For thirteen years now I have been trying to organize a public debate on what really happened to the Japanese economy. The effort continues. The facts below have convinced at least one top American economic thinker that a debate is overdue.
Last week I announced I will pay $10,000 to charity if either Robby Feldman or Ed Lincoln will meet me for a debate on the Japanese economy. I contend that Japanese officials have been understating Japan’s economic performance for trade diplomacy purposes. Robby and Ed have been the two most influential American promoters of the conventional wisdom of a failing Japan.
Robby has been in touch today to decline. He is too busy.
Now it is all down to Ed, who was the Clinton administration’s chief expert on the Japanese economy. I emailed him a week ago and again yesterday but have not yet heard back.
My full case necessarily must wait for the Big Day. In the meantime, however, I offer below a few pointers to whet Ed’s appetite and demonstrate that he has a case to answer.
A key thing well known to the high priests of the dismal science, if not to the laity, is that GDP numbers are easy to rig. This is because in a complex world, accounting assumptions have become ever more debatable. We got a memorable sense of this with the collapse of Bear Stearns and Lehman Brothers a few years ago. The accounting problems in calculating a nation’s economic growth are in many ways much trickier. Because a modern advanced economy produces not only easily countable, “fungible” items such as tons of coal and bushels of wheat but all sorts of highly variegated goods and services (everything from supercomputers to palmtops, from brain surgery to junk mail), economists have to make a lot of assumptions in estimating real added value.
Basically GDP accounting is the ultimate movable feast. Many governments give themselves the benefit of every doubt (as the British magazine Money Week has pointed out, the U.S. government’s so-called hedonic accounting, in use since 1987, is a blatant case in point). Conversely a government can play things down. And that is what the Japanese bureaucracy has been doing all these years. Its motive is clear: the worse the ostensible economic news out of Japan, the less pressure Tokyo is under from foreign governments to open Japanese markets (none of the great trade fights of the 1980s was ever resolved – not cars, not financial services, not even rice).
For those who don’t live in Japan and therefore cannot see for themselves what progress it has made in the last twenty years, the most obvious indication that Japan’s GDP growth numbers are cooked is the contrary evidence of its electric power statistics. Electricity output numbers are difficult to manipulate because measurement is relatively unambiguous and the world energy business is monitored by countless watchdogs at several levels. As a result electric power numbers are often used by international financial organizations as a crosscheck when a nation’s officially stated GDP numbers are in dispute. Growth in electricity output is not a perfect proxy but it tracks GDP growth quite closely. Typically it is slower and the correlation becomes somewhat attenuated in richer nations like Japan and the United States, where energy-light services are an increasing element in GDP and conservation measures such as the use of LED lamps and efficient new compressors (in air-conditioners and refrigerators) have become widespread in recent years.
I have analyzed the figures for the 18 years from January 1, 1990 (the beginning of the Tokyo stock crash) to December 31, 2007 (the last year before the Bear Stearns and Lehman collapses plunged Americans into economic despair). During that period hardly a week went by when American securities analysts and newspaper commentators did not proclaim from the rooftops how much better the United States was doing than Japan. Even in America’s worst times, such as in the aftermath of the dot.com bubble a decade ago, the spin was generally that, however bad things were for Americans, they were worse for the Japanese.
All this talk notwithstanding, the Japanese electricity business has held up rather well – so well in fact that electricity output increased fully 41.6 percent over the 18 years. That was remarkable by comparison not just with the United States, whose growth was a mere 38.2 percent, but with France’s 39.9 percent, the U.K.’s 25.5 percent, and Germany’s mere 13.9 percent (in Germany’s case it should be pointed out that German growth was badly discombobulated in the 1990s by the temporary but severe strains of unification).
The comparison with the United States is particularly telling given the two nations’ sharply contrasting demographics. Whereas population growth exceeded 21 percent in the United States in the period, it was little more than 3 percent in Japan. This points to a truly startling – startling even for me – dichotomy: Japan’s per-capita electricity increase was nearly 37 percent whereas America’s was less than 14 percent!
How can anyone looking at these figures hold that the Japanese economy was an underperformer in recent years? It beats me and I look forward to hearing Ed’s analysis.
Of course, there is the matter of Japan’s financial crash. As I predicted it, I claim some authority in saying that it did far less damage than people like Ed and Robby seem to think. My point is that, like a well-designed ocean liner, the Japanese financial system is highly compartmentalized in a way that minimizes the risk arising from even the most serious gash below the water line. (That is half the point of the tight financial regulation that we hear so much about.)
As I have argued all along, my conviction that there is something fishy about “basket case Japan” is strongly reinforced by the evidence of world trade. Japan’s current account surplus after all has soared more than fivefold since 1990, a mirror image of America’s current account deficit, which is up five-fold.
Why does trade matter? It is a question I am often asked. First and most obviously it was Japan’s rising current account surpluses in the 1980s that originally earned it the soubriquet “juggernaut Japan.” If trade is the criterion, Japan is a far bigger juggernaut today than it ever was in the 1980s – and America is a vastly more beaten-up economic trainwreck.
