Japan: I Could Have Been A Contender, Instead Of An Upper-Middle Income Country

Includes: EWJ
by: Modeled Behavior

By Karl Smith

Paul Krugman writes:

First, you should never make comments on Japanese growth or lack thereof without taking demography into account. Japan has low fertility and low immigration; this has translated into a dramatically aging population and a declining working-age population. So what does Japan’s performance look like if you calculate real GDP per working-age adult? (In the picture below I define working-age as 15-64; this is one case in which you do not want to look at FRED, which defines working age as 16+ and therefore takes no account of aging.)

I’ve used a log scale, so you can view vertical distances as percentage changes. If we look at growth from the early 1990s to the business cycle peak in 2007, we have growth of about 1.2% per year. That’s actually not bad; you can argue that demographically adjusted, the whole tale of Japanese stagnation is a myth.

I don’t have 15-64 but I have labor force, which should allow both for age-related dropouts and folks who choose to work longer. Also, it lets women’s labor force participation vary. The results are broadly similar, though I get a slower 1990s slowdown and a bigger run-up after 2000.

The U.S. is plotted on the right scale, just because I wanted to use it in the net graph.

Here we see Japan engaged in famous catch-up growth. Even as late as the 1980s, Japan seems headed for full on convergence and then slam -- the growth stops.

Here is the same story in a different form:

This is Japanese GDP per member of the labor force divided by U.S. GDP per member of the labor force. Japan converges rapidly on the U.S., hits a wall in the 1990s, diverges and then stalls out.

Now, Japan is stuck at the 70% of U.S. GDP found by most wealthy countries. Yet, it could have been different. France -- also ravaged by war -- made almost complete convergence. Its slow coast down was largely on the back of explicit policy aimed at pushing down the average hours worked by full-time employees.

In Japan, however, the gap is primarily the result of policy error -- that is, policy that does not even achieve its own goals in its own terms.