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Japan as Number Three:How Japan Must Cope with the New Reality

Takatoshi Ito

University of Tokyo

October 7, 2010

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Outline

China becomes No.2 replacing Japan this year

Japans long-term growth experience: Past,

Present, and Future

Demographic dividend and loss

Growth Prospect for Japan, a mature

economy

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China replacing Japan as No.2

China (real GDP) has been growing at 8.6% (2000-2009 average)

Japan (real GDP) has been growing at 1.4%(2000-2009 average)lost decade

China has experienced inflation and nominalappreciation of RMB

Japan, deflation and nominal exchange ragefluctuating

Applying market yen/dollar market rate tonominal, compare US, Japan, China

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The GDP size (in USD at market rate)

US, China, Japan, 1980-2010

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Japans problems

So, yes, China has done well in achieving high

growth, but Japan stumbles on its own

problems. crossover, earlier than expected

Japans problems Demography

Not taking advantage of globalization

Hollowing out of manufacturing

Political mess

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Japans lost decade (or two)

Japans trend growth is declining over five

decades

High economic growth, 10%, 1950s, 1960s

Medium economic growth, 4%, 1975-1992 Stagnation, or Lost Decade, 1993-2003

Weak Recovery: Koizumi reform, 2003-2006

Global Financial Crisis, 2008-2009

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1st oil crisis

2nd oil crisis

Banking

crisisGlobal

Financial

Crisis

High-speed growth

Stagnation

Nixon Shock

Quick 50-year history

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Real Estate Bubble and Burst

Real estate price bubble, 1984 to 1990

Burst, 1991-2003

Borrowers (construction companies, real

estate developers, nonbanks) could not repay

borrowed funds

Banks with nonperforming loans experienced

slow (over 10 years) death Policy mistake of forebearance

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6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Land price index for housing, Japan

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Macroeconomic Policy Mistakes

Monetary Policy too tight for bursting bubble,1992-1994

Monetary Policy not too aggressive to avoid

deflation, 1995-1999 Fiscal policy tightening too early, April 1997

Fiscal spending, only temporary effects, 1995,1997-2003

Monetary Policy hit zero interest rate bound,1999-2006; liquidity trap(?)

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Global Financial Crisis and Japan

Japanese financial institutions were not

affected by GFC

However, Japanese exports, production, and

stock prices declined sharply Recovery has been slow

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Japanese demographic pyramid

1950-2000-(2010)-2050

Pyramid -> cylinder -> inverted pyramid

Decline in fertility rate

Lengthening longevity

Harbinger of global aging This will happen to China certainly

Partly due to one-child policy

Maybe India too, in coming decades

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1950

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2000

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2010 (NOW)

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2050

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Demographic dividend and loss

Demographic dividend

Increase in

{working age population}/{total population}

Contributes to

Demographic decomposition of real GDP

growth rate (-> next slide)

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Demographic dividend and loss

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ave growth contribution

JAPAN 1956-1971 1972-1991 1992-2009 2010-2030

pop growth 1.09% 0.78% 0.15% -0.38%

WPOPr Gr 0.67% -0.07% -0.65% -0.50%

Y/WPOP Gr 7.47% 3.43% 1.26%

Y Gr 9.37% 4.16% 0.76%

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Contribution to Growth

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Whats the main problem?

It is NOT just demography

Growth {GDP/working population} has been

declining

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pro

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FUTURE: Growth Prospect for Japan,

a mature economy

Japans problems Demography

Not taking advantage of globalization

Hollowing out of manufacturing

Political mess

CAN BE SOLVED! How? Demography immigration, medical care industry

Not taking advantage of globalization FTA, agriculture,education (English-based, IT-based, international)

Hollowing out of manufacturing FTA, lower corporate

income tax, strengthen financial center Political mess political realignment

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Demography, opportunity

Immigration can be increased

Lots of opportunities in service industry, including

health care

Medical care can become a growth industry,taking in foreign patients

Doctors have to be internationalized

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Globalization, opportunity

Huge disadvantage in language (English)

Population was large enough to educate

higher education materials in Japanese, that

was advantage, but turned disadvantage, asthe world was integrated

Japanese education should be geared toward

English finally happening

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Hollowing out

Japanese manufacturing is moving abroad

Failure of Doha Round and failure of Japanese FTA

policy (high tariff, USA, EU)

High corporate income tax rate High wages

But, lack of workers

Keep the high tech part and product

development in Japan

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Concluding remarks

Whatever Japan does not have, India has

Population

English

IT Whatever India may be lacking, Japan has

Clean city environment

Good elementary, secondary environment

Opportunities to cooperate and win-winintegration

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