If Japan Is Our Worst-Case Scenario, We're All Right

In 1991, former MIT dean Lester Thurow wrote that "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century."

He wasn't alone. The standard view of the 1980s held that Japan's sway over the world economy was unbreakable. Its economy grew faster. Its corporations were more efficient. Its workers more productive. In 1988, former Reagan official Clyde Prestowitz warned: "The American century is over. The big development in the latter part of the century is the emergence of Japan as a major superpower."

Such comments are now ridiculed relentlessly by analysts and commentators, including myself. Japan, after all, did not boom. Far from overtaking the United States, its economic growth stagnated for two decades, its stock and housing markets collapsed, and its government entombed itself in debt. Twenty years ago, Japan was synonymous with the phrase "juggernaut." Today, it's often seen next to the phrase "lost decade."

America should take notice, we hear these days. If we don't get our act together, we could be in for a lost decade or two just like Japan.

But there's an interesting rebuttal to these warnings by a Japan-based journalist named Eamonn Fingleton. He summarizes his views bluntly: "[A]fter studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth."

How so? Consider:

  • The highest Japan's unemployment rate has been in the last 20 years is 5.5%. Its current unemployment rate, 4.6%, is about half that of the United States. Among those of prime working age, unemployment is virtually nonexistent in Japan today.
  • Japan's average life expectancy at birth increased by more than four years -- from 78.8 years to 83 years -- between 1989 and 2009. Japanese, Fingleton points out, "now typically live 4.8 years longer than Americans," and better health care is a major factor.
  • Japan had a current account surplus of nearly $200 billion in 2010, up threefold in 20 years. By contrast, America's current account deficit was nearly half a trillion dollars in 2010, up fivefold in 20 years. In short, Japan supplies the world with products and capital, while America supplies it with debt.
  • Based on purchasing power parity, Japan's income per capita has grown at nearly the same rate as America's over the last 20 years (0.8% vs. 1%, respectively).
  • According to the Japanese Statistics Bureau, during the "lost decade" of 1991-2001, the average Japanese citizen spent more time enjoying arts and culture, gardening, reading books, sightseeing outside the country, and visiting family.
  • The yen has strengthened 87% against the dollar and 94% against the pound over the last two decades.
  • Japan's ranking in the world Corruption Perceptions Index has increased substantially over the last decade, and is now well ahead of the U.S.

The average Japanese citizen, in other words, is living longer, earning more money, spending more time in leisure activities, being better represented by government, and enjoying some of the highest job security in the developed world. If this is the narrative of a failed economy, sign me up.

Why the gulf between perception and reality? Part has to do with the standard metric we use to judge economy's health: gross domestic product. Over the last two decades, Japan's real GDP has grown at 1% a year, compared with about 2.5% for the United States. Clearly, Japan looks like the loser of the two countries.

But there's a difference: Japan's population is in decline, while America's is rising. From 1990 to 2007, Japan's working-age population fell from 86 million to 83 million, while America's jumped from 160 million to 200 million. When GDP is measured on a per capita basis, the growth difference between Japan and America narrows by two-thirds. When viewed as GDP growth per working-age resident, the difference between the two nations virtually disappears. The size of Japan's pie may not be growing as fast as America's, but the amount of pie available to each citizen, and each worker, is plodding along at a similar rate.

Make no mistake: Japan's economy faces unimaginable challenges because of its staggering debt load. Demographics magnify those dangers. "Japan is a bug searching for a windshield," investor John Mauldin said two years ago -- a comment that was probably as accurate as it was controversial.

But Fingleton's points are valid, and highlight two important issues.

One, gross domestic product can be a poor way to measure an economy's worth and progress. It counts things that don't matter -- a vague calculation of output -- while ignoring how actual people on the ground are doing. In his book The Rational Optimist, author Matt Ridley shows how Africa frequently falls into the same trap. Judged by GDP growth, most of Africa looks like a pit of stagnation and decline. But using metrics that are actually meaningful to people -- life expectancy, access to health care, clean drinking water, disease prevention, education, democratic representation -- Africa has made incredible strides in recent decades.

