Why Worry About Japan?

Well I can think of several reasons, and none of them particularly related to the lamentable lack of security at nuclear power stations that was recently revealed there.

One good reason to worry might be the use and abuse of economic statistics that goes on in the Japanese context. I don’t know whether it is the fact that the Japanese economy is a topic which the majority of English language readers know so little about that means that normal caution is thrown to the winds, or whether Japanese obscurantism with the numbers themselves is the real culprit.

A classic case in point came in the middle of this week with my beloved FT declaring in a headline “Japan?s trade surplus widens as exports rise”, whilst Bloomberg reports exactly the same story in the following terms:“Japanese Exports Fell For A second Month in July”. Now which was it?

My feeling is that Bloomberg has it right, since they base their story on the seasonally adjusted yen value (not volume) figures, which probably are the more appropriate ones to chose. But it does all go to show what a minefield this is for the unwary.

In fact the FT itself today, in this story with the heading “Data signal slowdown in Japanese recovery”, seems to confirm the Bloomberg reading, since given that the Japanese recovery is export driven, if it is slowing, then this should imply that the export sector has cooled, at least slightly.

Another peculiar detail then shows up in the FT article itself: “The unemployment rate rose from 4.6 per cent in June to 4.9”.

Now the Japanese unemployment rate seems to be the most mysterious of numbers, this being due to their convention of dividing the population between those under and those over 15 (with no separate category for those over 65, or 70, or 75, or whatever).

The over 15’s are then divided between those working, those actively seeking work. and those not in the labour force. There is no distinction, however, between an 85 year old not in the labour force and someone of a more sprightly 50 years. This little detail makes movements in the Japanese numbers singularly difficult to interpret, as it is impossible to tell whether someone has stopped looking for work since they are now too old and infirm (remember roughly 25% of the Japanese population are still working by the time they reach 75 – in ‘pre-reform’ Europe we have roughly this percentage as we approach 65). If you really want to see for yourself what is happening, you can go here (Excel file) where you will find that the number of people working remained more or less the same, and that the increase in the unemployment rate is almost entirely due to more people actively seeking work, a statistic which is extremely hard to interpret.

But more than any of these problems with data interpretation, perhaps the main reason to worry about Japan is what we can learn about Europe’s own problems by looking in the Japanese mirror. This can be summed up in two words: the consumerless recovery.

Actually non-other than the Economist itself has an article this week on this very topic. Appropriately entitled “Enduring an Ersatz Recovery”, the article focuses on the plight of the German and Italian governments in trying to get to grips with nascent recoveries where the consumer seems a remarkably reluctant partner in the act.

With the notable exception of France, which is enjoying a heady consumption boom, the euro area?s biggest economies are still dependent on foreigners. Domestic demand in Italy and Germany, taken together, has not grown for a whole year, calculates Eric Chaney of Morgan Stanley; indeed, in Germany, it is still shrinking, figures released on Tuesday August 24th confirmed. The renewed confidence expressed by German businesses at the start of the year continued to ebb away in August, according to the Ifo Institute, a Munich-based think-tank. Retailers were particularly gloomy: Germans, it seems, have no appetite for their own products and services. What growth Germany enjoyed in the last quarter, it owed largely to the continued appetite of China and America for its exports.

In Japan, this time according to Bloomberg, the situation seems to be remarkably similar:

Japanese households unexpectedly cut spending in July and unemployment rose, adding to signs a recovery is faltering in the world’s second-largest economy.

Spending by households headed by a salaried worker fell for a third month, dropping 2.5 percent from June, seasonally adjusted, the statistics bureau said in Tokyo. ….. Consumer spending, which accounts for almost three-fifths of the economy, is declining as wages slide and companies replace full-time workers with part-timers. Falling domestic demand may hold back an economy that grew at a 1.7 percent annual pace in the second quarter, half the rate economists had forecast.

Now my question, and I don’t feel it is an unreasonable one, is whether there might not be a link here. Whether in fact the failure of domestic consumption to ‘ignite’ in Germany, Italy and Japan may not have a common cause: an ageing population, faced with diminishing earnings expectations as it ages, and faced with the need to make greater recourse to individual private saving as the possibilities of state funded retirement benefits continuously recede across a disappearing horizon.

