How The Economy Of Japan Could Predict The Next Decade

this is japan the third largest economy in the world and potentially one of the most important countries for predicting what the future may look like for the next 10 years simon kuznets a nobel laureate economist and the namesake of the kuznets curve once remarked that there were four types of economies in the world developed economies undeveloped economies argentina and japan this was a very tongue-in-cheek way of saying that these countries never really followed the conventional wisdom of how national economies were supposed to operate now argentina is a whole other thing but some economists are starting to theorize that japan is not unusual at all it's just ahead of its time japan was once the second largest economy in the world and in the 80s people thought it was almost inevitable that it would overtake the us fueled by massive export industries and a rapidly developing domestic market might sound familiar to a lot of you today however since its prime the country has stagnated with no real growth been experienced for the past three decades to combat this stagnation the japanese government has been the first in the world to roll out economic measures that were unprecedented at the time but again sound very familiar to us today quantitative easing negative interest rates and consistent deficit spending unfortunately none of this has really worked which is pushing some of the greatest economists in the world to have some interesting and potentially very concerning discussions so is there something unique about the economy of japan which is causing this stagnation or is it finally time to admit that endless growth in a finite world is not sustainable for any economy finally if japan really is ahead of the curve what can we learn about economic stagnation inflation and government intervention from the experiences of the country over the past three decades of course once we've done all that we can put japan the third largest economy in the world on the economics explained national leader board this video is brought to you by public.com the internet's premier investing platform public puts its investors first and that's why unlike other commission free trading apps public does not sell information about your trades to market makers or take commissions for payment for order flow also known as pfof public works for you not trading firms the app also lets you see market trends that your friends co-workers and industry thought leaders are following to offer you even more insight public users can participate in live q a sessions called town halls with public company executives allowing you to ask questions just like a wall street analyst get between three dollars and three hundred dollars in free stock when you sign up at public.com ee and fund your account today just use your phone's camera app to scan the qr code on screen or if you're watching on your phone feel free to click the link in the video description below the story of the modern economy of japan really starts in the mid-1980s by this time the country had fully recovered from the impacts of the second world war and had rebuilt itself into an economic powerhouse that was rivaling the united states it was building everything from cheap reliable cars to state-of-the-art electronics this was enabled by a new global push towards free trade which meant that the resource scarce island nation could focus on high quality manufacturing while relying on other nations for raw materials food and anything else that would be difficult to produce within japan itself this is a textbook example of comparative advantage countries like america are brilliant at farming but not so good at making consumer electronics countries like japan were great at making consumer electronics but not good at farming food if both countries focused on what they were good at and traded with each other it would mean more food and electronics for everyone win-win times were good and sustained double-digit growth meant that most japanese citizens had seen their quality of life significantly improve over their working careers but of course this didn't last forever the u.s was becoming concerned that its own domestic manufacturing was starting to be out-competed by countries like west germany and japan especially in the auto industry which was still a huge employer for all of these nations the normal solution to this would have been to implement trade restrictions slap a tariff onto every japanese car and vcr that arrives on american shores and suddenly american products will be cost competitive again although this is far from problem solved if america introduced trade restrictions on japan then japan would likely return the favor which would mean american exporters lose out on business it would also mean that american and japanese citizens would be worse off because they would be forced into buying more expensive products from manufacturers who had been artificially protected from global competition so a compromise of sorts was needed what the countries came up with was a plan to artificially lower the value of the american dollar relative to the currencies of west germany france the uk and japan this plan was signed by the five participating countries in 1985 in the new york plaza hotel for which the plan got its name the plaza record if american dollars were worth less then american citizens would have less purchasing power for foreign products and citizens from all of these other countries would have more purchasing power for american-made goods this would make american manufacturers more competitive globally and domestically not a bad deal for the americans but why on earth would japan a country heavily dependent on exports agree to something like this well the first reason was that they didn't have much of a choice had japan not agreed to this deal then lobbying from american manufacturers would likely have forced the american government into imposing trade tariffs on japanese imports this would have been worse for japanese companies than a simple foreign exchange shift it would also have been worse for japan as a whole sure they exported more to america than they imported but america was only relying on them for cheap cars and fancy home theater systems japan by contrast was reliant on america for food and a lot of the raw materials needed to build all the products it was exporting in the first place for this reason the plaza record was mostly seen as a win-win america got more competitive manufacturing and japan got cheaper everything when the japanese yen appreciated in value japan was able to go on a shopping spree with its new more valuable yen the citizens of the nation brought up everything from american holidays to american companies japan had been working hard as an industrial workshop for four decades and it had done well for itself but the plaza accord made it rich in the space of three years the relative value of the japanese people's money had more than doubled tokyo in the late 1980s was the work hard play hard capital of the world jordan belford couldn't hold a candle to how much japanese businessmen were spending on their sides in 1989 alone 50 billion dollars the equivalent of 113 billion today was charged to corporate expense accounts in tokyo besides the wild parties this had very real impacts on the economy real estate and city centers exploded in value to a point that had never been seen before and has never been seen since if you were to lay a 100 bill down on the ground in ginza in the late 1980s the ground that that bill covered would be worth more than the bill itself and again this is in 1989 to add fuel to this fire japan's central bank reduced interest rates as a preemptive measure to reduce the impact of lost exports instead of doing any of that this cheaper money was mostly used to speculate on the stock market and in real estate it sounds silly to us in hindsight but a lot of people genuinely believe that tokyo was going to be the new center of the world and had a few things gone differently they might not have been wrong but unfortunately as you may know the boom of the 1980s did not last forever it instead kicked off the beginning of stagnation the real estate and stock market crash of the early 90s put japan into a very difficult position its banks now ran the risk of people defaulting on their