The numbers make chilling reading. According to official Japanese government tabulations, in the last quarter of 2008 the second largest economy in the world contracted at an annual rate of 12.7 %. This is not a recession; those morbid numbers reflect an economy in free fall collapse. If this is not an economic depression, I don’t know what is. No wonder that the Japanese finance minister appeared drunk at a news conference at the G7 meeting in Rome. Sobriety does bring along the uncomfortable affliction of having to face reality.
Much reference is made to the L shaped Japanese recession of the 1990s, and the mistakes supposedly committed by Tokyo in its policy response to that prolonged period of stagnation, as justification for the frenzied pump-priming and corporate bailouts being enacted by frantic policy makers. Yet the Q4 figures from Japan are far worse than the quantitative measurements that reflected the dismal economic performance in Japan during the 1990s. Most importantly, Japan did not have the banking quandaries and low savings rate that precipitated the current Global Economic Crisis in the United States, which has now spread throughout the world. It appears that there is much more to the Japanese economic contraction now and in the 1990s than the sound bites being proffered by politicians and technocrats as justification for their wild orgy of deficit spending.
The truth about the Japanese stagnation of the 1990s is that it stemmed from massive asset bubbles, particularly in the real estate sector, as well as with Japanese equities. Though policy makers in the U.S. U.K. and Eurozone make reference to a lack of vigorous response by Tokyo in that period, the fact is that the Japanese government engaged in massive deficit spending in a futile measure to stimulate a stagnant economy. Ultimately, what little growth eventually returned to Japan’s economy stemmed from a rise in exports, fed by growth in other major economies. All the massive Japanese deficit spending accomplished was to drive up the national debt, though unlike the United States, the Japanese are a nation of individual savers. This meant that Japan had much more flexibility to engage in fiscal stimulus spending, in comparison to the U.S. with its negative savings rate.
We are now, however, experiencing massive global demand destruction stemming from the worldwide economic crisis. The second largest economy in the world is so highly dependent on exports, a major contraction in global demand inevitably will cripple it with a vengeance. The contraction is occurring so rapidly and dramatically, it negates any option of replacing export shrinkage with higher domestic demand. As in the 1990s, all the deficit spending in the world Tokyo may engage in will fail to arrest the grave economic crisis that has now gripped the Japanese economy.
If Japan is in depression, how can the United States be only in a recession? If past deficit spending failed to reverse macroeconomic trends in Japan stemming from irrational asset bubbles, how can replication of such an ineffective fiscal response reverse the Global Economic Crisis, especially in regards to the United States? It seems that the policy makers in Washington have drawn all the wrong conclusions from the Japanese experience of the 1990s, and appear doomed to follow Tokyo’s lead into massive economic contraction at levels that are clearly symptomatic of a severe, protracted economic depression.