In the latest episode of Power and Consequences, we (Gary Gensler and Simon Johnson) ask what happened to what was previously (eg., in the 1980s) regarded as the Japanese economic “miracle” - and why? And how does the long-term performance of the Japanese economy connect with the dramatic recent announcement that the US Treasury intervened to support the Japanese yen for the first time in 28 years? What could this imply for US interest rates?
What’s striking about the Japanese experience is not that they had a boom, bubble - and then a bust - in investments and asset prices. All too many countries have experienced such economic cycles. Japanese growth was based on real innovation by companies that appeared to be well run and that built dominant global market share. The Japanese stock market crash of 1989-90 was followed by not one or two but by ‘three lost decades’ of stagnation in total GDP. This is a remarkable and daunting story with more than its share of policy mistakes along the way.
What are the lessons and for whom? Does what happened in Japan offer warnings to the US of the dangers of a massive tech boom? Or the potential consequences of not dealing head on with economic distress if it becomes widespread? So-called Zombie firms and banks became a big part of the 1990s Japanese financial landscape.
Might Japan offer a cautionary tale for China this decade and next? Japan’s economic boom - like China’s in the past three decades - was based on export-oriented manufacturing and a tech/led economy. The Japanese authorities felt compelled to revalue (ie., appreciate) their exchange rate in the mid-1980s, coincident with when they loosened credit too much - driving up real estate prices and contributing to a big over-expansion of plant and equipment.
Today, low growth expectations and projected rapid aging of the Japanese population may also be a forerunner of what’s to come in many industrial economies - at least anywhere that significantly limits net immigration. Japan’s experience suggests that if a country wants to become or remain one of the world’s leading economies, it needs to sustain productivity growth - and it also needs to: have enough working age population (relative to the number of retirees); make sure young people receive the education they need; and promote vibrant competitive markets, including with continued entry by new entrepreneurs.
