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1
Japan’s Economic Prospects
Richard Katz
The Oriental Economist Report
© 2008 [email protected] www.orientaleconomist.com
NYU
March 4, 2007
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2
I.
Without Productivity Revolution,
Potential Full-Capacity Growth Limited to 1.5% per year
(optimists say 2%)
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3
Working Age Population Shrinking
1.2%
0.8%0.9%
0.8%
0.3%
-0.2%
-0.5%
-0.7%
-1.1%
-0.8%-0.7%
-1.0%
-1.3%
-1.8%
-1.5%-1.4%-1.4%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
1975 1985 1995 2005 2015 2025 2035 2045 2055
An
nu
al ra
te o
f ch
an
ge in
po
pu
lati
on
15-6
4
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4
…Faster Than Total Population
-0.5%
-0.7%
-1.1%
-0.8%-0.7%
-1.0%
-1.3%
-1.8%
0.1%
-0.9%-0.8%
-0.7%-0.6%
-0.4%
-0.3%
-0.1%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
2005 2010 2015 2020 2025 2030 2035 2040
An
nu
al ra
te o
f ch
an
ge in
po
pu
lati
on
15-6
4
15-64
Total
If the labor force falls 0.7% a year and the total population falls 0.1%, then even if per worker GDP stays the same, per capita GDP will fall 0.6% a year
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5
Productivity Sole Source of Growth
50556065707580859095
100105110115120125130
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
1990
=100
50556065707580859095100105110115120125130
Work Hours
GDP
Productivity
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6
Productivity Figures Are Cyclical
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Yea
r-o
n-y
ear
gro
wth
(2-
qtr
MA
)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
GDP
Productivity
Average productivity growth 1991-2007: 1.6%
In slumps, GDP falls faster than hours; in recoveries the reverse is true. Recent claims of productivity acceleration neglect this factor.
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7
No Trend Hike in Productivity
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
-3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
GDP (year-on-year growth, 1991-2007 (2-qtr MA)
GD
P p
er h
ou
r (y
ear-
on
-yea
r g
row
th, 2
-qtr
MA
) 2005-07
1991-2007 Trend Line
1991-2001 Trend Line
1991-2007
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8
ROA: Big vs. Small
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Ret
urn
on
ass
ets
(RO
A)
Big firms
Small firms
93-06 average (all firms)
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9
Japan's Manufacturing Productivity 30% Below US Level
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
Mfg
. P
rod
ucti
vit
y %
of
US
1998 2005US level
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10
Japan Grows More Slowly Despite Investing More Than Others
12%
15%
18%
21%
24%
27%
30%
33%
1992 1994 1996 1998 2000 2002 2004
Inve
stm
ent:
GD
P R
atio
Japan G7 ex-Japan
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11
Competition and Firm Mobility Breed TFP Growth
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Holland(1.9%)
France(0.9%)
AVERAGE(2.5%)
Italy (5.3%)
Finland(2.8%)
UK (1.8%)
% o
f T
FP
Gro
wth
Due to shifting market share
Due to exit of old f irms
Due to entry of new firms
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12
In Japan, Entry and Exit Play a Minor Role In TFP Growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
Due to incumbentimprovement
Due to shifting marketshare
Due to entry and exit offirms
Shar
e of
impr
ovem
ent i
n TF
P, 1
995-
2001
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13
Japan Firm Mobility Lags Behind G7
0%
5%
10%
15%
20%
25%
30%
JAPAN Italy Germany USA France Canada UK*
en
try/e
xit
as %
of
exis
tin
g f
irm
s
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14
Exit Rate Still Low, Entry Rate Declining As of 2002
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15
Competition Too Weak In Inefficient Side of Dual Economy
0%
2%
4%
6%
8%
10%
12%
14%
16%
78 79 80 81 82 83 84 85 86 87 88 89 90
Mar
ket
Sh
are:
Po
lyet
hyl
ene
film
Okura Kogyo Sekisui ChemWada Chem Ind Nakagaw a SeitaikakoTakigaw a kagaku
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16
Within Mfg., Worst Sectors Show Least Improvement: 1997-2006
Food
Metals
OtherChemicals
Machinery
Textiles
R2 = 0.7264
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
40% 50% 60% 70% 80% 90% 100% 110%
Productivity (TFP) Relative to U.S., 1987
An
nu
al C
han
ge in
Pro
du
cti
vit
y, 97-0
6
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17
Sectors with Worst Productivity Show Least Improvement: 1997-2005
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Services Constr Distrib. Other Manuf.