In any case exporting is the ultimate real-world test of a nation’s competitiveness. It is often suggested that U.S. labor productivity is higher than Japan’s but somehow this advantage rarely seems to translate into an edge in export markets. It is useful, for instance, to check which nation has been doing better in China. The information is easily accessible on-line at the China page of the CIA World Factbook. Of China’s total imports of $1,307 billion in 2009, fully 12.3 percent came from Japan, versus just 7.7 percent from the United States. Japan was in fact China’s largest source of imports and, unlike the United States which sells a lot of low-end goods like scrap metal and waste paper, Japan’s exports consist almost entirely of super-advanced producers’ goods. All this seems the more remarkable given that America’s workforce is more than twice Japan’s.
Perhaps the most revealing aspect of this story is how Japanese officials and commentators treated the electricity anomaly: they swept it under the carpet. Whereas in any other country it would have been widely discussed (along with a couple of dozen other contrary indicators that I don’t have space for here), no one in Japan seems to have made the slightest mention of it. Not only that, there was the interesting matter of how the series was treated in Japan: An International Comparison, a handy semi-official annual statistical booklet relied on by foreign observers. This publication had long carried electricity output figures for the most recent preceding five years. This practice was stopped with the 1995 edition (whose series ended with the 1992 figure). Thereafter only the most recent year’s figure was published, thus users were left in the dark about how strongly electricity output grew in the 1990s.
During the peak of American press concern about the Japanese economy, many prominent Japanese corporate chieftains compounded the jitters with a series of absurdly over-the-top remarks. In April 1998, for instance, Sony chairman Norio Ohga made front-page headlines around the world when he told foreign correspondents, “The Japanese economy is on the verge of collapsing.” He offered no coherent reason for this view and there was no hint of a downturn, let alone a collapse, in the electricity statistics.
One thing is clear: had Japan really been close to collapse, Ohga, in common with other top insiders, would have been honor-bound to avoid exacerbating public fears. Speaking out in such alarmist terms was the economic equivalent of shouting “Fire!” in a crowded theater. As a general rule, indiscretion on this scale is not considered an asset anywhere, least of all at the top of one of the world’s largest corporations. On the other hand, if everyone in the Japanese establishment knew that Ohga’s “outburst” was merely kabuki for foreign consumption, his behavior was entirely understandable.
The most interesting thing is how his remark correlated with the information available to him as a manager. After all, when a corporate chief talks like this, we are entitled to assume things are not going swimmingly for his own corporation. Remarkably, however, 1997 and 1998 were Sony’s best ever years to that time. Sales revenues in fiscal 1998 (the year to March 1999) hit an all-time high of $56.6 billion, up from $48.7 billion in 1997 and from a mere $18.2 billion in 1989. Profits in 1998, at $1,494 billion, were only slightly down on 1997’s record $1,682 billion and were up from a mere $650.7 million in 1989. Perhaps even more amazing is this: Sony achieved higher sales growth in the Japanese home market in fiscal 1998 than in the United States (as expressed in yen, the growth was 3.6 percent at home and 2.7 percent in the United States).
I look forward to an excellent session with Ed and I hope to hear from him soon.
Below is a statistical series showing electricity trends in Japan and the United States during the “basket case Japan” era. For good measure I am also including a note from Money Week on America’s so-called hedonic brand of GDP accounting.
Electricity generation (Terawatt hours)
Year Japan U.S.
1979 585.3 2359.7
1980 572.5 2427.3
1981 580.3 2437.0
1982 578.7 2376.6
1983 614.4 2449.0
1984 643.4 2562.8
1985 666.9 2621.9
1986 671.1 2639.7
1987 713.0 2717.2
1988 748.1 2858.0
1989 793.7 3127.9
1990 835.5 3202.8
1991 863.6 3254.9
1992 870.2 3270.6
1993 878.2 3391.5
1994 936.1 3451.8
1995 960.2 3558.4
1996 981.2 3651.2
1997 1004.3 3672.2
1998 1010.0 3804.5
1999 1027.9 3873.5
2000 1048.6 4025.7
2001 1029.8 3838.6
2002 1048.4 4026.1
2003 1037.5 4054.4
2004 1067.2 4147.7
2005 1088.4 4268.4
2006 1093.0 4274.3
2007 1123.5 4322.9
Hedonic accounting (Note from London-based Money Week)
Most countries measure inflation by simply looking at changes in the prices of individual goods. However, some countries, such as the US, also take into account changes in the quality of goods in a process known as hedonic price adjustment. It is usually applied to hi-tech products such as computers and mobile phones. For example, a £1,000 computer you buy today might be twice as powerful as one you could have bought for the same price a year ago. To capture this change in quality, US statisticians ask what it would have cost to buy one of the same power back then (let’s say it would have cost £2,000 last year). This makes it look as if the price of the computer has halved, which has the knock-on effect of making the rate of inflation look lower than it actually is. And because GDP is adjusted for inflation, it affects those figures too and massages them upwards. If everyone used hedonic adjustment, it wouldn’t be a problem, as we are mainly interested in relative changes and performance. However, while it has been used in the US national accounts since 1987, the technique isn’t used in Germany, for example, so any comparison between these two countries that relies on this number is flawed.