Coming Soon: A Reply to Paul Krugman

Paul Krugman has critiqued my analysis of Japan

Update: My response is here.

In an article in the January 8 issue of the New York Times Sunday Review, I extensively debunked the story of Japan’s lost decades. My analysis has not only drawn a flood of email but has been extensively noted in  the blogosphere.  I am happy to say that most of the comments have been  complimentary, particularly comments from Americans with a real understanding of Japan (not least the sort of people who have actually visited the country!).

The most common criticism I have had is that I did not address the Japanese government’s supposedly out-of-control debt. Actually the original article did address this as well as several other myths not dealt with in the final edit but my comments  had to be  cut for space reasons (there are so many myths out there you would need to write a book to deal with them — come to think of it I have!). The first thing to note about Japanese debt is that the Japanese government can borrow 10-year money for little more than 1 percent — the lowest rate of any government I am aware of and lower even that the rate at which the British government could borrow  at the height of British financial hegemony in  the late nineteenth century. To say the least buyers of Japanese government debt don’t seem to agree that things are out of control. Basically the issue here is accounting. The ratio of 200+% of GDP often cited involves an enormous amount of double-counting with various government agencies borrowing from one another. The usual figures in other words are phony. It should also be noted that much of  the money borrowed from the Japanese public goes  to finance not  Japanese but American government spending. Much of the rest of it goes to finance various semi-bankrupt European governments.

As for the blogosphere, of particular interest is that my analysis has been critiqued by Paul Krugman. Krugman is not only a first rate economist but a gifted writer and I find myself agreeing with most of his analysis of the American economy. His understanding of Japan, however, is a different matter. I plan to respond to his comments later this week and will deal also with one or two other intelligent interlocutors. In the meantime I am racing to meet a big deadline  for my next book. Watch this space.

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Japan’s “Lost Decades”: The Sophistry Continues

My article in today’s New York Times Sunday Review has been generating heat as well as light.

An article I have written on Japan for the January 8 New York Times Sunday Review went live at the nytimes.com website yesterday and already the reaction has been the greatest I have ever known. Virtually all of it has been good but some bloggers have greatly confused the issue.

In particular I am surprised by one Washington-based trade lobbyist for a Japanese corporation who in a 2,000-word commentary has ostensibly rebutted several of my points. On closer analysis his take is just standard-issue ignorance of Japan, plus an evident desire to perpetuate the usual spin.

I have a busy today ahead of me so I will confine myself here to a representative sample of his argument — his first and closing points, which  I take it  he considers to be particularly persuasive. His first point concerns life expectancy. As I mentioned, Japan’s life expectancy at birth increased by 4.2 years between 1989 and 2009. He thinks this does not count because Japanese-Americans are also extremely long lived. Well, yes,  Japanese-Americans enjoy exceptionally good life expectancy but that surely reflects in large measure the fact that they have long ranked among the wealthiest of ethnic groups in the world’s until-recently wealthiest nation (nearly 30 percent of Japanese Americans  have college degrees). They also benefit of course from a good diet. But all this is  beside the point.   I repeat: the 4.2 year increase reflects mainly a major improvement in the Japanese healthcare system and is a powerful indicator of superior economic growth. There is no other explanation and my interlocutor provides none.

Now for his parting shot. He shows pictures of Japanese consumers lining up to buy the new Apple iPhone. This supposedly is evidence that the United States, not Japan, leads in cellphone technology. He omits to mention — something well known to anyone who follows global competition in that industry — that Apple is an outsourcer. Its manufacturing is done in East Asia, particularly in Japan and to a lesser extent Korea and Taiwan, with final assembly in China. Essentially most of the jobs are East Asian.

More generally Japan is by far the largest manufacturer of the key components in all cellphones. And the real technological magic is in these highly miniaturized components (they are why your cellphone doesn’t look like a walkie-talkie). A survey by Deutsche Bank some years ago identified nine key components in cellphones. Of the 36 manufacturers worldwide of these, 29 were Japanese — and just one was American. Japan indeed monopolizes the world supply of many such components and without them Apple, Motorola, Nokia, and so on would not have a business. An example is  capacitors, formerly the size of light-bulbs but now, using tantalum technology, no larger than a grain of salt. They are essential in virtually all electronic devices and a typical cellphone requires half a dozen of them —  all made in Japan, mainly by Kyoto-based Murata. According to the Asian Development Bank Institute, Tokyo-based Toshiba Corporation alone contributes 33 percent of the manufacturing content in the iPhone (in particular its superb touch-sensitive screen). Such manufacturing not only requires far greater per-capita capital investment than U.S. corporations can afford these days but vast amounts of secret manufacturing knowhow, typically built up over decades.

Update:

I have now had time for a few further rejoinders.

My interlocutor says that Japan’s astounding  trade surpluses do not matter, nor do America’s vast trade deficits. We have come a long way since John F Kennedy said the two things he feared most were nuclear war and trade deficits. The idea that these deficits do not matter comes from broadly the same school of economics that told Americans they could borrow ad infinitum against the value of their homes without negative consequences.