Fingleton makes a somewhat analogous argument for Japan: "There's a dramatic gap between what one reads in the United States and what one sees on the ground in Japan," he quotes journalist William Holstein as saying. He continues: "The fallacy of the 'lost decades' story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years."

Second, misconceptions about Japan's economy demonstrate how easy it is to assume something is accurate just because you've heard it ad nauseum. Admittedly, I've mentioned Japan's lost decades in the past without asking whether there were another side of the story. I heard enough about stagnation and decline to assume it was all true. Not until I read Fingleton's rebuttals did I look at the details and realize, to my shock, that he was right. What's the saying? Trust, but verify.

Fingleton finished a recent essay with a note: "I feel so strongly about all this that I have more than once over the years challenged the principal proponents of the 'lost decades' story to a debate. I first tried in 1998; and then again in 2002. On each occasion there were no takers."

Anyone care to step up to the plate?

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (30) | Recommend This Article (72)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2012, at 11:33 AM, DividendsBoom wrote:

    Part of the American view towards Japan has to do with their stock market. Lost money in Japan that decade roughly equals Japan's lost decade

  • Report this Comment On February 03, 2012, at 12:25 PM, MartyTheCanuck wrote:

    You're right that when we hear something often enough, we assume it's true. I call that the "Narrative", when most media repeat the same thing, it becomes the truth, even when it is wrong or unproven, or only a small part of the story.

    We see that all the time in politics, when average people without any knowledge of a subject hold a belief that is simply biased opinions repeated by willing media.

    Regarding Japan, it is refreshing to hear another side of the story. I just hope that whatever increase they have in standards of living isn't simply paid by debt that will come back to haunt them. I only traveled in Japan for a week, but they are charming, warm and respectful, and I hope that I will go back one day.

  • Report this Comment On February 03, 2012, at 12:38 PM, ETFsRule wrote:

    "The highest Japan's unemployment rate has been in the last 20 years is 5.5%. Its current unemployment rate, 4.6%, is about half that of the United States. Among those of prime working age, unemployment is virtually nonexistent in Japan today."

    When a person gives up and stops looking for a job, they no longer show up in the unemployment numbers. That's why it's more accurate to look at the employment to population ratio:

    http://www.tradingeconomics.com/japan/employment-to-populati...

    Or, the participation rate:

    http://research.stlouisfed.org/fred2/graph/?g=4Lf

    (and no, such a sharp drop cannot be explained solely by Japan's aging population)

    Also, the average annual hours worked per employed person has plummeted:

    http://research.stlouisfed.org/fred2/graph/?g=4Le

    Also, Japan's suicide rate has skyrocketed since 1990, a trend that shows no signs of improving:

    "The number of people who committed suicide indicating "failure to get jobs" rose to 424, up 20 percent from the year before and more than doubling from 180 in 2007, the report said. About one-third were in their 20s, including new graduates seeking jobs.

    The results underscore the tough reality for student job seekers as companies cut back on hiring amid a lengthy economic slump.

    A record one-third of university students graduating this month have not found jobs, a separate government survey said in January."

    http://www.huffingtonpost.com/2011/03/04/japan-suicide-rate-...

  • Report this Comment On February 03, 2012, at 12:45 PM, FoolSolo wrote:

    A much more complete and detailed version of the Fingleton article can be found here:

    http://www.nytimes.com/2012/01/08/opinion/sunday/the-true-st...

    Media spin is always something other than reality. I see this kind of nonsense across all media channels, but especially when it comes to international news.

    Japan's trade surpluses have grown through the so called lost decade, and clearly the key indicators of real-estate and stock market are not reflective of the true prosperity in Japan, despite the earthquakes/floods, etc.

