Japanese Prime Minister Shinzo Abe arrives in Washington today with a long shopping list. First, he'll want to be assured of solid U.S. backing, including willingness to go to war on Japan's behalf if necessary, in Tokyo's face off with China over control of the Senkaku islands. Next, he'll want U.S. agreement to his policy of devaluing the yen to promote exports and growth of the Japanese economy. Finally, he'll want to politely refrain from joining the U.S. sponsored negotiations for a Trans Pacific Partnership free trade agreement (TPP).
Here's what the White House should give him.
Although in the light of history, China's claims to the Senkakus are arguably as good as Japan's, there is no way that Abe can accede to Chinese pressure to cede sovereignty over the islands in the face of Beijing's military threats. Because the United States has recognized Japan's administrative authority over the islands and guarantees Japan's security under the terms of a security treaty with Japan, Washington is obligated to back Japan in resisting any threats of force regarding the islands. At the same time, the United States desperately wants to avoid war with China and would like to get some negotiation or global inquiry going. The problem is that to their own publics both China and Japan would appear to be backing down if one of the proposed submitting the dispute to the World Court. One way around this would be for Washington publicly to voice support for Japan, but at the same time to persuade the World Court to invite Japan and China to submit their dispute to it. In this way, neither side would lose face by accepting the invitation.
On the economy and the yen, the White House, unfortunately, has already pretty much spoken. Undersecretary of the Treasury Lael Brainard voiced U.S. support for Japan's policies to stimulate its economy at the recent G-20 Finance Ministers Meeting. This, in effect, constituted a White House blessing on Abe's efforts to drive the yen lower as a way of creating jobs by reducing the price of Japanese exports. In his personal meeting with Abe, President Obama should make it clear that Brainard had gone rogue and was not voicing White House policy. Indeed, he should emphasize that the opposite is the case -- the United States strongly opposes Japan's efforts to manipulate the value of the yen and may be forced to take countervailing action if such efforts continue. Some will argue that Japan is doing nothing more than imitating the Federal Reserve's easy money, quantitative easing policies. But this is not entirely the case. The Fed doesn't talk the dollar down or call for greater U.S. exports as a main driver of rising GDP growth. But Abe does all of this (and the Bank of Japan is acquiescing) in his drive to stimulate the Japanese economy. What Japan desperately needs, and what Abe assiduously avoids mentioning, is to undertake far reaching structural reforms of its economy. Japan has been pursuing easy money and high stimulus policies for twenty years without much to show for it. Yen devaluation will not provide a long term fix but it will disrupt U.S. markets and reduce U.S. employment at a moment when Washington very badly needs to create jobs and make America more competitive. The president should make this crystal clear to Abe while emphasizing that he can't expect enthusiastic U.S. geopolitical support while indirectly subsidizing exports.
As far as the TPP is concerned, the White House should forget about it with regard to Japan. Tokyo is unlikely to join because of the opposition of its farmers and other domestic groups and also because at this stage of the negotiations (scheduled to end in October) Japan would be unlikely to be able to obtain many concessions. More importantly, bringing Japan into the TPP would increase the U.S. trade deficit and by reducing tariffs in key industries such as autos without gaining reciprocal reduction of non-tariff barriers in Japan that effectively keep many Japanese markets closed despite the absence of tariffs.
Instead of a futile and probably counter-productive effort to get Japan into the TPP, the president should go for something big that would be good for both economies while also reinforcing the geopolitical ties. He should propose that Japan join the North American Free Trade Agreement (NAFTA) and that NAFTA be developed into a true economic union with a common trade policy, currency coordination arrangements that prevent currency manipulation, and a common anti-trust and competition policy, as well as a high level of regulatory coordination. Eventually, a common currency -- the yelarso -- might be adopted along with a single financial system.
If the president truly wants to change the game, and do something for the history books, this is it.
There was a lot of good stuff in the President's State of the Union address last night, but a lot of it is not going to happen unless the Obama administration stops contradicting itself.
