What Went Wrong With Japan’s Economy (Part One of Three)

And How to Repair It

by Bill Totten

http://www.ashisuto.co.jp/ (January 29 2012)

I’ve lived in Japan for 42 years. The first half of those 42 years were called our “economic miracle”, while the second half are called our two “lost decades”.

During our “economic miracle”, we had low unemployment, low income differentials, low suicide rates, and so on.

During our two “lost decades”, our economy has stagnated while most indicators of well-being have worsened: unemployment rates have more than doubled {1};  we now have one of the highest income disparities of all rich nations (among OECD nations, only the United States, Mexico and Turkey have higher income disparities than our nation) {2}; suicide rates now are among the highest in rich nations {3}; and so on.

Why has our economy stagnated during the past two “lost decades”, while unemployment, income inequality, the suicide rate, and most other indicators of social illth have gotten much worse?

Economic Stagnation

From 1971 to 1988, our GDP grew by ten percent annually;

From 1989 to 1996,  our GDP grew by  four percent annually; and

From 1997 to 2010, our GDP shrunk annually {Japan GDP.xls, cells c66, c67, c68}.

Japan GDP

What caused this sudden crash of our economy?

The media focus on the crash of our 1986 to 1991 “asset bubble”, but I suspect they are wrong for several reasons:

1.  99% of our economy is consumption, capital investment, and inventory growth. These grew a mere fraction as much as much as real estate and stock market prices as the asset bubble inflated from around 1986 and declined a mere fraction as much as real estate prices crashed after the bubble popped in 1991. Land prices more than doubled from 1985 to 1990; by now they have fallen back to about the same as they were in 1985, less than half their 1990 peak {Japan Land.xls, line 5}.  The Nikkei 225 (more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average) stock market index for the Tokyo Stock Exchange climbed from 12,500 yen in 1985, reached a peak of 38,916 yen in 1989, crashed to half that peak in 1991, an now is under 9,000 yen {4}. By contrast the economy itself grew only 44% from 1986 to 1991, has never fallen below its 1991 peak,  and was two percent larger in 2010 than in 1991 {Japan GDP.xls, cells B71, B72}.

Japan Land

2. Moreover, I think mostly only rich people and giant corporations participated in the bubble; they’re mostly the ones who gained as it inflated and lost when it deflated. Most citizens and most businesses, which are primarily small and medium sized, neither gained nor lost by betting on stocks, land, or other assets during the bubble. In 2010, the average worker’s after-tax income was 390,000 yen per month, s/he spent 280,000 on consumption, leaving only 110,000 for saving or paying off a home mortgage. I doubt if many of these workers gambled much on stocks or land.

3. Finally, I cannot see how a five year bubble could have caused our economy to stagnate for two decades.
Governments and the mass media blamed the worldwide recession after 2008 on the “Lehman Shock”,  but I think that was either very bad analysis or pure propaganda to hide the real cause of that recession, which was the rise in oil prices to nearly $150 per barrel during the same month that Lehman Brothers failed. How can the failure of one gambling house crash the entire world’s economy? However, every aspect of today’s economy depends on oil, and when it’s prices rise severely that restricts the money available for both consumers and businesses to spend on other things.

One the other hand, here are some things I can see:

1. The Maekawa Report was published in 1986, under heavy pressure from the US government, to propose “economic reforms designed to make the living standards of Japanese more comparable to levels enjoyed in the West” {5}. Apparently that meant to bring our living standards down to those of the USA, and it certainly has worked! The Maekawa Report launched the era of deregulation and privatization, under the idiotic pretense that we can trust profit-maximizing corporations to serve society better than we can trust the governments we elect democratically.

2. Our government began cutting taxes on richer persons and larger corporations while raising taxes on poorer citizens and smaller businesses.

From 1971 to 1988 all of our taxes varied progressively or proportionally with ability to pay. None of our taxes varied regressively with ability to pay {6}.  By 2010, the latest year data are available, progressive and proportional taxes had declined to 85% of total tax revenues while the regressive Consumption Tax had risen to  sixteen percent of all taxes {Japan Taxes.xls, cell r93}.  Moreover from 1989 to 2010,

Japan Taxes

* Personal Income Taxes were cut nearly five trillion yen (28%)  {Japan Taxes.xls, cells c101, c102},

* Corporation Taxes were  were cut nearly ten five trillion yen (51%) {Japan Taxes.xls, cells d101, d102}, and

* Inheritance Taxes were cut nearly 600 billion yen (32%) {Japan Taxes.xls, cells e101, e102}, while

* Consumption Taxes were raised from zero to nearly thirteen trillion yen {Japan Taxes.xls, cells q101, q102}.

