Japan's Continuing Economic Crisis

One day or another Japan unfortunately is going to burst. Left on its present course, like the proverbial nineteenth century steamship with the boiler overheating, one day one too many of the bolts will sheer off, a boiler plate will give and then the devil take the hindmost. Of course one of the few debateable points remaining is whether or not there is really anything left to be done. Common sense says there is, and sheer humanity says that there ought to be. Recognising this is the easy part. The tricky bit is what to do. Ten years of sustained problems, various recessions, and the outbreak of what may be regarded as the developed world's first serious bout of sustained deflation have left little doubt about the depth and seriousness of what is taking place.................

In general terms, one of the problems with the whole Japan debate is that much of the available material fails to tackle the problem head-on. For instance the well-publicized Federal Reserve research report "Preventing Deflation: Lessons From Japan's Experience in the 1990s" rather surprisingly fails even to consider one of the most important factors which may be driving the Japanese deflation: DEMOGRAPHICS. This lacuna is not an isolated case. Even where the problem is mentioned, it is normally not explored.


So all of this is a bit like Hamlet without the prince. Little of the more fashionable analysis really helps us understand why Japan government debt is growing out of control - after all with deflation abounding, even government supplied services should get cheaper, and why raising interest rates at any point in the foreseeable future is going to be difficult. This is because many of the arguments rest on the assumption that eventually Japan will solve the slow growth problem and start to recover. Well, I'm afraid I wouldn't be too sureabout that. And if the problem is a faulty diagnosis, then how the hell do you expect the medicine to work............

As Robert Lucas among others has indicated, classical economists like Malthus and Ricardo saw the need to account for the dynamics of pre-modern societies, and in particular for the fact that in these societies per capita incomes normally did not increase, but rather tended to return to roughly constant levels despite technological improvement, as one of the central problems facing economic theory. Differences in ability to produce had the knock-on effect of leading to differences in population level, and not to differences in living standards. This static situation constituted what has become known as the Malthusian trap. With the coming of industrial society something new happened, we broke out of the trap. Population increased, but at the same time per capita incomes also continued to increase, systematically, and as never before in history. This 'modern era' has now lasted for around 200 years.


However, the signs are there that things are changing. We still continue to increase living standards in an unprecedented way, but planetary population is getting older, and soon, in some 33 developed countries according to the recent UN population revision, smaller. It seems we are once more in danger of falling into a population trap, one where population and economic growth again become ensnared, but this time in a downward spiral. Economic theory to date has notably and monumentally failed to come to terms with the implications of this change, and herein lies the significance of Japan.
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