Manish Chokhani, Director of Enam Holdings, in a recent interview said he fears the ‘Japanification of the world where there is no real growth’. Once not too long ago most countries wished to be like Japan as the country quickly turned around its economic fortunes with technology and development. So much so that Japanification was a matter of pride for most countries. Not anymore.
Japanification has come to mean a country which has been suffering from all kinds of stagnation: political, demographic and economic. How did this unwanted transition happen, and that too so quickly?
Japan was totally devastated during World War II and no one imagined that Japan would be the talking point of world economy in next few decades. In quick time, Japanese companies and their products captured the imagination of one and all. Whether it was automobiles where we had names such as Toyota, Honda, Suzuki etc. or household goods where names were Sony, Casio etc….and who can forget the Bullet trains? ‘Made in Japan’ became a top brand by itself and a sign of top quality.
There has been fair bit of research trying to understand the Japanese growth and the factors are as diverse as it can get: Industrial policy, undervalued exchange rate, exposure to foreign competition, role of government, importance of technology and so on.
Japan’s per capita GDP in 1960 was around $8,600, one-third of the United States per capita GDP. By 1988, Japanese per capital GDP had touched $ 35,000 levels surpassing the US. In the period, average per capita growth in Japan was 5.2 percent, double that of the US. Apart from GDP, all other indicators of development surged, and Japan became a developed country which so far was a club of European economies and the US. The Japanese economic model became an inspiration for other Asian economies and economies such as South Korea and China also used variants of the Japanese models.
The Japanese fairy tale ended in 1989 starting with a stock market crash followed by crisis in banks and non-banks, and collapse of the overall economy. In 1998, the US economy overtook Japan in terms of per capita income and continued to widen the gap. The US per capita income in 2018 was $55,000 compared to the $49,000 of Japan. Japan’s average per capita GDP growth rate in period 1998-2018 has been 0.76 percent, half of the US average in the same period. How times turned around!
Just like the Japanese surge surprised all, the stagnation has been equally vexing. Macroeconomists pointed out how Japanese policymakers did not address the declining economy with alacrity and delayed fiscal and monetary stimulus. More importantly, they delayed responses towards the financial sector and research shows that a financial crisis delays and prolongs an economic crisis. This was one of the central lesson from the Great Depression as well where large-scale banking failures in the US made the depression a prolonged affair. Japanese demographics too turned adverse as the country has been increasingly having a higher share of aged people compared to younger ones.
Since then, Japanese policymakers have struggled to put the economy back on track. There have been several attempts but the economy remains mired in deflation and low-growth conditions. The term lost decade became synonymous with Japan, and by 2019 we had three such lost decades. The term began to be used for other economies which let go of opportunities, and had lower-than-expected growth. For instance, Puja Mehra recently wrote a book on Indian economy titled The Lost Decade (2008-18).
As the 2008 crisis struck, one problem facing developed countries was to avoid another Great Depression. They managed to avoid the Great Depression but it soon struck that they could resemble Japan. In 2013, American economist Lawrence Summers spoke on how the developed world could be stuck in secular stagnation with low growth rates and little hope for revival of growth rates. Summers obviously mentioned Japan in the speech for its lower growth rates. Summers added the policymakers should take advantage of the low interest rates and push for investment to get out of the stagnation.
In a February interview, European Central Bank (ECB) chief economist Philip Lane was asked a question on whether there will be Japanification of the Eurozone economy? He said that recent ECB policies such as resuming quantitative easing and negative interest rates are an attempt to ensure there is no Japanification of Eurozone economies. These policies are an attempt to bring inflation to positive zone, unlike Japan which has struggled with low deflation for a long time now.
As economists and policymakers think and act on preventing the Japanification of their economies, one cannot help but think how quickly Japanification has become a word of good riddance for economics rather than good acceptance as was the case earlier. How did Japan’s story become like that of a business organisation which rises to stirring heights only to decline and remain stagnant thereafter?
American and European economists have for long lectured Japanese on getting rid of their long crisis. Japanese policymakers have grappled with their suggestions and even tried their own. Their response is that that best way to avoid a Japanese style economic crisis is to make sure the crisis does not happen at the first place. Americans and Europeans (and even Asians) are now learning the taste of Japanese medicine.
All is not lost for Japan though, and they have plenty to offer the world. Their sanitation and mask-wearing habits are lessons for countries. In a recent research, Hirotaka Takeuchi of Harvard Business School pointed how Japanese companies are so good at surviving crises. They plan for 100-200 years knowing there will be crises and we need to fight the same. This approach is needed by the businesses across the world which are grappling with the current pandemic.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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