August 15, 2015
Yes, it can be hard getting access to information in the barren heart of the nation’s capital. Therefore it is not surprising that the Washington Post seems completely unaware of the economic situation in Japan at present.
In an account of the economic problems facing the world the Washington Post told readers:
“Japan, meanwhile, has recorded years of slow growth, has alarming public debt levels and is perpetually on the brink of deflation.”
Actually in terms of employment growth, which is probably what matters most to the Japanese people (as opposed to GDP growth), the country has been doing pretty well as of late. According to the OECD, Japan’s employment to population ratio (EPOP) has risen by 2.4 percentage points from 70.8 percent to 73.2 percent since the new Prime Minister Shinzo Abe took power in the fourth quarter of 2012 and embarked on a policy of aggressive fiscal and monetary stimulus. By comparison, the EPOP in the United States rose by 1.4 percentage points to 68.7 percent in this period. If the EPOP in the United States had risen by the same amount as in Japan it would correspond to another 2.5 million jobs.
It’s not clear who the current levels of Japanese debt are supposed to be alarming to, but clearly financial markets do not fall into this group. The interest rate on long-term Japanese government bonds is 0.38 percent. In terms of being on the brink of deflation, fans of economics everywhere would say, “so what?” The United States, Europe, and Japan all have inflation rates that are lower than is desirable. If the inflation rate ends up being a small negative number rather than a small positive number it doesn’t matter. Any fall in the inflation rate, regardless of whether it means crossing zero makes debt burdens worse and raises real interest rates.
Finally, the piece comments on the currency issue and seems to just present it all as a sorry situation where we can’t all run trade surpluses. Actually, economics does have something to say about this story. We expect fast growing developing countries, like China to be importing capital from slow growing rich countries like Europe and the United States. The idea is that capital enjoys a higher return in fast growing countries than in slow growing countries.
The inflow of capital would correspond to China and other fast-growing countries running trade deficits. Instead most of these countries are running trade surpluses. This is not an accident. They have accumulated vast amounts of foreign exchange reserves in an effort to keep down the value of their currencies, thereby making their goods and services more competitive in the world economy.
While the Post presents the trade issue as a confusing he said/she said, the facts of the situation are pretty clear. It is worth noting that this is not a China/U.S. issue. They are major U.S. companies like General Electric and Walmart who directly benefit from an over-valued dollar. They produce items for export from China, or in the case of Walmart arrange for the import of low cost goods. These companies are not anxious to see the items they import from China rise by 20 percent as a result of the country moving to a market based exchange rate.
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