Hi Mike, all this minutia could simply be meaningless data before the tsunami ...
economist.com
Economics focus
Checking the slumpometer
Feb 28th 2002
From The Economist print edition
By several measures, Japan's slump is now worse than America's was in the 1930s
HOWEVER bad Japan's economy gets, at least policymakers can console themselves that their slump is not as bad as America's depression of the 1930s. Then, unemployment rose to 25% of America's labour force. Today, Japan's jobless rate has not yet breached 6%. Judged by the extent of human misery, Japan's recession is mild compared with that in America in the 1930s. Yet an analysis by CSFB, an investment bank, suggests that, in some other respects, Japan's slump is worse than the great depression.
It is now over 12 years since Japan's stockmarket bubble burst, in December 1989. CSFB has compared the path of various economic and financial indicators in Japan with those in America over the 12 years following the bursting of its own bubble, in 1929. The striking conclusion is that output, real equity values and profits are now all much lower in Japan than they were 12 years after the Wall Street crash of 1929.
America's economy took a much steeper dive in the early 1930s than Japan's in the 1990s—industrial production fell by half in just three years. Unemployment soared, banks failed in droves, and depositors lost their savings. But recovery then came fairly quickly. Bad loans were written off, and the banks were recapitalised much sooner than in modern Japan. By 1937 American output had regained its 1929 level. It stumbled in 1938, but then rebounded strongly, helped by the outbreak of the second world war.
In contrast, Japan's industrial production stagnated for most of the past 12 years; then it plunged last year, by 15%. As a result, Japan's output today is about 10% below its level in 1989. Twelve years after America's bubble burst, output was more than 40% higher than at the start (see top chart). Likewise, profits and real share prices recovered quite swiftly in America after their initial plunge.
To judge the depth of a slump properly, one needs to go further than the CSFB study and compare the shortfall in output relative to the economy's productive potential, had growth continued on its previous trend. GDP growth averaged 3.5% in America in the 1920s, and just over 4% in Japan in the 1980s. In both cases, these growth rates were unsustainable. Most economists estimate that Japan's trend rate of growth is now much lower. Nevertheless, it is instructive to compare the actual level of GDP with its potential level, assuming these previous rates of growth had been maintained.
America's output shortfall (that is, the gap between actual and potential GDP) reached 40% of GDP in 1933, and it took until 1943 for GDP to regain its theoretical potential. In Japan the output gap has widened slowly but continuously over the past decade, and on current consensus forecasts it will exceed 30% of GDP this year. Adding up the annual loss of output, America's total loss over the 1930s still exceeds Japan's—so far. But even if Japan's economy starts to grow again, output will stay far below potential for some years.
As Japan's economic problems have been allowed to fester, the balance sheets of both banks and the government have got into a far worse state in Japan than at the corresponding stage of America's earlier slump. As nominal GDP fell, the ratio of America's net public debt to GDP nearly tripled in the first half of the 1930s, but it then flattened off as growth returned. Despite less severe deflation, Japan's net public debt ratio is already far higher than America's was at its peak in the 1930s. It is still rising at an alarming rate (see bottom chart), storing up problems for the future.
When good news is bad
Optimists argue that Japan is experiencing nothing like as much pain as America did in the 1930s. Apart from anything else, Japan's slump began at a much higher level of prosperity. Besides, only a handful of banks have failed in Japan, few big firms have gone bust and job losses have been relatively modest. The optimists are right, but in part that is because necessary adjustments after the excesses of the 1980s have been postponed.
Monetary and fiscal policy mistakes helped to deepen America's depression, but they did not prevent the adjustment that was vital for the system to cure itself. To judge by the government's latest economic package, announced this week, the political will to address Japan's problems is still lacking. The package included a call for the Bank of Japan to pursue “bold monetary policy”, new measures to support the stockmarket, and a pledge that the government would act to forestall any financial crisis. It contained no specific plans for cleaning up the banking system.
Japan's recession has not been as abrupt as America's was in the 1930s. If, on the other hand, serious reforms continue to be put off, then the total potential loss of output over the coming years could eventually exceed America's during the great depression. |