  • Report this Comment On February 03, 2012, at 12:45 PM, TMFHousel wrote:

    ETFRules,

    All three figures you point out are virtually identical for the US:

    http://bit.ly/yL4oqh

    http://bit.ly/yjPtBS

    http://bit.ly/yjWTWc

  • Report this Comment On February 03, 2012, at 1:01 PM, DaveKATL wrote:

    Measure a sheet of paper with a yard stick (meter stick to the rest of the World), it's really thin.

    Measure it with a micrometer, it's pretty thick.

  • Report this Comment On February 03, 2012, at 1:27 PM, slpmn wrote:

    So in Japan, we have a society that manages to keep a high percentage of its people employed at a high standard of living, high education attainment levels, excellent health care for everyone, extremely low levels of violent crime, etc., but because their GDP and stock market numbers have been sluggish for 20 years, it has somehow been perceived as the global example of failure during that whole period. Absurd.

    Great piece, Housel.

  • Report this Comment On February 03, 2012, at 1:42 PM, Hawmps wrote:

    "The size of Japan's pie may not be growing as fast as America's, but the amount of pie available to each citizen, and each worker, is plodding along at a similar rate."

    This is a very important observation. Often times figures (whatever it is you're looking at) will show some type of growth and there is all sorts of hype about this "growth", but there is little real relativity to the measurement. Say (metaphorically), I increased the rent 5% so I collect 5% more rent... look at all my new growth, I say, and how wonderful it is. Great, compared to what? It is meaningless if my expenses increased 10% and my net effectively goes down or stays flat. I could put my money in a savings account earning 0.01% for less risk.

    Japan may have been growing at a much slower rate, but it appears that the type and ballance of growth has had greater overall value to the people. That's my take anyway. What the status quo generally looks at is growth, how much is there? When reducing the cost of living (lower expenses, more of the same pie) can have a positive net effect and even compound the effect of making a little bit more money... margins matter.

    There is so much emphasis on GDP growth, that's the top line, thats the hardest thing to grow. It is often more fruitful to reduce expenses to be more efficient and bring up the bottom line.

  • Report this Comment On February 03, 2012, at 2:40 PM, ETFsRule wrote:

    "TMFHousel wrote:

    ETFRules,

    All three figures you point out are virtually identical for the US:"

    For the average annual hours worked, right now the numbers are about the same. But, in 1990, Japan's was much, much higher. Their figure dropped from 2060 to 1760. Ours dropped from 1810 to 1740. If we endure a drop of 300 hours/worker over the next decade, it will be a disaster.

    For the employment to population ratio, we are still about 2.5% higher than Japan, which is very significant, and shows that the employment situation in Japan is indeed worse than here.

    Japan's participation rate is 59%, our is 63.5%. That's an enormous difference. How many millions more unemployed people would it represent, if our participation rate fell to 59%?

    Lastly, as I pointed out before, 1/3 of Japan's recent college grads are unemployed - an incredibly high amount. For the US it is only 13.2%:

    http://www.businessweek.com/business-schools/job-offers-incr...

  • Report this Comment On February 03, 2012, at 2:57 PM, DJDynamicNC wrote:

    GDP increases whether I spent the money because I wanted sports tickets or because I broke my leg; it in no way measures quality of life. It's good to keep that in mind.

    Great article as usual.

  • Report this Comment On February 03, 2012, at 2:59 PM, DJDynamicNC wrote:

    " If we endure a drop of 300 hours/worker over the next decade, it will be a disaster."

    Doesn't that strike you as sort of awful? You're saying that if we get into a situation where human beings have to work much less over the next decade, that would be a disaster.

    Curious.

    Is there some reason we don't structure our society in such a way that human beings working less is viewed as a positive?

  • Report this Comment On February 03, 2012, at 3:16 PM, slpmn wrote:

    One thing that I would add, is that in terms of investment performance, if our next 10-15 years mirrors the Japanese experience, we are in for a world of hurt. I'm not going to pretend I follow the Japanese stock market closely, but hasn't its performance over the last 15 years been abysmal? And, for savers, the ultra low interest rates are just as horrible.

