February 16, 2015
A NYT piece on the release of new data showing Japan’s economy grew at a 2.2 percent annual rate in the fourth quarter gave an excessively pessimistic view of Japan’s economic performance under Prime Minister Shinzo Abe. The article tells readers:
“The economy did not grow at all in 2014, with two quarters of recession almost exactly canceling out two quarters of expansion, according to Monday’s report. Growth in the two years since Mr. Abe began his campaign has added up to a modest 1.6 percent, slightly less than the 1.8 rate recorded in 2012, the year before he took office.”
As the article notes, the reason the economy did not grow in 2014 was because of a sharp increase in the sales tax that had been planned before Abe took office. While it says that the resulting downturn was a surprise to economists, this is exactly what standard economics would predict. The sales tax increase was clearly foolish policy (Abe has put off another hike that had been scheduled this year), but the economy clearly would have grown at a healthy pace in the absence of this rate hike.
It is also worth noting that Japan’s employment to population ratio (EPOP) rose by 2.2 percentage points from the fourth quarter of 2012, when Abe came to power, to the fourth of 2014. By comparison, the EPOP in the United States has risen by 1.1 percentage point over the same period. News reports have been nearly ecstatic over the rate of job growth in the United States.
In comparing economic growth rates in the United States and Japan it is important to note that the U.S. population is increasing at an annual rate of 0.7 percent while Japan’s is shrinking at a 0.2 percent rate. This means that Japan’s 2.2 percent growth rate in the fourth quarter would look to its people like a 3.1 percent growth rate in the United States. Japan needs a much lower growth rate to have the same increase in per capita income. (This ignores the benefit from less stress on the physical infrastructure and the environment due to a smaller population.)
The piece also errs in telling readers that the drop in oil prices creates a problem for Japan because:
“It is threatening another goal of Abenomics: that of keeping consumer prices rising modestly, instead of falling as they have done for much of the last two decades.”
The goal of a higher inflation rate is to encourage consumption and investment by having the price of these goods increase through time, effectively lowering the real interest rate. Lower oil prices do not change that story. In other words, people would have no less motivation to buy a car and firms would have no less motivation in invest in machinery or software because the price of oil has fallen. This is purely positive from the standpoint of Japan’s economy, although the increased use of oil is bad news from the standpoint of global warming.
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