Japan’s Slow-Motion Crisis

TOKYO – If you listen to American, European, or even Chinese leaders, Japan is the economic future no one wants. In selling massive stimulus packages and bank bailouts, Western leaders told their people, “We must do this or we will end up like Japan, mired in recession and deflation for a decade or more.”  

Chinese leaders love pointing to Japan as the prime reason not to allow any significant appreciation of their conspicuously undervalued currency. “Western leaders forced Japan to let its currency rise in the second half of the 1980’s, and look at the disaster that followed.”

Yes, nobody wants to be Japan, the fallen angel that went from one of the fastest growing economies in the world for more than three decades to one that has slowed to a crawl for the past 18 years. No one wants to live with the trauma of the deflation (falling prices) that Japan has repeatedly experienced. No one wants to navigate the precarious government-debt dynamic that Japan faces, with debt levels far above 100% of GDP (even if one factors in the Japanese government’s vast holdings of foreign-exchange reserves.) No one wants to go from being a world-beater to a poster child for economic stagnation.

And yet, visitors to Tokyo today see prosperity everywhere. The shops and office buildings are bustling with activity. Restaurants are packed with people, dressed in better clothing that one typically sees in New York or Paris. After all, even after nearly two decades of “recession,” per-capita income in Japan is more than $40,000 (at market exchange rates). Japan is still the third-largest economy in the world after the United States and China. Its unemployment rate remained low during most of its “lost decade,” and, although it has shot up more recently, it is still only 5%.