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Tuesday, January 21, 2003

Too Much Saving in Japan?

This piece raises a question which is very much to the point, is there too much saving in Japan? Secondly, if there is, is this structurally related to the demographics of contemporary Japan. This question is very much to the point since most of the current enthusiasm for the appointment of an 'inflation targeting' governor at the Bank of Japan results from a diagnosis that the deflationary savings excess/lack of demand growth is due to a 'bad' IS/LM equilibrium associated with the zero interest bound. Now if the problem went deeper, then logically the solution wouldn't work. Unfortunately the article ultimately backs off, concluding that: "Immigration is not a practical solution today when unemployment is high". Of course if the unemployment is high BECAUSE there has been no immigration (and consequently the slope of the labour supply curve is not steep enough in more technical terms) then we are caught in a vicious circle. Things aren't always as they appear, remember we used to think the sun went round the earth. It's my bet that the injection of a large quantity of cheap immigrant labour at the bottom end of the Japanese labour market would do a lot more to help get things going than any of the other proposals currently on the table.

Japan's economic problems have attracted a lot of attention over the years. They have also exposed a lot of erroneous thinking. Today is no exception. As politicians and academics continue to flounder, they ignore one vital fact: the Japanese economy has a structural savings surplus, and a change in economic policy is needed to deal with it.An unusually high proportion of Japan's population is in its 30s and 50s, when savings for retirement are high. There are still relatively few who are retired and spending their past savings. As a result, the national savings rate is high. At the same time, there are few people under 20, so the workforce is shrinking. This means growth is bound to be slower than in countries such as the US, which has a lot of immigrants and a growing workforce. Even if it is optimistically assumed that labour productivity will rise to US levels, the difference in demographics means Japan can only grow at half the US rate. Japan must either change its population structure by massive immigration or export its capital surplus with a much bigger current-account surplus. The trouble is that the first option is unpopular in Tokyo while the second is unpopular in Washington. Faced with unpalatable choices, the typical reaction has been denial.
Source: Financial Times

Unfortunately apart from the connection made with demography and growth the article really has little new to offer. Even the association of saving with those in their 30's and 50's is an oversimplification of what is probably a rather complicated picture (and one which I'm still trying to sort out myself). The range of policy proposals appears to be a complete rag-bag including virtually everything except my grandad's old nightshirt, but he is surely wrong that internal monetary easing is likely to be more effective than yen value reduction in provoking short term inflation. But as I said, if the diagnosis is bad, in all probability the medicine won't work in either case.

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