Author Archives: the prof

About the prof

Prof of Economics, Wms School of Commerce, Washington and Lee University, Lexington VA

Japan: A Normal Country

See my latest blogspot “Japan and Economics” post on Japan as “normal” in response to the “bond vigilante” claim that high-debt countries are bound to soon see high interest rates [and, typically, high inflation when these same people focus on monetary policy indicators]. Needless to say, anyone who’s actually made investments on the basis of these claims has lost their shirt. Somehow that doesn’t seem to get anyone to rethink their position.

Japan looks more and more ordinary across many dimensions. Continue reading

High yen –> hollowing out?

New yen headache hits Honda Accord in U.S.: Ohio factory to do double duty for export units
Hans Greimel, [link:] Automotive News — December 3, 2012 – 12:01 am ET

… the strong Japanese yen threatens to undercut U.S. sales of the Accord in another way….The Ohio factory that makes Accords will soon churn them out for export to places such as Russia and South Korea, possibly restricting product flow to American dealers….Normally those cars would come from Japan, but Honda has suspended Accord output at home so it won’t lose money on exports.

So … the yen’s strength will mean fewer exports from Japan and more from the US. This surely affects suppliers, too: Honda closing capacity has a multiplier effect inside Japan.

Now I’ve argued that from a long-term perspective Japan has too much manufacturing and will need to shift its labor force composition towards services such as healthcare. But while the economy is in the midst of a modest recession and continues to feel the effects of modest deflation … well, not now, can’t we wait a couple more years?
Apparently not.

Japan’s Shadow Banks

Japan remains overbanked…
For those who go back a long time, Japanese banking used to be characterized by “overborrowing”, “overlending” and “overbanking” – high debt/equity ratios in the corporate sector, and borrowing too much money from the Bank of Japan, Continue reading

Japanese Investment in Mexico

Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it’s not a natural a priori.

The answer lies in free trade agreements: Mexico has been more aggressive on that front than the US (and Japan). As a result not only can vehicles be shipped tariff-free to the US–0% from Mexico versus 2.5% on cars and 25% on trucks shipped from Japan. Ditto Europe–tariffs are 0% from Mexico versus 10% on vehicles shipped from the US or Japan. (I have not researched whether Mexico has similar aggreements in Latin America.)

Now Japan could offset some of this were it to negotiate more free trade agreements. (It has one with Mexico.) But that’s an awkward process, and has yet to join the biggest pending agreement (TPP, Trans Pacific Partnership). The reason: farmers, whose political clout is disproportionate to their share of the economy, and whose clout over time has led to subsidies and tariffs that allow rice farmers to remain in business despite costs that are multiples of those in other large producers. So removing protection for rice would drive most farmers out of business. In Japan, it’s the “3rd rail” of electoral politics.

Cell Phones vs Wi-Fi

A blog by Colin Marshall has a neat piece on cell phones vs wi-fi in Japan. Now in 2006 I did frequent a couple coffee shops that had wi-fi (Dotour Coffee and Excelsior Coffee, franchise chains of the same company). But Colin is correct in that you couldn’t count on having wi-fi, and the gist of his post suggests that things have gotten worse.
His argument is that the Japanese cell phone market moved earlier than the US to smart phones [though with an idiosyncratic standard, so that it is a “Galapagos” market, lots of unique things which however are not viable in any other market]. As a result, there was no net advantage [pun intended] in yourself paying to set up wi-fi.
Comments? Queries? — I’m pretty sure you can get a “hot spot” map, one way to check whether things were really as scarce as claimed.
Oh, and this is part of his two-part “Kansai no Nikki [diary] series. You can find Part I here. As someone who’s intensely interested in cities, they include interesting observations and comparisons to other cities.

Will the baby boom retirement be a boon for the young?