Pro
du
ctiv
ity
Gro
wth
, 199
7-20
05
0%
25%
50%
75%
100%
125%
150%
175%
200%
Pro
du
ctiv
ity
% o
f M
fg.,
1997
Productivity growth (left)
Prod. % of Mfg. (right)
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18
Japan Falls Behind Other G7in Output Per Worker
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
GD
P p
er w
ork
er %
of
US
, PP
P
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Canada Germany Italy
Japan UK France
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19
II.
Demand Growth Is Unbalanced
Too Much Dependence on Business Investment and
Trade Surplus
Too Little Consumer Demand
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20
Demand Ultra-Dependent On Investment and Trade Surplus
4.3%
55%
33%
16%
36%
41%
0%
10%
20%
30%
40%
50%
60%
Invest. Trade Surplus Household Consum.
Sh
are
of
GD
P G
row
th 0
2-I
to
07-I
V
Share of GDP
Share of GDP Growth
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21
Wage Share of GDP Plunges
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Co
mp
ensa
tio
n %
of
real
GD
P, 2
-qtr
MA
48%
49%
50%
51%
52%
53%
54%
55%
56%
57%1980-2001 average
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22
Income is Deficit-Financed
58%
59%60%
61%62%
63%64%
65%66%
67%
68%69%
70%71%
72%73%
74%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Rea
l Dis
p. I
nco
me
as %
of
GD
P
58%
59%60%
61%62%
63%64%
65%66%
67%
68%69%
70%71%
72%73%
74%
Private income
Total net disposable income
Govt tax cuts and transfer payments
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23
Household Savings Rate Drops
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sav
ing
s ra
te (
% o
f d
isp
osa
ble
inco
me)
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24
Firms Are Excess Savers
0%
2%
4%
6%
8%
10%
12%
14%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
0%
2%
4%
6%
8%
10%
12%
14%
Household savings
Business saving
Total excess private savings
CY
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25
Budget Deficits, Trade Surplus Offset Excess Savings
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Govt budget Trade surplus Private demand gap
CY
Black line in this slide equals total excess savings in previous slide
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26
Trade Surplus Record % of GDP
-0.5%
0.5%
1.5%
2.5%
3.5%
4.5%
5.5%
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Tra
de
Su
rplu
s (%
of
GD
P)
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27
Real Yen at 20-Year Low
50
60
70
80
90
100
110
120
130
140
150
1970 1975 1980 1985 1990 1995 2000 2005
Rea
l Exc
hang
e ra
te (1
970-
2008
= 1
00)
50
60
70
80
90
100
110
120
130
140
150
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28
Falling % of Global Trade Surplus
0
100
200
300
400
500
600
700
800
900
1,000
1985 1990 1995 2000 2004
Tra
de
bal
ance
, go
od
s an
d s
ervi
ces
($ b
il.)
Japan surplus
Global sum of deficits of countries in deficit
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29
III.
