In 1991, former MIT dean Lester Thurow wrote that "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century."
He wasn't alone. The standard view of the 1980s held that Japan's sway over the world economy was unbreakable. Its economy grew faster. Its corporations were more efficient. Its workers more productive. In 1988, former Reagan official Clyde Prestowitz warned: "The American century is over. The big development in the latter part of the century is the emergence of Japan as a major superpower."
Such comments are now ridiculed relentlessly by analysts and commentators, including myself. Japan, after all, did not boom. Far from overtaking the United States, its economic growth stagnated for two decades, its stock and housing markets collapsed, and its government entombed itself in debt. Twenty years ago, Japan was synonymous with the phrase "juggernaut." Today, it's often seen next to the phrase "lost decade."
America should take notice, we hear these days. If we don't get our act together, we could be in for a lost decade or two just like Japan.
But there's an interesting rebuttal to these warnings by a Japan-based journalist named Eamonn Fingleton. He summarizes his views bluntly: "[A]fter studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth."
How so? Consider:
The highest Japan's unemployment rate has been in the last 20 years is 5.5%. Its current unemployment rate, 4.6%, is about half that of the United States. Among those of prime working age, unemployment is virtually nonexistent in Japan today.Japan's average life expectancy at birth increased by more than four years -- from 78.8 years to 83 years -- between 1989 and 2009. Japanese, Fingleton points out, "now typically live 4.8 years longer than Americans," and better health care is a major factor.Japan had a current account surplus of nearly $200 billion in 2010, up threefold in 20 years. By contrast, America's current account deficit was nearly half a trillion dollars in 2010, up fivefold in 20 years. In short, Japan supplies the world with products and capital, while America supplies it with debt.Based on purchasing power parity, Japan's income per capita has grown at nearly the same rate as America's over the last 20 years (0.8% vs. 1%, respectively).According to the Japanese Statistics Bureau, during the "lost decade" of 1991-2001, the average Japanese citizen spent more time enjoying arts and culture, gardening, reading books, sightseeing outside the country, and visiting family.The yen has strengthened 87% against the dollar and 94% against the pound over the last two decades.Japan's ranking in the world Corruption Perceptions Index has increased substantially over the last decade, and is now well ahead of the U.S.The average Japanese citizen, in other words, is living longer, earning more money, spending more time in leisure activities, being better represented by government, and enjoying some of the highest job security in the developed world. If this is the narrative of a failed economy, sign me up.
Why the gulf between perception and reality? Part has to do with the standard metric we use to judge economy's health: gross domestic product. Over the last two decades, Japan's real GDP has grown at 1% a year, compared with about 2.5% for the United States. Clearly, Japan looks like the loser of the two countries.
But there's a difference: Japan's population is in decline, while America's is rising. From 1990 to 2007, Japan's working-age population fell from 86 million to 83 million, while America's jumped from 160 million to 200 million. When GDP is measured on a per capita basis, the growth difference between Japan and America narrows by two-thirds. When viewed as GDP growth per working-age resident, the difference between the two nations virtually disappears. The size of Japan's pie may not be growing as fast as America's, but the amount of pie available to each citizen, and each worker, is plodding along at a similar rate.
Make no mistake: Japan's economy faces unimaginable challenges because of its staggering debt load. Demographics magnify those dangers. "Japan is a bug searching for a windshield," investor John Mauldin said two years ago -- a comment that was probably as accurate as it was controversial.
But Fingleton's points are valid, and highlight two important issues.
One, gross domestic product can be a poor way to measure an economy's worth and progress. It counts things that don't matter -- a vague calculation of output -- while ignoring how actual people on the ground are doing. In his book The Rational Optimist, author Matt Ridley shows how Africa frequently falls into the same trap. Judged by GDP growth, most of Africa looks like a pit of stagnation and decline. But using metrics that are actually meaningful to people -- life expectancy, access to health care, clean drinking water, disease prevention, education, democratic representation -- Africa has made incredible strides in recent decades.
Fingleton makes a somewhat analogous argument for Japan: "There's a dramatic gap between what one reads in the United States and what one sees on the ground in Japan," he quotes journalist William Holstein as saying. He continues: "The fallacy of the 'lost decades' story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years."
Second, misconceptions about Japan's economy demonstrate how easy it is to assume something is accurate just because you've heard it ad nauseum. Admittedly, I've mentioned Japan's lost decades in the past without asking whether there were another side of the story. I heard enough about stagnation and decline to assume it was all true. Not until I read Fingleton's rebuttals did I look at the details and realize, to my shock, that he was right. What's the saying? Trust, but verify.
Fingleton finished a recent essay with a note: "I feel so strongly about all this that I have more than once over the years challenged the principal proponents of the 'lost decades' story to a debate. I first tried in 1998; and then again in 2002. On each occasion there were no takers."
Anyone care to step up to the plate?
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
10 comments