    As an investor, I hope the path the US takes offers far more return potential.

  • Report this Comment On February 03, 2012, at 3:20 PM, ETFsRule wrote:

    Using the same logic, would you say that higher unemployment is generally a good sign?

  • Report this Comment On February 03, 2012, at 3:37 PM, DJDynamicNC wrote:

    Ah, but that's not the same logic. My logic is that we have structured our society in such a way that people having less work is bad, even though on the individual level if I can maintain the same or better quality of life while doing less work, that's a good thing.

    If we could build a society where everything that needed doing got done even though nobody worked (say, through the dedicated work of our robot overlords) well that's hardly a bad thing. But how do you get from here to there?

    So no, in the current system, higher unemployment is not a good thing. But that's because we've pegged livelihood to employment and we use hours worked as a stand-in for productivity. But that's not how productivity is really measured. Workers are more productive now than they were in 2000, but wages have been stagnant. Where have those productivity gains gone? We haven't been returning them to the workers in the form of wages, and our system is set up such that returning it to them in the form of increased leisure time is a BAD thing.

    I find that curious.

  • Report this Comment On February 03, 2012, at 3:52 PM, 50yardline wrote:

    What did Japan in was the collapse of the Soviet Union. During the Cold War, US companies were not allowed to deal directly with Communist China. Japan acted as middleman for Chinese-produced goods, and took a percentage off the top.

    When the US started doing business directly with China in the early '90's, Japan was cut out of the loop. The Nikkei peaked December 30, 1989.

  • Report this Comment On February 03, 2012, at 4:40 PM, ETFsRule wrote:

    Agreed. In theory it would be nice if we could work fewer hours for the same salary.

    It seemed like you were criticizing my use of stats in regards to the Japanese economy. And, I really don't think most of those workers are happy with their hours getting cut. Companies tend to use more part-time workers in bad economic times, and in my opinion that is clearly what happened in Japan since 1990.

    Part-timers now make up 20% of all workers in Japan, compared with 14% in the US.

  • Report this Comment On February 03, 2012, at 4:44 PM, TMFHousel wrote:

    <<When the US started doing business directly with China in the early '90's, Japan was cut out of the loop. The Nikkei peaked December 30, 1989.>>

    What really did the Nikkei in was trading at 10 zillion times earnings.

  • Report this Comment On February 03, 2012, at 5:37 PM, DJDynamicNC wrote:

    @ETFs - there's really no reason we couldn't. Americans work far more than other nations. We don't get paid sick days unless our employers feel like giving them to us, we don't have guaranteed vacations, we don't get many holidays. Why not? Productivity has been climbing as fast as ever, so we're getting more done per person than ever before. If each person is more productive, and yet not getting an increase in wages, why not at least pay out the increased productivity in guaranteed sick days and vacation time? Or a 35 hour work week?

    Corporate profits are at record levels, so we know where the productivity gains have been going. I think it's fair to consider putting them back in the hands of the people who actually generate them.

  • Report this Comment On February 03, 2012, at 6:17 PM, xetn wrote:

    Observations:

    How much of Japan's manufacturing is outsourced? Compare that to the US.

    What part of the Japanese culture is non-Japanese?

    How much immigration is there is Japan?

    Compare the debt load of Japan to the PIIGS.

    How relevant is any of the above?

  • Report this Comment On February 04, 2012, at 9:41 AM, TMFMMTInvestor wrote:

    Out of curiosity, Morgan, have you read Richard Koo's book on the Japanese lost decades, "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession"?

    Scott

  • Report this Comment On February 04, 2012, at 1:26 PM, bbell46356 wrote:

    Kudos Morgan,

    Another excellent article and the commentary is just as good.

  • Report this Comment On February 04, 2012, at 2:01 PM, Turbolover wrote:

    I'll check out Koo's book, but what about lessons learned for the individual investor in Japan since 1989?

    There are certainly people who have made money in the Japanese market over that time period. What industries, sectors, or companies returned gains and what can we learn from it?

