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Japan’s Lost Decade

From Doug Casey “Anatomy of Japan’s “Lost Decade”

“The similarities between the U.S. now and Japan then derive from the big run-up in debt prior to the onset of economic crisis. Likewise, the reactions of the Bank of Japan and the Federal Reserve in cutting interest rates to zero and using unconventional methods to buy assets to expand their balance sheets are much the same. Further, the central governments both went into deficit to support the economy. Fed up with low growth from the early 1990s, Japan experimented with quantitative easing between 2001 and 2006, adding $250 billion to its excess reserves. The U.S. has adopted the concept of quantitative easing with even more vigor and promises much more intervention than even Japan. Japan has taken almost two decades to do what the U.S. is planning to do in two years. What can we learn from these results? 1. Very little happened in Japan. From beginning to end, the Japanese government spent trillions in its various stimulus programs, including currency interventions, but the economy did not return to robust growth. The GDP after 1990 has stayed level, so the best that can be said is that their actions may have helped the country avoid a worse downturn. Other than temporarily, their interventions certainly didn’t help the Japanese stock market, which dropped from 38,000 in 1990 to 8,000, doubled from that level during the easing, then sank back to 8,000. One might, therefore, be tempted to conclude that the U.S., like Japan, could be in for a slow economy for a long time”.

Pasted from http://theconstantbroker.blogspot.com/2009/02/economy-lost-decade-japan-vs-us.html

Just as it took time for the Bank of Japan to move interest rates down, regulatory and fiscal reforms were also tardy; not until 1998 was a comprehensive policy response to the banking crisis proposed. After years of debate over the merit of using public funds to bail out banks, Japan’s parliament passed a massive bank rescue package in October 1998. The package involved ¥60 trillion (equivalent to 12% of GDP at the time) and set aside funds for three major purposes. Nearly half the funds were used to recapitalise banks deemed weak but solvent, while the rest of the package was for the liquidation or nationalisation of insolvent banks and full deposit protection for account holders in these institutions.
Unfortunately, the spending package approved by parliament did not lead to recovery for the banking system.

Nikhilesh Bhattacharyya is an associate economist in the Moody’s Economy.com Sydney office.

Pasted from

Japan’s economic performance since the early 1990s has been disappointing, both in relation to its own history and relative to the record of other major industrial countries. Real GDP growth has averaged 1 percent a year over the past 10 years, well below that in other OECD countries, and only one-fourth of the 4 percent annual average growth rate recorded in Japan in the 1980s. Japan, moreover, experienced three recessions in the past decade, in contrast to the trend in other industrial countries toward milder and less frequent downturns in the postwar period. Meanwhile, nominal GDP has fared even worse than real GDP (the level of nominal GDP in 2001 was approximately the same as in 1995), as moderate deflation has become entrenched. This poor economic performance has led some commentators to call the 1990s Japan’s “lost decade.”

There is little doubt that dysfunctionality in the banking system—because of a shortage of capital in the face of still-to-be-recognized downgrades to asset quality—hampered the ability of monetary policy to end deflation. It is also likely that fiscal policy management—especially the focus on rural public works projects with low multiplier effects—undercut that instrument’s ability to support aggregate demand. Uneven progress in regulatory reforms has also contributed to a documented lack of productivity growth in many of Japan’s domestic sectors, in contrast to the more dynamic export-oriented industries such as electronics. This has resulted in a sharp slowdown in potential growth in the 1990s, helping to contain the size of the output gap, unemployment, and capacity underutilization over the past decade.

The government of Prime Minister Koizumi, which came into office in April 2001, has made some progress in addressing the fundamental weaknesses in the economy. A strategy has been set out, encompassing banking reform, fiscal consolidation, and deregulation.

Given the high level of public sector debt and the large budget deficit, the staff has stressed the need to lay out a detailed and credible medium-term fiscal consolidation strategy to maintain investor confidence in JGBs. At the same time, however, steps would be needed to ensure that a sizable near-term fiscal contraction did not add headwinds to economic activity that would arise from an accelerated effort to spur bank and corporate restructuring. Key fiscal reforms that would help to establish the credibility of the government’s program include:
• spending reform, especially the elimination of the current practice of earmarking revenues for road-related spending projects, and a more thorough cost-benefit analysis of public works projects to free up resources for an expanded social safety net and better-crafted job training programs;
• tax reform, including broadening of the personal and corporate income tax bases, perhaps with cuts in effective corporate tax rates (early introduction of taxpayer identification numbers would facilitate such base broadening);
• social security reform, including curbs in the health care system’s total outlays and another round of old age pension reforms; and
• faster progress on restructuring and privatizing public enterprises, including government financial institutions.

International Monetary Fund Editors Tim Callen and Jonathan Ostry: http://www.imf.org/external/pubs/nft/2003/japan/index.htm

Taxes Vs. Tax Revenue

Changes in marginal income tax rates cause individuals and businesses to change their behavior. As tax rates rise, taxpayers reduce taxable income by working less, retiring earlier, scaling back plans to start or expand businesses, moving activities to the underground economy, restructuring companies, and spending more time and money on accountants to minimize taxes. Tax rate cuts reduce such distortions and cause the tax base to expand as tax avoidance falls and the economy grows. A review of tax data for high-income earners in the 1920s shows that as top tax rates were cut, tax revenues and the share of taxes paid by high-income taxpayers soared.

Detailed Internal Revenue Service data show that the across-the-board rate cuts of the early 1920s-including large cuts at the top end-resulted in greater tax payments and a larger tax share paid by those with high incomes. Figure 1 focuses on those earning more than $100,000. As the marginal tax rate on those high-income earners was cut sharply from 60 percent or more (to a maximum of 73 percent) to just 25 percent, taxes paid by that group soared from roughly $300 billion to $700 billion per year. The share of overall income taxes paid by the group rose from about one-third in the early 1920s to almost two-thirds by the late 1920s. (Note that inflation was virtually zero between 1922 and 1930, thus the tax amounts shown for that period are essentially real changes).

Veronique De Rugy, fiscal policy analyst for the cato institue

Tax Rates Vs. GDP

You can read the growth rate directly from the slope of the graph: For example in 1983, first year of the Reagan tax cuts, log of GDP is 10.052, and in 1989, last year of the Reagan presidency, log of GDP is 10.250, so the log increased 0.198 in six years, 0.198/6= 0.033, so during those years GDP growth was 3.3% a year.
Average growth during high tax periods was 1.08%, average growth during normal times was 2.45%. Every high tax period was a long period of economic stagnation, malaise, or decline or else contained a long period of decline. Such events were rare during normal tax periods.
The graph suggests that taxes are well and truly on the wrong side of the Laffer curve — that increasing taxes will lead to decreased revenue after a fairly short period

Pasted from http://jim.com/econ_growth/index.html

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