(This essay first appeared in Newsweek Japan in 2011. The basic situation has not changed very much since then, so I am reposting it here. I plan to update the argument soon—although the U.S. or even the global economy might collapse before I get the chance.)
・
These days I often hear Japanese friends complain, “Japan has become poor.” When I ask why they think so, the answer is usually simple: hotel rooms in the United States or Europe now cost three times as much as in Japan.
At first glance, the numbers seem to support this gloomy view. Japan’s GDP has steadily fallen behind that of the United States and China, and it was eventually overtaken by Germany as well.
But the reality does not quite match the statistics.
・
A couple of years ago I visited the United States and was shocked by the condition of the subway system. While the upper middle class and above may enjoy living standards comparable to Japan’s top elite, the situation for the average middle class—and especially those below it—can hardly be called prosperous.
・
Japan, by contrast, has changed quietly. Japanese homes were once mocked abroad as “rabbit hutches.” They may still be smaller than Western houses, but their interiors—clean, functional, and carefully designed—now often exceed the Western average in comfort.
・
So let me turn my friend’s complaint upside down. If Japanese travelers can stay in hotels (in Japan) that are often more comfortable than the Western average for only one-third the price, perhaps the conclusion should not be that Japan is poor—but that Japan is relatively rich.
・
What has actually happened is something subtler. It is not so much that Japan’s living standards have fallen behind the West—though Japanese cities may still lack some of the visual grandeur of Western capitals. Rather, over the past decade the West has experienced inflation while Japan remained trapped in a deflationary environment. In effect, the two sides have begun living in different price worlds; the sharp depreciation of the yen in recent years has only widened that gap.
During the decade following the 2008 Lehman shock, cumulative inflation in the United States reached roughly 27–28 percent, and about 12 percent in France. Japan’s inflation during the same period was only around 5 percent. Meanwhile, the yen weakened against the dollar by about 34 percent.
The United States adopted aggressive monetary easing, and inflation naturally followed. Japan also implemented massive monetary easing later under the Abe administration. Yet for many years the country remained stubbornly deflationary—though inflation has begun to appear recently.
・
Why the difference?
・
Part of the explanation lies in Japanese attitudes toward money. Japanese people are generally wary of “making money with money”—that is, speculative investment.
In the United States, more than half the population invests retirement savings through mutual funds. Those funds then leverage that money twenty or thirty times over in financial markets, generating profits along the way.
As a result, finance and insurance account for about 6.8 percent of U.S. GDP. In Japan the share is only about 4.1 percent. The difference may appear modest, but in absolute terms it amounts to nearly ¥120 trillion.
In other words, the American economy is greatly inflated by financial capital. As long as the bubble does not burst, that financial expansion appears as real wealth.
・
Some people in Japan argue that the country is already comfortable enough and does not need further economic growth. But without growth—and the tax revenues that come with it—the quality of social security and healthcare will inevitably decline. Even the equipment of Japan’s Self-Defense Forces could eventually fall behind that of South Korea.
・
The deeper problem is psychological. The trauma of the asset bubble collapse in early 1990s still hangs over Japanese society. Consumers keep their wallets tightly shut. Companies restrain wage increases—although they have recently begun to raise wages again, they still lag behind inflation—and businesses hesitate to invest.
・
The result is a vicious circle. Because the economy fails to grow, both consumers and companies become even more cautious. Japan ends up trapped in a deflationary spiral of its own making.
If this continues, the country could eventually become poor for real.
・
There is a well-known measure called the Big Mac Index. It compares the price of a McDonald’s Big Mac around the world and uses that comparison to estimate the purchasing-power value of currencies.
By that measure, the dollar should not be around ¥115 (now about ￥157)—as it was at the time—but closer to ¥70.
If Japan’s GDP were converted into dollars at that purchasing-power rate, the result would be striking:
115 ÷ 70 = 1.64.
In other words, Japan’s economy would appear about 64 percent larger than the official dollar-based figure suggests.
・
Japan does not need to overstretch itself. But there are sensible steps the country could take: systematically repair aging infrastructure, strengthen disaster preparedness in a country increasingly exposed to severe natural disasters, and expand investment in renewable energy.
Even a modest commitment by companies to return part of rising revenues to employees—if not through permanent wage increases, then at least through bonuses—could help break the deflationary cycle.
・
If a nation constantly tells itself that it is shrinking, it will shrink.
Yet Japan possesses many of the historical and social conditions necessary for growth. Instead of assuming decline, the country might simply allow itself to breathe—and grow again.