Japanese Medium-Term Growth Dependent on American Prospects,
Especially US Imports
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30
Nikkei 225 Echoes S&P 500
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08
Nik
kei 2
25
1,300
1,325
1,350
1,375
1,400
1,425
1,450
1,475
1,500
1,525
1,550
1,575
1,600
S&
P 5
00
Nikkei 225 S&P 500
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31
Last Seven Years: 70% Correlation Between US and Japanese GDP
-1%
0%
1%
2%
3%
4%
5%
6%
2000 2001 2002 2003 2004 2005 2006 2007
US
Yr-
on
-Yr
GD
P g
row
th
-2%
-1%
0%
1%
2%
3%
4%
5%
Jap
an Y
r-o
n-Y
r G
DP
gro
wth
US (left scale) Japan (right scale)
Japanese exports tumble
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32
Japanese Global Exports Mirror US Global Imports
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000 2002 2004 2006
Yr-
on
-yr
% g
row
th
US imports
Japanese exports
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33
Japanese Exports to China Mirror Chinese Exports to US
-20%
-10%
0%
10%
20%
30%
40%
50%
97 98 99 00 01 02 03 04 05 06 07
Yr-
on
-Yr
gro
wth
Japan exports to ChinaChina exports to US
Anti-Japan boycott in
China
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34
Japanese Exports to Asia Mirror Asian Exports to US
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
99 00 01 02 03 04 05 06 07
Yr-
on
-Yr
gro
wth
Japan exports to Asia
Asia exports to US
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35
Capex Mirrors Exports Two Quarters Earlier
-15%
-10%
-5%
0%
5%
10%
15%
20%
00 01 02 03 04 05 06 07
Yr-
on
-Yr
gro
wth
, E
xp
ort
s
-15%
-10%
-5%
0%
5%
10%
15%
Yr-
on
-Yr
gro
wth
, C
ap
ex
Exports Capex
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36
US Imports Decelerating
-9%
-6%
-3%
0%
3%
6%
9%
12%
15%
2000 2001 2002 2003 2004 2005 2006 2007
Rea
l Im
po
rts,
Yr-
on
-Yr
chan
ge
recession
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37
US trade deficit down 18% from peak
200
250
300
350
400
450
500
550
600
650
2000 2001 2002 2003 2004 2005 2006 2007
Go
od
s an
d s
ervi
ces
trad
e d
efic
it (
$ b
il.)
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38
IV.
Japan’s Declining
Weight in the World
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39
Japan’s Declining Weightin World GDP (PPP)
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980 1984 1988 1992 1996 2000 2004
% o
f W
orl
d G
DP
, PP
P
0%
2%
4%
6%
8%
10%
12%
14%
16%
Japan
China
![Page 40: 1 Japan’s Economic Prospects Richard Katz The Oriental Economist Report © 2008 rbkatz@ix.netcom.com NYU March 4, 2007](https://reader034.vdocuments.site/reader034/viewer/2022052509/56649d3a5503460f94a14edb/html5/thumbnails/40.jpg)
40
Japan’s Declining Weightin Asian GDP (PPP)
0%
10%
20%
30%
40%
50%
60%
1980 1984 1988 1992 1996 2000 2004
% o
f A
sian
GD
P, P
PP
0%
10%
20%
30%
40%
50%
60%
Japan
China
![Page 41: 1 Japan’s Economic Prospects Richard Katz The Oriental Economist Report © 2008 rbkatz@ix.netcom.com NYU March 4, 2007](https://reader034.vdocuments.site/reader034/viewer/2022052509/56649d3a5503460f94a14edb/html5/thumbnails/41.jpg)
41
Japan Falls Behind China in Global Imports
0%
1%
2%
3%
4%
5%
6%
7%
8%
1980 1984 1988 1992 1996 2000 2004
% o
f W
orl
d Im
po
rts (
co
nsta
nt
2000 $
)
0%
1%
2%
3%
4%
5%
6%
7%
8%
Japan
China
![Page 42: 1 Japan’s Economic Prospects Richard Katz The Oriental Economist Report © 2008 rbkatz@ix.netcom.com NYU March 4, 2007](https://reader034.vdocuments.site/reader034/viewer/2022052509/56649d3a5503460f94a14edb/html5/thumbnails/42.jpg)
42
Japan Not Asia’s Main Customer
0% 5% 10% 15% 20% 25% 30%
Hong Kong
Singapore
Taiwan
Korea
Malaysia
Thailand
Philippines
Indonesia
China
% of each country's GDP, 2003
Exports to Japan
Exports to China
Exports to EU
Exports to US
61%