For many people under 40, it is hard to grasp just how far this is
from the 1980s, when a mighty — and threatening — “Japan Inc.” seemed
ready to obliterate whole American industries, from automakers to
supercomputers. With the Japanese stock market quadrupling and the yen
rising to unimagined heights, Japan’s companies dominated global
business, gobbling up trophy properties like Hollywood movie studios
(Universal Studios and Columbia Pictures), famous golf courses (Pebble
Beach) and iconic real estate (Rockefeller Center).

In 1991, economists were predicting that Japan would overtake the
United States as the world’s largest economy by 2010. In fact, Japan’s
economy remains the same size it was then: a gross domestic product of
$5.7 trillion at current exchange rates. During the same period, the
United States economy doubled in size to $14.7 trillion, and this year
China overtook Japan to become the world’s No. 2 economy.

China has so thoroughly eclipsed Japan that few American intellectuals
seem to bother with Japan now, and once crowded Japanese-language
classes at American universities have emptied. Even Clyde V.
Prestowitz, a former Reagan administration trade negotiator whose
writings in the 1980s about Japan’s threat to the United States once
stirred alarm in Washington, said he was now studying Chinese. “I
hardly go to Japan anymore,” Mr. Prestowitz said.

The decline has been painful for the Japanese, with companies and
individuals like Masato having lost the equivalent of trillions of
dollars in the stock market, which is now just a quarter of its value
in 1989, and in real estate, where the average price of a home is the
same as it was in 1983. And the future looks even bleaker, as Japan
faces the world’s largest government debt — around 200 percent of
gross domestic product — a shrinking population and rising rates of
poverty and suicide.

But perhaps the most noticeable impact here has been Japan’s crisis of
confidence. Just two decades ago, this was a vibrant nation filled
with energy and ambition, proud to the point of arrogance and eager to
create a new economic order in Asia based on the yen. Today, those
high-flying ambitions have been shelved, replaced by weariness and
fear of the future, and an almost stifling air of resignation. Japan
seems to have pulled into a shell, content to accept its slow fade
from the global stage.

Its once voracious manufacturers now seem prepared to surrender
industry after industry to hungry South Korean and Chinese rivals.
Japanese consumers, who once flew by the planeload on flashy shopping
trips to Manhattan and Paris, stay home more often now, saving their
money for an uncertain future or setting new trends in frugality with
discount brands like Uniqlo.

As living standards in this still wealthy nation slowly erode, a new
frugality is apparent among a generation of young Japanese, who have
known nothing but economic stagnation and deflation. They refuse to
buy big-ticket items like cars or televisions, and fewer choose to
study abroad in America.

Japan’s loss of gumption is most visible among its young men, who are
widely derided as “herbivores” for lacking their elders’ willingness
to toil for endless hours at the office, or even to succeed in
romance, which many here blame, only half jokingly, for their
country’s shrinking birthrate. “The Japanese used to be called
economic animals,” said Mitsuo Ohashi, former chief executive officer
of the chemicals giant Showa Denko. “But somewhere along the way,
Japan lost its animal spirits.”

When asked in dozens of interviews about their nation’s decline,
Japanese, from policy makers and corporate chieftains to shoppers on
the street, repeatedly mention this startling loss of vitality. While
Japan suffers from many problems, most prominently the rapid graying
of its society, it is this decline of a once wealthy and dynamic
nation into a deep social and cultural rut that is perhaps Japan’s
most ominous lesson for the world today.

The classic explanation of the evils of deflation is that it makes
individuals and businesses less willing to use money, because the
rational way to act when prices are falling is to hold onto cash,
which gains in value. But in Japan, nearly a generation of deflation
has had a much deeper effect, subconsciously coloring how the Japanese
view the world. It has bred a deep pessimism about the future and a
fear of taking risks that make people instinctively reluctant to spend
or invest, driving down demand — and prices — even further.

“A new common sense appears, in which consumers see it as irrational
or even foolish to buy or borrow,” said Kazuhisa Takemura, a professor
at Waseda University in Tokyo who has studied the psychology of

A Deflated City

While the effects are felt across Japan’s economy, they are more
apparent in regions like Osaka, the third-largest city, than in
relatively prosperous Tokyo. In this proudly commercial city,
merchants have gone to extremes to coax shell-shocked shoppers into
spending again. But this often takes the shape of price wars that end
up only feeding Japan’s deflationary spiral.

