Commentators, academics and policymakers often assert that Japan’s economic performance since the 1980s is one of the worst fates a rich country can endure. While this has become somewhat less common since 2008 — Paul Krugman even apologized for his earlier criticisms — concerns about the “ Japanification ” of the euro area have become particularly intense as inflation has slowed and government bond yields have converged towards zero.
In a new note, economists at Nomura suggest that Europeans should only be so lucky. After all, Japan endured its supposedly “lost decades” with grace . The euro area has not, and things could end up getting even worse.
Before we dig into the meat of their arguments in a follow-up post, we can’t stress enough how important it is to adjust aggregate economic data for demographic differences. For perspective, the number of Japanese aged 15-64 peaked in 1995 and has since fallen by more than 10 per cent. Japan’s total population hasn’t undergone as dramatic a change but it seems to have peaked sometime in 2010 and is basically the same size as it was nearly 25 years ago.
We’ve previously noted that, between the start of 2005 and the recent consumption tax increase, real GDP per person has grown more in Japan than in the US, Canada, the UK, and the euro area, while Professor Krugman has noted that real output per working-age adult in Japan has tracked the equivalent figures in the US and Europe quite closely throughout the “lost decades”.
(There were a few years in the late 1990s when the the US and Europe pulled ahead but we can easily attribute that to a combination of the Asian Financial Crisis and the temporary boost to investment and consumption from the tech bubble.)
Household consumption, rather than total GDP, is an even better comparison, since that’s a closer proxy for living standards of actual people. Real Japanese household consumption grew at an annual average rate of 1.2 per cent from the beginning of 1990 through the end of 2013 — slower than in almost any other rich country , with the notable exception of Germany:
(Sources: Eurostat , author’s calculations)
However, once you remember that Japan’s population only grew by just 0.13 per cent per year during that period (on average) the statistics look a lot different. Again, with the exception of Germany, all of the countries we looked at had significantly faster population growth than Japan throughout this period. After adjusting for population, real household spending grew more from 1990-2013 in Japan than in every country in our sample except for Sweden, the UK, and US:
(Sources: Eurostat , World Bank , author’s calculations)
Moreover, the UK and US only managed to pull off their superior consumption growth with the help of huge unsustainable debt bubbles and “wealth effects”, while Japanese consumers had to contend with sinking asset markets and stagnant nominal wages. So much for the idea that deflation kills the impulse to shop!
If we start the clock not in 1990, however, but in 2000, Japan looks even better, while the Europeans look even worse. The miserable fate of the Netherlands — a country not normally thought of as an object lesson in what to avoid — is particularly striking:
Now, one could argue that some of this is as much a reflection on the severity (and mishandling) of the aftermath of the excesses in other countries as much as it is a testament to the strength of Japan. But even if we use the cherry-picked time frame of 1990-2007, real consumption per person still grew more in Japan than in Germany and Switzerland, and almost as much as in France and Austria:
While we distantly remember the era when Germany was known as “ the sick man of Europe ,” the other three countries were not generally thought of as basket cases during that period. Another way to think about this is that real Japanese consumption growth was almost spot on the average for countries that didn’t end up with unsustainable bubbles (Spain, the UK, and the US).
Japan looks like even less of an outlier if we start the clock in 2000:
If we once again exclude Spain, the UK, and the US, Japan is right on the average. The Japanese experience is simply not that exceptional and nothing particular to be feared, at least no more than the Swiss and Austrian experiences.
To be sure, the steady growth of Japanese consumption has been powered more by the steady decline of the Japanese household savings rate than by real income growth. But that hardly makes Japan unusual among rich countries. Besides, as the Japanese population ages, it makes sense that retirees would gradually draw down their voluminous savings to support themselves. Moreover, unlike most of their peers elsewhere, Japanese household indebtedness has been dropping .
On the whole, we struggle to find evidence that Japan really lost much compared to its peers elsewhere, which is rather remarkable considering the magnitude and wastefulness of the excesses of the 1980s. In our next post, we will dig into Nomura’s analysis of why the euro area is in so much worse shape and why its deflation outlook is far less benign.