Where does the Japanese slowdown come from?

Chris Reicher refers me to his recent paper, entitled “A simple decomposition of the variance of output growth across countries”:

This paper outlines a simple regression-based method to decompose the variance of an aggregate time series into the variance of its components, which is then applied to measure the relative contributions of productivity, hours per worker, and employment to cyclical output growth across a panel of countries. Measured productivity contributes more to the cycle in Europe and Japan than in the United States. Employment contributes the largest proportion of the cycle in Europe and the United States (but not Japan), which is inconsistent with the idea that higher levels of employment protection in Europe dampen cyclical employment fluctuations.

On Japan in particular, Chris sums up his results as follows: “I think that Karl Smith is right about Japan’s productivity performance; that seems to be the real long-term issue there.  Shrinking population + no more convergence in productivity + some convergence in hours worked per worker from a very high level = very slow growth, independently from the business cycle.”

Matt Yglesias frequently asks why TGS arrived first in Japan.  Chris’s paper reports:

In the United States, productivity only contributes about 27% of the cycle and labor input four-fifths. Meanwhile, in France and Germany, productivity contributes 43% and 38% of the cycle, respectively. Japan is more European than Europe in this regard; productivity contributes 59% of the cycle there, while Korea looks more like the United States.

That’s hardly an answer, but it suggests the Japanese economy was more dependent on productivity gains in the first place.  As those gains start to slow down or dry up, it bites harder and more quickly.

Here is Japan investment as a share of gdp.  Here are falling real wages in Japan.  Here is Noah on Japanese unemployment.  Another (possible) story is that Japan was hit first by outsourcing to China.


The need for further productivity gains doesn't really make sense to me as an explanation. Japan has low hanging productivity fruit out the wazoo. The stereotypical salaryman stays out late "working" every night. Send the same dude home at 5:00pm and he'd get just as much done and increase productivity by 4 hours a day, easily. Or is the suggestion that Japanese culture is too resistant to this kind of change, hence productivity couldn't grow, hence it got hit by TGS?

Where does the Japanese slowdown come from?

Their Gov is even crazier than ours and that combined with competition from China has slowed GDP growth. Crazy land use etc.

No land? Check.
Small, dense population? Check.
Highly capitalized economy? Check.

Makes perfect sense that their economic growth should be very dependent on productivity gains. Japan is the canary.

Shrinking population + no more convergence in productivity + some convergence in hours worked per worker from a very high level = very slow growth

What does "convergence" mean in this respect? Increase? Decrease? Stagnation? Convergence with what. Sorry, if this is a naive question.

The claim that Japan has no more land is false. Most of the lack of land has to do with crazy zoning/other regulations (+taxes and subsidies) that keep lots of land in low productivity agricultural uses for political reasons. Deregulate or free up even ten percent of that land and all of a sudden Japan has more city space and more Western style suburbs.

**Deregulate or free up even ten percent of that land and all of a sudden Japan has more city space and more Western style suburbs.**

If that were true and possible then instead of better mobility than the USA, Japan would have worse mobility. Nobody anywhere given a choice in the market wants more American-style command and control nasty development. Since Japan is not an oil exporter, destroying the quality of life to promote motoring the way the USA did makes no sense.

Kyoto is surrounded by mountains, Osaka-Kobe is surrounded by sea and mountains. Tokyo continues to expand into Chiba and other open, developable space but slowly because free market development doesn't resemble American suburbia.

Japan does have more land. If it uses much of that land for development, it will lose any hope of food independence in a world with more and more scarcity. Nevertheless, plenty is still available for urban growth.

The population has stopped growing because Japanese women don't want more babies. And because the Japanese want their children to inherit Japan and don't want to turn their nation over to fecund third world immigrants the way Europe and the USA have chosen to.

You might look to Michael Pettis (http://online.wsj.com/article/SB10001424052748704584804575644172879953904.html( for a different explanation.
Japan followed the SE Asia growth model: low wage growth relative to productivity growth, undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth. This resulted in global trade imbalances: low domestic consumption, trade surplus and capital export to developed countries. As the reserve currency the U.S. was particularly vulnerable to Japan fixing the exchange rate at a low value relative to its productivity growth, forcing the US to run a trade deficit. Once the Japan economy became large relative to the U.S. economy this model was not sustainable, and Japan has not found an alternative.

I'm the author of that paper.

My own interpretation of my paper is that Japan sees a lot more labor hoarding than Europe or the United States, so unemployment is a particularly bad measure of the cycle there. We'd want to look at some measure of the output gap as a cyclical indicator since labor market indicators from Japan don't carry much information about the macro situation.

BUT, Karl has a major point, which is what the second quote was about. If we look at output, our analysis is complicated by the fact that the trends which we saw through 1990 or so--convergence in productivity and unusually high hours worked per worker--have stopped. Without putting words in Tyler's mouth, Japan picked the low-hanging fruit and now its productivity has been at 70% of that of the United States for some time now. We can't just naively extrapolate that trend and expect a large amount of growth. Combine that with low population growth and a sharp downward trend in hours worked, and the Japanese growth slowdown since then is not surprising.

I'll see if I can post something short on the subject.

In a variety of ways, though, Japan seems to be doing fairly well: low unemployment, housing wasn't anything like the disaster it's being in the US, monster positive balance of trade, poverty isn't anywhere near as much of a disaster for its victims here as it is in the US, affordable universal medical care, it's still the second largest industrialized economy (although China, at 1/10 the per capita GDP, has edged it out), and there's a lot of seriously good jazz to be heard in Tokyo.
So my question: why all the Japan bashing? Is it really that bad here? Or is there a psychological need to bash someone, and Japan has been selected as the bashee? I strongly suspect the latter...

FYI, when I introduced this post in my Japanese blog, one blogger pointed out that a similar analysis was already done in Annual Report on the Japanese Economy and Public Finance 2010 by Japanese Cabinet Office.
See figure 3-1-10 of http://www5.cao.go.jp/keizai3/2010/0723wp-keizai/3syo-matome.pdf

More detailed graph (including 1980s and EU(*) data) is showed in Japanese version: http://www5.cao.go.jp/j-j/wp/wp-je10/10f31100.html
(*) EU 10 countries = Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain, United Kingdom

What the report says from this graph is almost opposite of this post's conclusion: labor productivity in Japan is still higher that that of US and EU, and the negative contribution from labor input caused Japanese slowdown since 1990s.

cf) Figure 3-1-11 of the report decomposes labor productivity into labor quality factor, capital intensity ratio factor, and rate of increase in TFP.
(More detailed graph: http://www5.cao.go.jp/j-j/wp/wp-je10/10f31110.html )
It does point out lower TFP increase in Japan compared to those of US and EU.

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I do not agree with you. In consequence of overissue of bank notes, the currency of both US and EU dropped significantly. You take a look today's GDP per capita. And Japan's national wealth, = assets - debt, per capita is larger than the US. See National wealth on Wikipedia. And Japan's International trade balance is in black. 90% of their national bond (Govt. debt) are held by Japanese nationals. This is like a loan from family. And they have huge cash.

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