Will Japan’s Lost Decade Become the Norm?

Blomberg columnist William Pesek plays out a line of thought that may have occurred to some readers: what if the resolution of the credit crisis and global imbalances isn’t a nasty recession or punishing inflation but Japan-like protracted low growth, with stagnant to deteriorating living standards?

This idea may not be as much of a stretch as it sounds. Policy makers, in trying to avoid the depression/entrenched inflation extremes, may steer themselves into the Japan solution.

In the US, despite the brave talk of free markets, we have been socializing losses right and left and trying to shore up plummeting asset values. Although inflation is running at high rates in many countries, it is the product mainly of commodities price increases due to developing economy demand. If the banking system in the US, UK and Europe are in as bad shape as I think they are, demand for imports will slacken further, which will reduce growth, and in some cases, reduce consumption. Reader DownSouth reminded us that from 1979 to 1983, oil consumption fell from 67 million barrels per day to 58 million bpd. And high fuel price act as a tariff, again hurting exporters. We have already discussed that factories near Hong Kong are being shuttered at a rapid pace, and this is before the expected post-Olympics slowdown.

Similarly, the strain on food prices is due to biofuels, increased consumption of meat in third world, and poor harvests in Australia, have put pressure on foodstuffs. Biofuels subsidies may get undone (one can only hope) and similarly, higher food costs will have us all, not just people in developing countries, being more sparing of our meat consumption. A near-global slowdown will intensify that trend.

And there is the bigger question of whether we really have reached a crisis of capitalism, whether a system whose raison d’etre is growth and increasing standards, can adapt to a world of resource constraints. The optimists at the Milken Institute Global Conference felt that technology would provide and answer. But new technologies take time to be developed and implemented, particularly on a broad scale, while the needs appear urgent.

From Bloomberg:

Count Hong Kong real-estate mogul Ronnie Chan firmly among those who think Japan’s 1990s experience is highly instructive. The reason: Lost decades may become the rule, not the exception.

“What if the lost decade in Japan becomes the global norm?” Chan, chairman of Hang Lung Properties Ltd., said at the Asia Innovation Initiative conference in Fukuoka, Japan, on July 8. “Can you imagine that? Perhaps we should. Perhaps people should get used to slower growth, or no growth.”

It’s not that Chan, who runs Hong Kong’s fourth-largest real-estate development company by market value, is a pessimist. Property developers don’t often relish 10 years of lost growth here and 10 years of declining asset values there. Chan sees a rare confluence of economic and demographic trends that bode poorly for a global rebound.

No one should be surprised by the rapid pace of economic expansion after World War II…. It began from a low base, following the devastation of economies in Europe and parts of Asia. Next came rapid population growth and a boom in innovation. Then there were new social and institutional paradigms as democracy spread and organizations such as the United Nations and the World Bank offered support.

Today, the picture looks vastly different. As everyone tries to stabilize growth, things are hardly at a low base. Population growth is fueling demand for commodities, driving up inflation and increasing poverty rates. Innovation may slow as investment dries up. And institutions such as the International Monetary Fund hardly seem up to today’s challenges.

Oddly, one of Asia’s potential failures is democracy, Chan says. It simply isn’t proving to be the panacea that leaders in the U.S. and Europe promised. Poverty rates remain stubbornly high in many Asian democracies, and so does corruption. The former is often a result of the latter.

It’s certainly not that democracy is bad. Yet there’s something to be said about what Chan calls “premature democratization” in Asia.

Elections matter only when nations build strong institutions such as independent courts, ministries, a free press, credible central banks and ample systems of checks and balances. Their absence means many governments don’t operate as transparently or successfully as expected.

Yves here. That is not a trivial point. My Communist college roommates would remind me that Russia and China were the only economies to industrialize in the 20th century (for the record, I was apolitical then and previously had a someone who appeared in the Ivy League Playboy issue and later a brilliant but highly wound poet as roommies).