Repairing and upgrading infrastructure and education, facilitating and investing in production of more and cheaper energy, fostering domestic manufacturing and the re-shoring of production and jobs, reforming how we do healthcare to cut costs by paying for results rather than procedures, stoking R&D and innovation, and fixing our broken immigration system are all important and largely (or should be) bipartisan undertakings.
But does the White House understand that it is operating in a global economy, have any idea of what that is, or of how other countries conduct themselves in that environment?
The President announced that he is launching talks to conclude a Trans Atlantic Free Trade Agreement (TAFTA) between the United States and the European Union. This is a worthy initiative that I, along with a few others, have been promoting for nearly twenty years. It's worthy because the EU is by far the world's largest economy and the economic relationship between the U.S. and the EU dwarfs any other. The United States sells three times as much to the EU as it does to China, for example. Furthermore, the EU's attitudes and policies on international trade and investment are very similar to our own and its markets most nearly match ours in terms of openness to outsiders. EU wages are, if anything, higher than ours, as are its environmental, health, and safety regulations. So there will be no race to the bottom in a TAFTA. Nor are the euro and the pound sterling manipulated currencies, and the EU anti-trust regime is fully as tough as that of the United States. I believe a TAFTA could add 2 to 4 percentage points to U.S. GDP. So far so good.
But then the President reiterated a line from his inauguration address which said that the Trans Pacific Partnership Free Trade Agreement that he is hoping to complete with Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam (and possibly Japan) by October will level the playing field and promote American exports and jobs. He essentially equated the two proposed deals.
But they are in no way comparable. For starters, the TPP is likely to undermine the North American Free Trade Agreement (NAFTA) and the Caribbean Area Free Trade Agreement (CAFTA) and result in the loss of more than a million jobs in Mexico and the Caribbean, along with nearly 200,000 jobs lost in the United States. This is because under NAFTA and CAFTA textile producers in the Caribbean and Mexico who use U.S.-made fiber and yarn receive duty free access to the American market. The only manufacturing industries in the Caribbean are based on this deal, as is much of Mexico's manufacturing industry. These deals were done in the 1990s in part to mitigate illegal immigration and illegal production and shipment of drugs to the United States. A TPP will remove the tariffs on textile imports from much of Asia and take large chunks of the U.S. market away from Caribbean and Mexican producers and give it to Vietnamese producers that are heavily controlled and backed by their government, according to studies by the Mary O'Rourke Partners Group of economic analysts.
But that's just a small part of the problem. The main part is that the TPP does not at all address the issue of trade-related currency manipulation in which governments actively adopt policies aimed at promoting their exports and reducing their imports by lowering the value of their currencies. A good recent example is that of Japan. Before being elected, the new Prime Minister Shinzo Abe called for devaluation of the yen. Upon election he immediately began introduction of policies and rhetoric aimed at reducing the value of the yen. Not surprisingly, the yen has devalued by nearly 30 percent over the past few weeks. That would far outweigh any removal of a 5 percent tariff that might be achieved in a TPP deal. Yet the TPP has nothing with which to combat this kind of currency policy.
And it gets a lot worse. On Monday, I received an urgent email from an old friend in Tokyo who is a former top economist for Goldman Sachs. He had just seen on Bloomberg a comment by Treasury Undersecretary Lael Brainard saying in answer to a question about Tokyo's recent actions that the administration supports Abe's policies to stimulate the Japanese economy. In other words, the Obama administration apparently approves of Abe's efforts to weaken the yen as a way of subsidizing Japanese exports, many of which come to America, a country that needs to reduce its trade deficit in order to keep economic growth and job creation going.
Asked my Tokyo friend: "Do these people have any brains? Who do they work for? Who?"
Well, they all work for the president, and he hasn't figured out yet that the TPP and fiddling with currency values to promote trade surpluses and promoting manufacturing in America don't go together. So it was a good speech, but a very mixed message.
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Dear Ms. Pritzker,
Rumor has it that you are going to be the new secretary of commerce. Let me be the first to congratulate you. You apparently have been seeking this position for some time, a very interesting quest. Perhaps you have glimpsed a possibility to which all secretaries of commerce over the past quarter century have been blind. That is, the potential for the secretary of commerce to be a power in the government equal to and perhaps even more significant than the secretaries of defense, state, and treasury.
