| By Kolsen Shunk | November 23, 2021 |
Simon Kuznets once said that there are four types of economies: developed economies, underdeveloped / developing economies, Japan, and Argentina. Argentina is unique in that it has all of the right conditions for economic growth and the potential to be wealthy, but for some reason isn’t growing. Japan, at the time Kuznets said this, was the opposite. Japan was a country with almost none of the right conditions for economic growth, that still managed to grow rapidly and eventually become the second largest economy in the world. Even after Japan's economy stopped growing in the 1990s, it is still unique because it is now developed and despite the government's best efforts, has still not been able to grow.
The four main conditions for economic growth are population, natural resources, capital (debt, stock market, investment, infrastructure), and technology. In the early 1900s Argentina's economy had a fast growing population of European immigrants seeking better quality of life, had vast agricultural resources that were exported to the rest of the world, was the recipient of much foreign investment, and was effectively utilising new agricultural technologies. Compare this with Japan. For centuries Japan had been an isolationist and closed off from the rest of the world, had little to no natural resources, and was undergoing political turmoil. These were not the ideal conditions for economic growth.
In the middle of the 19th century, the Meiji restoration occurred in Japan. After overthrowing the shogunate in a revolution, the new government of Japan was highly centralised, nationalistic, and wanted to modernise and industrialise rapidly so that they could defeat European powers. However, Japan ran into a problem: it needed to industrialise rapidly, but had very few natural resources to do so. Because of economic circumstances and nationalism, Japan decided to invade Korea, and later China. It was ultimately successful in conquering much of China, Southeast Asia, and the Malay Archipelago. Although Japan did industrialise, modernise, and imperialise, Western Nations' better trained armies and technology led to Japan's defeat in WW2.
As many as three million Japanese people died in WWII, and after two atomic bombs were dropped on large Japanese cities, Japan's economy crashed. Japan decided to utilise the labour force it had left by moving them away from low productivity industries like agriculture towards higher productivity industries such as manufacturing and electronics. Japan was recovering at a time when globalization and free trade was rapidly becoming more popular in mainstream economic thought, and Japan's productive and educated, yet cheap labour force made it very competitive in the global market.
Japan's economy saw a massive, sustained economic boom that lasted from the end of WWII until the 1990s. Cheaply imported technology allowed for a massive boost in productivity. Japan became one of the largest producers of several industries such as car manufacturing and electronics, and Japan had a consistent trade surplus with many other nations in the world. Japan's economy grew to such an extent that by the 1980s economists were theorizing when Japan's economy would overtake America's economy. This fear of Japan overtaking America led to trade wars between the USA and Japan, as well as the Plaza Accords which depreciated the US Dollar and made trade with Japan less valuable. The Bank of Japan would attempt to alleviate this by depreciating the Yen and lowering interest rates.
This lowering of interest rates created a bubble in Japan and caused Japanese citizens to take out massive loans that they otherwise would not be able to pay back. Therefore if the Bank of Japan (BOJ) decided to raise interest rates, millions of Japanese citizens would not be able to repay their loans, and the economy would crash. Another result of low interest rates was a massive inflation in the value of stock and real estate. The BOJ was concerned about a bubble forming and decided to raise interest rates in 1989. Unfortunately the BOJ severely underestimated the severity of the bubble.
This caused less borrowing for home loans, and many Japanese citizens were unable to pay their mortgages at the same time their property values fell. Now that people were struggling to repay their debts, many had to buy less stuff. Because of lower demand, prices would fall. This caused many companies to lower wages in response, and the consumption of goods decreased from there. This process is known as deflation.
Even though the BOJ lowered interest rates, it could not break the cycle of deflation. The BOJ would also attempt quantitative easing, in which billions of Yen are given to banks in the hope that they lend to borrowers and stimulate the economy. However, because the economy was in a downward spiral, it was too risky for banks to give loans to people so this quantitative easing didn’t end up working.
Eventually, the BOJ ran out of the money it stored from consistent trade surpluses, and they couldn’t lower interest rates further because the rates were already 0%. Eventually however, the BOJ managed to pay off the massive private debt that many were struggling to pay. Unfortunately this created a new problem, the debt had not been erased, it had merely been transferred from private citizens to the government, which due to deflation, was receiving lower tax revenues that made it difficult to repay those debts.
Deflation also hurts an economy when there are little to no debts, as it encourages saving rather than spending. Why should anyone buy a car now if they can buy that same car at a lower price next year? This contributes to the cycle of deflation, and ruins an economy, because economic growth is dependent on the assumption that people will buy more things.
After printing lots of money and giving it to banks, Japan finally experienced mild inflation again. However, almost immediately after inflation started to appear, the 2008-2009 global financial crash occurred. This caused the USA and EU to stop buying Japanese exports, as they no longer had enough money to keep buying, and Japan's economy crashed again, resulting in the deflationary cycle beginning again.
Japan decided to implement radical changes (and by radical changes, I mean the same practices they have been using for decades, but on a larger scale). This included negative interest rates, printing way more money, amplifying quantitative easing, tax cuts for corporations, and massively increasing government spending and cutting taxes. This created so much government debt that before COVID-19, Japan's debt-GDP ratio was over 240%. The massive tax cuts given to corporations did little to stimulate the economy because these corporations would either hoard the money or give it to shareholders who would hoard the money. Similarly, due to expected deflation, households also wouldn’t spend the money that they received.
The final nail in the coffin of Japan’s economy is a declining and aging population. Japan’s population is getting older on average, meaning that more people are retiring than are being born and entering the workforce. This means that much of the productivity of the working age population is going towards supporting the retired rather than growing the economy. Birth rates in Japan are among the lowest in the world, and due to the difficulty of learning the Japanese language, and the fact that Japan’s economy is stagnating, there is very little demand for immigration to Japan. This means that the population will decline, and as population declines, economic growth becomes almost impossible.
Albert Einstein said that the definition of insanity is doing the same thing over and over again and expecting a different result. By this definition, the Government and BOJ are insane, as they have spent the last 30 years attempting to stimulate the economy through the same measures of printing money and giving loans to banks, yet no inflation or economic growth has been produced as a result of this. Combining the insistence of Japan’s institutions to use these measures and an aging population, it is hard to see a future in which Japan grows again. Even if Japan will never be as prominent as it once was before the bubble burst, it serves as an example to other countries of the dangers of economic bubbles, deflation, and low interest rates. It is uncertain whether other nations will ever follow the path of Japan, but it’s uniqueness unquestionably gives it reason to be one of the four types of economies in the world. Such is the economy of Japan.
Comments