February 23, 2008


Japain: The world's second-biggest economy is still in a funk—and politics is the problem (The Economist, 2/21/08)

Similarities exist between Japan then and America today, notably the way that a financial crisis threatens the “real” economy. But the differences outnumber them. Japan should indeed be a source of worry—not, however, because other rich countries are destined for the same economic plughole, but because it is the world's second-biggest economy and it has not tackled the fundamental causes of its malaise.

Even by today's gloomiest assumptions, Japan's bust dwarfs America's, if in part because its boom did too. Take for instance the collapse in the equity market. America's S&P 500 is down just 8% from its 1999 peak. The Nikkei 225 share index is now nearly two-thirds below its 1989 peak. In commercial property the comparison between the two boom-and-busts is almost as dramatic.

The more important difference, though, is how each country got into its mess and then responded to it. In America, the government can be blamed for inadequate oversight of the vast market in slicing and dicing mortgages, but it has reacted aggressively to the bust, with monetary and fiscal stimulus. Financial institutions are busy declaring their losses. In Japan, the government was deeply complicit in puffing up the market and complicit, too, in hiding the ensuing mess for years.

Japan's economy is still held back by its politicians

Japan actually has negative population growth, which would be called decline if any country had ever experienced it before. Its malaise is spiritual, not political.

Posted by Orrin Judd at February 23, 2008 6:22 PM
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