August 20, 2011

WE'LL JUST RE-OPEN OUR BORDERS, THEY'LL NEVER OPEN THEIRS:

No, the US Isn't Japan: Fears the US economy is becoming the new Japan are misplaced, argues James Pach. US policymakers have far more options at their disposal than their Japanese counterparts. (James Pach, 8/17/11, The Diplomat)

[T]he point is, whether or not it actually chooses to exercise them, the United States still has policy options that Japan now lacks.

Let me explain. In 2009, the United States had a population of 307 million, Japan had 127 million. In 2050, the US is projected to have a population of 393 million, according to the middle series estimate of the US Bureau of the Census. Japan, by contrast, will have just 95 million people, according to its Ministry of Health. So, over the next 40 years, if these projections hold, the US population will grow by about 30 percent, while Japan's will shrink by 25 percent.

The effects of this contraction on Japan are so profound that no reasonable discussion of macroeconomics can exclude them. Picture yourself as a Japanese manager. What would your thinking be as you made long-term plans for your company's growth? That's right, unless they operate in emerging sectors, Japanese companies are shuttering domestic facilities and taking their investment overseas. In disclosure after disclosure, companies are announcing bluntly that they see no more growth in Japan, and are looking abroad. Japan Inc. is becoming a holding company.

Of course, for many companies in Japan's uncompetitive service sector, competing in foreign markets isn't realistic. Even for companies that do have an offshore option, overseas expansion can be a slow process. In the meantime, cost cutting and mergers are the only paths to earnings growth. In fact, corporate Japan in the post-bubble era has done these things very well--earnings are generally good. But investment is weak. The upshot is that Japanese companies have been hoarding cash, so that roughly half have more cash than debt.

No investment means no demand for borrowing. This in turn means that monetary policy, whether lowering interest rates or flooding the banks with cash, is ineffective, because the surplus money never leaves the financial system to enter the real economy, at least not through the private sector.

The same lack of investment also contracts the economy, which must be offset by government spending, even as the reduced private sector activity lowers tax revenues. That's what the Japanese government has been doing for the last two decades, and that's why it has the world's largest public debt.


Posted by at August 20, 2011 2:43 PM
  

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