Japan as the New Normal: Living in a Constrained Economy

I am struggling to come to terms with the possibility that Japan may economically be the “new normal”. By “new normal” I mean a situation where the economy is in recession for prolonged periods of time, seeing only fleeting periods of growth. My struggle relates to the fact that conventional wisdom would suggest that after two decades of recessionary tendencies, Japan should be an economic and societal wreck. But quite the opposite is the case. In many respects Japan seems to be doing fine.

Now what leads me to this latter conclusion? I was struck in particular by the findings of the 2012 Inclusive Wealth Report from the International Human Dimensions Programme on Global Environmental Change (IHDP). Set up as an alternative to gross domestic product (GDP), the Inclusive Wealth Index reflects the state of natural resources, the economy and ecological conditions, the population’s health and productive capacity, and measures whether or not national policies are sustainable.

In the report, the authors looked at various indicators in 20 countries, including Japan, over the period from 1990 to 2008, and I was surprised to read the following:

“Japan depicts the most favorable situation, as it is experiencing wealth accumulation while at the same time increasing its natural capital stocks. This has been achieved primarily through investment in the forest sector. This position is also explained by a slower population growth rate in relation to other nations. This is to a large extent supported by the recent assessment of Japan’s ecosystem services…”

We should recognize that the Inclusive Wealth Index is still in development and, for those who wish to learn more, there will be an event on the topic at United Nations University in Tokyo on 7 January 2013.

The point I am trying to make here is that if we look at Japan through our conventional lens, that is GDP growth, we end up concluding that the past two decades were effectively stagnant, but from this new perspective things look very different.

This is where our journey begins…

We are naturally attracted to the status quo, which is very often taken to mean times of economic growth. We feel very uncomfortable with times of economic difficulty, partly because we witness the pain and hardship experienced by many around us and partly because we ourselves feel vulnerable. So we yearn for those normal days of growth to return.

Back in 2008, just after the financial crisis, I had a conversation with my bank manager in the United Kingdom. She was complaining about how terrible the situation was and explained how she could not wait for things to “get back to normal again”. For her, “normal” meant a situation of banking profits, growing investment opportunities and satisfied customers. The likelihood of normality not returning would never cross her mind — it seemed a given.

Four years later, after a double-dip recession and with a potential triple dip on the horizon, the return to normality across the globe appears still a distant prospect. In this context, it is easy to understand how in recent years an increasing number of commentators suggest that we are witnessing the end of growth. There is Richard Heinberg, from the Post Carbon Institute and author of The End of Growth, who states that “economic growth as we have known it is over and done with”.

“Experts argue that we are facing the end of global growth and our institutions, policies and individual behaviours and aspirations are going to have to change.”

Jeff Rubin, former Chief Economist with CIBC World Markets, who also has a book with the title The End of Growth, argues that the real engine of economic growth has always been cheap, abundant fuel and resources. But that era is over.

Energy and finance expert Nate Hagen in a recent lecture also argues that we now face the end of global growth and — although we in advanced economies are still incredibly rich — our institutions, policies and individual behaviours and aspirations are going to have to change.

Both books and Nate Hagen’s lecture present a rather bleak and depressing assessment of our current situation. We are given three reasons as to why economic growth may be a thing of the past: over-consumption of resources, negative environmental impacts like climate change, and debt. We appear to have maxed out, or to be close to maxing out, the global economy and the biosphere.

In response, Heinberg argues that we need to create a “new normal” that fits within the constraints imposed by depleting natural resources, especially the peaking of conventional oil production. Instead he calls for a “healthy equilibrium economy” operating within the planetary budget of sustainably extractable resources and warns that if we try to hang on to the “old normal” we may find ourselves locked into persistently high unemployment, widening inequality and worsening environmental crises.

Heinberg’s thinking, in particular, is very similar to that of Tim Jackson, Professor of Sustainable Development at the University of Surrey and author of Prosperity without Growth – Economics for a Finite Planet. Jackson calls for the redefinition of prosperity to something that is more meaningful, less materialistic and less reliant on growth.

But are these proposals from Heinberg and Jackson anything other than good ideas?

