Japan's brutal economic decline

An awesome warning

Japan's brutal economic decline has been brought about by circumstances very similar to those now emerging in Britain

o Will Hutton
o guardian.co.uk, Wednesday 20 May 2009 22.00 BST


Japan, the world's second largest economy, by the end of this year will have experienced a decline in its national output of 10% from the peak in 2008. Figures announced yesterday show that in the first three months of this year output fell by 4%. This is the fastest rate of decline since the war; overall it is the biggest decline of any major economy since the US economy contracted by a quarter during the Great Depression.

Japan's travails closely impact on us. It is a major locomotive of the world economy; its problems are everyone's. Japan's output has now fallen so far that it has lost all the gains it made since 1992. Brutally, it has lost two decades. You have to shake your head at the horror of it – another sobering example of the dark times in which we are living.

Economists comfort themselves that the worst is behind. A lot of Japan's recent problems arose from a cataclysmic 26% decline in its exports over the quarter as retailers and distributors around the credit-crunch-suffering globe stopped ordering, and met what demand there was from stocks. Japan, uniquely dependent on industrial exports for its prosperity, was hit very hard. But now there are signs orders are picking up again as the "destocking" stops. Exports are steadying.

On top there is a colossal £97bn stimulus package, focusing on stimulating demand for green products. The big car firms report a surge of orders. Even the IMF believes the Japanese economy will decline less rapidly as the year wears on. The Japanese stockmarket, expecting the news, was hardly affected. Perhaps the crisis is yesterday's story.

Wrong. The explanations for Japan's problems are unlikely to evaporate soon. The first is that its economy was crippled during the 1990s and the first part of the 2000s by a drawn-out credit crunch. Banks had lent too much and were crippled by losses as the property market collapsed. With bank and corporate balance sheets badly hit, the economy got stuck in low investment, low growth, low confidence doldrums. It is an awesome warning of what may happen to Britain, similarly stricken.

Matters improved over the last few years, thanks to Japan's powerful industrial exporters and the pick-up in demand from Asia and the US. But crisis-hit America is no longer a big buyer of Japanese and Asian exports. As treasury secretary Tim Geithner has said, over-indebted America is unlikely to become a big consumer again any time soon. Nor can Europe, beset by unemployment, fill the gap.

Which presents Asia and Japan with an enormous challenge. Japan has been the economy Asia has copied – high ­saving, high investment and high exports – along with a government which closely directs economic activity. This is the Asian model. But who is now going to buy all those TVs, cars, cameras and video games? The only answer is the Asians themselves.

Which means they will have to save less and spend more – a diagnosis easier to make than to execute. Asians save because they don't have confidence in their governments, the tax base on which welfare is financed or on the stability of property rights. There are even fears about the region's political stability.

So governments have to spend to compensate, which is what Japan's is doing on an epic scale. But this can only be a short-term solution. Over the next five years Japan and Asia face the economic fight of their lives, with protracted stagnation and social unrest very real prospects. The solution is an Asian Enlightenment, a more transparent, consumer-oriented capitalism. The biggest worry of all is that so few in Asia recognise the problem. Unless it changes, the next 20 years will be even more dominated by the US and Europe than the last.