Similarly, Japan with its one party system is not exactly a Western-style democracy. Singapore, an island with just about nothing going for it, and some serious disadvantages at the time of its independence, prospered under a far sighted nation-builder who bordered on being a benevolent dictator, Lee Kwan Yew. Yew in particular was concerned about corruption, and early on created tough watchdog agencies and implemented the policy that top bureaucrats would earn the same level of pay as top private sector professionals, both to make sure the government would attract good people and reduce the incentives to cheat.

Back to Pesek:

All this may be a problem for the region as it tries to avoid the worst of the credit-market crisis. Chan wonders if the type of prosperity during the decade before the 1997 Asian crisis will be more unusual in the future.

“Those 10 golden years of rapid growth and high returns may well have been an aberration,” Chan says.

The combination of surging energy and food prices will challenge economies with political rifts, such as Thailand and Malaysia. Nor does it bode well for high-poverty ones such as Indonesia and the Philippines, or those trying to compete amid China’s boom — South Korea, Singapore and Taiwan, for example.

Slower growth is absolutely necessary, of course. Economists, including Kenneth Rogoff of Harvard University, argue that accelerating inflation is a clear sign the global economy needs to cool to let commodity supplies and fuel alternatives catch up. Yet a sharp slowdown in Asia may be devastating.

Take China, which needs to expand about 10 percent annually to raise the living standards of 1.3 billion people. Slowing growth will place dangerous pressure on Asia’s second-biggest economy. For a nation at China’s level of development, 5 percent growth is essentially a recession…

Policy makers are merely putting off the inevitable and treating the symptoms of what ails the global economy. If they aren’t careful, Japan’s experience during the 1990s will become a familiar one.

“It’s not a scenario many expect for the West or for Asia,” Chan says. “But I’m not sure it can be ruled out.”

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  1. Anonymous

    It is not difficult to imagine a sequence of rolling crises whereby the credit crisis is succeeded by the energy crisis Charlie Maxwell has predicted in 4/5 years’ time which in turn overwhelms the world economy just as the effects of global warming become increasingly severe.

    Slower growth (i.e. less environmental degradation) and lower living standards in the developed world are to be welcomed but will inevitably hamper our ability to make the transition to a low-carbon economy.

    Thomas Homer-Dixon covers this territory with aplomb in “The Upside of Down”.

  2. Anonymous

    I think people confuse Capitalism and Democracy….they are supposed to be two very different things. In America, we have seen democracy effectively vanish. We now operate mostly as capitalists in both economics and politics, and thus have the monied special interests at the top functioning like benevolent dictator without enough benevolence. Ultimately, though, capitalists are nationless (they economic nations unto themselves) and reduce countries to demographic zones.

  3. Richard Kline

    With regard to the US, I don’t think the original question is an either-or. From my perspective of considering long-trend historical analysis, I think it’s highly likely that the US will have a ‘lost decade’ of stagnation and minimal growth that feels more like a decline. Through a generation, we have put off multiple, crucial macro-economic initiatives; now, we will have to implement and pay for them all at once. A real health care system, and it’s funding. Affordable higher education that hasn’t been for ten years. A complete reconfiguation of public mortgage subsidies. A tax system which supports public expenditure even at the current rates. A prodigiously expensive, unproductive, and unsuccessful military establishment experiencing continuous mission creep at the behest of peabrain politicos of all flavors. A great deal of infrastructure work which has been shriked by deadbeat governments, local and federal. Urban sprawl which will be tremendously costly to either sustain or abandon with permanently doubled or trebled oil prices from the time of their masterplan approval. Failure to meet any of these initiatives only precipitates more stagnation; successfully meeting them requires long-term revenue commitments for which we have neither consensus nor planning. The dollar is not going to recover to its former levels, so our long term costs for imports finished and raw will take a bigger chunk of our discretionary income than we have been accustomed to hitherto. Oh, and we have a colossal amount of existing public debt to fund if not retire. Inflation takes everyone of these problems, inverts it, and makes the ass-end balloon (not pretty). Yadda, yadda, yadda, but look, these things take time to work through, and most of them simply can’t be put off another ten years like they have been for thirty.