You, of course, are aware that Commerce is generally considered a second or even third rate department, the management of which Presidents usually entrust to former business executives or operatives who have been top campaign fund raisers and political organizers -- think Robert Mosbacher for George H.W. Bush or Ron Brown and Bill Daley for Bill Clinton or Don Evans for W. -- as a payoff for their help in getting the President elected. Indeed, Commerce has often been denigrated, even by some of its own secretaries, as nothing but a "grab bag" of agencies thrown together with no rhyme or reason. Perhaps you have some inkling that nothing could be further from the truth. Let me, as the former counselor to Reagan administration Secretary of Commerce Malcolm (Mac) Baldrige, try to expand your insight.
The secretary of commerce has the authority to initiate investigations of key industries with regard to the impact of their loss of competitiveness on national security; the authority to initiate anti-dumping and countervailing duty investigations; the authority, under circumstances of the temporary provision of relief from import competition, to direct corporations and industries to restructure for revitalization; the authority constantly to analyze the competitiveness of industries and to recommend improvement actions; the authority to convene industry leaders and to give then anti-trust immunity if they work together on certain prescribed projects to improve the entire industry. Additionally, the secretary oversees an entire corps of commercial diplomats who staff U.S. embassies and promote U.S. exports while gathering information on foreign industries, economies, and technologies. For someone who knows how to use them, these authorities can be the levers by which the secretary of commerce can rise to a position of great power. Here's why.
The future power, welfare, and security of the United States do not depend primarily upon its military, diplomatic, and financial capabilities. Rather, they depend mainly on its productive capacities and its ability to compete in the global economy. America's main challenge is not how to deal with al Qaeda or North Korea or the People's Liberation Army (PLA). It's how to compete with the Chinese, South Korean, Singaporean, Japanese, Indian, and EU economies. America is not losing influence around the world or suffering stagnation of household income at home because it doesn't have enough weapons or soldiers or diplomats or Wall Street investment banks. Its influence and general welfare are waning because it increasingly doesn't produce competitively. Just look at the high technology fields in which Americans pride themselves on being leaders. Yet the United States has a more than $100 billion trade deficit in high technology. Reversing that trend is what being secretary of commerce is all about, or should be.
There aren't many secretaries of commerce who have genuinely made it into the history books. But any secretary who leads the charge to regain American competitiveness will surely be remembered. But here's the hard part.
I've been looking over your resume. I don't have to tell you that it's very impressive. But I do have to tell you that it's mostly a hindrance and irrelevant to what you have to do to make Commerce into a front line agency and to become a great secretary of commerce and public servant. Sorry, but it's totally an establishment background, and it's the establishment that's our problem.
For nearly the past seventy years, our establishment has embraced policies that emphasize geo-politics while subordinating national economic competitiveness. In particular, it has adopted a doctrine of unilateral free trade globalization that has been totally rejected by our main competitors like South Korea, China, Taiwan, Germany, and France. Our establishment believes the argument that while companies may compete economically, countries do not. Their establishments consider that notion to be total nonsense, pointing out that the Soviets did not lose the Cold War for lack of soldiers, tanks, or missiles. Rather, the cause was lack of competitiveness.
So I'm pulling for you and hoping you can overcome your background, as they say in the rehabilitation business. I want you to be a great secretary. As the first step in that direction, I suggest that the first thing you should do after confirmation is a world tour during which you visit South Korea, Taiwan, China, Singapore, Brazil, Germany, and Sweden, and study carefully what they do to be competitive and then start doing what they do. It isn't rocket science. Just good old fashioned blocking and tackling.
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America prides itself on technological and innovation leadership and subconsciously assumes it will always be number one because such leadership is uniquely American.
Well, maybe America should guess again, according to a survey by KPMG Consulting. The global questionnaire of 668 top executives worldwide concluded that China will surpass Silicon Valley in high-tech innovation by 2016. That means that in three years we'll be saying goodbye Google, goodbye Facebook, goodbye Apple and hello Huawei, hello Baidu, and hello names you've never heard of.