Put another way, from 1989 to 2010,

* Regressive Consumption taxes were raised by nearly thirteen trillion yen, while progressive and proportional income, corporation and inheritance taxes were cut by nearly eleven trillion yen (10%) {Japan Taxes.xls, cells p101, p102}.

This clearly shows that our government, since 1989, has been shifting the tax burden from richer citizens and larger corporations to poorer citizens and smaller businesses.

Why is this important?  Here are three things that come to my mind:

First, is it fair to shift the tax burden from those most able to pay to those least able to pay?  Is that what we believe as citizens, as a  nation?

Second, why are our politicians and mass media crying about the national debt while cutting taxes on those most able to pay (richer people and larger corporations)?

Third, I think it explains clearly why our economy has crashed since 1989.

Look at these three periods again, keeping in mind that (1) Total Consumption (private and public) comprises about seventy percent of our economy {Japan GDP.xls, column j} and (2) poorer citizens and smaller businesses are our primary consumers: the poorer a citizen or the smaller a business the more of her income she spends on consumption while the richer a citizen or the larger a corporation, the less of her income she spends on consumption {7}.

1971 to 1988

GDP grew by ten percent annually {Japan GDP.xls, cell c66}.

Total Consumption also grew by ten percent annually {Japan GDP.xls, cell k66}.

This is natural because taxes were proportional or progressive to income or wealth, so the tax burden fell most on those who could most afford to pay taxes (and consume less of their income or wealth) leaving those least able to pay taxes (who consume more of their income or wealth) more to spend on  consumption.

And with Consumption growing at ten percent annually, it was natural for suppliers to invest in more capacity, which they did at a rate of nine percent per year {Japan GDP.xls, cell n66}.

Also, expecting to sell more year after year, suppliers increased inventories at a rate of 64 percent per year {Japan GDP.xls, cell q66}.

Meanwhile, our nation’s net exports (exports minus imports) shrank at a rate of  77% percent per year during this period {Japan GDP.xls, cell t66}.   In other words, during Japan’s high-growth era, our so-called “economic miracle”,  we were a net importer not a net exporter. We did not have an “export-driven” economy, we had an economy driven by the domestic consumption of such an increasingly prosperous citizenry that our own manufacturers couldn’t supply sufficiently despite rapid capital formation and inventory increase, so we had to import more than we exported to close the gap between domestic demand and domestic supply.

1989 to 1996

GDP growth sank drastically to only four percent annually {Japan GDP.xls, cell c67}.

Our government instituted a three percent tax on consumption from 1989 while cutting personal Income Taxes by 22 percent,Corporation Taxes by nineteen percent , and Inheritance Taxes (which fall only on the five percent largest estates) by  seventeen percent {Japan Taxes.xls, cells c105, d105, e105}. So the richer citizens and larger corporations, who spend less of their income or wealth on consumption, paid less taxes while the poorer citizens and smaller businesses, who spend more of their income or wealth on consumption, had to pay more of their income in taxes, leaving less to spend on consumption.

As one would expect, growth of Total Consumption (seventy percent of our economy) shrank by sixty percent from ten percent annually before the Consumption Tax was levied to only four percent annually after it was levied {Japan GDP.xls, cells k66, k67}, pulling down GDP growth.

With growth of domestic consumption dropping drastically from ten percent annually to four percent annually, suppliers naturally cut capital formation, from nine percent to three percent annually {Japan GDP.xls, cells n66, n67}.

And, with that drastically lower domestic demand,  suppliers cut back drastically on inventories; inventories that had grown 64 percent annually from 1971 to 1988, shrunk by more than 100% annually from 1989 to 1996 {Japan GDP.xls q66, q67}.

Since Consumption, Capital Formation, and Inventory Increase comprised 98 percent of our economy during this period, and the latter two are driven by Consumption, there was no way our economy could grow by more than four percent annually when Consumption was growing only by four percent annually …

… Unless, if Net Exports were increasing enough to make up for the shrinkage in Consumption, thus Capital Formation and Inventory Increase. But Net Exports were still shrinking by five percent annually {Japan GDP.xls, cell t67}.

As if this wasn’t enough to cripple our economy, and bring our living standards down to Western standards as the Maekawa Report recommended, let’s look at what our “Dear Leaders” have done since 1997.

1997 to 2010

GDP growth turned negative, shrinking the economy itself {Japan GDP.xls, cell c68}.

Our government hiked the Consumption Tax by two-thirds, from three percent to five percent in 1997, while slashing Personal Income taxes by another 32 percent, Corporation taxes by another 38  and Inheritance taxes by another 48 percent {Japan Taxes.xls, cells c108, d108, e108}.  Put another way, from 1997 to 2010, our government slashed progressive and proportional Income, Corporation, and Inheritance taxes by nearly thirteen trillion yen while hiking Consumption taxes by more than six trillion yen {Japan Taxes.xls, cells p107, q107}.