    The question is whether ten years of stagnation begins with three-five really bad years of implosion. If the powers that be do _really rapid triage_ cutting out the infected capital in the financial system but keeping the banking system as a whole solvent, we may get only three-five crummy years and long and featureless financial plain. If those said powers throw huge public commitments at stupendous private paper losses, we’ll blow our powder early and have nothing left to fund the necessary parts of the re-build. Or if the authorities kill our currency, there will be Hell to pay, but the Devil will have to get in line behind all our senior creditors overseas. To this point, it’s a near run thing as the public authorities seem so mesmerized on the need to coax bankrupt speculators back in from their window ledges with great wads of public cash that they are leaning toward blowing this thing, badly (when they should slam down and bolt the frickin’ window instead and pray for a high wind). Nor can they conceivably save individual mortgage holders from asset price declines; faith based economics just won’t serve: those losses are in the pipeline and inevitable, so effort would be better spent on political mitigation. Our present ‘leadership’ is 1930 level, sold to the system and paralyzed in the headlights, so I think implosion is the more likely experience, if not the certain one.

    However, as the US goes so _does not go_ the rest of the world. I’m going to steer clear of the EU in this monologue. That said, what typically produces growth is demand, and there is tremendous demand starting from a very low base in many, indeed most, ’emerging economies.’ Domestic demand in India, China, Vietnam for a few will produce growth if the public authorities there choose to use that ratchet. Whether that growth is ’emergent high’ or ’emergent low’ it is likely to be positive and substantial because the bar is set lower in these realms. In this respect, the article prompting Yves’ post here seems to me off base, and their musings regarding the ‘inefficacy of democracy’ not at all cogent to the issue of growth (despite what neo-liberals would have us think, but remember Think for Yourself). Taiwan and HK may not see the kind of growth they have through the last twenty years, but China will continue to grow barring massive macrofinancial mismanagement, which doesn’t seem in the cards.

    I will add here that in my view _no one_ does genuinely good economic forecasting even five years out, including myself; good in the sense of both substantively accurate, comparable in scale to outcome, and following from anticipated causes. Even though in a rather complex way I have tools for this that others don’t which make appropriate historical comparisons possible, I still don’t see prediction as readily achievable: too much changes, and too much expected not to change proves ephemeral. Even which is which are very hard to discern from their midst, so hard that efforts to do so are more dependent on luck then perspicacity for their accuracy. So too, then, with this ‘ten flat years’ suggestion: we do not see the technological innovation, political dislocation, or military provocation which banks a moving trend into a deflection point only potential rather than probable at this instant of observation. . . . We’ll get ten flat years unless we blow a hole in them or build an autogyro for and ascension by another azimuth. Sez I.

  4. Richard Kline

    A Polish commentator quoted in the media (who and where I cannot recall) several years after 89: “What we wanted was democracy. What we got was capitalism.” So as well could seven generations in Western Europe and the United States declaim. I’d have warned the Poles and their neighbors, but I didn’t have a soapbox, and they wouldn’t have listened anyway . . . .

  5. Danny

    Sometimes I wonder how we got where we are now, and then I read comments like the first two, and, to some extent, Richard’s, and it all makes sense. Who ever thought democracy would be a good idea?

    “Slower growth (i.e. less environmental degradation) and lower living standards in the developed world are to be welcomed but will inevitably hamper our ability to make the transition to a low-carbon economy.”