I'm always a bit skeptical of these kinds of surveys, particularly because there is always a kind of favor the underdog sentiment that expresses itself in responses to the questionnaire. America and Silicon Valley have been on top so long and have bragged about being on top so long that there is a longing in much of the world to see them knocked down a peg or two. Still, I don't think Silicon Valley is going to blow away in the next three years.
Nevertheless, the weakness of the United States is that it constantly underestimates the efforts and capabilities of its competitors. This means there will be surprises because China is making tremendous efforts and has tremendous talents. Over the past twenty years, its investment in R&D has doubled from .73 percent of GDP to 1.77 percent and the plan is to reach the European level of 2.5 percent by 2020. Just in the past decade, the volume of Chinese investment in R&D has grown by more than 600 percent, according to Professor of Technology and Innovation Management at IMD in Lausanne, Switzerland, and Professor Marc Laperrouza of the Evian Group at IMD, HEC, the University of Lausanne, and the Swiss Federal Institute of Technology. As a result, they say, China will soon go from being the world's biggest factory to being its biggest laboratory.
They also note that China is graduating more than 700,000 engineers annually compared to about 60,000 in the United States. Of course, numbers like these can be misleading. What is an engineer? The standards vary greatly from country to country. We must also keep population sizes in mind when making comparisons. If we ask what percentage of students around the world are earning degrees in science and engineering, the answer in Europe , Asia, or the United States, the answer everywhere is 10-13 percent, according to former MIT President Charles Vest.
If we ask the same question solely about engineering, however, the answer is quite different. Across Asia about 21 percent of students are earning engineering degrees. In Europe the number if 12 percent, and in the United States it is only 4.5 percent. This could be problematic for the America's future competitiveness.
China has nearly 700 incubators that provide facilities, financing, and advice to start-up businesses. About 70 of these are tied to key universities and form part of the government's Torch program that is aimed at promoting high tech industries. The incubators and other support programs also attract foreign investors. Thus some 800 non-Chinese companies have established laboratories in China. These include such firms as Nokia, Intel, Alcatel, and Organge. Particularly in telecommunications, China has shown innovative capacity by developing its own TDSCDMA standard for 3G mobile communications. Beyond this China's Tianke 1A supercomputer has broken the world record for computing power and with massive investments in nano-technology, Beijing is aiming to surpass the United States in this field by 2020.
China is also rapidly developing world class capabilities in life sciences at universities in Shanghai/Suzhou and Guangzhou and Beijing. It is also now the dominant force in green tech with its companies holding more than 40 percent of the world market for voltaic solar panels.
So while I don't anticipate the demise of Silicon Valley, I can easily anticipate the rise of Silicon China.
Recent statements from Beijing and Tokyo suggest that China and Japan may be pulling back a bit from the brink of confrontation over the Senkaku/Diaoyutai islets. Let's hope it's true, but regardless of whatever diplomatic settlement evolves, we must recognize that the whole affair undercuts a central premise of U.S. foreign policy.
This is the notion that globalization leads to peace. It is actually quite an old notion. Richard Cobden, the English manufacturer and advocate for free trade who in the 1840s led the move to remove British tariffs on grain (so called Corn Laws), argued in the 1850s that globalization is "God's diplomacy" and that free trade would lead to peace among nations. For a while in the early twentieth century it seemed that that might be the case. The global economy had become highly integrated with enormous flows not only of goods and services but also of capital creating global supply chains that tied nations together.
It was John Maynard Keynes who wrote of that period in The Economic Consequences of the Peace noting that:
" The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent."
Of course, it turned out in August, 1914 not to be permanent at all. The globalization of the 19th century had led to a high degree of interdependence among nations and to greater creation of wealth than had ever previously occurred. But the wealth not only served to improve the standard of living of the citizens of London and other metropolises. It also provided the means for pursuing ancient rivalries and for acting on paranoiac fears at an entirely new level of potential destruction. After the first shots of the Guns of August of 1914, the world economy would not be as fully integrated and globalized again until the advent of the Clinton administration in 1993.
