Long-time readers may know that I spent a good chunk of the 2000s in Japan, the longest stretch being a two-year stint teaching at a top tier public high school northwest of Tokyo during the dark days of the Iraq invasion. That experience, combined with graduate-level courses on East Asia gives me some perspective on life in a stagnant economy.
So deeply had macroeconomic issues permeated Japanese consciousness that in one of the advanced courses I taught, one of my students offered a presentation on “The Bubble,” referring to the real estate bubble that festered in Japan between the Plaza Accord of 1985 and 1991. Because Fed Chairman Paul Volcker raised interest rates into the double digits in the early 1980s, the dollar’s value soared, wiping out U.S. exporters. To compensate, the Reagan administration along with a bunch of first world central banks, agreed to revalue the Yen and the West German (don’t get write about that country often) Deutschemark (or that currency either) against the dollar. The result was a valuable Japanese currency that corporations plowed into real estate thanks to subprime lending. Here’s what the Plaza Accord did to the Yen.
The Louvre Accord in 1987 stopped the process.
Courtesy of the IMF, here’s Japan’s real output in 2000 constant Yen (billions). You can see growth halting in 1991.
Between 1980 and 1991, GDP grew at a 4.5% annualized rate (5.1% between 1986 and 1991). By contrast, from 1991 until the beginning of the recovery in 2002, it was 0.8%, and from 2002 to 2008 it was 1.5%.
Aside from a historic moment in the early 1990s in which the socialists took power, the Liberal Democratic Party (LDP)—the party that controlled Japan since before the communists ruled China—began running the country again in 1996. Having no idea how to deal with a popped asset bubble, it was slow to reduce interest rates, cut government spending in 1996, increased it slightly in 1998 by building roads between rural prefectures and issuing shopping coupons, and began cutting budgets again in 2001. Japan’s economy began showing real growth in 2003, thanks in part to Japan’s trade surplus and superstar Prime Minister Koizumi’s efforts to cut nonperforming loans from banks’ balance sheets. I don’t know how the Japanese government measures unemployment, but this is what it looked like:
Why so low compared to the U.S.’s misleading measurement? The LDP’s ruling policy since the 1940s was “Comical Nepotism”: political scandals (such as accepting bribes from Lockheed Martin) were fine so long as everyone is employed, which is surprisingly generous given that the LDP’s base lies in rural prefectures, which is overrepresented in the legislature. I also suspect that watching its grandparents dig themselves out of fire- and nuclear-bombed rubble left an impression on the ruling class.
The United States, however, is not ruled by governing parties that care about unemployment. It is making all the same mistakes while inventing a few of its own. It does not run a trade surplus (even when it should be with developing countries), political paralysis prevents any action to reduce private sector debt (the bankruptcy code still bars mortgage cram downs), it’s contemplating spending cuts that thankfully only amount to 5% of projected spending over the next decade, murmurs of a double-dip recession loom, and in several years the government will have to explain to the public why all the student debt it lent out isn’t being paid back. As far as history is concerned the U.S. government’s abject incompetence will make forgotten LDP prime ministers like Obuchi Keizo (1998-2000) appear prudent solons.