PRIDE GOETH BEFORE THE FORTIETH FALL, TOO

A New Confidence in Tokyo (Jesper Koll, Asian Wall Street Journal, 6/2/2003)

A new confidence is sweeping through Japan. This is because Japan is back in the No. 1 slot -- as the world's most advanced deflation economy....

Tokyo's policy makers are starting to believe, once again, in the supremacy of the Japanese model -- that Japan has attained a stable "deflation equilibrium" and that it remains to be seen whether other G7 countries can manage a transition as stable and smooth as Japan's. Viewed from Tokyo, Europe's rhetoric of denial or America's table-thumping insistence that "deflation will not happen here" is little more than deja vu. Japan has been there, done that.

As a result, Tokyo's confidence in excusing its lack of action is growing. Asked about nonperforming loans and excess employment, a typical response is "Japan has fewer than China." Asked about asset deflation and policy rigidity, the quip is "Better than Germany." Asked about corporate governance, they'll answer "better than America -- our managers may be incompetent but they are not crooks."...

In Japan there is a strong national consensus that, yes, the belt needs to be tightened. A case in point: Japan's labor unions have been actively lobbying for wage cuts and longer working hours for the past two years. And Japan's pensioners have accepted cuts in benefits while workers and firms agreed to pay increased contributions. The result will be, of course, a reduced standard of living at first, but it will also help raise the competitive position of Japanese firms....

Make no mistake -- Tokyo's policy elite is growing increasingly confident in the success of the Japanese model. Deflation has been accepted as an inevitable reality poised to persist for another decade. The combination of global technological progress, industrial societies' aging and the emergence of China and India has been studied in detail. The conclusion is that price deflation across all sectors of industrialized economies is poised to persist. This fatalistic view of the world is the mainstream view among many of Japan's policy elite. The net effect is that Japan's top policy priority is to redistribute the benefits and costs of deflation, rather than promote new growth. From the outside, this may look like inaction, but from the inside it has been very hard work, with bureaucrats and politicians working overtime to contain the damage done by deflation.

Viewed from this perspective, the Japanese ruling elite has done an outstanding job. Despite an unprecedented destruction of wealth caused by the collapse in the stock and real estate markets -- almost one generation of wealth accumulation has been wiped-out -- Japan has successfully avoided a great depression. More importantly, Japan has remained free of foreign debt and never once lost the status of being the world's largest net creditor.

One thing we can be sure of: amidst catastrophic failure, ruling elites never conclude that the ruling elite needs to be replaced. Instead, they brag about how nobly they're failing, and demand more support so they can fail even more gracefully.

Japan will keep its treasured status of creditor to the world. The increasingly elderly Japanese can find no good investments in Japan, so they'll continue loaning their savings out to foreigners. And Japan will slowly, but proudly, descend, like the setting sun that adorns their flag.

UPDATE:
The Statism Trap (Arnold Kling, TechCentralStation, 5/28/2003)

There are many conceivable explanations for Japan's economic woes. For example, as Australia's Ken Henry succinctly pointed out, the aging of Japan's population was bound to reduce its growth rate....

However, I think that the most convincing overall explanation for Japan's long decline is that its centralized, bureaucratic industrial policy ran out of steam. Brink Lindsey, in his book Against the Dead Hand, writes that even at its peak, Japan was a "deformed 'dual economy' - a vibrant and dynamic international sector that all the world envied and feared, and a much larger, but largely stagnant, domestic sector that the world all but ignored."...

[W]here statism falls apart is in its inability to cut its losses when the government makes a bad bet. The difference with the private sector is that the government is almost totally incapable of winnowing out losers. In the long run, heavy government involvement inevitably leads to suffocation, as "zombie" businesses backed by the government suck all of the oxygen out of the economy. That is what Japan has been experiencing for the past decade.

Arnold Kling, who operates one of the best economics blogs, keenly diagnoses Japan's troubles.

Posted by Paul Jaminet at June 2, 2003 10:49 AM