Since the collapse of the Japanese debt bubble in 1989-90...GDP averaging around 0.8 per cent a year. Nominal GDP is roughly the same as it was in 1992.
The world moved ahead and Japan is stuck where it was 20 years ago.
History repeats for Japan economy
BY:SATYAJIT DAS From: The Australian March 04, 2013 12:00AM
JAPAN has had seven prime ministers in six years and six finance ministers in three years. Former Brazilian president Luiz Inacio Lula da Silva once joked that in Japan you say good morning to one prime minister and good afternoon to another.
The rapid turnover may explain second-time prime minster Shinzo Abe's urgent actions to try to resuscitate its moribund economy. Since the collapse of the Japanese debt bubble in 1989-90, Japanese growth has been sluggish, averaging around 0.8 per cent a year. Nominal GDP is roughly the same as it was in 1992.
The initiatives revolve around an additional $US130 billion ($127bn) of public spending and aggressive yen printing by the Bank of Japan to create inflation to reduce the debt-to-GDP ratio and devalue the yen. All these policies have been tried before, without much success.
Since the collapse of its bubble, Japan's budget surplus of 2.4 per cent in 1991 has become a chronic large budget deficit. Japan now spends more than Y=200 ($2.09) for every Y=100 of tax revenue received. Government gross debt has arisen to around 240 per cent of GDP. Net debt (which excludes debt held by the government for monetary, pension and other reasons) is about 135 per cent.
Increased government spending will allow politicians to channel funds to favoured projects. But if the past is any guide, much of the investment is not productive. Investment has increasingly been misallocated into expanding manufacturing capacity and excessive infrastructure spending. This has reduced returns on investment and Japan's potential growth rates.
After the initial boost to activity, this infrastructure investment requires perpetual maintenance expenditure, absorbing scarce government resources.
The BoJ has tried unsuccessfully to increase inflation to reduce debt. Japanese inflation has averaged minus 0.2 per cent in the 2000s.
The BoJ has agreed to support the Prime Minister's initiatives, announcing a policy of "open-ended" asset purchases and a 2 per cent inflation target. But asset purchases will only begin in 2014. It is not clear what the BoJ can do to achieve the new inflation target, which is well above current forecasts.
Abe's announcement has succeeded in weakening the yen. The sharp fall took the government by surprise, with government officials puzzlingly stating that the yen had actually fallen too far.
A weaker yen will help Japan's exporters. But weak demand in its major market will limit the benefit. Attempts to weaken the yen affect other nations such as the US, China and Europe, which have expressed alarm and pointed to the risk of a currency war.
Competitive devaluations and monetary policy from other central banks will neutralise the effects: after all, not every country can have the cheapest currency.
To date, Abe has not tackled more sensitive structural changes, such as deregulating the economy and opening the country to international competition through free-trade deals. He has not addressed the demographic problems of an ageing population and a shrinking workforce, which are increasing health and aged-care costs, expected by 2025 to be 10 to 12 per cent of GDP.
The policies will provide a short-term lift in economic activity but are unlikely to create a sustainable recovery. They will compound the ongoing problem of large budget deficits and government debt levels.
Current territorial disputes with China complicate Japan's problems. They have exacerbated the decline in exports. Abe has signalled an increase in defence spending to support the proposed abrogation of its limits to self-defence.
The Japanese government's policies are oddly reminiscent of the old slogan from the Meiji restoration, fukoku kyohei - "a rich country and a strong army". It will be interesting to see if they can restore Japan's fortunes.
Satyajit Das is a former banker and is the author of Extreme Money, and Traders, Guns and Money
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