  • Report this Comment On February 05, 2012, at 12:24 AM, brickcha wrote:

    Japan is proof that GDP is a terrible measure of anything useful. Life is far from perfect over here, but without a doubt, a typical Japanese is more secure in both their career, body and person, is healthier, is better looking (because they ain't fat), is longer-lived, is better educated, more well-travelled, eats better, dresses better, and receives better service than the typical American. The major upsides to living in the US as I see them are much nicer housing (at comparable income levels), more air conditioning and heating, daylight savings time, and laws that restrict the volume levels of commercials. Seriously, that's my entire list.

    One thing that might be causing some of the descrepancy between Japan's poor GDP performance and what one sees on the ground is the fact that Japan has a huge underground economy. The US of course, has one too, estimated at ~10% of GDP. But Japan's seems much, much larger to me. Japan is a heavily cashed based society, to the point that there about equal amounts of physical yen and dollars in circulation...and unlike the dollars, almost all the yen are at home, sloshing around and often not being taxed. If the US black market is 10%, I fail to see how Japan's could be less than 20%. Throw that on top of the fact that they spend half what we do on health care and much less on transportation as well, and you start realizing why the typical Japanese seems to have quite a bit of money to spend on luxury brands and travel.

    Btw, the minimum wage over here is around $10/h, and includes two weeks of vacation per year, virtually free health care, and is typically supplemented with free or subsidized transportation to and from work. Yet the unemployment rate is under 5%. Go figure.

  • Report this Comment On February 06, 2012, at 10:28 AM, whereaminow wrote:

    --------> In 1991, former MIT dean Lester Thurow wrote that "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century." <-----

    Another witch doctor that doesn't understand basic economics or the business cycle. Japan pumped their economy full of cheap credit in the 80s, created an unsustainable boom, had a spectacular crash, and spent the last 20 years engaging in Keynesian stimulus.

    I bet this quack thinks China is going to continue its growth and become the next owner of the 21st century.

    Study Austrian Business Cycle Theory.

    David in Liberty

  • Report this Comment On February 06, 2012, at 3:13 PM, DJDynamicNC wrote:

    @Brickcha: "Btw, the minimum wage over here is around $10/h, and includes two weeks of vacation per year, virtually free health care, and is typically supplemented with free or subsidized transportation to and from work. Yet the unemployment rate is under 5%."

    I'm not surprised at all, but I'm really excited to hear from our Austrian friends about how this particular real world example doesn't count.

  • Report this Comment On February 09, 2012, at 11:44 AM, DJDynamicNC wrote:

    What? No takers?

  • Report this Comment On February 13, 2012, at 1:22 AM, ChrisBern wrote:

    Good article overall, but it reminds me of the Dr. Richard Koo book I read last year: "The Holy Grail of Macroeconomics". The similarity being, both this article and that book seem to assume that Japan's lost decades are now over and that their accumulated debt won't be catastrophic in one way or another going forward. Yes this article mentioned the debt but more as a sidebar. Anyhow I'm positive that if the U.S. racked up as much debt as Japan has, we'd have shiny new infrastructure and less reported unemployment as well. Which all looks great until the debt train leaves the station!

  • Report this Comment On February 24, 2012, at 1:59 PM, thidmark wrote:

    "Or a 35 hour work week?"

    Yeah, that worked great in France ...

    Back to the main discussion, don't discount the Japanese respectful culture. Disaster strikes and the Japanese band together. Here in the good ol' US, a disgusting mob of low-lifes loots whatever it can get its hands on.

  • Report this Comment On April 25, 2012, at 3:27 PM, DJDynamicNC wrote:

    ^^^ And why wouldn't they? They've watched a disgusting mob of high-lifes loot their country for decades.

  • Report this Comment On April 25, 2012, at 3:28 PM, DJDynamicNC wrote:

    Also, I want to point out the irony of saying that Japan is strong because its people band together, but America is weaker because those disgusting other people ruin everything.

    Banding together: you're doing it wrong.

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