Using Monetary Policy to End Stagnation
Subsequent to the outbreak of the global financial crisis symbolized by the bankruptcy of Lehman Brothers in September 2008, the United States, Japan, and other Asian countries have all been recovering, each at its own speed. Even Europe has returned to growth, although the Greek debt crisis has slowed the pace of recovery there. Particularly compared with Britain, which is transitioning into the postindustrial age and has, accordingly, seen a long-term decline in industrial production, Japan’s recovery was quick. Germany also bounced back fast, though its upturn has recently lost momentum.
Japan’s real gross domestic product and real consumption bottomed out in the January–March 2009 quarter and have returned to growth. Statistics on Japanese employment do not yet show improvement, but workers are spending more time on the job, and eventually the longer working hours will lead to gains in the employment index. Corporate ordinary profits hit bottom in the first quarter of 2009 and moved back up to 70% of their peak level in the first quarter of 2010 year ending in March 2010 (data for all industries except finance and insurance).
Though Japan is in the midst of something close to a V-shaped recovery, one cannot say that all is well. As yet its economy has not regained as much ground as has the economy of the United States, the epicenter of the global financial earthquake. While Japan’s downturn was quite steep, its upturn started off on a gentle slope and now seems to be leveling off. The economy, it seems, is running out of steam.
The so-called BRICs (Brazil, Russia, India, and China), meanwhile, have been doing remarkably well. In all of them except Russia, industrial production has now climbed above the peak prior to the global financial crisis. It seems that to China and India, the Lehman shock was no more than a little bee sting, an episode that has already faded into the past.
There can be no doubt that growth has resumed in Japan, but the degree of recovery has hardly been satisfactory. What are the background factors that have caused the pace of the upturn to be relatively slow? Figure 1 charts the trends in exports and private capital investment. In earlier recovery phases, an expansion in exports was linked to an expansion in capital investment. As soon as exports regained momentum, companies would invest in production facilities to meet the demand. Under the circumstances, nothing could have been done to prevent plummeting exports from causing a steep fall in corporate spending on plant and equipment when the global financial crisis struck. Now exports are again expanding briskly, but this time companies have been slow to resume their domestic capital investment. Apparently they are responding to the growth in export demand with production increases at their overseas bases, not at plants in Japan. This, we may presume, will be the pattern to be expected from now on.
Harada Yutaka
Graduated from the University of Tokyo, where he majored in economics. Joined the Economic Planning Agency and subsequently received his master’s degree in economics from the University of Hawaii. Has been an executive research fellow in the Cabinet Office’s Economic and Social Research Institute. Is now chief economist at Daiwa Institute of Research. Author of Nihon no ushinawareta jūnen (Japan’s Lost Decade) and other works.
