The annual gender gap report by the World Economic Forum has come out and Japan has placed 101st out of 135 countries. In developmental economics we have been discussing the reliable indexes for potential development. Studies of economic development in recent years have shown that the most reliable index of development is gender equality. The Japanese don’t seem to hold any regard for this statistic as demonstrated by almost no web reaction to the poll. However, based on the logic of a developmental economist improving gender equality should be one of Japan’s strategies for improved GDP growth. Furthermore, with a shrinking population getting more women to work should be a priority of the Japanese government. Getting more women to work will be an effective tool at balancing out the loss to the labor force through retirees and slow the shrinking tax base. When I went to see what could be done to improve the work rate of women in Japan I came across and article that showed that out of all industrialized countries Japan has the second highest disparity in wages for gender with women earning 30% less than men for full time employment. A focus on improving wage equality may be an effective way to increase female employment. http://economix.blogs.nytimes.com/2010/03/09/the-gender-wage-gap-around-the-world/

http://www.washingtonpost.com/blogs/worldviews/wp/2012/10/28/japan-ranks-101st-globally-for-gender-equality-but-web-users-shrug/

In real terms, the average monthly income per household is up 1.8% and average consumption expenditures per household are up .9% from the previous year. However, one area that elicits concern is the decrease in housing consumption by 8.5% in real terms. Is this just a slowing down effect from the aftermath of The Great East Earthquake reconstruction, or does this signal trouble for recovery? Accordingly, housing prices in both Tokyo and Osaka have fallen this past year.

The second largest drop in consumption was Education, which fell by 5.4% in real terms from the previous year. This may be more attributed to the aging population.

http://www.stat.go.jp/english/data/kakei/156.htm

http://www.nuwireinvestor.com/articles/japanese-land-prices-stable-house-prices-fall-59937.aspx

In this article, Marina Primorac uses examples in history to deal with the current deficit problems countries are experiencing.  She notes that countries like Japan, the United States and many European countries are experiencing deficit levels that have surpassed 100 percent of their respective GDPs.  In this study, Primorac uses examples from the IMF database dating back to 1875 to examine the public debt levels in countries.  This study examines six cases: the United Kingdom (1918), the United States (1946), Belgium (1983), Italy (1992), Canada (1995), and Japan (1997).  In this study, Marina Primorac points out three lessons that the countries with high public debt ratios should utilize when they try to reduce their deficits.

Lesson 1: Fiscal consolidation must be complemented by policy measures that support growth.

Japan’s weak economic growth prevented effective fiscal consolidation.  In Belgium, Canada, and Italy, the large fiscal adjustments implemented only effective reduced the debt levels when monetary conditions became supportive.  The United Kingdom tried to devalue the pound.  This led to increased unemployment, poor economic growth, and debt continued to rise.  Although this internal devaluation showed high costs in the United Kingdom, there still needs more research to determine whether to rule out this strategy.  The supportive monetary policy in the United States confirmed success in reducing the debt.  The limits on the nominal interest rates and the bursts of inflation were helpful in quickly reducing the debt ratio.

Lesson 2: Debt reduction is larger and more lasting when fiscal measures are permanent.

Belgium, Canada, and Italy all implemented large fiscal adjustments, but their successes varied based on the length of the adjustment.  Belgium and Canada experienced better results than Italy because their fiscal measures were permanent while Italy’s was meant to be temporary.

Lesson 3: Fiscal repair and debt reduction take time.

Only in post war years periods did country’s public debt reverse quickly.  Taking the example of Belgium, it took ten years for the 7% deficit to move to a surplus of 4%.

Today, Japan, the United States, and European countries should look at this study with caution.  Due to many variables, the effectiveness of fiscal measures to reduce their deficits could have varied results.  However, these findings in this study does provide empirical evidence for how these countries should act.

http://www.imf.org/external/pubs/ft/survey/so/2012/RES092712B.htm

http://blogs.ft.com/money-supply/2012/03/25/shirakawa-four-problems-with-aggressive-monetary-policy/#axzz29z4kJ8wF

This article is a bit outdated, but given the previous post’s argument that deflation has been a long term concern of Japan, I think that its arguments are still valid. It makes 4 counter-arguments against the premise that an aggressive monetary policy may be the solution to heavy deflation:

1. An expansionary monetary policy might allow people to pay their debts easier, but it disincentivizes both the private and public sector from balancing budgets. Shirikawa also argues that those without debts are incentivized to spend more, bring future demand to the present and increasing aggregate demand. This increase will diminish over time despite low interest.