There are vending machines that sell canned drinks for 10 yen, or 12
cents; restaurants with 50-yen beer; apartments with the first month’s
rent of just 100 yen, about $1.22. Even marriage ceremonies are on
sale, with discount wedding halls offering weddings for $600 — less
than a tenth of what ceremonies typically cost here just a decade ago.

On Senbayashi, an Osaka shopping street, merchants recently held a
100-yen day, offering much of their merchandise for that price. Even
then, they said, the results were disappointing.

“It’s like Japanese have even lost the desire to look good,” said
Akiko Oka, 63, who works part time in a small apparel shop, a job she
has held since her own clothing store went bankrupt in 2002.

This loss of vigor is sometimes felt in unusual places. Kitashinchi is
Osaka’s premier entertainment district, a three-centuries-old
playground where the night is filled with neon signs and hostesses in
tight dresses, where just taking a seat at a top club can cost $500.

But in the past 15 years, the number of fashionable clubs and lounges
has shrunk to 480 from 1,200, replaced by discount bars and chain
restaurants. Bartenders say the clientele these days is too
cost-conscious to show the studied disregard for money that was long
considered the height of refinement.

“A special culture might be vanishing,” said Takao Oda, who mixes
perfectly crafted cocktails behind the glittering gold countertop at
his Bar Oda.

After years of complacency, Japan appears to be waking up to its
problems, as seen last year when disgruntled voters ended the virtual
postwar monopoly on power of the Liberal Democratic Party. However,
for many Japanese, it may be too late. Japan has already created an
entire generation of young people who say they have given up on
believing that they can ever enjoy the job stability or rising living
standards that were once considered a birthright here.

Yukari Higaki, 24, said the only economic conditions she had ever
known were ones in which prices and salaries seemed to be in permanent
decline. She saves as much money as she can by buying her clothes at
discount stores, making her own lunches and forgoing travel abroad.
She said that while her generation still lived comfortably, she and
her peers were always in a defensive crouch, ready for the worst.

“We are the survival generation,” said Ms. Higaki, who works part time
at a furniture store.

Hisakazu Matsuda, president of Japan Consumer Marketing Research
Institute, who has written several books on Japanese consumers, has a
different name for Japanese in their 20s; he calls them the
consumption-haters. He estimates that by the time this generation hits
their 60s, their habits of frugality will have cost the Japanese
economy $420 billion in lost consumption.

“There is no other generation like this in the world,” Mr. Matsuda
said. “These guys think it’s stupid to spend.”

Deflation has also affected businesspeople by forcing them to invent
new ways to survive in an economy where prices and profits only go
down, not up.

Yoshinori Kaiami was a real estate agent in Osaka, where, like the
rest of Japan, land prices have been falling for most of the past 19
years. Mr. Kaiami said business was tough. There were few buyers in a
market that was virtually guaranteed to produce losses, and few
sellers, because most homeowners were saddled with loans that were
worth more than their homes.

Some years ago, he came up with an idea to break the gridlock. He
created a company that guides homeowners through an elaborate legal
subterfuge in which they erase the original loan by declaring personal
bankruptcy, but continue to live in their home by “selling” it to a
relative, who takes out a smaller loan to pay its greatly reduced

“If we only had inflation again, this sort of business would not be
necessary,” said Mr. Kaiami, referring to the rising prices that are
the opposite of deflation. “I feel like I’ve been waiting for 20 years
for inflation to come back.”

One of his customers was Masato, the small-business owner, who sold
his four-bedroom condo to a relative for about $185,000, 15 years
after buying it for a bit more than $500,000. He said he was still
deliberating about whether to expunge the $110,000 he still owed his
bank by declaring personal bankruptcy.

Economists said one reason deflation became self-perpetuating was that
it pushed companies and people like Masato to survive by cutting costs
and selling what they already owned, instead of buying new goods or

“Deflation destroys the risk-taking that capitalist economies need in
order to grow,” said Shumpei Takemori, an economist at Keio University
in Tokyo. “Creative destruction is replaced with what is just
destructive destruction.”

Steve Lohr contributed reporting from New York

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