Undoubtedly pension and labour market reforms are necessary, but what I don’t see is how these will stimulate domestic demand, and this is what most of the commentators seem to imagine will happen. Simple logic seems to me to imply the contrary, but c’mon, tell me, what am I missing?

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

24 thoughts on “Why Worry About Japan?

  1. You are not missing anything.
    We will have to get used to this new environement of sloooow growth.
    Older people do not spend as 25 to 40 years old.
    No more excess demand for durable goods.

    We are entering a new age, and we have no experience to rely on to understand what to really expect.
    Maybe it is better to governements not to try to artificially stimulate an non-existant demand, that could be a waste of money.

    How are we going to live in such environement? What are the psychological effects?

    I have no answers but questions

  2. Fine posts. I too have no answers but questions. We are in Senor Edward Hugh’s age of demographic wonder.

  3. http://www.nytimes.com/aponline/business/AP-Greenspan.html?hp

    Alan Greenspan Issues Warning on Retirement Benefits
    By Associated Press

    JACKSON, Wyo. – Federal Reserve Chairman Alan Greenspan said Friday that the country will face “abrupt and painful” choices if Congress does not move quickly to trim the Social Security and Medicare benefits that have been promised to the baby boom generation.

    Returning to a politically explosive issue that he has addressed a number of times this year, Greenspan said that it was wrong for the government to hold out the promise of more retirement benefits than it is capable of providing.

    He said this issue was particularly critical given the impending retirement of 77 million baby boomers born in the two decades after World War II.

    “As a nation, we owe it to our retirees to promise only the benefits that can be delivered,”

  4. http://www.nytimes.com/2004/08/27/opinion/27krugman.html

    America’s Failing Health

    Working Americans have two great concerns: the growing difficulty of getting health insurance, and the continuing difficulty they have in finding jobs. These concerns may have a common cause: soaring insurance premiums.

    In most advanced countries, the government provides everyone with health insurance. In America, however, the government offers insurance only if you’re elderly (Medicare) or poor (Medicaid). Otherwise, you’re expected to get private health insurance, usually through your job. But insurance premiums are exploding, and the system of employment-linked insurance is falling apart.

    Some employers have dropped their health plans. Others have maintained benefits for current workers, but are finding ways to avoid paying benefits to new hires – for example, by using temporary workers. And some businesses, while continuing to provide health benefits, are refusing to hire more workers.

    In other words, rising health care costs aren’t just causing a rapid rise in the ranks of the uninsured (confirmed by yesterday’s Census Bureau report); they’re also, because of their link to employment, a major reason why this economic recovery has generated fewer jobs than any previous economic expansion.

  5. That Alan Greenspan talks us into debt from surplus by supporting tax cuts for the wealthy, then talks of cutting Social Security and Medicare when the debt problem become obvious, is intolerable.

  6. At the same time Bush is promoting “Ownership”.
    The biggest scam of the 21st century.
    Vote for me people! and you will be responsible for yourself and enjoy the fruits… as long you are wealthy and in good health. otherwise too bad for you. It’s God will.

  7. http://www.epinet.org/content.cfm/webfeatures_econindicators_income20040826

    It should be noted that these income, poverty, and health insurance results over the past year occurred in the second year of an economic expansion, with the nation’s gross domestic product up 3% and productivity growth?a supposed determinant of the living standards of working families?up especially strongly, at 4.5%. As today’s report shows, clearly the benefits of this growth have failed to reach middle- and lower-income families.

  8. http://www.epinet.org/content.cfm/webfeatures_econindicators_income20040826

    The inflation-adjusted income of the nation’s median household fell slightly in 2003, from $43,381 to $43,318 (though the decline was statistically insignificant), according to today’s report from the U.S. Bureau of the Census. Since 2000, the median household income has declined consistently in real terms, down $971, $502, and $63 in 2001, 2002, and 2003, respectively, for a cumulative loss of $1,535?a 3.4% drop?over these years.