My interlocutor tries to gainsay the scale of the remarkable building boom during Japan’s supposed “lost decades.” He cites misleadingly low population figures for U.S. cities to suggest that Tokyo’s skyscraper ratio is not very impressive on a per-capita basis.  The key  fact — one that he has no answer for — is that 81 skyscrapers taller than 500 feet have been built in Tokyo proper since 1990, versus a total of only 12 such buildings up to that date. And this in a country that suffered one of the biggest real estate busts on record (true), an aging population (also true), supposedly idiotically out of control government finances (not true but widely believed in the West), and huge hidden unemployment (obviously untrue but also widely believed in the West).  The issue here again is economic growth: how can such a historically extraordinary pace of building be reconciled with the story of an economy that is supposed to be flat on its back? And why don’t the analysts who have sold us the “basket case Japan” story ever mention such interesting contrary data?

He suggests that Japanese unemployment figures are understated. Wrong. The figures I used have been adjusted by the U.S. Bureau of Labor Statistics to be fully comparable with U.S. statistics. He points out that the labor participation rate is lower than in the United States. This is true but it does not cast doubt on the low unemployment rate. The lower labor participation rate – 59 percent versus 64 percent – reflects (1) a high proportion of retirees; (2) a high proportion of young people at college; and (3) a strong cultural tendency for women to give up work once they have a child. Those of us who read Japanese know that small businesses are constantly advertising for staff. There is no shortage of jobs in Japan, either for women or men. As countless foreign employers in Japan can testify, the problem rather is a shortage of young workers.

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The Fingleton Invitation: Progress Report

People have asked me what happened to the Fingleton Invitation. The answer is nothing.

Some months ago I invited Ed Lincoln, a former Tokyo-based economic adviser to the U.S. government, to join me for a public discussion of the Japanese economy. In his capacity as economic adviser to the then U.S. ambassador to Japan Walter Mondale, Ed had been particularly influential in leading the American public to accept that the Japanese economy had somehow lost its mojo after the Tokyo stock market crash of  1990. I have consistently taken the opposite view that, slumping stock and real estate prices notwithstanding, the underlying Japanese economy has done rather well. Indeed, in key ways, particularly in the most rarefied areas of manufacturing, it has raced far ahead of the United States.

Beginning in 1998, I have on several occasions offered to debate the dozen or so leading proponents of the “basket case Japan” thesis. I have had no takers.

Ed would be a particularly relevant interlocutor, and, to cut a long story short, I offered last summer to make a $10,000 donation to his favorite good cause if he would come forward. I mentioned earthquake relief in Tohoku as a particularly appropriate cause. I have not had a reply but my offer is still open.

I have summarized my argument in an article in the January 8th issue of  the New York Times Sunday Review. To read it, click here.

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An Open Letter to Professor Edward J. Lincoln

The letter below, to the Clinton administration’s chief Japan economist, is self-explanatory.

Dear Ed:

Having heard nothing from you over the summer despite several private attempts to make contact, I must now press publicly for an answer.

As you know, I have offered to donate $10,000 to your favorite charity if you are prepared to join me for a public discussion of the hidden contradictions in the  “lost decades” story of Japan. On several occasions since 1998, I have extended similar invitations to nearly a dozen other key commentators, most of them securities analysts, yet none has come forward.

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Dollars and Dragons

I have just published the article below in  the American Conservative.

TOKYO—In the mid 1990s, I published a book entitled Blindside: Why Japan Is Still on Track to Overtake the U.S. By the Year 2000. The prediction in the subtitle did not, as they say, pan out. But it was more soundly based than casual readers of the U.S. financial press might imagine. The book offered a view on exchange rates: I argued that a huge devaluation was desperately needed to save America’s already fast-sinking manufacturing sector.

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Best Books On Japan: A Second Opinion

I have had occasion to  second-guess a recent list of best books on Japan.

An old joke has it that a newspaper editor is a person who separates the wheat from the chaff, and then prints the chaff. On this basis the Tokyo-based Japanologist Jeff Kingston shows promise as an editor if he ever tires of academe. A list he recently posted of best books on Japan  contained some notable omissions — and commissions. It appeared in the house magazine of the Foreign Correspondents’ Club of Japan. The magazine has now published a letter from me.  My letter, plus Kingston’s commendably collegial reply (he is evidently a scholar at heart!), can be accessed  here. For convenience sake I have also included the former, sans Kingston’s reply,  after the jump.

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The Weight of the Yen

As I have repeatedly documented at this website, the story of Japan’s two lost decades is a myth. But if I am right, how come so many ostensibly reliable observers seem to disagree with me? There are several reasons, none of which reflect particularly well on the reliability of  the Western press. Here I explain one of them.

Western views on Japanese economics have long been shaped disproportionately by a few Tokyo-based economic analysts working for “prestigious” Wall Street investment banks such as Morgan Stanley and Goldman Sachs.

Unfortunately these people are rarely disinterested torchbearers of truth. Not to put too fine a point on it, they profit from pumping misinformation into the Western press.

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My $10,000 charity offer: an appearance on Thom Hartmann’s show

I am still awaiting news from Ed Lincoln on whether he will join me for a debate. In the meantime my offer has not gone unnoticed elsewhere.

I created quite a splash with my offer last month to pay $10,000 to charity if the two leading proponents of the “lost decades” story of Japan will meet me for a debate. Among other things, I was interviewed by Thom Hartmann for his Big Picture show. You can view the interview here.

The American Conservative has also picked up the story and its commentary can be read here.

As I reported earlier, Robby Feldman has turned my offer citing pressure of work. The good news is that Ed Lincoln is still considering his options.

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An invitation, some surprising facts, and two elusive experts

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.

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