Shop for Japan? (Noah Smith)

It has often been said, by this writer and others that Japan needs to “raise domestic consumption” in light of the current economic crisis. In actuality, this is a murky concept. There are a number of different reasons for this, and a number of ways it can be done.

Reason 1: Correcting international imbalances. “Surplus” countries (Japan, Germany, and especially China) produce more than they consume, “deficit” countries (the US and UK) consume more than they produce. This is unsustainable (obviously), and fuels dangerous bubbles. If Japan and the Surplus Gang consume more, the US can safely consume less without wrecking the world economy. Of course, it’s too late to save the world economy this year, but if the imbalances persist, this will all just happen again.

So raising consumption is considered the safest way for Japan to help fix the international financial system.

Reason 2: Avoiding a steep drop in output. If Japan sells less to the world — as is now inevitable — it can either make less or consume more. Making less means Japanese companies must either go out of business, lay off workers, or cut wages; or, more likely, all three. It means Japan will be a less wealthy place.

So raising consumption is considered the least painful way to weather the global recession.

Reason 3: Reducing export dependence. Exports are dependent on external demand, and therefore subject to big, abrupt swings. It is difficult for the government to either predict or prevent these swings. Consumption in Japan represents only 55% of GDP, compared to almost 70% in the U.S. If Japanese people are really as risk averse as they are rumored to be, they would naturally like an economy that is less vulnerable to the wild storms of global demand.

So raising consumption as a percentage of output is considered a way to reduce future risk for Japan’s economy.

There are other reasons, but these are the big three. Now the question becomes: How does Japan accomplish this feat? I am guessing that telling people to “get out there and shop,” as Bush did after 9/11, will go over like a lead balloon.

The classic way of boosting consumption is to lower interest rates, which discourages saving. However, Japan’s interest rates have been at or near zero for a long time, so there is no more ammo in that gun.

As I and others have noted, Japan’s aging and shrinking population bodes ill for future consumption. It also makes it harder to strengthen the social safety net (since young workers are needed to pay for the pensions of old retirees). Immigration will not increase enough to compensate for this decline. Even the U.S., with over a million new immigrants a year, is aging. That leaves the much-discussed fertility rate.

Finally, there is trade. Increasing imports doesn’t seem like it will raise Japanese output, but as I noted in an earlier post, it does. Output is measured in real terms. If you lower import barriers, you can get 20,000 apples per Prius instead of 7,000. That means you are richer, even if some domestic apple-growers go out of business. And it also helps reduce global financial imbalances and bias the economy toward consumption, as well. Of course, this is tricky. If you open up your country to trade with protectionist countries, as the US did with China, you can find yourself on the receiving end of a disruptive flood of cheap money. But free trade with relatively open, rich countries like the US and Europe, as well as with poorer countries like Southeast Asia and Latin America would be a great idea.

And then there’s my own idea: harness wealth effects. Most Americans are homeowners. Far fewer Japanese people are. Changing regulations, especially taxes and land-use regulations, could increase that rate. The economic security afforded by homeownership could conceivably raise consumption rates, and the extra living space might encourage larger families.

In any case, “Shop for Japan” is not nearly as foolish a motto as “Shop for America” proved to be in the earliest part of this decade. Balance, in economics as in so many things, is the goal. And a more comfortable lifestyle for the hard-working, long-suffering people of Japan would not exactly hurt the electoral prospects of the party that could deliver it.

– Noah Smith

3 thoughts on “Shop for Japan? (Noah Smith)

  1. Consumption does not have to mean \”private, discretionary consumption\”, though. An expanded safety net, reformed pension system, child care leave and so on, paid for by increased taxes, also qualifies as consumption. It has the extra benefit of reducing future uncertainty which is one of the prime reasons people hold onto their money here.It\’s really no point in trying to make, say, a couple of 30-somethings with a child consume more. They have only one paycheck so they\’re one job loss away from disaster. They have increasingly expensive high school and university fees to look forward to, and they also have the prospect of taking in and nursing either, and perhaps both, sets of parents sometime in the next 15-30 years. Any stimulus is only going to change their behavior at the margins.


  2. The international system is in the biggest crisis at least since the 1930s so it might be time to rethink a lot of things starting with which comes first, the economic system or the social system? That is, should the economic system serve social relations or must we continue to warp social relations to fit a discredited set of assumptions about some utopian self-regulating market system? It would be nice if the so-called elite would have an adult conversation about the underlying reasons for the current crisis and the dim hopes for near-term recovery. We are very deep in the doo-doo here people and cranking up consumerism might not be the answer anymore. As people lose their jobs and household debt bolts up, it will be hard to realize this fix it. There`s too much wealth concentrated in too few hands and that is exactly according to design.


  3. I don\’t think it\’s possible to boost private domestic consumption in Japan anytime in the next two decades. The population is greying and declining, and work conditions/wages are getting worse. People are simply not going to have more to spend.


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