Japan’s experience should comfort policymakers

February 23, 2010

The conventional wisdom is that Japan has never really recovered from the bursting of the stock market and real estate bubbles in 1990. That view is basically wrong.
Sure, prices have never recovered. The stock market is still almost 75 percent below its peak and land prices are down 60 percent. After two decades of nearly stable consumer prices, the Japanese government is once again badgering the central bank to do something to create a bit of inflation.
This appeal, like so many before it, is likely to end inconclusively. Japan will continue with its longstanding pattern of near-stable prices, slow growth and gargantuan government deficits. But the economy is basically in pretty good shape.
Sure, an annual GDP growth rate of 1 percent since 1990 sounds unimpressive. But the number of people below retirement age has been shrinking by 0.4 percent a year. Annual growth in U.S. per capita GDP over the same period was 1.4 percent – not much different from Japan.
Other economic indicators suggest Japan is managing pretty well. Even in mid-recession, car sales are only 20 percent less than at the 1990 peak. Housing starts are down 50 percent, but the population was rising then and is declining now. The 5 percent unemployment rate is modest by Western standards. And the 1.4 percent yield on the 10-year government bond hardly sounds like a vote of no confidence in the government or the country.
The country’s financial burden — gross government debt at 200 percent of GDP — could yet prove too much to bear for a rapidly aging and steadily declining Japanese population. But for now, Japan should be more a sign of hope than gloom for the United States, UK and euro zone countries that have endured a severe financial collapse.
However, Japan had advantages in dealing with a financial collapse. It has a high savings rate, a big trade surplus and a powerful tradition of cultural and political unity. Few Western countries have all of these. Most also face almost Japanese-style demographic challenges. They will be fortunate to do as well as Japan.

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