    So, you would rather have humans living in lesser conditions so that the Earth is cleaner? Last time I checked, when civilizations advance, they become wealthy enough to care about the environment, and the cost/benefit analysis of accumulating more wealth versus living in a clean place becomes weighted more and more in favor of clean than in wealth. Green buildings cost more to build, so it takes more wealth to buy or rent a ‘green’ unit than it does so random rat hole with lead in the paint that is less energy efficient. You should be cheering increasing wealth, especially in places like China, as they are beginning to actually care about the crappy air, because as they become wealthier, they can care about the environment, because putting food on the table isn’t the primary issue.

    Back to the whole issue of democracy. We act like democracy wasn’t tried before modern times. That it has been the reason why we are all prosperous. That is utter and total nonsense. Anyone who has really gotten into political philosophy knows that the Greeks realized how unstable democracy was, and that it would always lead to its own collapse. Our founding fathers knew this, John Adams even said, “Democracy never lasts long. It soon wastes, exhausts and murders itself. There was never a democracy that did not commit suicide.” There are many great books on this subject, but Hoppe has one in particular, ‘Democracy: The God that Failed’.

    Those of us who understand political philosophy are watching with amusement as democracy murders itself. The crazy democratic ‘solutions’ that are going to be proposed and put into place will hasten the self mutilation. At the same time, it is disheartening knowing what the end result will be, lots of pain for the masses, who don’t really know any better.

  6. b

    It’s always seemed to me that one obvious factor in Japan’s predicament is demographics. Their population is falling, ipso facto demand for housing and many other assets will also fall. This is already occurring in Europe, and even China’s population will peak in the next 50 years. Sometime this century, world population will begin declining.

    If population falls 1%, and real growth is flat, people are 1% richer on average. How is that worse than population growth of 1% and real growth of 2% like we have averaged in the US?

    All the navel convoluted analysis about political systems seems fairly silly.

    The big problem I foresee is that our whole economic system can’t deal with positive deflation. That’s where the Fed made it’s mistake in the early 2000s. That deflation was good. If they had raised rates, house prices would have flattened and cars and TVs would have cost less.

  7. jm


    The barber shaves all the men in town.
    No man shaves himself.
    Who shaves the barber?

  8. jm


    I think you have the best economics/financial blog on the net.
    I treasure your insights and informed commentary.

  9. jm

    I believe the critical factor determining the future path of the US economy will be how long the Chinese government can continue the dirty float that continues to give its manufacturers massive subsidies for exports to the US, and brings in the dollars with which the Chinese government buys US securities to keep our interest rates low.

    Sans purchases of US securities by foreign central banks, US rates will go through the roof, US consumption will plunge as the savings rate rises, and our retail/distribution-based economy will implode.

    Will not the money-creating mechanisms of fractional-reserve banking go into reverse as more and more loans go bad?

    It seems to me it is not a question of whether this will happen — only when.

    I suspect that the internal contradictions of the Chinese system are going to cause it to collapse just as the Soviet system did, soon after the Olympics end.

  10. Anonymous

    After looking at that link above, I knew I saw her picture before. It took me a while to find it, but there she is, Miss January 1983!!!


  11. Anonymous

    I know. I just randomly through out a date becuase deep down, all men have a juvenile side to them!


  12. Walt French

    “…Who shaves the barber?” I don’t have the original Bertrand Russell quote, so the answer — highly relevant to the assumption that Yves is male — that the barber is a woman — is probably a cop-out: the original likely forces the self-referential paradox.

    And are we in such a paradox, where our logic is doomed to fail? The arguments here are too fast & loose to be subjected to such rigor. Claims that we’re headed for a decade or more of slow growth may be true, or may not, without any reference to the reasons we give. A society produces what it is willing to. *I* think the US has lost most of its vitality, and the emergerers will be making news as they rise to our level of productivity.

    Finally, the notion that Green is a cost, not a benefit: it’s always been both. We have given very short shrift to externalities of our development, but it’s now obvious to many that choking ourselves to death is not “economic progress.” You can think of it as people ALWAYS liked fresh air, water, etc., but never had to worry about it before. The time is now.

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