    Because the largest income declines occurred among the lowest income families, the share of the nation living in poverty increased, from 12.1% in 2002 to 12.5% last year, adding 1.3 million persons to the poverty rolls. Since 2000, poverty is up 1.2 percentage points, an addition of 4.3 million poor persons.

    The share of the population with health insurance also declined last year, with 45 million persons?15.6% of the population?going without coverage in 2003, compared to 15.2% in 2002. This increase in the uninsured was largely due to less employer-provided coverage, another indication of deteriorating job quality in 2003.

  9. Mmmm..maybe it’s me but..:-), $43,318 a year does not sound all that bad as a median income to my European ears. Or is there some cost I’m not taking into account?

  10. Frere, it is a “Household income”, not an individual, per capita, income. Then of course there is the fact that many things that in Europe are tax funded, have to be bought in the USA, chiefly health care.


  11. http://www.epinet.org/content.cfm/webfeatures_econindicators_income20040826

    Income inequality has also increased, both in the past year and to a greater degree over the recession and jobless recovery. Low-income households?those with incomes that place them at the 20th percentile of earners?have experienced income declines of 6.0% since 2003 and 1.9% since last year. The median household (the 50th percentile) is down 3.4% since 2000 and essentially unchanged (down just 0.1%) between 2002 and 2003. Upper income households, with incomes at the 95th percentile (i.e., only 5% of families have higher incomes) have been relatively flat over this full period.

  12. http://www.nytimes.com/2004/08/28/business/28fed.html

    Warning Anew About Retiree Expectations

    JACKSON HOLE, Wyo. – The chairman of the Federal Reserve Board, Alan Greenspan, warned on Friday that the federal government might have to scale back promises to the elderly in programs like Social Security and Medicare.

    “As a nation, we owe it to our retirees to promise only the benefits that can be delivered,” Mr. Greenspan told a conference here sponsored by the Federal Reserve Bank of Kansas City.

    “If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our programs,” he said.

    Mr. Greenspan has expressed similar views many times in the past, but he went further on Friday by warning political leaders that they cannot count on continued rapid rises in productivity and faster economic growth to solve the problems ahead.

  13. It looks like a swift change in Fed fiscal policy has become essential to avert trouble downstream but has that impinged on the election debates yet? Greenspan seems to be doing his best to get it on the public agenda but from over here it doesn’t seem as though more than a few are taking any notice.

  14. Let me think about responsible political leaders who managed to be ever so fearful about a hard won budget surplus in 2000, and turned it ever so quickly to a deep deep deficit. Suddenly, surprise, we need to think through whether we can honor promises made to an aging worker. Yes, responsible leaders.

  15. “Greenspan seems to be doing his best to get it on the public agenda but from over here it doesn?t seem as though more than a few are taking any notice.”

    Greenspan did much to make sure there would be a problem. Remember the surplus? Remember the tax cuts? Remember who supported the tax cuts because the surplus was too too large?

  16. http://www.nytimes.com/2004/08/28/international/asia/28asia.html

    Across Asia, Beijing’s Star Is in Ascendance

    NEWMAN, Australia – Chris Dunbar watched as a front-end loader carved into a 60-foot wall of iron ore glinting in the red dirt of a vast open mine in the big sky country of northwestern Australia. ‘This is as good as it gets,’ said a satisfied Mr. Dunbar, 47, a manager with more than 20 years of experience.

    He was boasting about the richness of the blue-black ore at the Mount Whaleback mine, but he might as well have been bragging about the boom that has propelled economies across the Asia-Pacific region. These days, Australian engineers – like executives, merchants and manufacturers elsewhere in the region – cannot seem to work fast enough to satisfy the hunger of their biggest new customer: China.

    Not long ago Australia and China regarded each other with suspicion. But through newfound diplomatic finesse and the seemingly irresistible lure of its long economic expansion, Beijing has skillfully turned around relations with Australia, America’s staunchest ally in the region.