2. The prolonged nature of shocks in China’s government might prompt companies to further invest in low interest investments that would only be profitable with aggressive monetary policy. This is an inefficient allocation of resources.

3. Flattening the yield too far will also cause inefficient allocation of resources and undermine profitability. Long term investments could yield negative returns.

4. Mr. Shirakawa’s fourth point is an argument about why banks such as fed should worry about the effect of easy policy of global commodity prices. In essence, he says that individual central banks that concentrate on domestic inflation targets that could end up causing global problems, which in turn make it hard to hit domestic inflationary targets.

The last point is rewritten from the site. It is what really confused me, and I think it’s really important. I would appreciate some input on explaining it to me.

From what I know of economics, an expansionary monetary policy to combat inflation seems textbook, but most of these counterpoints seem valid in this specific scenario.

Trade economist Alan Blinder in analyzing how new technology will affect international trade, has predicted that Services will become more outsource-able as technology continues to develop. In the past, trade was limited by our ability to transport a product from one location to another:  “any item that could be put in a box and shipped (roughly manufactured goods) was considered trade-able and anything that could not be put in a box (such as services) or was too heavy to ship (such as houses) was thought of as nontradeable.” Now as the internet becomes more secure and reliable, the range or products that we can deliver over long distances is expanding to include services as well as manufactured goods.  Considering the role services play in the Japanese economy, accounting for almost 20% of GDP in 2010, a massive movement of service jobs out of Japan would have massive effects on the composition of the Japanese Labor force and its economy in general.

Not all service jobs are vulnerable to outsourcing. Some jobs are improved by proximity or physical contact with the provider of the service, such as hair-cuts, surgery, and childcare. Others like accounting and Technological services are particularly susceptible.

The Bank of Japan’s efforts to encourage price increases across the Japanese economy have failed to produce the desired results. The ‘goal’ of a 1% increase in the CPI in Japan is now appearing to be a far more long-term expectation than originally desired by the Japanese government as the try to shake the economy out of nearly ’20 years of deflationary pressure.’ As the BOJ considers the purchase of 10 trillion yen in additional assets as a form of easing, officials at the Bank have blamed the downgraded inflation expectations on the appearance of fresh negative issues such as slowing production levels in China as its economy finally begins to feel the full impact of the global recession. This all plays out in the context of a stronger yen acting as a ‘brake’ on exports, a crucial segment of the Japanese economy (WSJ link below).

The problem of deflation in the Japanese economy is hardly a new one, as shown by the BOJ’s own statistics (link below). Since 2006, the CPI (Laspeyres chain index less fresh food) in Japan has only reached positive numbers five times, and then only for a brief six to seven month spurt only for gains to be almost wiped out by dips of equal weight in the opposite direction. The most extreme instance took place in 2008 when the CPI increased by 1% to 2% over the year to be followed by a 2.5% drop the very next fiscal year. The impact of a stronger yen on Japan’s already depressed exports to China (see ‘More Bad News for Japan’s Auto Industry’ blog entry) could be very negative.

In addition to all of this, the poor numbers have revealed a ‘rare display’ of intense division between the BOJ and the Japanese government as officials criticize the Bank for not being clear enough on its inflationary goals. The government itself is also in a state of disharmony, as Prime Minister Noda’s administration may be ‘left without cash as soon as next month’ as a legislative stalemate in the Diet holds up progress on an economic stimulus package (see Bloomberg link below).

http://online.wsj.com/article/SB10000872396390444734804578064391717778934.html

Click to access gp1210b.pdf

http://www.bloomberg.com/news/2012-10-17/japan-to-hold-special-cabinet-meeting-following-stimulus-reports.html

A recent article for Reuters has highlighted the surge in Japanese companies’ global M&A deals. If the proposed deal for Softbank to purchase Sprint Nextel Corp for $20 Billion is completed, Japanese companies will set a record for outbound acquisitions this year ($75 billion). Japanese firms have announced 14 outbound transactions worth at least $2 Billion each, which totals 5 more than the previous year.

