Tuesday, March 24, 2009

Lessons To Be Learned From Japan

Japan suffered a banking crisis two decades ago. US lawmakers have the luxury of studying some of the effects of the remedies the Japanese government attempted to undertake to cure its ailing economy. One can only hope that US lawmakers won't repeat some of the same mistakes that were made in Japan in order to please constituents in the short term at a heavy price in the long term.

Japan had what's known as The Lost Decade, where economic growth stagnated for several years following its credit crisis. While there are many complex issues at play that caused this episode, one of the main problems Japan's economy faced during this time was extremely low productivity growth rates. As we've discussed, productivity growth is the key to increasing a nation's standard of living. The actions and policies of the Japanese government were often a drag on productivity, and the US would do well to ensure it does not fall into these traps.

First of all, the Japanese government exacerbated its credit problem by creating what's known as "zombie companies" by subsidizing failing banks and businesses. While these moves likely reduce mass layoffs in the short-term, they effectively are taxes on good businesses to throw at poor ones, thereby stymieing growth of great companies at the expense of poor ones.

Japan has also been slow to remove tariffs and laws protecting local businesses from competition. Without competition, firms are able to get by without improving efficiencies, and bad companies are able to stay in business, which saves jobs in the short-term, but is good for no one in the long-term. This would be akin to the US proposing "Buy American" requirements or putting tariffs on Chinese imports.

While Japanese exporters are extremely competitive because they are forced to compete globally, domestic companies within Japan are protected in order to for people to be able to keep their jobs. Mom-and-Pop retailers account for 55% of retail jobs in Japan, compared to just 19% in the US. The efficiencies that large retailers bring accounts for the fact that Japanese retail productivity is half of what it is in the US.

Similarly, the construction, health-care, and food processing industries suffer from further anti-competitive policies that have resulted in little in the way of productivity gains. Thankfully, the US is a very competition-friendly nation, but special interest groups can at times sway governments to protect certain groups.

The Japanese government also embarked on several stimulus packages (as we're seeing now in the US), but these only resulted in ballooning government debt. While stimulus can temporarily spur demand, only with policies that encourage productive growth can economies in the developed world grow in the long run. The US government should keep these issues in mind when determining its policies for navigating its way out of this recession.


Anonymous said...

Good post. Don't you think age demographics likely played a role too? Japan had no population growth and a reversal lately which would impact the economy.

Anonymous said...

The U.S. is well on its way to its own Lost Decade. Congress has already passed the first (of likely numerous) "bridge to nowhere" stimuli. We are supposedly "more creative" than Japan but our political class is now doing its best to demonize productive people and nullify any advantage we may have had. The Japanese were always more frugal but we have just started to increase our savings rate to make up for many years of profligacy. Maybe we're in for a Lost Two Decades.

Saj Karsan said...

Hi Chris,

You are right that demographics can play a role in overall GDP. But I was specifically speaking to productivity, which is a measure of output per hour worked, so for the most part it ignores the effect of people who have left or entered the work force.

sagar said...

Certainly the US companies are far better in terms of productivity, you can see the figures for WalMart they are less people in number than the population of sweden but have more revenue than the Sweden' GDP(but offcourse they dont employ people above 65 yrs of age)