    The turnabout is just one sign of the broad new influence Beijing has accumulated across the Asian Pacific with American friends and foes alike. From the mines of Newman – an outpost of 3,000 in a corner of the outback – to theforests of Myanmar, the former Burma, China’s rapid growth is sucking up resources and pulling the region’s varied economies in its wake. The effect is unlike anything since the rise of Japanese economic power after World War II.

    For now, China’s presence mostly translates into money, and the doors it opens. But more and more, China is leveraging its economic clout to support its political preferences.

    Beijing is pushing for regional political and economic groupings it can dominate, like a proposed East Asia Community that would cut out the United States and create a global bloc to rival the European Union. It is dispersing aid and, in ways not seen before, pressing countries to fall in line on its top foreign policy priority: its claim over Taiwan.


    American military supremacy remains unquestioned, regional officials say. But the United States appears to be on the losing side of trade patterns. China is now South Korea’s biggest trade partner, and two years ago Japan’s imports from China surpassed those from the United States. Current trends show China is likely to top American trade with Southeast Asia in just a few years.

    China’s prime minister, Wen Jiabao, as much as threw down the gauntlet last year, saying he believed that China’s trade with Southeast Asia would reach $100 billion by 2005, just shy of the $120 billion in trade the United States does with the region.

    Mr. Wen’s claim was no idle boast. Almost no country has escaped the pull of China’s enormous craving for trade and, above all, energy and other natural resources to fuel its still galloping expansion and growing consumer demand. Though the Chinese government’s growth target for 2004 is 7 percent, compared with 9.1 percent for 2003, few are worried about a slowdown soon.

  17. http://www.nytimes.com/2004/08/28/politics/campaign/28econ.html

    Economic Squeeze Plaguing Middle-Class Families

    NEWTON, Iowa – Sure, she is upset that she cannot afford health care, and it hurts that higher tuition costs at the community college where she carries a full load have put her deeper in debt. But at the end of this month, Molly Illingworth will suffer the worst blow yet: she is getting laid off by her mother.

    “I hate to close the shop,” says Pam DeBruyn, Molly’s mother, who owns a small party and office supply store here, and also works full time as a graphic designer. She needs the designer job for the health insurance, so she will close the store, and with it will go her daughter’s employment.

    In this Iowa family, one generation is trying to step through the gateway to the middle class; the other is struggling to stay in it. And it is the middle-class squeeze – rising college tuition and soaring health care premiums at a time when wages are stagnant and job creation is sluggish – that may be the sleeper economic issue of the presidential campaign.

    “I feel the squeeze from both ends,” said Beth Steenhoek, a mother of two who owns a small insurance agency in Newton. Fewer people are buying insurance, she said, because of a hefty increase in premiums, and her own family insurance costs have gone up as well.

    Ms. Steenhoek has refinanced her home mortgage loan, and remembers getting “about $400 a kid” in the Bush tax cut, but she said it still feels like the family budget is shrinking. And she has not even thought of taking a few days off.

    “A vacation? No, I can’t leave the office.”

    For Ms. Steenhoek, the economy is the No. 1 issue in the presidential campaign. She is that rare species this election year: the undecided voter. But even solid partisans are troubled by the tremors at the edge of middle-class life.

    “I’m a pretty staunch Bush Republican and I have a great job at I.B.M.,” said Todd Canny, who was sharing ice cream with his three children and wife in a new mall. “But we’re paying a lot more for health care co-pays and premiums, which is through my wife’s job as a teacher. And trying to save for college for these three little ones has gotten a lot harder.”

  18. “Frere, it is a “Household income”, not an individual, per capita, income. Then of course there is the fact that many things that in Europe are tax funded, have to be bought in the USA, chiefly health care.”

    That is a rather dramatic overstatement. A rather large percentage of Americans get health care linked as a job benefit. The company portion of the insurance payments are not counted as income on the survey. (And I don’t think the employee portion is counted as income either but I’m not sure.)

  19. Most people I know who work for medium size businesses do not have health care coverage. When they do this is thank to their spouse who work either for a big firm or as a teacher or nurse.
    For a family of 4 or 5 this is at least $850
    a month and is tax deductible only if you are self employed.

