1

Noda’s Mistaken PrioritiesJapan is not the next Greece

Richard Katz

The Oriental Economist Report

© 2012 rbkatz@ix.netcom.com www.orientaleconomist.com

Temple University In Japan

June 29, 2012

2

Why Japan Is Not Greece

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%

Net govt debt, % of GDP, 2010

Cu

rren

t ac

cou

nt,

% o

f G

DP

, 200

5-10

ave

rag

e

GreecePortugal

Spain

Ireland

Japan

Italy

Belgium

USA

FranceUK

Germany

Austria

Holland

3

Income, Not Trade,Drives CA Surplus

-4-2

024

68

1012

141618

202224

2628

85 87 89 91 93 95 97 99 01 03 05 07 09 11

Bal

ance

of

pay

men

ts (

tril.

yen

)

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Trade balance (left) Int'l Income (left) Income % of Curr. Account (right)

Even if trade deficit, no CA deficit for perhaps a decade, then net assets to draw upon

4

Why Japan Isn’t Greece (cont.)

-125%

-100%

-75%

-50%

-25%

0%

25%

50%

75%

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%

Net Govt Debt, % of GDP, 2010

Net

Int'

l Ass

ets,

% o

f G

DP

. 200

9 o

r 20

10 JapanBelgium

Greece

PortugalIreland

Spain

ItalyFranceUK US

GermanyHolland

5

Low Growth Expands Deficit;Better Growth Lowers It

Primary deficit is deficit aside from debt service

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

84 86 88 90 92 94 96 98 00 02 04 06 08 10

Pri

mar

y b

ud

get

bal

ance

, % o

f G

DP

Decrease during 2002-07 recovery, then explosion in 2009-09 recession

1997-2001 recession and stagnation

6

Interest Payments Still Low Despite Debt Explosion

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% o

f G

DP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Net Governnment Debt (left scale)

Net Interest Payments (right scale)

7

Slack Demand For Credit Keeps Interest Rates Down

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

10-y

ear

JGB

yie

ld

Panic due to irrational fear of run on banks

8

Consumer Spending Flat Because Household Income Flat

40

45

50

55

60

65

70

75

80

85

90

95

100

105

110

115

1980 1984 1988 1992 1996 2000 2004 2008

Inco

me

and

Co

nsu

mp

tio

n (

real

, 199

7=10

0)

40

45

50

55

60

65

70

75

80

85

90

95

100

105

110

115

Real Disposable Income

Real Consumption

9

Tax Shifts IncomeFrom Households to Firms

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

Total Corporate Income Other Consumption

Ch

an

ge in

an

nu

al ta

xe, 1988-2

012 (

Bil. Y

en

)

Corporate tax down mainly due to tax cuts; 2011 profits up 3% from 1988, up 11% at big firms that pay most of corp. taxes

10

Gov’t Borrowing Makes Up for Reduced Private Borrowing

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Deb

t as

% o

f G

DP

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

Government net debt

Households

Non-Financial Corps.

11

Budget Deficit, Trade Surplus Replace Private Demand Shortfall

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% o

f G

DP

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Budget deficit Trade surplus Private demand gap

CY

12

GDP Still 2.3% Below Peak; Forecast: 6 Years To Regain Peak

1995 Kobe earthquake barely registered in GDP tables; electricity makes the difference

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

0 1 2 3 4 5 6

Years from pre-recession peak

Cu

mu

lati

ve G

DP

ch

an

ge

From Jan-Mar 1997From Jan-Mar 2008JCER forecast

Tsunami

Jan-March 2012

13

Joblessness Seen In Reduced Hours, Not Unemployment Rate

-11%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ch

an

ge f

rom

2000 (

3-m

o M

A)

Jobs Hours

14

All Growth From Productivity…

50556065707580859095

100105110115120125130

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

1990

=100

50556065707580859095100105110115120125130

Work Hours

GDP

Productivity

Productivity = GDP per workhour

15

…But Productivity Anemic 1.4%;GDP Just 0.9%, Per Capita Just 0.7%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Year-

on

-year

gro

wth

(2-q

tr M

A)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

GDPProductivity (GDP per hour)