What can you expect, other than for consumption to shrink further, when a government continues to slash taxes on richer citizens and larger corporations, who spend the smallest portion of their incomes and wealth on consumption, and continues to hike taxes on poorer citizens and smaller businesses, who spend the largest portion of their incomes and wealth on consumption?

Our government did even better!  It curtailed consumption growth altogether, to zero percent!  {Japan GDP.xls cell k68}.

And with no annual growth in domestic consumption, suppliers cut their Capital Formation by three percent annually {Japan GDP.xls, cell n68} while shrinking their inventories by 48 percent annually {Japan GDP.xls, cell q68}.

Since Consumption, Capital Formation, and Inventory Increase comprised 99 percent of our economy during this period {Japan GDP.xls, cells j64 + m64 + p64], and the latter two are driven by Consumption which was no longer growing, there was no way our economy could grow …

… Unless Net Exports grew enough to make up for the shrinkage of Consumption, and thus Capital Formation and Inventory Increase. Net Exports did grow by 39% annually during this period {Japan GDP.xls cell t68} but, as Net Exports are only one percent of our economy {Japan GDP.xls, cell s64}, they could not make up for the shrinking of domestic Consumption.

Where did the propaganda media get the idea that ours is a “export driven” economy?

So just as I think blaming the worldwide recession after 2008 on the failure of one gambling house, Lehman Brothers, when the real cause was the rise of oil prices to $150 per barrel, I think that blaming our nation’s two lost decades on a five-year asset bubble in the 1980s is either very bad analysis or a smokescreen to hide the real cause.

Which is?

Our government’s two-decade policy of cutting taxes on richer citizens and larger corporations – who provide most of the political campaign funds, “descent from heaven” jobs for used bureaucrats, lavish entertainment, and advertising revenues for the propaganda cum entertainment media – while raising taxes on poorer citizens and smaller businesses!

What Next?

Now that our government has used regressive Consumption Taxes to strangle our economy, what is it planning to do next?

Apparently, more of the same.  Prime Minister Noda is planning to raise Consumption Taxes in two stages, from the current five percent to eight percent, and then to ten percent. And the International Monetary Fund or IMF, controlled  by the US government on behalf of international financial pirates, says our government must raise Consumption Taxes to fifteen percent {8}.

Hiking the Consumption Tax rate from the present five percent to eight percent would raise this regressive tax from six percent of all taxes when the rate was three percent during 1989 to 1996 {Japan Taxes.xls, cell r96} and fifteen percent of all taxes when the rate was five percent during the period of 1997 to 2010 {Japan Taxes.xls, cell r97], to 21 percent of all taxes {Japan Taxes.xls, cell r114}.

Doubling the Consumption Tax from the present five percent to ten percent would raise this regressive tax to 25 percent of all taxes {Japan Taxes.xls cell r115}.

And tripling this regressive Consumption Tax to fifteen percent would raise it to 33 percent of all taxes {Japan Taxes.xls, cell r116}.

If first instituting a three percent Consumption Tax in 1989 cut our economic growth from ten percent to four percent annually, and if raising the Consumption Tax to five percent in 1997 completely eliminated our economic growth, what else can we expect from raising it further to eight percent or ten percent or fifteen percent than to put us into rapid economic decline?

Some people think our “dear leaders” are ignorant and stupid; some think they are parasites pursuing bribes in the form of political campaign contributions, cushy jobs for used bureaucrats, lavish entertainment, and favorable publicity from our advertising-controlled mass propaganda cum entertainment organs; others think they are traitors bribed or blackmailed by the “world’s sole superpower”; and still others think they are all of the above.

I don’t know, but I cannot find any reason for believing that our “dear leaders” are intelligent, diligent persons selflessly serving the interests of our nation and our citizenry.

Notes:

{1} Japan Unemployment Rates.xls and OECD Historical Unemployment Rates.xls

{2} OECD Inequality.xls

{3} https://en.wikipedia.org/wiki/List_of_OECD_countries_by_suicide_rate

{4} Email: 01/23/2012 02:22 PM from Mayumi Kita.

{5} https://en.wikipedia.org/wiki/Haruo_Maekawa

{6} More accurately, nearly  all of our taxes varied progressively or proportionally with ability to pay. Our nation has a third type of “other” national and local taxes, a plethora of minor taxes:

* At the national level, for example: Liquor tax, Tobacco tax, Gasoline tax, Petroleum gas tax, Aircraft fuel tax, Petroleum and coal tax, Exchange tax, Securities transaction tax, Motor vehicle weight tax, Customs duties, Tonnage tax, Stamp duties, Local gasoline tax, Petroleum gas tax, Aircraft fuel tax, Motor vehicles weight tax, Special tonnage tax, Crude oil et cetera tax, electric power source development tax.