Significantly, it was this administration that enthusiastically embraced globalization as America's new strategy, replacing the containment (of the Soviet Union) strategy of the Cold War era. According to a popular mantra of the time, globalization would make all nations rich, being rich they would all become democratic, and being democratic they would all become peaceful because democracies don't go to war against each other, or, at least, that was the belief. In effect, globalization was widely viewed among the American policy elite as a kind of Americanization. The whole world would become like the United States and then America would have no enemies and peace would reign.
This thinking was a powerful force behind the drive to bring China into the World Trade Organization. It was widely believed that countries whose industries participated in the same global supply chains would not go to war with each other. This view was reflected in the widely articulated notion of making China "a responsible stakeholder" in the global economy.
To be sure, World War III has not yet begun and hopefully never will. But what we are seeing in Asia looks a lot like what we saw in Europe in the early 20th century. Globalization has not led, at least not yet, to full democratization. The creation of wealth has not only lifted living standards. It has also increased the ability of nations to pursue ambitions and old rivalries despite being in the same supply chains and despite being interdependent.
Far from leading to peace, the god of globalization is revealing feet of clay as the possibility of war becomes more apparent.
Obama's was one of the better inaugural addresses, and in emphasizing the need, in an age of globalization, for collaboration between all sectors of society including the government and on the necessity of executing the rights of each in order to assure those of all it struck a resonant chord.
However, executing those rights will be a lot easier in a robust, growing economy than in a stagnant one. In the past several months and in the past week there has been much talk of budgets, debt, taxes and tax cuts, borrowing ceilings, economic recovery, social insurance programs, and lower interest rates through quantitative easing (printing more money, essentially). But what I have heard neither the president nor anyone else explain, is what we Americans are going to sell.
We talk about all of these programs, policies, and initiatives as if they are the main game and as if the U.S. economy is a constant that can be automatically pushed and shoved in different ways to achieve desired ends. In fact, this is not at all the case. Take quantitative easing as an example. The economy is not recovering from the recent crisis as quickly or creating as many new jobs as everyone would like. The Federal Reserve has already reduced interest rates to virtually zero. So to push things along faster, it decides actively to buy assets in an effort to reduce the cost of money even more and thereby to encourage bank lending, borrowing, and investment. But do investors borrow and invest just because money is cheap? Look at Boeing. It's new 787 Dreamliners, absolutely key to the company's future, are all sitting on the ground waiting for engineers to figure out how to stop their lithium-ion batteries from burning and setting the planes on fire. Is Boeing going to take a big loan and redouble Dreamliner production right now?
But at least Boeing has something to sell if it can fix the batteries. For the United States the question of what it will sell is much more vexing. You say Boeing jets, as one obvious example. But those batteries are actually made in Japan along with the wings of the new Dreamliner and lots of other parts. And if it's not made in Japan, much of the rest of the plane is made in a wide variety of other countries. Nothing wrong with this, in principle, in a globalized world economy. But for the United States it means that even if the batteries get fixed, there won't be a huge wave of investment to take advantage of the Fed's cheap money.
Amid all the debate and speeches of the past several weeks, no important officials or commentators have mentioned the U.S. trade (technically current account) deficit. Economists generally consider that a deficit equal to three percent or more of GDP is unsustainable in the long term. The U.S. deficit has been at that level for a number of years. That deficit is worth 6-10 million jobs, enough to virtually wipe out unemployment in the United States. Getting rid of that deficit would or even halving it would go a long way toward executing the self-evident rights of each American while also resolving the split between those who wish to tax less and those who wish to spend more.
Yet, even as that deficit and the international debt to which it constantly adds remain un-discussed, they are getting worse. This may sound counter-intuitive because of all the recent media talk of cheap shale gas and rising labor costs in China making U.S. based manufacturing more competitive and driving a wave of re-shoring and relocation of global production to America. But while it may be the case that some of this is occurring, the numbers don't reflect it. While U.S. oil and energy imports have fallen dramatically as a result of the U.S. shale gas and shale oil production booms, the fact is that the U.S. trade deficit has remained about the same and even grown a bit. This is because U.S. imports of manufactured goods, services, and agricultural products have increased enough to more than compensate for the fall in energy imports. In other words, we have swapped imports of Saudi Ariabian oil for imports of Japanese lithium-ion batteries and British banking services.