From an economic paper by Arikawa Yasuhiro and Miyajima Hideaki (link below), they describe the causes and parallels for a mature economy to undergo a surge in M&A activity. They conclude that industries with higher growth opportunity are likely to engage in more M&A activity, but that the same is also true for industries facing negative fundamental shocks like sales declines.

Is this aggressive growth an indicator that Japanese CEO’s are becoming more confident in the future of the Japanese economy or is it the result of less confidence in domestic growth potential?

http://www.reuters.com/article/2012/10/15/us-japan-ma-outbound-idUSBRE89E1GF20121015

Click to access 07e042.pdf

China which is Japan’s biggest export market has shown substantial reductions in demand for Japanese made cars. The drop in demand (by a whopping 41% for Honda, 35% for Nissan, and 49% for Toyota) is the result of the feud between China and Japan over the Senkaku islands. As if to justify this assessment polls have showed Chinese tours of Japan have dropped off by as much as 70%. The loss in revenue for Toyota is estimated at nearly half a billion dollars. Recovery for Japan’s auto industry in China is not predicted until the second quarter of next year. Unfortunately for the U.S. GM has made almost no ground in the wake of plummeting sales for rivals Honda and Toyota. The biggest gainers are BMW and Audi with respective sales increases of 55% and 20%, Mercedes also showed significant growth with a 10% sales increase. One is made to wonder though if other factors are to play since the largest growth is seen in the luxury vehicle sales. Average costs of these vehicle companies are not insignificant.

http://www.foxnews.com/world/2012/10/09/japan-economy-on-shaky-ground-after-island-spat-sends-auto-sales-plunging-gets/

http://news.investors.com/business/100912-628639-toyota-honda-general-motor-china-sales.htm

http://www.nytimes.com/2011/11/15/business/global/in-china-car-brands-evoke-an-unexpected-set-of-stereotypes.html?pagewanted=all&_r=0

As evident from the articles the professor posted it is clear that even the best and brightest economists have difficulty predicting how economic relations will change in the future. The “Containing Japan” article by James Fallows offered several notable insights on the future of the Japanese economy and relations with neighboring countries, but ultimately his thesis on needing to impose limits on the Japanese Economy proved an inadequate reaction to economic conditions at the time. The article Japanic offers serious concerns about Japan’s future, however, as we should take into consideration even the best Economic models do not account for all real variables that influence economies. Maybe hyperbole is used to draw attention to the fact that a particularly bad economic situation is a possibility. But as should be noted from the article by James Fallows our knowledge on the best Governmental policies to take in response to financial hazards is often found in hindsight.

An article by Sudeep Reddy offers an analysis for high debt economies. The risk for countries with debt at or above 100% of GDP is not as threatening as it may seem and if countries implement long term strategies most economic dangers can be contained. The main concern to this line of thinking is that long term strategies are often difficult to implement because they are viewed unfavorably by the public. Many countries including the United States only focus on short term solutions to economic woes but to be fair economic models work better in the short run than the long run.

[The Prof:

1. neat!
2. I edited the graphic to make it larger – if you view the html, you’ll see width and height settings. I boosted each by 1/3rd.
3. The post does not reference it, but underlying the debate is a deservedly famous book (well, famous among cognoscenti) by Reinhart and Rogoff, This Time is Different (2009).
4. See my comment for a bit on Fallows (I’ve been on a panel with him, among other interactions).

http://www.yomiuri.co.jp/dy/business/T120920004155.htm

Japan posted another trade deficit with China and Europe due to the continued strength of the yen and the economic problems the countries face. Japan’s recovery may be delayed due to the fact China growth has slowed and they are Japan’s major exporter. The increase in exports, for the 7th straight time, by 10.9% to the U.S. helped lessen the trade deficit, but only so much can be done with exports to one country. China’s imports from Japan were down 9.9% which fell for a fourth straight time and Europe was down 22.9% also falling from previous declines. It is to early to make a ruling on the Senkaku islands, but it will be very interesting to see what effect the islands will play in the international trade between China and Japan.

The graph to the right shows the trade deficit that Japan has run in comparison to other countries.