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Analysis

Japan - not as sickly as it seems

Alternative metrics offset low GDP figures

by Brian Reading

Fri 4 Nov 2016

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Japan’s economy has supposedly spent a quarter of a century in the doldrums, the sick man of Asia. According to the International Monetary Fund, it is one of the worst performing advanced economies. It has been ill with remissions, a roller-coaster ride, but not necessarily downwards.

Japan’s performance can be judged relative to its own past or to that of other countries. The former, indisputably, has been much worse. The latter depends on the metrics by which performance is judged. The obsession has been with real GDP growth, but it is not that simple. Other metrics suggest that Japan has performed better than some other G7 economies, Italy almost always and France sometimes.

The set of metrics that can be measured in a comparable way includes growth in GDP per capita and in GDP per worker, employment levels, the rate of unemployment and participation in the labour market, and inflation. Income and wealth inequality and social and political stability are more difficult to measure and compare. But when taking these factors into account, Japan’s economic story appears to be one of success rather than failure.

In fact, it is remarkable how well Japan has performed relative to other G7 countries since its own financial crisis a quarter of a century ago. While Canada has had the fastest GDP growth in the G7 since 1992, when Japan’s crisis began, when it comes to GDP per worker, Japan comes within a whisker of Canada and has grown twice as quickly as Italy. Unemployment has risen slightly, but remains by far the lowest of the G7 countries, as does inflation.

Many of the measures of relative performance result from demographics. Japan’s aging population is in decline. Those over 65 account for just over a quarter of the population. The birth rate has collapsed. Immigration is negligible. The labour force has increased slightly. Working age population growth is minute. Measures of participation rates among the working age population are misleading. Labour force numbers include those over 65, but the working age population does not. Participation rates in Japan have risen sharply when counted in this way.

Less easily measured metrics attest to Japan’s success rather than failure. Income and wealth distribution are statistical minefields. In the last quarter of a century, Japan appears to have become no less unequal than other nations. This can be explained by the collapse in asset prices after its financial crisis and their failure to recover fully. Other indicators suggest that alienation from the establishment, globalisation and inequality are not major political issues. Demonstrations focus on nuclear policy and American military bases. There are no extremist parties. The two centrist parties still rule the roost.

As John Plender points out in an OMFIF report, ‘At the edge of the shock – Japan’s problematic monetary future’, Japan has been atypical. Policy targets are enhancing employment and GDP growth while controlling inflation. Fiscal and monetary policies are rival weapons – most often they work in opposite directions, fiscal profligacy countered by monetary prudence or fiscal stringency by monetary laxity.

With stops and starts, Japan has exceptionally combined fiscal profligacy with monetary laxity. This is pure counter-cyclical policy. The problems remain structural. Japan will struggle on, no worse than some and no better than others.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.

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