Quick answer:

No, despite the large size of the boomer cohort relative to today’s new school leaver population, the boomer retirement will in fact be gradual, not sudden, according to my estimates using age-specific employment/population ratios. All too many Japanese continue working until age 70 and beyond, and so on average firms won’t be left short-handed and need to turn to the young, or at least not quickly. There will be no Year 2013 effect [which is when the youngest boomers, the 1948 cohort, turn 65].
Details and qualifications:
  1. labor economics work suggests that old and young workers are not perfect substitutes, indeed they may be complements (though that’s hard to check empirically as common shocks can produce both lower old-age and lower young-age employment). this is termed the “lock box” effect.
  2. measures are for headcount — employed — versus hours worked. since older workers tend not to work full time, my calculations may understate the retirement effect. however, at present there are also many underemployed (and not just unemployed) youth, so by focusing headcount I overstate employment levels at the young end, too.
  3. the data! — I basically need to recheck my spreadsheet from beginning to end as I made many changes as I went along. my calculations may simply be wrong! so graphs to follow…
Government policy is to encourage firms to keep older Japanese working, by making the retirement age older (target age 65 instead of the current mode of age 60), by re-employing retirees (under fixed-term contracts, eg to age 65), and by placing them with other firms. The young get no extra help. Cynically, policymakers are near retirement age and so are more sensitive to the older worker issue than to the younger worker one (high-status individuals are more likely to have children who made it into high-status universities and have jobs). plus there are more votes, there are more old than young and (as in the US) older invididuals are more likely to vote and (Japan-specific) to be tied to grass-roots electoral machines.
  • graphs need to be added!!

Is Japan Doomed?

More to follow — just getting the links up quickly to the Economist’s View blog posting. This discusses a recent (Oct 2012) Atlantic article “The Next Panic” by Peter Boone and Simon Johnson and a response by Noah Smith, “Time to Japanic?” on Noahpinion blog. This is not the first time the Atlantic’s carried an incendiary article on Japan; see James Fallows’ May 1989 piece, “Containing Japan” (the link lacks the cover art, I should have a copy of the original somewhere, and anecdotes about Fallows that I can share in class).

===== reactions: note that I glanced through the online comments to both the “Panic” and “Japanic” posts; there was only one truly substantive comment out of 100+ (now two, since I added one).

