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The Japan Story

Tuesday, 10 January 2012 15:04

Eamonn Fingleton started a debate on Japan's slump or lack thereof with a Sunday review piece in the NYT. This has since been joined by Paul Krugman and others. Since I have been asked by a number of people what I thought, I will weigh in with my own two cents.

First I agree with Fingleton that the description of Japan as a basket case is way off the mark. While GDP growth has been weak, its productivity growth has been better than the average in the OECD.


                                            Source: OECD.

The fact that its productivity growth has exceeded its GDP growth is explained by both the aging of the population, leading to a decline in the size of its labor force and also the reduction in the number of hours worked per year by the average worker. Neither of these seems to be obviously bad, although it is almost certainly the case that Japan still suffers from some hidden unemployment (mostly among women) in addition to its relatively low official unemployment (@ 4.0 percent).

Fingleton probably does go overboard in a few areas. First, Shadowstats is not a credible source. There are issues with the official statistics in the U.S. (as is the case everywhere), but the idea that we have overstated growth by 2 percentage points a year does not pass the laugh test.

Second, the measure of electricity use that he sees as a main determinant of living standards is likely distorted by the fact that Japan was starting from a very low base whereas the U.S. was starting from a very high base. We can get any number of new appliances that will be markedly better than the ones that they replaced and still use considerably less electricity. The same is not likely to be the case with Japan. The same applies to commercial and industrial users of electricity.

But there is an area in which Fingleton may actually understate his case. I remember refereeing a journal article at the end of the 90s about Japan's price index for passenger trains. (Wait, this is not that boring.)

The article purported to show that the official Japanese index overstated inflation because it missed quality improvements. The main quality improvement was that the trains were less crowded. The author had compared the price of first class and second class seats and noted that the main difference between the two was that first class passengers were guaranteed a seat. However because the trains had become less crowded, almost everyone in second class could now get a seat as well. This in effect meant that a second class seat at the end of the period examined was as good as a first class seat at the beginning.

This made a substantial difference in the price index for trains, effectively showing a much slower rate of price increase when this quality improvement (less crowding) was taken into account. This issue could be an important factor in the quality of services across Japan more generally. If the reduced population has led to fewer people on planes and other forms of transportation, fewer people sharing parks and beaches and other potentially crowded public places, then it may imply a substantial improvement in living standards that would not be picked up in conventional economic measures. 

I don't know if anyone has researched this issue and tried to quantify the benefits that the Japanese may be receiving from reduced crowding, but it is plausible that the gains would be substantial.

Comments (7)Add Comment
Whoever puts that study together...
written by LSTB, January 10, 2012 4:57
has their work cut out for them.

Although Japan's working-age population started declining in the 1990s, Japan didn't stop expanding its mass transit system. At least in Tokyo. That's probably a bigger contributor to transit decrowding.

I'm also sure the population has shifted around. For instance, parts of southern Saitama and Chiba prefectures, which border Tokyo Prefecture were growing during the mid-2000s. I have no idea where they moved from.

Declining demand, increasing supply, shifting demand ... Yeah, it'd be a tough study. Interesting though.
written by Luke Lea, January 10, 2012 6:04
Japan is dealing with a problem all societies are going to have to face sooner or later: the problem of a stable or declining population. Look and learn.
Can we measure inflation accurately to 2%??
written by Wisdom Seeker, January 10, 2012 6:24
Seems to me you're now giving John Williams the same treatment you complain about getting from David Brooks:

"First, Shadowstats is not a credible source. There are issues with the official statistics in the U.S. (as is the case everywhere), but the idea that we have overstated growth by 2 percentage points a year does not pass the laugh test."

If you think we're understating inflation by 2% / year, which seems to me entirely credible given the documented changes in methodology over the last 20 years, then you get your 2% fake GDP growth immediately.

Or do you think that we were understating GDP growth previously? Or that the changes in methodology don't matter?

I'd like to see a well-reasoned critique of ShadowStats. I personally would prefer to have faith in my government's data, and I certainly don't agree with ShadowStats' spin on their own data, but I need more than just an assertion that we can measure inflation to 2%, given the non-Shadow-Stats evidence to the contrary.
written by McDruid, January 11, 2012 1:21
I don't get Krugman's graph. It looks like he is suggesting that the Japanes economy should have grown at a consistant rate from an arbitrary start. From the chart it appears that they had a slow period in the early 90's, a retreat in the late 90's and a slow period in the early 00's. Other than that, they grew pretty good.

ShadowState critique is here: http://www.econbrowser.com/arc...s_deb.html
written by Jesse, January 11, 2012 9:26
"We can get any number of new appliances that will be markedly better than the ones that they replaced and still use considerably less electricity. The same is not likely to be the case with Japan."

Japan has been on a crusade to reduce electricity use through the purchase of more efficient appliances since the Fukushima incident at least and probably well before that. I have seen some impressive figures.

I hope I misunderstood what was said because it seems incredibly wrong.

And the knock on Shadowstats was uncharacteristically off base.
Yes! The benefit from less crowding!
written by Charles Peterson, January 11, 2012 10:51
So often we hear how catastrophe will result from declining birth rates and eventually population. But what really occurs from declining birth rates is less gross product for the masters to rake away, while working masses benefit from less crowding. The real catastrophe will occur because endless growth isn't slowing and reversing in enough places to keep us from hitting the limits of our limited planet too hard.
Shadowstats deserves scrutiny
written by Kevin O'Neill, January 12, 2012 5:23
It's hard to take the Shadowstats inflation numbers seriously. Check that - it's impossible to take the Shadowstats inflation numbers seriously. And when they're just completely off-base on one stat, what reason is there to trust them on anything else?

Paul Krugman has often pointed to MIT's Billion Price Project. We have empirical numbers that collate and compare millions of prices. While the CPI may be slightly understated, the Shadowstats numbers are simply unbelievable.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.