December 15, 2013
Japan’s new Prime Minister, Shinzo Abe, is quite explicitly taking his country on an economic course that is 180 degrees at odds with the austerity policies being pursued in the United States and Europe. He is committed to major stimulus, which is increasing Japan’s government debt, even though it is already almost three times as large relative to its economy as the U.S. debt. He also got the central bank to commit itself to raising Japan’s inflation rate to 2.0 percent. Japan had been experiencing modest deflation, with prices falling at an annual rate of around 0.5 percent.
If Abe’s path succeeds then it would suggest that the United States and Europe might be going in the wrong direction, with governments needlessly wasting trillions of dollars in potential output and keeping millions of people out of work. The data to date have mostly been positive. For example, Japan’s employment to population ratio has increased by 1.1 percentage points over the last year. This would be the equivalent of 2.8 million additional workers in the United States. Its deflation has stopped and the country now appears to be experiencing a modest rate of inflation. And, contrary to what austerity proponents might have predicted, interest rates have not soared. The interest rate of 10-year government debt is still less than 1.0 percent.
In spite of these positive signs, the NYT seemed to be determined to highlight the negative in an article that focused on Saga, a small prefecture that is far from Japan’s major cities. The article seemed to have a hard time getting its story straight although it does want readers to believe that Abenomics is bad news. The whole theme is that Abe’s spending is just like the stimulus pursued by prior governments which have left Japan with a large debt burden. (Japan’s interest payments are less than 1.0 percent of its GDP, so most of Japan’s population would not be feeling this debt burden.)
At one point the article tells readers:
“Still, with no guarantee the spending bonanza will continue, even construction companies are hesitant to ramp up hiring or investment. A growing number of public construction projects are finding no bidders because of a shortage of workers and machinery.”
Since there is a shortage of workers, then we might conclude that Japan has a fully employed economy, with the stimulus therefore having largely accomplished its goal. But that conclusion would be too quick. Later we are told:
“Saga’s ratio of job offers to job-seekers, a crucial employment measure, continued to stagnate at 0.77 in September. An almost 20 percent jump in construction jobs was not enough to offset a loss of jobs in other sectors, according to the local government. With a tepid labor market, wages have also remained stagnant, as have consumer prices, because of weak demand, according to a November report released by the Fukuoka branch of the Bank of Japan.”
Okay, so now we have a tepid labor market, where there is not enough demand for workers. (By comparison, the ratio of job openings to workers in the United States is 0.36.) A policy that is leading to both too few workers and too many workers must be a really bad policy. As a practical matter, monthly data are generally erratic, which is why economists usually don’t make too much out of monthly changes, especially in a small area like Saga. It would have been far more useful if this piece had presented year over year changes which are considerably more meaningful.
It would have also been useful if this article followed standard practice in the United States and expressed growth numbers at annual rates rather than quarterly rates. The article told readers;
“Overall, growth for the quarter was revised to just 0.3 percent from the previous three months, down from an initial reading of 0.5 percent.”
It is likely that many readers thought these numbers were annual growth rates. As such, these would indeed be low. However, they are in fact quarterly growth rates. Even after the downward revision, Japan’s economy would still have been growing at a 1.2 percent annual rate in the third quarter. Since Japan’s population is shrinking at a 0.1 percent annual rate, while the U.S. population is growing at a 0.7 percent rate, this means that even in this relatively weak quarter (which followed two quarters of strong growth), Japan’s per capita growth rate exceeded the U.S. growth rate over the last three years. Readers who thought these numbers referred to annual growth rates would not be aware of that fact.
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