Those Who Lived Through Japan's 'Lost Two Decades' Can Now Build A Better Future

Goshi Kataoka starts serving as the member of the Monetary Policy Committee of the Bank of Japan on July 24.

He is highly qualified for this job, but there is one thing I did not emphasize enough in my previous post; that is his youth. Kataoka is just 44 years old, very young by the Japanese standard. He has also lived and worked through the Lost Two Decades. When he entered the job market in 1996, the unemployment rate went up to around 3.3 % percent, the overall job opening-to-application ratio fell to 0.7% including part-time workers, while the job opening-to-application ratio for college graduates fell to 1.08%, the lowest in the 1990s. We have an expression for those who entered the labor market from 1993 to 2005, and also from 2010 to 2013 – Shushoku Hyogaki or 'Generation Ice Age'. In other words, he is the first among Generation Ice Age to become the member of the MPC of the BOJ, and that is notable.

Staggering Economic Costs

In my previous post, I argued that Japan’s salaries and wages are too low. The same can be said of Japan’s economic growth.  The following graph shows the movement of nominal GDP from 1991 to 2016 for five OECD countries. Unsurprisingly, GDP follows the same pattern as nominal average wages. After all, nominal GDP is the sum of all salaries, wages and interest payments. All other countries except Japan have experienced nominal growth rate of at least annual 3 percent.

If Japan had grown by a similar rate of 3 % throughout the period, Japan’s nominal GDP would have doubled in 25 years. A simple calculation suggests that Japan has lost roughly 6.7 quadrillion yen in nominal GDP worth

Human Costs Were Also Substantial

Material costs were staggering, but they are accompanied by human costs. Human costs have been substantial. Suicides shot up as the unemployment rate soared (thankfully, now they are falling as the unemployment rate is decreases).

Not only did people die, but the birth rate also decreased during this time. Throughout Japan’s history, we have had two baby booms – the first one right after the Second World War from 1947 to 1949, and the second from 1971 to 1974.

But there was no third baby boom. The people who might have spurred one are part of Generation Ice Age, and so had a difficult time in forming a family and bearing children. A glance at Japan’s population pyramid suggests that this only served to accelerate Japan’s depopulation.

Policy Matters

What would have happened to the lives of ordinary Japanese people if the Japanese governments and the Bank of Japan did not fail as they failed in macroeconomic policy management? No doubt, the country may have experienced several policy blunders, setbacks and recessions down the road. We might have experienced another financial bubble. Japan may even have been one of the centers of the financial meltdown in 2007 to 2008.

In that sense, I do not blame policymakers for all of the problems that Japan has faced, nor do I expect them to alleviate all the factors contributing to deflationary stagnation. But the economy and policy responses matter. As the following graph (an extension of one Ben Bernanke draws in his book Courage to Act, p.568) shows, Japan experienced one of the world's severest recessions between 2008 and 2009, even though Japan was not at the center of the financial meltdown and its financial sector was largely problem-free.

I have argued in my book Japan’s Great Stagnation and Abenomics that the recession had a lot to do with the rapid appreciation of the Yen: when other central banks were frantically injecting money into the market, the Bank of Japan did virtually nothing and let the Yen appreciate.

Japan could have done better than this. And I am sure Kataoka understands it. We must now hope that Kataoka and others of Generation Ice Age will learn from, rather than repeat, the mistakes of previous generations.