Average productivity growth 1991-2011: 1.4%

No current structural reform policies to accelerate productivity, such as farm reform, competition policy, labor market, or TPP

16

Anemic Per Worker GDP Will Mean Lousy Per Capita GDP

-0.9%

0.3%

0.9%

-1.3%

-0.2%-0.4%

-1.6%

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2011-15 2016-20

An

nu

al %

declin

e

20-64Total populationPer capita GDP

Per capita GDP growth assumes productivity growth remains at 1.4% and no change in workhours per working age person; actual growth should be higher in the process of economy getting back to full capacity

17

Low Growth Worsens Deflation;Better Growth Fights It

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Ou

tpu

t g

ap

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Def

lati

on

(d

om

esti

c d

eman

d)

Output gap (left)

Deflation, domestic demand (right)

Correlation = 79%

Output gap is gap between actual GDP and what GDP would be at full employment and full capacity-utilization; better growth would eliminate gap

18

2011 Cut In Electricity Per GDP

1.60

1.62

1.64

1.66

1.68

1.70

1.72

1.74

1.76

1.78

1.80

1.82

1.84

1.86

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Kw

H p

er Y

1,00

0 G

DP

2001-2010 average

19

Nukes Down; Oil, LNG Way up

22

03

-20-20

-10

0

10

20

30

40

50

60

70

80

90

Total Thermal Nuclear Hydro

Ele

ctri

city

, b

il. K

wH

Feb. 2011 Feb. 2012 Change

20

Electricity Demand Down Because GDP Still Down From 2007 Peak

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1 2

Ch

an

ge f

rom

2007 t

o 2

011

Total KwH

Decline

Due to GDP fall

Due to less

KwH per GDP

21

And Because Mfg. Still Down 12%

64

68

72

76

80

84

88

92

96

100

104

00 01 02 03 04 05 06 07 08 09 10 11 12

Indu

stria

l Pro

duct

ion

Inde

x, 2

007-

IV =

100

64

68

72

76

80

84

88

92

96

100

104

22

Unhealthy Dependence on Trade Surplus to Drive Growth

34%

5%

16%

55%

29%

40%

-10%

0%

10%

20%

30%

40%

50%

60%

Trade Surplus Investment Household Consum.

Sh

are

of

GD

P G

row

th 0

2-I

to

07-I

V

Share of GDP

Share of GDP Growth

23

Trade Surplus Still Pivot For Growth

Net Exports

Net Exports

Rest of GDP

Rest of GDP

-10%-9%

-8%-7%-6%

-5%-4%-3%

-2%-1%

0%1%2%

3%4%5%

6%7%

08-I to 09-I 09-I to 12-I

Co

ntr

ibu

tio

n t

o c

han

ge

in G

DP

(%

)

45% of drop

35% of recovery

24

Real Yen Below 25-Year Average

50556065707580859095

100105110115120125130135140145

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

(19

86-2

012=

100)

50556065707580859095100105110115120125130135140145

Real (price=adjusted) yen rate

Nominal rate

25

Easy Money Alone Can’t Cure Deflation

0

50

100

150

200

250

300

350

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Ind

ex (

1990

=100

)

0

50

100

150

200

250

300

350Nominal GDP

M2+CDs ex-base

Monetary base

Overnight rate dropped from 2.3% in Jan. 1995 to 0.5% in Sept.

26

Alternatives on Tax• Use fiscal and monetary stimulus to restore full

demand• Combine this with new law to raise taxes once

economy hits certain benchmarks, e.g. narrowing of output gap (which will also fight deflation); that will reassure bond markets

• Why tax consumption when structural defect is chronically anemic consumption due to low consumer income?

• Better taxes that would raise revenue and GDP growth: Taxpayer ID, Rezone fake farmland, Change real estate taxes, Change land usage laws

27

Structural Reform Agenda• Energy policy• More domestic and int’l competition, including

imports and inward FDI• Easier for new companies to challenge

incumbents (cf. current problems in electronics)• Improve productivity in backward sectors of dual

economy by raising to global benchmarks• Real labor market flexibility, not wage austerity via

irregulars• Raise household share of national income• Real social safety net making Japan safe for

creative destruction