There's been some discussion on this blog about how much responsibility the LDP bears for Japan's current economic woes. Has Japan been helplessly swept up in a crisis of America's making? Or did LDP policies leave Japan more vulnerable than necessary to the storms sweeping the global economy?
The answer, as I see it, is "both." To understand exactly where the LDP's faults lie, it's important to understand the multiple channels through which global economic crises spread.
One channel of contagion is the financial channel; falling demand for assets in one part of the world reduces the price of those assets, which causes capital losses to financial institutions in other parts of the world. In the current crisis, those assets are U.S. mortgages, mortgage-backed securities, CDOs, CDSs, asset-backed commercial paper, and other various debt-related securitized products. And, remarkably, Japan's financial institutions have relatively little exposure to these products — much less exposure, in fact, than any other large rich country.
In other words, Japan dodged a huge bullet. If Japanese banks, hungry for profits after years of capital rebuilding, had jumped into US debt and derivatives markets as European banks did, Japan would now be facing a financial meltdown to rival 1990. The fact that Japanese banks didn't jump on the bandwagon is a huge coup. It's unclear how much, if any, of the credit for this goes to the LDP. A lot of it is simple luck and timing.
The Japanese economy, however, has still been hit hard, through the second channel of contagion: exports. Japan remains an export-dependent economy, one that is still structurally weak in many ways. How much of the blame does the LDP take for that? A lot, I would argue.
Many have noted that Japan's export dependence is a result of sluggish consumption growth during the Koizumi years, a weakness that continues today; the reason for that sluggish growth is less discussed. One reason is the demographic transition; Japan's market size relative to the world economy has shrunk. Whether the LDP deserves the blame for that is the subject of the ongoing debate about fertility.
A second reason for sluggish consumption growth is stagnant wages. Globalization takes part of the blame for that, but much of the effect is due to shifts in the labor market. As Japan's baby boomer men retire, many have been replaced not by full-time workers with lifetime employment guarantees and seniority-based wages, but by low-paid, insecure temporary workers. That helped Japan's companies cut costs, but it put a huge damper on consumption, because generational turnover has made mean wages fall automatically.
I blame the LDP not for allowing the rise of temp workers, but for encouraging the creation of a two-tiered employment system in the first place. Baby boomer salarymen, with their secure jobs and non-performance-based wages, were and are getting paid more en masse than their productivity justified. Which means younger generations are getting paid less than their productivity justifies. That's made Japan less efficient, and left it more exposed to an export slump than it might have been.
The LDP has done other things over the years that had the effect of suppressing Japanese consumption — nontariff trade barriers, restrictions on FDI, inadequate antitrust enforcement, etc. And of course, there were all the mistakes of the Bubble Era, which have left Japan's companies (and therefore domestic investment) in a weak position to this very day. The LDP should have been banished in 1993, giving opposition parties the chance to reform the bureaucracy and other broken institutions. Fifteen years of reform could have left Japan stronger in 2008, but that ship has sailed.
To sum up: Japan's lack of direct exposure to America's financial crisis offered it a golden opportunity to come out of the world recession with a head start on every other economy in the world. But because of decades of LDP failure to address other problems in the economy — sins of omission and commission — Japan missed that opportunity, and must suffer alongside everybody else.
The next key question is: Would the DPJ do better? Going by Ozawa's promises, I'd conclude that in the short term it would not. Japan's best hope now is for the long term - embarking now on a path of institutional reforms will make Japan much stronger ten or fifteen years in the future. Better late than never, I say.
— Noah Smith
The answer, as I see it, is "both." To understand exactly where the LDP's faults lie, it's important to understand the multiple channels through which global economic crises spread.
One channel of contagion is the financial channel; falling demand for assets in one part of the world reduces the price of those assets, which causes capital losses to financial institutions in other parts of the world. In the current crisis, those assets are U.S. mortgages, mortgage-backed securities, CDOs, CDSs, asset-backed commercial paper, and other various debt-related securitized products. And, remarkably, Japan's financial institutions have relatively little exposure to these products — much less exposure, in fact, than any other large rich country.
In other words, Japan dodged a huge bullet. If Japanese banks, hungry for profits after years of capital rebuilding, had jumped into US debt and derivatives markets as European banks did, Japan would now be facing a financial meltdown to rival 1990. The fact that Japanese banks didn't jump on the bandwagon is a huge coup. It's unclear how much, if any, of the credit for this goes to the LDP. A lot of it is simple luck and timing.
The Japanese economy, however, has still been hit hard, through the second channel of contagion: exports. Japan remains an export-dependent economy, one that is still structurally weak in many ways. How much of the blame does the LDP take for that? A lot, I would argue.
Many have noted that Japan's export dependence is a result of sluggish consumption growth during the Koizumi years, a weakness that continues today; the reason for that sluggish growth is less discussed. One reason is the demographic transition; Japan's market size relative to the world economy has shrunk. Whether the LDP deserves the blame for that is the subject of the ongoing debate about fertility.
