No Growth - How Japan Does It

An old one from the 'drafts' folder, but it seemed appropriate given the past few posts.

[E]veryone and their cat cares about the environment these days, but such concern seems irreconcilable with the ‘infinite growth’ assumptions of most economists. It has long been pointed out by environmentalists, concerned citizens and the sane how, if we are to prevent global warming from melting the planet, we have to put some sort of a ceiling on economic growth and industrial development. This is a truly pressing concern – yet it appears that economists and policymakers simply cannot integrate it into their worldview.

But here’s an uplifting thought: what if History is doing our work for us? What if we are already entering a sort of ‘post-growth’ world?

A few days ago Professor Bill Mitchell – a man who I predict will turn out to be one of the most important economists of his generation – ran a piece on his blog entitled ‘When a nation stops growing’. The piece deals with the sluggish growth of the Japanese economy over the past two decades.

While most economists have been cooking up madcap schemes to reignite growth without end, Professor Mitchell took a far more interesting tack. Instead of concocting fantasies of what the world should be like, he took a glance at reality and asked a very important question: what if the Japanese economy has entered a stage of ‘post-growth’?

In his post Professor Mitchell points out that although the Japanese economy has been growing at a very sluggish rate, employment has been plentiful, incomes have been kept secure and prices have been reasonably stable. I’d also point to the fact that the manufacturing sector continues to be as dynamic as ever – Japan still produces extremely high-quality, up-to-date cars and electronics.

The key to this, Mitchell claims, is simple: public spending. Public spending has maintained Japanese living standards – and without smothering the economy in a web of bureaucratic stasis. 

Philip Pilkington: Beyond growth – are we entering a new phase of economic maturity? (Naked Capitalism)

Skeptics asked how a country with a national debt that was over 200% of gross domestic product (GDP) could be "strong and wealthy". In a Central Intelligence Agency Factbook list of debt to GDP ratios of 132 countries in 2010, Japan was at the top of the list at 226%, passing even Zimbabwe, ringing in at 149%. Greece and Iceland were fifth and sixth, at 144% and 124%. Yet Japan's credit rating was still AA, while Greece and Iceland were in the BBB category. How has Japan managed to retain not only its credit rating but its status as the second- or third-largest economy in the world, while carrying that whopping debt load?

The answer may be that the Japanese government has a captive funding source: it owns the world's largest depository bank. As US vice president Dick Cheney said, "Deficits don't matter." They don't matter, at least, when you own the bank that is your principal creditor. Japan has remained impervious to the speculative attacks that have crippled countries such as Greece and Iceland because it has not fallen into the trap of dependency on foreign financing.

Japan Post Bank is now the largest holder of personal savings in the world, making it the world's largest credit engine. Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated. Japan Post is not only the world's largest depository bank but its largest publicly owned bank. By 2007, it was also the largest employer in Japan, and the holder of one-fifth of the national debt in the form of government bonds.

Before the 1990s, Japan was the world's leading industrial and consumer goods innovator. The Japanese public-private model promised a high standard of living and leisure time for all, with much of the work done by robot-driven machines.

But Japan was also the world's largest creditor, posing a threat to other international interests. The Bank for International Settlement (BIS), the "central bankers' central bank" in Basel, Switzerland, demonstrated in 1988 that it had the power to make or break banks and economies when it issued a Basel Accord, raising bank capital requirements from 6% to 8%. Japan's banks were less well capitalized than other banks, and raising the capital requirement forced them to cut back on lending.

Housing in Japan was in a major bubble. The Basel Accord supplied the pin. When credit collapsed, so did the housing market, creating a recession in Japan like that in the US today. Property prices fell and loans went into default, as the security for them shriveled up. A downward spiral followed, ending with the total bankruptcy of the banks. The banking system had to be rescued by the government. Essentially, the banks were nationalized, although that word was avoided to prevent arousing criticism.

The Nikkei stock market crashed and took Japanese industries down with it. By 2001, Western investors were finally able to penetrate Japanese markets that had previously been closed to them, entering the merger-and-acquisition market to acquire crippled Japanese enterprises. Major public companies were at least partially privatized, including the railway, telegraph and telephone companies; but the government resisted letting go of its vital postal service system. 

Japan Post's stalled sale a saving grace (Ellen Brown, Asia Times)