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Japan’s Lousy Economy Is a Warning for U.S.

If only Japan's economy could perform half as well as Kei Nishikori of Japan. (Photo: Newscom)

Japan is flush with national pride this week, thanks to Kei Nishikori, the tennis phenom who knocked off seemingly indestructible Novak Djokovic to reach the U.S. Open finals and become the first Japanese to reach a grand slam final ever.

If only Japan’s economy could perform half as well. For also this week, Tokyo announced that second-quarter GDP shrank by an annualized rate of 7.1%.

This decline followed a rise in the national sales tax — a monumental blunder that has sunk Japan back into recession.

The bigger worry, however, is that this isn’t just a bump in the road to recovery. By almost any measure of wealth and income, Japan has suffered through a two-decade-long financial malaise due to a series of catastrophic Keynesian policy mistakes.

The tenets of Lord Keynes and his modern disciples have been put on trial in Japan, and the verdict is not a happy one. The rest of the world, not least of all the U.S., ignores these lessons at its own peril.

This decline followed a rise in the national sales tax — a monumental blunder that has sunk Japan back into recession.

The engine of growth that created the Land of the Rising Sun economic miracle in the post-World War II era first began to falter in the early 1990s in large part because of a centrally planned industrial policy model.

The panicked response to the downturn was to flood the economy with a continuing series of Keynesian monetary and spending stimulus injections.

None of it has worked.

The collapse of Japan’s stock market tells the whole story. In December 1989, the Nikkei 225 index stood at a lofty 38,900. Today, almost a quarter-century later, the index stands at just under 16,000.

In 25 years Japan has experienced a nearly 3/5 liquidation of its financial wealth.

Japan has directed tens of billions of dollars into public works projects — “investments,” as President Obama calls them. This was paid for with debt. In the last two decades, Japan’s debt burden catapulted from 19% of GDP, among the lowest in the industrialized world, to over 142%, among the highest.

KIMIMASA MAYAMA/EPA/Newscom

The government spending coincided with a monetary policy almost unprecedented in its looseness. From the late 1980s through 2000, the central bank’s balance sheet more than doubled — a precursor to the “quantitative easing” carried out by the U.S. Federal Reserve. And since 2000, the balance sheet has doubled once again.

Inflation rates in Japan are bearing down on 4% — a near-high among major competitors.

The result? The expected Keynesian “multiplier effect” from spending and a flood of yen into the market never arrived.

Housing starts in Japan are still lower than the level nearly 25 years ago. Unemployment, still low by international standards, is nearly twice the level of 1990, and wages have been flat.

Labor force participation continues to trend downward as well — falling by around 4 percentage points over the last two decades.

Japan, Paul Krugman predicted, “may also end up showing the rest of us the way out” of stagnation.

Yet, liberal economists have urged Japan to keep the stimulus coming. Last winter, the New York Times’ Paul Krugman exulted in Prime Minister Shinzo Abe’s expansionary fiscal and monetary policies.

“So, how is Abenomics working?” he wrote. “The overall verdict on Japan’s effort to turn its economy around is so far, so good. If Abenomics works, it will serve a dual purpose — giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.”

Japan, Krugman predicted, “may also end up showing the rest of us the way out” of stagnation.

Joseph Stiglitz, a fellow Nobel laureate of the Keynesian variety, advised American politicians to use the same strategy: “What we really need in the U.S. is expansionary policies that Abenomics is bringing into Japan.”

But rather than a model of recovery, Japan has slipped back into recession. Now, with the debt-to-GDP ratio nearing 143%, further borrowing in Tokyo would be reckless and counterproductive. So last year Abe turned to a 60% sales tax hike to finance Tokyo’s rampant government spending.

But the tax hike had the predictable effect of draining consumer demand when government spending was intended to goose it.

In short, Japan has adopted an economically deranged game plan of imposing austerity on its private sector through taxes while continually stimulating its inefficient public sector.

“This is what created the original crisis in Japan back in 1989,” says economist Arthur Laffer. “Tax hikes, government spending and debt have led to a catastrophic outcome.”

What is needed is precisely the opposite. Japan still hasn’t tried a sustained supply-side strategy of incentivizing growth and profits of private industry through tax and regulatory reductions.

The corporate tax was trimmed, but it remains one of the highest in the world. No surprise that businesses and capital are not rushing into Japan.

For America, the sad lesson of the setting sun of Japan’s once-rising economy is that Keynesian policies never lead to the promised land of recovery and prosperity. Japan was once the second-largest economy in the world, but China has sped ahead and other Asian tigers are catching up.

Bungled policies and dreadfully bad economic advice have toppled an economic empire, and the worry is that if the U.S. doesn’t learn from these mistakes, it could happen here too.

Originally appeared on Investors.com

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