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Japan as Number Three:How Japan Must Cope with the New Reality
Takatoshi Ito
University of Tokyo
October 7, 2010
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Outline
China becomes No.2 replacing Japan this year
Japans long-term growth experience: Past,
Present, and Future
Demographic dividend and loss
Growth Prospect for Japan, a mature
economy
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China replacing Japan as No.2
China (real GDP) has been growing at 8.6% (2000-2009 average)
Japan (real GDP) has been growing at 1.4%(2000-2009 average)lost decade
China has experienced inflation and nominalappreciation of RMB
Japan, deflation and nominal exchange ragefluctuating
Applying market yen/dollar market rate tonominal, compare US, Japan, China
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The GDP size (in USD at market rate)
US, China, Japan, 1980-2010
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Japans problems
So, yes, China has done well in achieving high
growth, but Japan stumbles on its own
problems. crossover, earlier than expected
Japans problems Demography
Not taking advantage of globalization
Hollowing out of manufacturing
Political mess
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Japans lost decade (or two)
Japans trend growth is declining over five
decades
High economic growth, 10%, 1950s, 1960s
Medium economic growth, 4%, 1975-1992 Stagnation, or Lost Decade, 1993-2003
Weak Recovery: Koizumi reform, 2003-2006
Global Financial Crisis, 2008-2009
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1st oil crisis
2nd oil crisis
Banking
crisisGlobal
Financial
Crisis
High-speed growth
Stagnation
Nixon Shock
Quick 50-year history
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Real Estate Bubble and Burst
Real estate price bubble, 1984 to 1990
Burst, 1991-2003
Borrowers (construction companies, real
estate developers, nonbanks) could not repay
borrowed funds
Banks with nonperforming loans experienced
slow (over 10 years) death Policy mistake of forebearance
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6
0.0
20.0
40.0
60.0
80.0
100.0
120.0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Land price index for housing, Japan
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Macroeconomic Policy Mistakes
Monetary Policy too tight for bursting bubble,1992-1994
Monetary Policy not too aggressive to avoid
deflation, 1995-1999 Fiscal policy tightening too early, April 1997
Fiscal spending, only temporary effects, 1995,1997-2003
Monetary Policy hit zero interest rate bound,1999-2006; liquidity trap(?)
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Global Financial Crisis and Japan
Japanese financial institutions were not
affected by GFC
However, Japanese exports, production, and
stock prices declined sharply Recovery has been slow
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Japanese demographic pyramid
1950-2000-(2010)-2050
Pyramid -> cylinder -> inverted pyramid
Decline in fertility rate
Lengthening longevity
Harbinger of global aging This will happen to China certainly
Partly due to one-child policy
Maybe India too, in coming decades
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1950
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2000
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2010 (NOW)
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2050
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Demographic dividend and loss
Demographic dividend
Increase in
{working age population}/{total population}
Contributes to
Demographic decomposition of real GDP
growth rate (-> next slide)
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Demographic dividend and loss
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ave growth contribution
JAPAN 1956-1971 1972-1991 1992-2009 2010-2030
pop growth 1.09% 0.78% 0.15% -0.38%
WPOPr Gr 0.67% -0.07% -0.65% -0.50%
Y/WPOP Gr 7.47% 3.43% 1.26%
Y Gr 9.37% 4.16% 0.76%
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Contribution to Growth
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Whats the main problem?
It is NOT just demography
Growth {GDP/working population} has been
declining
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pro
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FUTURE: Growth Prospect for Japan,
a mature economy
Japans problems Demography
Not taking advantage of globalization
Hollowing out of manufacturing
Political mess
CAN BE SOLVED! How? Demography immigration, medical care industry
Not taking advantage of globalization FTA, agriculture,education (English-based, IT-based, international)
Hollowing out of manufacturing FTA, lower corporate
income tax, strengthen financial center Political mess political realignment
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Demography, opportunity
Immigration can be increased
Lots of opportunities in service industry, including
health care
Medical care can become a growth industry,taking in foreign patients
Doctors have to be internationalized
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Globalization, opportunity
Huge disadvantage in language (English)
Population was large enough to educate
higher education materials in Japanese, that
was advantage, but turned disadvantage, asthe world was integrated
Japanese education should be geared toward
English finally happening
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Hollowing out
Japanese manufacturing is moving abroad
Failure of Doha Round and failure of Japanese FTA
policy (high tariff, USA, EU)
High corporate income tax rate High wages
But, lack of workers
Keep the high tech part and product
development in Japan
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Concluding remarks
Whatever Japan does not have, India has
Population
English
IT Whatever India may be lacking, Japan has
Clean city environment
Good elementary, secondary environment
Opportunities to cooperate and win-winintegration
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