The Myth of Japan's Lost Decade

by: Scott Krisiloff, CFA

Any time the US slowdown chatter picks up, comparisons to Japan seem to follow. Though the comparisons are debated, one idea that isn't is the idea that Japan has had a "lost decade(s)." The main data supporting this is the Nikkei, which still hasn't returned to its 1990 peak and Japanese GDP, which has grown at a lackluster pace for decades. It's debatable whether an equity average moving from extreme overvalued territory to more reasonable valuations is a reflection of a stagnant economy. What's not quite as debatable though is that GDP growth has lagged the US, pictured below.

(Click charts to expand)

Despite outpacing the US between 1980 and 1990, Japanese GDP has nearly flat-lined since. Most people know that a large part of the problem is demographic. The Japanese working-age population has similarly flat-lined over the same period, and the total population has actually begun to shrink.

While most, including the Japanese government, consider stagnant GDP and population decay a dire problem for Japan, GDP output per capita tells a slightly different story.

From 1980-2009 (as far as this data set goes, unfortunately) Japanese GDP/capita has kept pace with the US. In fact, growth has actually exceeded that of the US over the whole period (US GDP per capita is still higher on an absolute basis though). This indicates that productivity has kept pace with the US even if aggregate GDP has not. Importantly, rising per capita GDP means that standards of living have risen, not fallen, which is the primary reason for economic activity: higher standards of living.
If the average living Japanese person is better off now than 20 years ago (as measured by GDP per capita), then why fixate on the aggregate output of the Japanese economy? Asking the Japanese economy to produce goods at a rate that keeps pace with economies of growing populations seems unnecessary and even impossible. As a mathematical necessity, a decreasing population means that Japanese productivity (output per capita) would have to outpace the US in order for aggregate output to rise at an equal rate. As technology saturation between the two countries is relatively level, this scenario seems highly improbable.
Of course, the Japanese Government doesn't seem to see it that way and has been trying to push on a string for decades. This has left the country with an unsustainable amount of leverage, which threatens to actually reduce standards of living. Perhaps the lost decades of Japan aren't a historical phenomenon but a future one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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