Learning from Japan

Japan has come to be viewed as exemplifying the type of economic malaise that the industrialized West should desperately seek to avoid. Many commentators refer to Japan’s whole 1990s and 2000s experience as the Lost Two Decades. When the bubble economy burst in 1989, the stock market collapsed, a debt crisis followed and the government had to bail out the banks. Sound familiar? Two decades later, the Japanese economy is stuttering along, perhaps even going into recession once more.

Robert Samuelson, writing in the Washington Post, argues that Japan faced three major structural problems: 1) The country’s basic economic model depending on export-led growth is broken; 2) the population is in decline and aging; and 3) government debt exceeds 200 percent of GDP.  He concludes by stating that the “loss of economic dynamism changed both the nature of its prosperity and the national condition”. So, if Samuelson is correct, the Japanese are in the process of redefining what they mean by prosperity.

“If we look at Japan through a conventional lens, we end up concluding that the past two decades where effectively stagnant, but from this new perspective things look very different.”

I would tend to agree with Samuelson, but since I am not an economist I cannot back this assertion up with reams of data. In my view, this reappraisal is also very much an undercurrent rather than mainstream and appears in various forms, for instance in the Mottaniai Society. I really like the Wikipedia definition of Mottaniai:  a Japanese term meaning “a sense of regret concerning waste when the intrinsic value of an object or resource is not properly utilized”. It gives the strong impression that something other than a GDP-growth-at-all-costs fixation is at play in parts of Japanese society.

But this undercurrent has not touched all Japanese and results from the most recent national elections in December 2012 showed how the majority of people basically voted for economic reform in an effort to escape from those “decades of stagnation”.

Whether reform will be forthcoming and effective is another question. In the years ahead we are likely also to see more reflection upon what Japan’s transition to the “new normal” might actually look like. And remember, this “new normal” will be the future path for most industrialized and industrializing countries, if people like Heinberg, Rubin, Nagen and Jackson are correct.

But the reality is that the new normal may not be as stark as we might expect. There are some who suggest that Japan has not lost anything at all — echoing the findings of the Inclusive Wealth Report. According to financial journalist Anthony Hilton, “Japanese exports increased by 73 percent during the ‘lost decade’ and electricity usage — a key indicator of economic activity — increased by 30 percent. By 2006, Japan’s exports were three times what they were in 1989. As in The Wizard of Oz, being ‘lost’ might not be so bad after all.”

Over at the New York Times, Eamonn Fingleton argues that in recent decades “Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.”

He points out that average life expectancy grew by 4.2 years in the period from 1989 to 2009 while unemployment remains at 4.2 percent, about half that of the United States (US). He also states that the current account surplus has grown threefold since 1989, standing at US$196 billion in 2010.

“Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash.”

Now not everyone agrees with this assessment and some point to the growth in youth unemployment, the falling ratio of population in employment and the fall in the average annual hours worked per person employed as indicators of future possible problems. As we would expect, the picture is confusing because we are in a transitionary period from a growth economy to something else, perhaps a steady-state economy. It is going to take some time before the situation becomes clear to all involved.

Yet it is important to recognize that Japan continues to invest in infrastructure, to maintain its facilities and to generally keep public places clean and safe. There is still a strong sense of civic pride and social cohesion in the face of economic difficulties. That is not to say that everybody is doing just fine and there are no problems, but the way that the Japanese people pull together in times of crisis is something to be admired.

One strong proponent of an alternative viewpoint on how Japan is faring is Junko Edahiro, who set up the Institute of Studies in Happiness, Economy and Society (ISHES) in 2011. She argues that:

“We live not for economic growth. We live for happiness in our daily lives and we hope generations to come can enjoy their happiness. Economies and societies should do something to serve this purpose and should take on different forms and structures if they fail to meet their goals.”