Obama won't see the execution of rights for everyone that he wants to see and that he has promised unless he reduces unemployment. He won't be able to do that with more fiscal stimulus because the congress will not appropriate more stimulus funds in view of the deficit and debt issues. Nor will the Federal Reserve be able to loosen money much more. It has pretty much used up its ammunition, and as we noted above, it's not clear that it could have much practical affect even if it had more ammo.
The only way out of this situation is to reduce the trade deficit. But to do that America must have something to sell. Maybe the president can tell us what it will be in the forthcoming State of the Union address.
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Because it is of such long term global importance, let's drill down and look at the full truth and implications of today's Japan.
We can start with debt. Most of the public discussion lists Japan's national debt at about 230 percent of GDP. That's true if you're talking strictly about the debt of the Japanese government. But as Tokyo resident and long time Japan watcher Ken Courtis notes in a new presentation, what's happening in Japan is that private debt is being transferred to the public balance sheet. Over the past thirteen years, private debt equivalent to about 100 percent of GDP has effectively been transferred to the public balance sheet. Remaining private debt is about 270 percent of GDP which implies that Japanese government debt could be 500 percent of GDP in the not too distant future.
Indeed, Courtis notes that Prime Minister Abe's new stimulus plan could easily explode the government budget deficit to 10-12 percent of GDP over the next twelve months. At the same time, the new government has more or less merged fiscal and monetary policy by essentially bringing enormous political pressure to bear to force the Bank of Japan to achieve a 2 percent inflation rate through aggressive quantitative easing (QE) measures. So far this has resulted in a substantial weakening of the yen which is already providing a boost to exports. But it will also likely lead to a sharp increase in interest rates with very significant consequences.
Consider that ten year interest rates in Japan are about 0.75 percent. Deflation in Japan has not been the crushing force often portrayed in western media, but it has been running at about 1.5 percent annually, meaning that investors in Japanese bonds are earning a comfortable, safe 2.25 percent. With the economy growing only very slowly, the banks have not been lending much. Rather they have been stuffed with Japanese Government bonds (JGBs). They now hold one third of all Japanese government debt and equivalent to about 83 percent of GDP.
Now suppose that the Bank of Japan actually does get inflation up to the desired 2 percent. Interest rates would rise, let's say to 2.5 percent to pick a number. Now investors aren't earning 2.25 percent. They're earning only 0 .5 percent and likely taking their money out of Japan. At the same time, debt servicing would, of course, explode. Right now debt service equals 25 percent of the annual budget. If interest rates triple, debt service would suddenly be three quarters of the budget. Today, the budget is ½ health, pensions, social security, and education; ¼ debt service, and 1/4 th everything else. If debt service suddenly became 3/4ths of the budget, the budget would simply disintegrate. On top of that, the fall in the value of JGBs would torpedo the banking system. So it's clear that a substantial rise in interest rates could have potentially dire effects, not only for Japan, but for the rest of the world as well.
Of course, Abe is hoping that he can get the Yen to Y100/$ and hold it there while it drives exports and revitalization of production which in turn would drive up the GDP, employment, wages, and tax revenue which could cover the increased cost of debt service. If he can do that for a reasonably sustained period, Abe and Japan will be heroes of the highest order.
But can he? What if there are simply not enough able workers to sustain the required increase in production? What if the products and services Japan can produce and provide are simply no longer competitive with those from Korea and China? What if Japanese corporations fail to invest aggressively enough? What if Japanese can't operate in the global economy as readily as Germans, Chinese, and Koreans?
These are the key questions for which Japan and the world hope Abe has answers.
In the late 1970s, Ezra Vogel's book, Japan as Number One, became a runaway best seller both in Japan and in the United States. Contrary to popular belief, the book did not predict that Japan's GDP would surpass America's to make Japan the world's biggest economy. Rather it noted that in a wide variety of industrial, technical, and socio-political fields, Japan's performance was, well, number one.
