After the stock market crash of 1990 in Japan, Japan has entered a period of stagnation. Her economy grew by only a total of 0.5% between 1992 and 1994. At the end of 1999, she is expected to be the first major industrialized economy to have suffered three consecutive years of decline in GDP. Japan's prolonged stagnation is obviously a classic case of insufficient aggregate demand. But the symptom has not been responsive to the classic treatment of massive fiscal and monetary stimuli1.
Unlike the U.S. economy where domestic saving consistently falls below investment, Japanese domestic saving consistently exceeds domestic investment. In the late 1970s and 1980s, the excess averaged about 4 to 5 percent of GDP a year. Today, it totals 7 percent. Surplus production has been exported overseas resulting in huge trade surplus. From 1973 to 1985 (except for 1978 and 1979), about 40 percent of all GDP growth was supplied by a growing trade surplus. This outlet for surplus production is no longer a viable option because East Asia, which used to take 40% of its exports (Alexander, 1998), is in a slump and other trading partners are increasingly wary of persistent Japanese trade surplus.
And as Japan's fast growing economy matures, its need for investment has also subsided. With no labor growth, her economy can, at best, can grow at only 2 percent a year. But, her investment rate is still at a high double digit rate. During the 1990s, capital stock continued growing even though GDP did not. The result is excess factories, equipment, office buildings, and infrastructure. Some of these ill-considered investment also spilled over to other East Asian countries. Not surprisingly, problem bank loans has been estimated to reach 30% of Japan's GDP.
The fundamental demand-side problem is this: Since Japan has a mature economy; its growth should be led by consumer demand. But that cannot happen because households have too small a share of national income. Contrary to popular belief, Japan's high saving rate came from increased business saving rather than increased household saving. The household saving rate as a percentage of GDP stayed constant during the high-growth years while corporate profits tripled from only 5 percent of national income to 16 percent. Corporations still rake in cash flow (profits and depreciation) as they did in the high-growth heyday. They no longer plow that money back into the economy through investment, but the profits have not been returned to households via higher wages, dividends, and interest to drive higher consumption. In fact, the household share of national income has continued to decline. Consumption is low not because households save too much, but because they earn too little.
Cartellization2 of businesses with the overt or covert blessing of the Japanese government has conspired to keep wages, dividends, and interest low and prices high. Until the cartels are considerably weakened and the economy deregulated, disposable income will stay low. But many parties have a vested interest in the status quo as it protects inefficiency and provides job security in the absence of strong government-provided social safety net.
- Japan's annual budget deficit is running at about 10% of her GDP and her public debt is more than 100% of her GDP. Japan is in a classic liquidity trap with interest rates close to zero (Makin 1999).
- Japanese businesses have been bound by strong vertical and horizontal cartels at the expense of foreign and consumer interests. Firms in the same cartels buy one another's share for mutual benefits. The rate of cross-shareholding among these businesses reached a peak of 72% in 1988.
- Katz, R. "Economic Anorexia: Japan's Real Demand Problem," Challenge, 3/1/1999.
- Alexander, G. "Japan Stares into Abyss," Sunday Times (London), 10/4/1998.
- Makin, J. "An Overdose of State Planning Is Killing Japan," Sunday Times (London), 4/4/1999.