This begs the question: if we are witnessing the end of economic growth, not only in Japan but globally, what are the new forms and structures of economic and societal behaviour that we should be searching for? Surely some of the answers can be found in Japan. Heinberg perhaps captures this best when he states:

“A few nations and communities are already moving in the direction of a steady-state economy. Sweden, Denmark, Japan, and Germany have arguably reached a situation in which they do not depend on high rates of growth to provide for their people. This is not to say these countries have only smooth sailing ahead (Japan in particular is facing a painful adjustment, given its very high levels of government debt), but they are likely to fare better than other nations that have high domestic levels of economic inequality and that have gotten used to high growth rates.”

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Japan As the New Normal: Living In a Constrained Economy by Brendan Barrett is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

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Author

Brendan Barrett

Brendan Barrett joined the United Nations University in 1997. His professional career includes work in the private sector, academia and with international organizations. He uses the web and information technologies as a means to communicate, teach and undertake research on issues of environment and human security.

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  • disqus_7TtmtXEaNF

    This is an excellent observation, Brendan. There has been some research trying to model a no growth economy and very practical starting points by Thomas Princen in his book Treading Softly. I have read both these analyses where Japan is either a failure economically or just the new normal and I can’t really figure it out (not being an economist either doesn’t help).

    I have two points that come to mind as to how Japan has been able to keep a high standard of living: one is that it has borrowed against its national savings, so this standard of living is held up by debt. Secondly, I think Japan is able to take advantage of fast growing economies in East Asia, (that is why its current accounts are positive, and GNP is probably better than GDP), looking like it is not growing but still having income from foreign investments.

    Still as we know Japan is unique and I too wonder what its economic and social structures can tell us about a new way to live our lives.

    Darek Gondor

  • BrendanBarrett

    Darek, thanks for your insights. I think that more often than not Japan is portrayed as a failed economy in the mainstream media and it is easy to understand why. The national debt issue is a major concern and it is true that this may be one explanation as to how it as been possible to maintain (or improve) living standards. How Japan responds to this national debt issue (which worsened considerably after the triple disaster in Tohoku) will be crucial. Currently, as far as I understand, the new Government believes it can get the economy growing again, and reduce the debt burden. However, the jury is still out on whether the current proposals on the table will actually work.

    What I find fascinating is how Japan has been able to get through two decades of stagnancy so far without a major societal breakdown. While the uniqueness of Japan is often highlighted, I believe that there are some key lessons we can all learn from the Japanese response to these difficult times. In fact what I would like to see further elaborated is how regular Japanese people understand this situation and how they evaluate their own response.

  • AlanZulch

    I’m so glad you dove into this issue, Brendan. I’m a long-time fan of Junko Edahiro and her sensibilities. I suspect she has her finger on the pulse of what may well promise to be the future innovative spirit – albeit and appropriately, Japan Style – that carries not just this country, but others as well, each with their unique formulation, into the future. A colleague of hers in the field of alternative economics, Helena Norberg-Hodge, can undoubtedly provide additional key insights and perspective into possible new forms and structures. Perhaps OW might see fit to interview her?

    • BrendanBarrett

      Alan, thanks for your positive comments and yes it would be a great if we could do an interview with Junko. She is one of the leading lights in Japan’s shift to a more sustainable future. I am so impressed with her work and her passion.

      • http://www.facebook.com/noriko.sakamoto.731 Noriko Sakamoto

        Interested in interviewing Junko? Please contact Japan for Sustainability.

  • Dave Elliott

    I hate to be difficult but the period you describe was buttressed by a big nuclear input, now no longer viable. The new energy situation will really test low growth views. I hope they survive it .

    • BrendanBarrett

      Surely low growth requires less energy and as such isn’t that a good thing?

      • Dave Elliott

        Japan will have to import a lot more increasingly expensive gas (from Qatar) to fill the gap left by nuclear for some while, until they can get renewables and energy efficiency up to speed. They did well during the post Fukushima power crisis period, cutting demand by 10% or more due to imposed and also voluntary measures, but there were still blackouts. Whether demand can be kept down longer term remains to be seen. I hope so. See my Palgrave book: ‘Fukushima: Impacts and Implications’