A second reason for sluggish consumption growth is stagnant wages. Globalization takes part of the blame for that, but much of the effect is due to shifts in the labor market. As Japan's baby boomer men retire, many have been replaced not by full-time workers with lifetime employment guarantees and seniority-based wages, but by low-paid, insecure temporary workers. That helped Japan's companies cut costs, but it put a huge damper on consumption, because generational turnover has made mean wages fall automatically.
I blame the LDP not for allowing the rise of temp workers, but for encouraging the creation of a two-tiered employment system in the first place. Baby boomer salarymen, with their secure jobs and non-performance-based wages, were and are getting paid more en masse than their productivity justified. Which means younger generations are getting paid less than their productivity justifies. That's made Japan less efficient, and left it more exposed to an export slump than it might have been.
The LDP has done other things over the years that had the effect of suppressing Japanese consumption — nontariff trade barriers, restrictions on FDI, inadequate antitrust enforcement, etc. And of course, there were all the mistakes of the Bubble Era, which have left Japan's companies (and therefore domestic investment) in a weak position to this very day. The LDP should have been banished in 1993, giving opposition parties the chance to reform the bureaucracy and other broken institutions. Fifteen years of reform could have left Japan stronger in 2008, but that ship has sailed.
To sum up: Japan's lack of direct exposure to America's financial crisis offered it a golden opportunity to come out of the world recession with a head start on every other economy in the world. But because of decades of LDP failure to address other problems in the economy — sins of omission and commission — Japan missed that opportunity, and must suffer alongside everybody else.
The next key question is: Would the DPJ do better? Going by Ozawa's promises, I'd conclude that in the short term it would not. Japan's best hope now is for the long term - embarking now on a path of institutional reforms will make Japan much stronger ten or fifteen years in the future. Better late than never, I say.
— Noah Smith
5 comments:
Noah,
I agree fully that the LDP had nothing to do with the low level of exposure that Japanese banks had to the subprime crisis. They were hardly targeted by the salespersons who were looking for funds in such investments, mainly due to the fact that they were barely in position to contribute. Still, Nonrinchukin et al did lose quite a bit.
I agree more with the role of the LDP and the bureaucracy in hurting the labor force. Declining wages is a given when more highly paid workers are retiring. Still, we have to examine why deregulation has allowed up to 35% of the work force to be contract workers. Is this what Japan Inc needs to survive?
The answer to that question is a clear no, amongst firms with a large workforce. When we really look at who works on contract status, we find that it is most prominent amongst small and medium sized firms, where nearly 70% of the workforce is employed. For these firms, employing workers on part time basis helps avoid the massive costs of social insurance.
Exports amount to about 15% of Japan's GDP; drops in consumer spending and capex hurt GDP more than declining export growth.
I would like to see what percentage of the US population works at or within 10% of the minimum wage. Given that about 2/3 of US GDP depends on domestic consumer spending, I think a comparison to Japan would be in order.
Exports amount to about 15% of Japan's GDP; drops in consumer spending and capex hurt GDP more than declining export growth.
Two answers to that: volatility and multiplier effects.
Exports are volatile. Japan's exports just fell 26.5% in a year. Consumption never swings anywhere near that much.
And a lot of capex spending is for export industries, or firms that sell to export industries. Then there's the reduced wages and employment in export industries, which means shrinking consumption, which means a slump in domestic industries too - multiplier effects in action.
So that 15% of GDP can be the tail that wags the dog, if it's subject to big exogenous shocks...which it is!
Ken and Noah -
Strong work and benefits guarantees have been a major, if not the major, cause of high structural unemployment in industrialized countries. Given the premium Japanese citizens and society place on employment--any kind of employment--legislation and regulation protecting permanent positions had no sustainable constituency.
One more "America" point needs to be considered. There is a strong belief that American pressure is behind the Japanese government decision not to take serious action on the skyrocketing yen (which is hammering exporters). Of course, we can blame the LDP for putting themselves in a position where they "can't say no", but the rise of the yen is a major Japanese woe right now and the American government is part of the problem.
The Japanese exposure to securitized products is not insignificant. Norinchukin have exposure of at least $50B (and they were still actually actively buying into H1 '08), MUFG exposure is north of $30B.
As for the LDP vs DPJ, given that one of the main pillars of support for the DPJ are the trade unions, it is difficult to see that they are going to be any better at instigating any kind of fundamental reform. The corporation "vs" trade union dynamic in Japan is such that it is the trade unions who are now most vocal about resisting the reinstatement of bans on temporary workers in the manufacturing sector.
I blame the LDP (and its corporate backers represented by the Keidanren et al) and the DPJ (and its trade union backers represented by Rengo et al) for screwing the younger generations to preserve the status quo for the older generations who have fiddled as Rome burns.
Talk about a move towards a two party political system is scary when the coporations and trade unions (who are the main backers of the two major parties) are joined at the hip.
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