Japans lost decades: one big hoax

Few “facts” of modern history have become so firmly established as the idea that the Japanese economy flamed out in the early 1990s. This story has greatly discombobulated [thrown into a state of confusion] other nations’ policymaking, not least, as we will see in a moment, policymaking in the United States.

Yet the “lost decades” story is not just a hoax but one of the most absurd and transparent hoaxes ever promoted in the English-language media.


Interesting and thought-provoking article in Forbes from Eamonn Fingleton. Marc Faber was one economist who wrote that the deflation in Japan was not a bad thing at all for most Japanese, enabling normal people to buy property, something that was near impossible during the boom years.

Some more snippets from the article in Forbes, explaining the origins of the hoax, and the reason it was sustained for such a long time:


Cline records that whereas the U.S. labor force increased by 23 percent between 1991 and 2012, Japan’s labor force increased by a mere 0.6 percent. Thus, adjusted to a per-worker basis, Japan’s output rose respectably. Indeed Japan’s growth was considerably faster than that of  Germany, which is the current poster child of economic success.

Cline, a senior fellow at the Washington-based Peterson Institute for International Economics, also points out that Japan’s much lamented deflation is not a problem. Quite the reverse: in the last twenty years the Japanese economy has actually done better at times when prices were falling than when they were rising. He adds that Americans make a big mistake in assuming that Japan’s  gentle deflation bears any resemblance to the highly disruptive deflation the United States suffered in the early 1930s. In reality Japanese deflation is similar to the sort of “good deflation” in an earlier era of American history, between 1880 and 1900, when rapidly rising U.S. labor productivity consistently reduced consumer prices and rendered America the miracle economy of the era.

Japan has continued to do remarkably well on trade, whereas  America’s performance has been disastrous. Japan and Germany rank as the only two major advanced economies that have increased their current account surpluses since 1989.

Japan’s trade performance is all the more remarkable for the fact that, far from falling as one might expect from the way the Japanese  economy has generally been covered, the Japanese yen has on balance risen on world currency markets (it is up nearly 49 percent since early 1990 when the so-called lost decades allegedly began).

Cline contends that Japan’s government borrowing is a problem but fails to note a remarkable mitigating fact: much of the debt the Japanese government has incurred  has been used to buy foreign government securities, not least those of the United States. In effect the Japanese saver is propping up the United States and other deficit nations, and the Japanese  government is merely acting as banker. The nation with the real debt problem is not Japan but the United States.

Almost everywhere you look in the details of the Japan story you find that the basket case story could not be further from the truth. Of course, the Tokyo stock market crashed and has never subsequently reached the ridiculous heights it hit in 1989 (I can call these heights ridiculous because I was one of a few — a very few — observers who predicted the crash). But Japanese stock valuations are not a guide to the underlying performance of corporate Japan. Far from it. With virtually no exceptions, Japanese corporations have continued to boost their revenues — and maintained their employment levels — in the face of a constantly rising yen. The Japanese car industry, for instance, has continued to make extraordinary gains.

Why did the “basket-case Japan” story ever catch on? It was spread at first by rather naive Americans who, unlike some of us, did not understand that Japanese stocks had been wildly overvalued in the late 1980s. They therefore took the  crash  as a premonition of a terrible future real-economy calamity — a calamity that in the event never materialized.  In the meantime Japanese officials found that the basket-case story powerfully ameliorated angst in Washington over Japan’s closed markets. They proved quick learners and have projected an image of  Japan as suffering some weird economic equivalent of dementia ever since.

In Washington, however, the basket-case story worked like a charm. After all a chivalrous United States doesn’t kick a man when he’s down. The result is that even today not one of Washington’s  highly publicized trade grievances of the 1980s has been resolved – not autos and auto parts, not financial services, not even rice.