Rising Sun: Japan Leads the Way

by Benjamin Studebaker

Only a few weeks ago, Shinzo Abe, leader of Japan’s centre-right Liberal Democratic Party and a noted nationalist, became prime minister for the second time. Abe has a reputation for militarism and for a revisionist attitude toward Japan’s conduct during World War II. Yet, despite those shortcomings, I am here to praise Abe today, to provide one of those rare posts about something genuinely positive that is happening right now in the world in Japan. Abe has decided to do what so many countries in the west are afraid to do–he has decided to embark upon a policy of stimulus. I’d like to look at precisely what Abe has proposed, what it can be expected to do for Japan, and what sort of lessons it has the potential to teach the rest of us.

There are two primary components to Japan’s stimulus plan:

  1. Fiscal Policy–$116 billion in new spending on public works, disaster mitigation, financial aid to small businesses, and subsidies for high technology enterprises. $100 billion in new military spending.
  2. Monetary Policy–expansionary monetary policy to meet a high inflation target of 2%.

Japan’s goals are 2% higher GDP and 600,000 new jobs. It may very well do much better than that. Taken together, Japan’s new spending amounts to somewhere in the neighbourhood of 3.5% of its GDP. The IMF now believes that in times of economic malaise fiscal stimulus carries with it a multiplier of 1.5–meaning that the economy is likely to grow 1.5 times the percentage of GDP that is invested in stimulus. If my understanding of Japan’s spending figures and the IMF multiplier prove correct, Japan could be looking at growth as high as 5% from the fiscal policy alone. That would do a great deal to help Japan’s recent growth rates, which have been extremely lethargic:

What I find even more interesting, however, are the conditions under which Japan is embarking upon this stimulus policy. What is so very fascinating is that Japan’s public debt absolutely dwarfs the public debt of all the various countries currently attempting to reduce their debt and deficits. Check out these trading economics figures:

Country Debt as Percentage of GDP
USA 103
UK 85
France 86
Germany 80.5
Japan 211.7

Yet here we are in the United States and Europe talking about austerity and spending cuts while Japan has just decided to spend 3.5% of its GDP on stimulus. For comparison, 3.5% stimulus spending in the American economy would amount to a stimulus package of $528 billion in the United States, very similar in size to the original Obama stimulus package’s state spending increases (which accounted for around $600 billion of its size). We are usually told in the west that if we were to spend with anything like the profligacy that Japan is showing we would be faced with a fiscal crisis. The markets would lose confidence in our economies and refuse to purchase our bonds, and we would be forced into a currency devaluation or worse–default. How have the markets responded to the news that Japan is going to throw more money at its problems when its debt is more than twice the size of its annual output? With complete amiability–in fact, according to more trading economics figures, Japan’s debt is currently financed at one of the cheapest interest rates on earth:

Country 10 Year Bond Interest Rate
USA 1.90
UK 2.09
France 2.14
Germany 1.53
Japan 0.83

If macroeconomics were a popular subject for internet memes, “Debt Indifferent Japan” would be a winner:

Japan Stimulus

And Japan is doing all of this despite having an unemployment rate that most western nations would envy–4.1%. It is motivated exclusively by its low growth rates (shown in the graph above) and by its rate of inflation. Ah yes, inflation–is Japan running scared that this expansionary policy will produce runaway inflation, as many in the west would fear if their governments embarked upon stimulus? Not in the slightest, though this is in part due to the fact that Japan has been experiencing deflation, the gradual shrinking of prices, more or less continuously since the economic crisis:

However, lest anyone begin to argue that we could act as Japan does if our inflation were low but because it is not we cannot, let us examine the inflation data of the other countries we’ve been looking at:

Country Inflation Rate
USA 1.80
UK 2.70
France 1.30
Germany 2.10
Japan -0.20

While Japan’s rate is lower than the rates in the west, the rates in the west are not particularly high, either. None of these western countries can post an inflation rate above 3%, with the United States and France unable to top 2%.

The upshot of all of this is that there is no reason that western countries cannot embark upon a similar policy. Western countries service smaller, more sustainable public debts; their inflation is also negligible. Western countries typically have much higher unemployment figures than Japan has and need the stimulus just as badly if not more so. If and when Japan does experience significant GDP growth, job creation, and an end to deflation as a result of this policy, it will be direct proof that a country whose financial balance sheet is otherwise extremely unsound can spend anyway, get away with it, and produce a good outcome.

If Japan of all countries does not need to do austerity with the very highest of public debt to GDP ratios of all developed countries, who does? It’s not as if Japan’s debt is growing at a slower rate, either. Japan’s deficit is among the very worst as well:

Country Deficit as Percentage of GDP
USA 8.70
UK 7.80
France 5.20
Germany 0.80
Japan 9.70

When it comes to stimulus, what Japan can do any of us can do. If Japan can spend a given sum of money without experiencing negative consequences, there is no reason to believe any of the other major economies cannot do the very same thing.

I wish Japan the best of luck in its stimulus experiment, and hope the rest of us learn much from the results.