I have actually said very little about the economic crisis in the US — and what I have said about Japan is not particularly new. For the most part I have simply updated an argument that I have made since the early days of this blog to take new circumstances into account: Japan is in the midst of systemic, secular decline, akin to the bakumatsu, the end of the Tokugawa shogunate in the mid-nineteenth century. I am far from alone in making this argument; Ozawa Ichiro himself is fond of making it, with the implication that he and the DPJ will be the instrument of Japan’s restoration. (Among foreign observers, Michael Zielenziger has made a similar argument.) Japan’s decline long predates the current financial crisis. It arguably goes back to the bursting of the bubble and the onset of the “lost decade.” The decline has institutional causes, demographic causes, and leadership causes, but these factors all add up to an unmistakable and precipitous drop in the state of the Japanese economy, the post-2001 “boom” notwithstanding.
The current crisis has served merely to illustrate just how fragile the post-2001 “recovery” was and just how little the Japanese economy has changed. As an article in this week’s Economist notes, “In the long run, what Japan needs is as clear as it has always been: less dependence on export-led manufacturers, more productive and internationally minded service companies, and a more flexible workforce that welcomes women, older workers and immigrants…For the time being, where the world economy goes, so goes Japan.” The Koizumi revolution was still-born. Structural reform was left incomplete before Mr. Koizumi departed. Even worse, Mr. Koizumi failed to destroy the old LDP. He dealt it what may ultimately prove to be a mortal blow, but in the short term he gave the party enough of a boost to ensure that a largely unchanged LDP would continue to hold power during this critical period. But not only did Mr. Koizumi serve to prolong the life of the LDP, he also dealt the DPJ a serious blow. Not only did he steal the opposition party’s better ideas, but he also served to draw reformist candidates to the LDP. With Mr. Koizumi as party leader running as an LDP candidate was palpable for young, idealistic reformers. By doing so, Mr. Koizumi deprived the DPJ of candidates who would naturally belong to the DPJ’s reform wing. The DPJ’s leadership crisis can at least partially be laid at the feet of Mr. Koizumi. The young reformers — now orphaned in the LDP by Mr. Koizumi — may yet leave, but I think that when we assess the impact of Mr. Koizumi’s tenure, we must consider this line of reasoning as one of the negative consequences. As a result, Japan now has a ruling party which in the three years since the last general election has turned its back on structural reform (and paying down the debt) and an opposition party that is not nearly as reformist as it could be.
Is it really necessary to spell out again the crisis facing Japan today? The dying regions? The bleak demographic outlook? The national debt? It is hard to overstate the impact of Japan’s national debt problem. According to this list, Japan ranks third in the world in debt/GDP ratio at 170%, behind Zimbabwe and Lebanon. The next highest G8 country is Italy, in seventh place at 104%. The numbers will change somewhat in light of various stimulus packages in response to the crisis, but in Japan’s case it will only get worse. Granted, the US has a major debt problem of its own, which barring drastic action in the coming years will only worsen. But the US has one important advantage that Japan doesn’t have: the dollar remains the world’s reserve currency. Despite the crisis, governments and investors are still willing to hold US dollars. This doesn’t mean that the US can avoid adjustment (more on this momentarily), but it does give the US government more room for maneuver. Japan’s situation is not hopeless — as an anonymous commentator to my earlier post notes (scroll to the bottom), Japan’s debt/GDP ratio includes prefectural debt and most of it is held domestically, which gives the government a cushion that the US government may not necessary have.
The consequences of Japan’s debt are clear. The government is trapped. How will it revive economic growth, foot the bill for a greater portion of welfare provisions (effectively building a welfare state), and cut its debt to more sustainable levels so that it will be able to do more for its retiring baby boomers? Japan is not alone in this dilemma, but it is feeling the pain particularly acutely.
What about the US?
First, let me say that US elites have been no less incompetent (ideological, short-sighted, arrogant, etc.) than their Japanese counterparts. The biggest difference is that Japanese elites have had years to correct their mistakes. Say what you will about President-elect Obama, but at least American voters had the good sense not to reward the Republican Party with another presidential term. I’ve seen few signs that the Democratic Party is any better equipped to deal with the crisis, but at least the Republican Party has been sentenced to some time in the wilderness, which one hopes it will use productively.
I have no doubt that this crisis is dire, and that the US has yet to hit bottom. There is still the risk that the recession will become a depression. It is still unclear whether the banking crisis has passed. The Paulson Treasury appears to have mishandled the bailout package.
And then there are the structural problems. To say that America has been living beyond its means is a gross understatement — America has been living as if the very idea of limits didn’t exist. No limits to energy consumption. No limits to the US government’s ability — by means of its unrivaled military — to reshape the world and provide extended security for the American people. At the same time, the US has neglected its infrastructure, its health care and pensions systems, and, most important for future growth, its education system. Above and beyond these serious problems, Americans and their government have acted as if there were no limit in the rest of the world’s demand for US debt.
Americans are now learning the meaning of limits. The question, as Paul Krugman notes, is what the post-crisis economy will look like. He looks at the balance of consumer spending, nonresidential investment, residential investment, government purchases, and net exports and concludes that a smaller trade deficit should step in for lower consumper spending, which means that the US may become more dependent on exports than it has been in the past. Meanwhile, as Niall Ferguson argued in Monday’s Washington Post, central to this transformation will be the US relationship with China, a relationship Ferguson describes with the unfortunate word “Chimerica.”
“In essence,” Ferguson argues, “we need the Chinese to be supportive of U.S. monetary easing and fiscal stimulus by doing more of the same themselves. There needs to be agreement on a gradual reduction of the Chimerican imbalance via increased U.S. exports and increased Chinese imports. The alternative — a sudden reduction of the imbalance via lower U.S. imports and lower Chinese exports — would be horrible.
“There also needs to be an agreement to avoid a rout in the dollar market and the bond market, which is what will happen if the Chinese stop buying U.S. government bonds, the amount of which is now set to increase massively.”
The very word Chimerica undoubtedly keeps Japanese officials awake at night, as it captures what has long been the worst nightmare of many Japanese elites: ever closer cooperation between Washington and Beijing. The thought of the economic crisis bringing the US and China closer together, perhaps under the watch of Secretary of State Hillary Clinton, is surely causing a spike in the blood pressure of certain Japanese. (That said, Ferguson does not mention that Japan holds more US treasuries than China, meaning that surely US-Japan bilateral negotiations are no less necessary thank US-China negotiations.) (Correction: As of September, China became the largest holder of US treasuries.)
Ultimately it is foolish to argue that one country’s problems are worse than another’s. The developed countries have their collective back to the wall, and not for the first time does the world run the risk of watching an age of unprecedented prosperity collapse into an “era of fear.” (It is worth revisiting a Tony Judt essay to which I linked nearly a year ago.) Japan’s and America’s problems are both severe, but different. For the past two decades, Japan has fallen from a great height, and barring adjustments, it may have further to fall. The US may yet experience a similar decline.
Finally, I must repeat what I said in the comments to the earlier post: I do not celebrate Japan’s decline. I lament it, and wish its leaders had done more sooner — and failing that, I wish that they be held responsible for their failures. I don’t believe that Mr. Aso is wrong to believe in Japan’s latent power, and hope that the government finds a way to release the energy of the Japanese people.