  1. Please cringe whenever you see the word “crisis”. We can find examples in economics – the collapse of Lehman Brothers, or the end of the peg of the Thai Baht to the US$ on July 2, 1997. When things go wrong, however, sovereign debt is a chronic disease, with a gradual onset. The patient – a country, a state – doesn’t die. In any case, for me the very first sentence of the Boone and Johnson piece raised a red flag: you don’t need hyperbole if you have a real story.
  2. OK, for your information here’s government debt, net of government financial assets (e.g., subtract the bonds held by the Bank of Japan).
  3. And here’s the reaction of financial markets to this mass of bonds. Notice the panic?
  4. They then trot out the standard gross and net debt levels, which certainly are high, but are domestically financed. While the amount of new bond issues each year sounds huge (59% of GDP, according to them), most of that consists of debt that is rolled over: new bonds are issued to replace old bonds. The net is far smaller, a few percent of GDP, while domestic financial assets are a multiple of GDP.
  5. Their argument on pensions suffers from the fallacy that a country can save in advance for retirement. However, all societal-level retirement systems are fundamentally pay-as-you-go, with the modest exception of the ability to build up and then draw down foreign assets. That latter is not insignificant for Japan, but (unlike, say, Luxemburg) Japan is “large” in global markets and also comparatively “closed”. Except for the past few months (a drop in exports to China and Europe, a jump in imports of oil in the face of reactor shutdowns), Japan has run large trade surpluses. That does represent foreign savings – Japan is the second largest holder of US bonds, after China – and so they are investing a goodly portion of their savings abroad.
  6. Retirement must nevertheless rely primarily on domestic resources. So what matters are current tax rates, not past levels of social security taxes. And the rate that you need is a function of demographics (the ratio of retirees to workers) and the “replacement level,” the generosity of pensions relative to wages. Japan has the oldest population of any major society, as we’ve seen, but is not generous and doesn’t start paying pensions until age 64 (ane rising to age 65 in 2013). Oh, and
  7. Because debt relies on domestic resources, a panic can’t occur: Japanese bondholders have nowhere to flee, unlike German holders of Greek euro bonds, who could flee to German euro bonds, in a time frame short enough to represent a crisis from the Greek perspective (but not the German, since such bonds were a small share of their portfolio!). So the worst that can happen is a rise in domestic interest rates. However, I cannot tell a story where that would happen in the space of (say) a month, rather than a period of years.
    1. Note that I attended a 2004 State Department INR conference on “Japan’s Fiscal Volcano.” This sort of fear-mongering has been around for a long time, but the sky has yet to fall.
  8. Indeed, B&J don’t provide any details to match their cries of wolf. What would a panic look like? Who would sell, and why (since they’d sell at a loss, who would have to sell)?
  9. Much more important, they seem unaware that the government just passed a tax increase, an eventual doubling of the consumption tax (a national sales tax) from 5% to 10%. Now this won’t be enough to balance budgets – we’ll cover debt sustainability later this term – but it’s a start. And politically these are not opportune times for a tax increase.
  10. OK, so can I tell a story? Yes, interest rates would rise if growth returns strongly enough to start boosting domestic wages and bringing an end to deflation. That would raise interest rates. But it would also raise corporate and personal income tax returns (a lowering of that volatility to booms and busts is one function of turning to sales taxes). It would also make it easier (not easy!) to legislate another increase in taxes. In the background is an important distinction from the US case: in Japan there is a consensus across the political spectrum (and a reluctant acceptance by the general public) that taxes must increase. Now that doesn’t mean that politicians want it to happen on their watch, and so the increase has been put off time and again. However, there is no large constituency arguing that taxes are too high. (There are many constituencies arguing their taxes are too high!)
  11. One puzzle: Despite the record-low long-term (nominal) interest rates, Japanese debt is of surprisingly short maturity (the last time I estimated that, it was a bit over 5 years). The longer the debt that’s issued, the less the impact of any short-term increase in interest rates. I know the Ministry of Finance has talked of pushing maturities, but to my knowledge any move in that direction has been at best modest.
  12. Finally, and I mean it this time, the implicit scenario of B&S is of hyperinflation. Unlike in the case of the US, where a substantial portion of bonds are held by non-residents (above all, China and Japan), Japanese debt is domestic. Furthermore, the biggest obligations, those to retirees, are indexed to inflation either explicitly (pensions) or implicitly (healthcare insurance). Likewise teachers’ salaries and other expenses are more real than nominal in nature. So inflation wouldn’t restore fiscal health – inflation could lower some of the government’s real debt burden, but not all of it, but would not eliminate deficits.

GDP Data redux: homework for Thur

Go to the Japanese government web site for GDP data — Ah, switch languages to English (you need to get over the shock of seeing Japanese pop up). There’s a news release, but as practice look for the statistics link and see what other data this site has. It’ll guide you to the SNA data, the “here” will take you to the top page for such data.

In the US the official name is NIPA (Natl Income and Product Accounts) but for Japan (and most other countries) it’s the SNA (System of National Accounts), drawing upon work by an international coordinating group at the UN that helps countries avoid having to reinvent the wheel. (The US and UK were first movers, and at least the US remains idiosyncratic for certain details.)

Look for the time series data that you can load into Excel and not the pdf files; that may take clicking on a few links to locate the proper one. The files are .CSV but can be opened by excel — but save them as .xls right away!Use quarterly data.

That will let you examine what’s happened to GDP since 1994.

  1. what do you want to look at — nominal or real? seasonally adjusted or not?
  2. do you want to look at levels or at rates of change?
  3. how about trade — what is the level of exports/gdp? how has that changed over time?

Can you find 3/11 in these data?

Note that the Annual Reports contain more detailed tables, including ones on national wealth under the “stock” accounts. The quick number for 2010 is ¥2,700,000 billion vs GDP of ¥500,000 billion or about 5x GDP. Fixed assets are 1,500,000 or 3x GDP. So earthquake losses of ¥16,900 billion are a “mere” 1% of fixed assets. The largest loss (¥10.4 trillion) was of buildings.

==> But what of indirect losses? How might we measure those? <==