Saturday , June 12 2021

What about Japan?

Summary:
What about Japan? It's a question I often hear from advocates of fiscal expansion. Japan has huge debts and no crisis or inflation (so far). Doesn't that prove the US can borrow a ton more money painlessly? I offer two new points today: 1) Not every high debt country is so happy. 2) Just what did ...

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What about Japan? It's a question I often hear from advocates of fiscal expansion. Japan has huge debts and no crisis or inflation (so far). Doesn't that prove the US can borrow a ton more money painlessly? 

I offer two new points today: 1) Not every high debt country is so happy. 2) Just what did Japan get for all its fiscal stimulus? Indeed, I will start asking "What about Japan?" Japan seems a tough case for those who advocate that fiscal stimulus will save us from secular stagnation, or that huge spending programs bring prosperity in other dimensions.   

1. Picking and choosing

Here, fresh from the April IMF Fiscal Monitor  is the list of top 30 countries sorted by debt to GDP ratios. I boldfaced larger countries. 

What about Japan?

Yes, Japan is up there at 256% of GDP. The champion is Venezuela however. Sudan and Eritrea are not particularly known for economic prosperity. Greece and Italy are not held up as examples to follow either. Serial defaulter Argentina is behind the US already. 

If Japan is sustainable, that doesn't mean all large debts are sustainable. It means there's something different about Japan than the other countries on the list -- or ones now lower down on the list because they already defaulted or had crises. 

2. So what did Japan get for all that debt anyway? 

What about Japan?

It was not always thus. Japan started borrowing heavily in the 1990s from a debt/GDP ratio of 63%. (For some reason the IMF does not have US data before 2002.) 

What about Japan?


Those debts come from deficits, of 5-10% of GDP every year. Since 2006, the US has been behaving a lot like Japan, or more so. We only have less debt because the US ran surpluses through the 1990s. 

Japan has had perpetually low GDP growth, low inflation and zero interest rates since the 1990s. I view it as low "supply" growth, but it ought to be the poster child for "secular stagnation" fans. 

So I turn the question around: If massive deficits, including lots of "infrastructure"  are going to boost the US economy, why did they not do so for Japan? 

Update

In response to tweets about why is Japan different from the US,  

I did not want to repeat old points. Japan's debt is long-term, held by domestic people, pensions and central bank. US debt is short-term, held by foreign central banks and financial institutions. Our debt is much more prone to run, and a rise in interest rates will feed quickly into the budget. Japan also has accumulated assets from trade surpluses; we have the opposite. Japan's debt is held by old people and subject to estate tax.

More importantly, Japan  does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more.

 Sustainability is about debt vs. ability to repay; about future deficits;  not debt alone.

Japan's slow growth for three decades comes from microeconomics, taxes, regulations, demographics, slow productivity, not money, stimulus, "aggregate demand." 

John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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