Over the past twenty odd years, what Japan had accomplished and is capable of accomplishing has been forgotten in a dismal fog of schadenfreude inspired denigration of what has come to be widely accepted as Japan's "two lost decades." During this time, it is said, Japan has endured anemic growth rates, has lost its ranking as the world's number two economy to China, has pushed its national debt to the world's highest at 220-40 percent of GDP (Greece is only about 160 percent), and has generally lost its former samurai mojo.
Never mind that Japan's GDP growth for the twenty one years 1990-2011, when adjusted for inflation and population growth, was about the same as that of the United States. Indeed, its growth of GDP per capita actually exceeded that of the United States as did its growth of productivity per capita. Never mind that Japan's debt is almost entirely funded from internal sources and that its interest rates are at rock bottom and that its currency , the yen, has become a safe haven currency. Never mind that Japanese life expectancy is near the top of the rankings and far above that of the United States and that Japan's streets are safe for walking at any hour and that it has more Michelin three star restaurants than France.
The truth is that the denigration of Japan (what I call the true "Japan bashing") has been way over done by western analysts and officials. Nevertheless, it is true that Japan has lost some of its edge. What we long expected from the likes of Sony now comes from Samsung and while Toyota vows to maintain production in Japan, other Japanese manufacturers have embraced what they long criticized American producers for doing -- offshoring production to China, Vietnam, and other low cost countries in Asia.
Now a new prime minister and a new administration have taken hold in Tokyo and have announced a bold program to kick start and revitalize the economy and to rekindle the old samurai spirit of Japanese enterprise. The program calls for huge new public works spending especially aimed at the areas of Japan recently devastated by the tsunami and the nuclear reactor emissions. It also calls for increased technology development programs, for a weaker yen, and for the Bank of Japan to adopt a monetary policy with an inflation target of 2 percent , something the bank has long resisted but which it now seems to be considering. This is all aimed at immediately boosting GDP growth by 2 percentage points and creating an initial 600,000 jobs.
Will it work? There are no guarantees. Japan has tried these kinds of programs on numerous occasions in the past without success. Indeed, that is how its debt has grown so large. Or some would say that it has had some success in the past only to snuff it out with premature interest and tax rate hikes. In any case, my guess is that Abe's program will show a significantly positive short term impact. He is throwing a lot of money at the problem and I guess the Bank of Japan will listen to the election returns and do some quantitative easing of some sort that will further loosen monetary policy.
But the big question is the long term. Actually there are two questions. Can Japan ever expect to retrieve the old vitality? Does this program of Abe's have a chance of doing so?
To the first question, I offer a qualified "yes". Nations are resilient beasts, capable of extraordinary effort and accomplishment. So I would never say never with regard to a Japanese renaissance. But to understand the extent of the necessary effort we must understand the factors now at play on the Japanese scene. The single most important one is the aging and shrinking of the population. Forecasts indicate that by 2050 Japan's population will be down to about 90-100 million from today's roughly 127 million. Keep in mind, that during the period of Japan's rapid growth (1950-1980) population growth was high and the age of the population was young. New workers were flooding into the economy and providing the basis for expanded health care, retirement, and social welfare programs. The opposite of that is now the case. It will be very difficult if not impossible for Japan to enjoy a robust and dynamic economy with a shrinking and aging work force.
A second major consideration is integration into the global economy and the adoption and development of new technology and new techniques. Here, what the Japanese call a "Galapagos syndrome" seems to have taken hold in a way that seems to slow the development and introduction of new ideas and ways of doing things. The ability to learn from the outside seems to have diminished in some way.
A third issue is that of the gap between the ability of ordinary Japanese to endure hardship and sacrifice and to engage in self-organization and the inability of the governing authorities properly to lead. This gap was most apparent in the contrast between the heroic reaction of citizens to the twin disasters of the tsunami and the nuclear emissions and the bumbling responses of both corporate and political leaders.
There are many other structural issues that could be raised such as agricultural subsidies, land use and land tax rules, zombie companies, bridges to nowhere, corporate governance, and more. My Japanese friends can easily add to the list.
But the point is that, so far at least, the Abe program doesn't seem to deal with these issues very well. So while I believe that Japan can become number one again, I doubt that Abe's current plan will do the trick.
What more would he need to do? Stay tuned.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.