How much comfort can the U.S. take in the sufferings of Japan? In a side-by-side comparison of the productivity of the two economies, the U.S. comes off looking worse than one might expect, while Japan, long in the mire of recession, not as badly as one might assume.
True, this little examination may seem misplaced now that Resona Bank, Japan’s fifth biggest, has been extended a Y2 trillion lifeline, after a more stringent accounting treatment of its deferred tax losses meant its capital to asset ratio fell to just 2%, and that its official capital adequacy threatened to breach the already wafer-thin domestic bank minimum ratio of 4%.
However, let us take a second look at the Japanese GDP figures and compare them to the U.S., in order to see whether or not the Japanese Prime Minister’s pronouncement that “the real economy is not too bad” was taken straight from the Marie-Antoinette school of social commentary.
Well, actually, let’s acknowledge that the fruits of previous Japanese prudence—their vast stock of assets held abroad—bring in a good deal of income too, and consider GNP instead. Then, let’s perform our usual trick and throw away government spending (since that’s exactly what the government does with its citizens’ confiscated money, more often than not) and concentrate on the private sector.
In short, let’s look at the health of the true center of wealth creation. We’ll call this pGNP. Next, let’s see how this wealth can potentially be spread around, by looking at pGNP per capita—or pGNPpc.
Finally—and accepting there are major epistemological problems with the way all these things are measured—we’ll look at some of these aggregates in both real and nominal terms, so we don’t confuse a lower paycheck with a smaller basket of purchasable goods.
Though the headlines were partly correct in that nominal pGNP was barely changed on the year and, indeed, fell 1.2% annualized on the quarter, real pGNP climbed 2.9% from March 2002, and 0.6% even in the first three SARS and war-ridden, stronger-yen months of this year.
True, since the Asian Crisis broke out six years ago, those Japanese prices associated with these two aggregates have declined a cumulative 8.3%—or by 1.5% a year—to reach 1985 levels. Despite this, the recovery in real private income has simultaneously taken this last measure to within a whisker of its all-time highs and fully 6% above its end-1999 low. This all but erases the effects of both the Asian Contagion and the U.S.-Techno Bust.
That Japan has not met its potential since the early 90s is obvious from the statistics, we have to admit. But with the wholesale monetary manipulation of domestic credit levels, interest rates and exchange parities, combined with a creeping necrosis of socialization of the productive economy, which has seen public spending hit 33% of private domestic outlays, this is hardly to be wondered at.
Nominal pGNP more than doubled in the 11 years to the Bubble’s peak, rising by 6.7% a year, but it has essentially stagnated ever since. In real terms though, the contrast is a touch less intimidating, dropping from a 5.5% pa compound rate of climb (equivalent to 5% per head) to 0.8% (0.6% per head).
Over this last period, the comparable U.S. figures show markedly stronger trend growth of 3.4%, which translates into 2.8% per capita. However, if we take a smaller sample and concentrate only on the past three years of turmoil, it becomes evident that post-bubble Americans have actually slipped behind their Japanese colleagues in the bust.
Since early 2000, Japanese real pGNP has risen 3.5% overall, and by 2.9% per head, for a modest, but perceptible, annual rate of gain of 0.9%.
For its part, U.S. real pGNP grew by an almost identical 3.6% between 1999 and 2002, but, with its population rising between four and five times faster than in its low immigration Asian counterpart, income per head in the U.S. barely increased at all over the period.
Moreover, look at the investment ratios, standing each country side-by-side, to begin with.
In Japan, (hopefully productive) nonresidential investment was 4.2 times greater than the (largely consumptive) residential kind, 1.6 sigmas over a 23-year mean multiple of 3.4 and the second highest proportion ever.
In housing bubble, corporate funk America, by contrast, the ratio was a paltry 2.2—the lowest since 1978 and 1.5 sigmas below a lower mean of 2.8 times.
Put another way, Japanese nonresidential investment as a fraction of GDP was 14.8% in March, an 18-month high, if still 0.9 sigmas off the 1980-to date mean of 16.4%
In the U.S., in comparison, the ratio was a lesser 10.3%—a 9½ year low and 1.3 sigmas below an already lower mean of 11.6%.
Indeed, the ratio of these two investment aggregates, in common currency, hit a seventeen-year low last March, with the Japanese spending only 47 cents to every dollar laid out in this manner in the U.S.
However, 12 months on and this ratio has jumped to 56 cents on the 1 dollar (an improvement of 18% in a year), to reach its best since the end of 2000.
To back this up, we can also see that Japanese corporate profits (measured in dollars)—which, for a decade, have observed a stable distribution centred on a mean of 39.4% of U.S. profits, were sitting comfortably 0.6 sigmas above that norm at 43.8%, as of last December.
Finally, there is one key measure on which even the inveterately interventionist Japanese ruling elite is beginning to behave more wisely than their voodoonomics counterparts across the Pacific.
In the past twelve months, government spending in Japan fell by its largest amount in at least 22 years, taking expenditures back to 1995 levels. Contrast this with a full-bore fiscal overshoot in the U.S.—where the State now sucks up resources to the tune of a quarter more than it did four years back.
With the differential in the change in these two burdensome obligations hitting a two-decade-plus record of 11.1% in the last four quarters, the relative size of this harmful intrusion into the free market has seen U.S. spending jump from 150% to 200% of Japan’s since the bust began, continuing a reversal from a point in 1995 where these were almost equal.
So let’s not have any pious criticism of Koizumi and Co. on that score: whatever their undoubted failings elsewhere, they’re doing a whole lot better than Dubya–Dubya III and his team in this particular regard and if continued—you never know—some day soon, once their credit system is patched up, it might set the stage for a period of relative economic vigor.
So, government wastefulness, housing mania and debt-fuelled personal spending aside, has Japan’s 8.3% price decline, or the United States’ 8.6% price increase done more or less harm, in real terms, to the crucial private sector economy?
The above analysis, we would suggest, implies the answer is not as straightforward as the sound bite doomsters would have you believe.
Indeed, it has to be a source of sardonic amusement that the news of Resona’s bail-out and a massive BOJ liquidity injection has seen the yen hit a 27-month high against the dollar, pushing it up against all sorts of long-term chart points and prompting a bout of intervention as it did.
But then, as Treasury Secretary John Snow put it, when dismissing the Greenback’s 23% fall from its 2002 peak against the world’s other major currencies as “fairly modest” (sic):
What you want to be strong is that you want people to have confidence in your currency, you want them to see a currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it to be hard to counterfeit.
So on at least four of those five counts, we can rule out the Once Almighty Dollar!
