Japan Can - and Will - Be a Normal Economy Again
Remarks to the 12th Annual Mitsui Symposium, Center on Japanese Economy and Business, Columbia University, New York
For several decades, business and economic pundits have exoticized Japan’s economy. The supposed lost decades since 1990 have only heightened perceptions of a country whose economic system operates in unique ways, not subject to standard economic analysis. As I have argued tonight, this view of Japan as atypical and mysterious is, however, unfounded for macroeconomic policy purposes. With the enormous challenges that Japanese citizens face today, it is important to keep in mind this fundamental commonality – returning to the belief that Japan has its own path economically, not just culturally, could lead to deeply mistaken conclusions about the country’s longer-term economic prospects.
It is my belief that the human tragedy of the March 2011 earthquake and tsunami will do nothing to dislodge the Japanese economy from the long-term development path common to all advanced economies. If, as I have argued, the story of Japan’s economy in the 1990s is that of Seven Samurai: in which a terrible, negative shock disrupts the normal farming village cycles of Japanese economic life, eroding communal prosperity until strong leadership requiring significant sacrifice is exerted to restore normality. Seen that way, the future for Japan’s economy is continued normality in the absence of new, self-destructive social or policy paths – and even a horrendous natural disaster can be overcome.
Absent the current crisis, Japan’s prospects over coming decades should be fine for a normal country at the global technology frontier, with ample savings, and secure property rights. This means the economy should grow over time at approximately the rate of productivity growth—around two percent annually—adjusted for changes in prices and population size. The country should have normal business cycles, and be vulnerable to external or further weather shocks, but should not display any unusual patterns. The rebuilding from the tsunami will only accelerate the growth rate in the short-term with a surge in capital investment, just as occurred following the devastation of World War II or the Kobe earthquake. This is of course what a Solow-type growth model would tell you would happen when an economy in the steady state suffers a sudden loss of capital (and history bears this theory out in practice beyond Japan).