  • kwatanabe

    “The success of the economy has always depended not only on the size of the gross domestic product, but on the reach of the prosperity,on the ability to extend opportunities to every willing heart, not out of charity but because it is the surest route to our common good.” Multiple view points and analysis on a country’s recent, economic and historical development sure help us to determine what course of actions we should take in future. Overall, investing in education and training that prepare individuals to seize opportunities and make the best out of them, would build consensus among policymakers as a future course of action. The aims of sustainable development, inclusive wealth report, and whatever the terms that suits the need of analysis ultimately come down to the emphasis on importance of environmental service vis a vis economic growth. In the end, it is harder to prove better environment is better life than better economy is better life for logical connection between environment and life is only tenuously visible or so intertwined that one is taken for granted for the other. Economic indicators, on the other hand, seem so straightforward for higher number leads to better quality without looking into the internal logical connection (let’s say contradiction) between them. This irresistible simplicity is harder to be replaced by more complex, seemingly subjective sets of standards, I find. Insinuating environmental values into economic growth through education and training seems harder but sure is more promising in the current course of historical progress, I think.

  • BrendanBarrett

    For those interested to explore these themes further I would recommend you read the following articles:

    Will 2013 be the year globalization died? http://www.resilience.org/stories/2013-01-15/will-2013-be-the-year-globalization-died

    Globalization in Retreat – http://www.realclearpolitics.com/articles/2012/12/31/globalization_in_retreat_116548.html

    They reveal interesting new trends to follow in 2013.

  • christopherdoll

    There seems to be a contradiction in the article. Despite low/zero growth, electricity consumption has increased 30%, but you assert below that low growth means less energy demand. Something doesn’t add up here.

    I hope you are right but I fear you gloss over the debt issue. Everything can seem stable when you are borrowing heavily. What happens when all these retirees
    start withdrawing their savings en-masse to pay for health costs?

    David Harvey notes that the capitalist model only really worked for about 20 years after WWII, since then there has been a gradual borrowing to support an ever increasing welfare state. Looked at in that way, it would seem the biggest challenge we face is one of intergenerational equity. Succeeding generations are going to have to pay for the baby boomers who gave us the growth and this compels us to grow.The destination of a steady state/resource based economy looks rosy but I don’t see a painless transition.

    • BrendanBarrett

      Chris,

      Good points. The increase in electricity consumption is viewed by one commentator as an indicator of economic activity over the past couple of decades, even though economic growth rates were low. But if you look at primary energy consumption for Japan it has been flat since around 1997 and began to decline from around 2005 onwards (according to the BP Statistical review).

      On the debt issue, I agree that it would have been important to look at this in more detail and to be honest I was shocked to see that the new Government in Japan has actually decided to increase the debt rather than try to reduce it. They have been criticized for going back to the old style of infrastructure development fund by debt and that is very worrying. It would appear that rather than acknowledging the depth of the problems Japan faces, they have chosen to risk it all on another gamble. It is all very short term and you are correct when you point out that inter-generational equity should be taken into consideration more by today’s leaders.

  • BrendanBarrett

    Check out this paper from Takeo Hoshi of Stanford University who argues that Japan – with the world’s third-largest economy – is headed toward a debt crisis in the next 10 years unless it embraces significant tax hikes or budget cuts. Would you agree? http://news.stanford.edu/news/2014/march/hoshi-japan-economy-032714.html

  • BrendanBarrett

    Here is an interesting article from Project Syndicate arguing that Europe should avoid the lost decade experience that faced Japan. http://www.project-syndicate.org/commentary/michael-heise-explains-how-europe-can-avoid-a-japanese-style-debacle

    However, perhaps the analyst has misinterpreted what has happened in Japan, and also what the best way forward for Europe may be.

    In many respects, perhaps Europe is just experiencing the “new normal” and other parts of the world will follow this path sooner, rather than later, including the US.

    I was particularly struck by a presentation by Fatih Birol of the IEA on the launch of the World Energy Investment Outlook (see here – http://www.slideshare.net/internationalenergyagency/weio2014-presentation?ref=http://www.worldenergyoutlook.org/) when he said in recent years the US has been investing in the “shale revolution” while Europe has been investing in the “renewables revolution.” Short-termism versus longer termism. But ultimately, we are all heading in the same direction.