What happened to Japan?
By Paul Krugman
I hope that at least some of my readers are too young to remember this, but in the early 1990s, many Americans — especially pundits, but also business leaders and a fair share of the general public — were obsessed with the rise of Japan. Two of the bestselling books of 1992 were Michael Crichton’s novel “Rising Sun,” about what he imagined to be the growing, sinister influence of Japanese corporations, and Lester Thurow’s “Head to Head: The Coming Economic Battle Among Japan, Europe and America.” It’s easy to forget now, but I like to remind people how airport bookstores were full of paperbacks with samurai warriors on their covers, purporting to teach you the secrets of Japanese management.
The timing of this Japan obsession was impeccable: It came at almost the exact moment Japan’s remarkable rise turned into a sustained decline in economic power.
These days, the focus of anxiety about global competition has shifted from Japan to China, which is a bona fide economic superpower; adjusted for purchasing power, its economy is already bigger than ours. But China has seemed to be faltering lately, and some have been asking whether China’s future path might resemble that of Japan.
My answer is that it probably won’t — that China will do worse. But to understand why I say that, you need to know something about what happened to Japan, which wasn’t at all the catastrophe I think many people imagine.
Here’s the story you may have heard: In the late 1980s, Japan experienced a monstrous stock and real estate bubble, which eventually burst. Even now, the Nikkei stock average is significantly below the peak it reached in 1989. When the bubble burst, it left behind troubled banks and an overhang of corporate debt, which led to a generation of economic stagnation.
There’s some truth to aspects of this story, but it misses the most important factor in Japan’s relative decline: demography. Thanks to low fertility and unwillingness to accept immigrants, Japan’s working-age population has been declining quite rapidly since the mid-1990s. The only way Japan could have avoided a relative decline in the size of its economy would have been to achieve much faster growth in output per worker than other major economies, which it didn’t.
Given the demography, however, Japan hasn’t done too poorly. Adjusted for demography, Japan has achieved significant growth. It has seen a 45% rise in real income per relevant capita. The United States has done even better, but this hardly fits the narrative of Japanese stagnation.
Wait, there’s more. Managing an economy with a declining working-age population is difficult, because low population growth tends to lead to weak investment. This observation is at the heart of the secular stagnation hypothesis, which says that nations with weak population growth tend to have persistent difficulty in maintaining full employment.
Yet Japan has, in fact, managed to avoid mass unemployment, or indeed mass suffering of any kind. One indicator, the employed percentage of men in their prime working years, has remained high in Japan — indeed, consistently higher than that of the United States.
What about young people? Japan did see a rise in youth unemployment (ages 15-24) in the 1990s, but that rise has since been reversed.
So Japan’s economic performance since the days when everyone thought it would rule the world has actually been pretty good. It’s true that employment has been sustained in part through large deficit spending, and Japanese debt has shot up. But people have been predicting a Japanese debt crisis for decades, and it hasn’t materialized. In some ways, Japan, rather than being a cautionary tale, is a kind of role model — an example of how to manage difficult demography while remaining prosperous and socially stable.
And while this is hard to quantify, lots of people I’ve talked to say that Japanese society is far more dynamic and culturally creative than many outsiders realize. Economist and blogger Noah Smith, who knows the country well, said that Tokyo is the new Paris. Given the language barrier, I mostly have to take his word for it, although having been taken around Tokyo by locals, I can confirm that the city has a lot of vitality.
True, that same language barrier means that Tokyo likely can’t play the same role in global culture that Paris once did. But the Japanese are clearly having great success with sophisticated urbanism; if you think of Japan as a tired, stagnant society, you’re getting it wrong.
Which brings me to the question that I raised at the beginning of this newsletter: Will China be the next Japan?
There are some obvious similarities between China now and Japan in 1990. China has a wildly unbalanced economy, with too little consumer demand, kept afloat only by a hypertrophied real estate sector, and its working-age population is declining. Unlike Japan in 1990, most of the Chinese economy is still well behind the technological frontier, so it should have better prospects for rapid productivity growth, but there are growing concerns that China may have fallen into the “middle-income trap” that seems to afflict many emerging economies, which grow rapidly but only up to a point, then stall out.
Yet if China is headed for an economic slowdown, the interesting question is whether it can replicate Japan’s social cohesion — its ability to manage slower growth without mass suffering or social instability. I am very definitely not a China expert, but is there any indication that China, especially under an erratic authoritarian regime, is capable of pulling this off? Note that China already has much higher youth unemployment than Japan ever did.
So, no, China isn’t likely to be the next Japan, economically speaking. It’s probably going to be worse.