*  At the local level, for example: Local corporate tax, Real Estate tax, Tobacco tax, Golf tax, Automobile Purchase tax, Light Oil Trading tax, Automobile tax, Small Automobile tax, Special land owner tax, Bath tax, Corporate office tax, City Planning tax, National Health Insurance tax, Nuclear Fuel tax, Gasoline Price Adjustment tax, Used Nuclear Fuel Tax, Enviromental tax, Industrial Waste tax, Environment Future tax, Fishing tax, Accommodation tax.

Some of these are regressive for very good reasons, such as to discourage consumption of things inimical to health, such as tobacco and liquor), things that must be imported (petroleum and other forms of energy),  luxury items (golf tax), and so on.

I ignore this plethora of minor taxes here because the detail would only distract from the main analysis without affecting it significantly.

{7} Email: 01/23/2012 03:23 PM from Mayumi Kita:

Bill-san, I am not sure this can be a proof, but the average net income (income including tax) of average worker in 2010 is 427,000 yen.  Disposable income, net income minus tax and social insurance premium) is 390,000 yen. Average consumption expenditure is 283,000 yen. Balance goes to saving or mortgage payment. The richer, the more one can save (or repay the loan)  http://www.stat.go.jp/info/guide/asu/2011/27.htm

{8} http://moslereconomics.com/2012/01/19/imf-staff-on-japan/

8 thoughts on “What Went Wrong With Japan’s Economy (Part One of Three)

  1. Are you serious? “Repair it?”

    Japan is RADIOACTIVE. You cannot “repair” what the meltdown at Fukushima has done to this nation. Any “repair” that doesn’t take into account the longterm deterioration in the health of the people of this tragic country is bound to failure.

    But, Japan itself is bound to failure. The economy is literally and figuratively radioactive.

    1. ‎Thanks for your comment. I agree that Fukushima is a horrific disaster and it is only a matter of time before we get another horrific disaster at another of our 54 nuclear reactors. We must get rid of all nuclear power plants here. That is probably the most important issue facing our nation; I have posted a number of articles on that, and intend to write more shortly. But nuclear power is not the only issue facing our nation and the post you commented on addressed another issue that our Fukushima disaster should not persuade us to ignore.

      I do not agree that our “economy is literally and figuratively radioactive”. Our economy is flawed and we need to fix those flaws, but our economy is doing much better than most other economies in this world.

      Again, thanks. Bill

  2. A very interesting article. I have a couple of questions. You say that during the economic miracle 71-88 Japan was a net importer. This is the period a lot of us in the west think of as being the Japanese “invasion” of consumer goods, transistor radios, cameras, cars, etc….so it comes as a surprise to learn Japan was importing more than it exported. What was it importing to counterbalance all those exports. I can think of oil…..but what else?

    The thing I can never work out is how does Japan…. which one always reads as having “unspecific” economic woes…..how does it always have such a strong currency? One always associates countries with economic problems as having weaker and weaker currencies, but the Yen always seems strong. Howcome?

    Apologies for such unsophisticated questions. I do hope to learn more.

    1. Dear Guy:

      Thanks for your comments. Other than energy, the most important thing Japan imports is food, seventy percent of our grains and sixty percent of our calories. Beyond energy and food, being one of the richer nations, we mostly import luxuries that we really don’t need.

      I don’t think of our yen being strong. Rather, I think the dollar and euro are weak, so speculators are buying the yen as a less bad alternative to the dollar and euro.

      Bill

  3. I was interested until you got ont the oil prices caused the economic crisis thing…..this is pretty standard conspiracy theorist stuff and believed by nobody who actually knows about such things.
    Shame, I was curious exactly what went wrong in Japan.

    1. Thanks for your comments, but this is no conspiracy theory. Nearly everything we produce or buy relies heavily on fossil fuels, primarily oil. When oil prices rise so high as in 2008, and are rising again now, both producers and consumers have substantially less money to spend on other things. When producers and consumers reduce spending on things other than oil, the economy shrinks.

      Our situation in Japan is even worse because (1) we must import nearly all of our oil, (2) our government strives to keep the value of the yen low to help our exporters, which (3) makes oil even more expensive for us to import, (4) leaving us even fewer yen to spend on other things.

  4. Wow…It’s nice to hear from people that know what they are talking about. I have a story for you: Once upon a time, the owner of an automobile plant and the employees union representative decided to have dinner to celebrate their new wage contract. After dinner, the owner invited the union man over to the plant to show him “The Future”. The plant had been recently equipped with new welding robots and automatic painting robots. The owner asked the union man: “how are you going to get my robots to go out on strike?”. The union man asked: “how are you going to get your robots to buy one of your cars?”.
    By reducing the ability of the middle class to buy a new car, the wealthy class has cut their own throat. It’s almost time for the French to bring out that guillotine again.

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