  20. Actually, Greenspan advocated using the surplus created in the late 1990s to pay down the national debt. He didn’t exactly support the tax cuts; he just said that if the surplus had to be spent, he’d prefer tax cuts over spending increases.

  21. “Greenspan argued on the basis of budget projections — which he must have known are notoriously unreliable — that the federal government would pay off all its debt in a few years. If this happened, the government would be forced to invest future surpluses in the financial markets — which, he argued, would be a bad thing. To avoid this outcome, he claimed, surpluses had to be reduced with tax cuts.”

    Paul Krugman 6/6/04

  22. @ Anne / Joe:

    “The changes in the budget outlook over the past several years are truly remarkable,” the Fed chief told the House Budget Committee. With debt reduction in check, tax cuts appear possible because “the sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us.”
    However, as he did before the Senate, Greenspan cautioned, “We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.”
    Greenspan said tax cuts are desirable because, with growing surpluses, the government could start accumulating private assets, something he has warned would be harmful.
    Greenspan’s endorsement of tax cuts has helped bolster President Bush’s argument for his $1.6 trillion tax relief proposal, although he has not commented specifically on Bush’s plan. However, many Congressional Democrats are angry that Greenspan appeared to be modifying his stance on tax cuts to accommodate the new GOP administration.” Money CNN march 2001
    My emphasis.

    Paul O’Neill wrote (well Suskind did but you know what I mean): Rubin (in the meeting of Greenspan with senators the day before the crucial hearing with the Senate Budget Committee on January 25 2001) ?said it was all about perceptions and that Greenspan might be seen as endorsing Bush?s tax cuts. ?I can?t be in charge of people?s perceptions? Greenspan said. ? don?t function that way. I can?t function that way?. ?

    A very very strange remark from the FED?s chairman indeed. In my opinion that is 50% of his job and I think that his opinion too.
    Hence my emphasis: in my view that sentence is rather ideological. To me it is yet another sign that Greenspan is less of the non-partisan expert than he is characterized sometimes.

  23. Frans

    I agree completely. This was Alan Greenspan the Republican partisan who effectively endorsed tax cuts at a time not long before the baby boom generation will begin to retire, and knowing full well the business cycles make long term budget projections iffy at best. The tax cuts were designed not to immediately stimulate the economy and then be phased out, but as long term cuts that set us towards a structural deficit that will worsen from here.

  24. http://www.nytimes.com/2004/08/29/business/yourmoney/29old.html?

    Coming Soon: The Vanishing Work Force


    TO be perfectly blunt about it, Pittsburgh is getting old. Half the line workers who repair, maintain and upgrade the grid at Duquesne Light, its electric utility, will be eligible to retire by the end of the decade. Likewise, half the 6,500 nurses working at the University of Pittsburgh Medical Center hospitals will hit the typical retirement age of 55 in the next seven years. And just outside of town, at Westinghouse Electric, which designs and maintains nuclear power generators, the average age of engineers is the late 40’s.

    The trend has some people worried. “A silent crisis threatens the prosperity of Pittsburgh and western Pennsylvania,” warned a report done two years ago by the Center for Competitive Workforce Development at Duquesne University. “A declining and aging population places at risk the stability of the region’s work force and opportunities for economic progress.”

    In other words, there just may not be enough young workers to go around in the not-too-distant future. So the older ones may have to stick around a lot longer than they originally planned.

    That may seem counterintuitive, given the hand-wringing across the country about the sluggish pace of job creation. Indeed, Pittsburgh is flush with surplus workers, judging from an unemployment rate that jumped to 5.7 percent in July from 4.2 percent three years ago. The city’s power industry, in particular, has shed about 40 percent of its jobs in the last 10 years.

    Yet a peek through the demographic keyhole presents a startlingly different picture. More than 16 percent of Pittsburgh’s population is above the official retirement age of 65. By 2012, southwestern Pennsylvania could face a shortage of 125,000 workers – about a tenth the size of today’s labor force, according to the Duquesne University report.

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