homes that were worth only a fraction of the mortgage price the same problem existed for businesses in japan as well people had just seen their net worth evaporate overnight and in many cases we're still left with the crippling debts used to fuel the extravagance in the first place the consumer culture very quickly shifted back from debaucherous extravagance to modest frugality causing consumer spending to tank as the demand for goods fell so too did their price the reduction in the general price level of goods and services is called deflation you might think it sounds like a good thing but most economists are actually more scared of deflation than they are of inflation and japan was about to find out why as prices fell businesses made less money by selling their products less money coming from sales means that businesses had to hold off on giving out raises or even cut down on staff reducing household incomes reduced household incomes meant that people had less money to buy things which reduced demand which reduced prices it's a vicious feedback loop that is really hard to fight to make matters worse as the relative value of the yen increased so too did the debts denoted in that currency if you took out a million dollar loan to buy a house and then deflation kicks in making that million dollars worth twice as much as it once was then you're going to be in for a really bad time making those repayments the japanese central bank did try to combat this by lowering interest rates but it had very little effect economists call the 1990s in japan the lost decade but that's not to say that the next two decades were much better by the time the 2000s rolled around japan had sort of recovered from the debt hangover but it was then hit with a new downward pressure china for a long time japan was the go-to place for low-cost mass manufacturing a role that still served them well despite the plus record and the slowdown of the 1990s but as china opened up to global trade japan quickly realized that they could no longer compete on price or quantity in international markets it was around this time that japan also started to realize that its young productive population from the 1980s was getting old and retiring this put a burden on younger workers and social programs to look after the people that were no longer giving back to the economy that supports them this issue of an aging population is not unique to japan most advanced countries have birth rates below two children per female meaning that their populations are growing older over time that being said this issue is most pronounced in japan this is because well japanese people live for a really long time but also because there has been a cultural hesitancy to rely on immigration to rejuvenate the workforce as is common in most other advanced economies throughout this entire time the japanese central bank dropped interest rates over and over again in an attempt to combat these issues and get the economy moving but unfortunately it had very little impact in response to this the central bank became increasingly desperate to try out new strategies to stimulate the economy and get inflation on the right side of negative the biggest hammer they had in their toolbox was quantitative easing a term that we are all too familiar with these days but was considered very radical when japan first put it to use quantitative easing involves a central bank creating money and then using that new money to buy up assets in the open market normally this is government bonds but in japan's case the central bank went on a buying spree of basically anything they could get their hands on government bonds corporate bonds and even shares today the japanese central bank is the single largest holder of japanese corporate stock the idea of this plan is that it puts money directly into the hands of whoever is selling these assets if the bank buys government bonds it gives the government money to spend building roads or on social programs if the bank buys corporate bonds it gives money to corporations to build new factories and offices and if the bank buys shares it could very well be giving money directly to regular consumers to spend in the economy so why didn't this work despite low interest rates and heavy quantitative easing over the past two decades inflation in japan has remained stubbornly low hovering around zero percent some economists point to this as something that should comfort us if sustained low interest rates and quantitative easing didn't cause any inflation in japan then it's unlikely to cause hyperinflation in our own economies so is this a reasonable expectation or is japan special there are a few reasons to expect the japan situation might be different from what has currently been experienced around the world today the first is the time frame the us has been conducting heavy quantitative easing over the course of the past two years rather than the last three decades spreading out cash injections means participants in an economy have more time to react doubling the money supply over 20 years probably isn't a huge deal doubling the money supply over two years might be the second big difference is the supply side of the economy aside from an aging population there is no major difference between the productive capacity of japan today and its capacity three decades ago if an economy has five dollars and five loaves of bread then each of those lows should cost a dollar if the economy suddenly has a hundred loads of bread and 100 then each of those loaves should still cost a dollar of course this doesn't account for a variety of factors elasticity of demand for bread competing products with bread and the general gluten tolerance of the population but you get the basic idea if the money supply increases and so too does aggregate supply then there is no reason to expect that prices should rise by contrast supply has been heavily impacted in most countries around the world today waiting lists and empty grocery shops are things we're becoming all too familiar with the third big reason is something that is much harder for economists to grapple with and that's the professional and consumer culture of japan it is incredibly taboo to ask for a raise in japan and since the workforce is aging it's also harder to get a promotion or switch jobs for a better salary because the corporate ladder is filled with people who have been with their companies for decades this means that disposable incomes have remained almost totally stagnant since the 90s compare this to the u.s where workers are far more active in demanding raises promotions and new job opportunities and you can see disposable personal income has increased dramatically in the same time a quick side note is that the spikiness of this graph is because japan collects its data quarterly so it's subject to seasonal shifts around holidays and bonus periods the u.s collects its data annually so these spikes are kind of just ironed out on the opposite side of the same coin japanese consumers are incredibly cost conscious and they demand stable prices japanese companies have been known to broadcast ads to formally apologize for raising their prices by as little as 10 yen the equivalent of around 10 cents the same kind of prudent approach to finances spills over into businesses as well when american companies get a large injection of cash the first thing they think of is how can this be reinvested into the business by contrast japanese companies have historically preferred to just give that money back to their investors which must be really annoying for the japanese central bank given that they are those companies biggest investors and they are trying really hard to give cash to them ironically the expectation of inflation can cause inflation if people expect prices and salaries to rise they will accept higher prices at the supermarket and demand a raise every year if that expectation is not there then they will be angry about price rises and content with stagnant wages the economy of japan is infinitely complex and there's a good reason why it was one of the first countries i ever explored on this channel it's also why some of the greatest economists in the world are totally baffled by how it behaves we can learn a lot from japan and it's a great example of money printing not necessarily leading to inflation but we also have to respect its differences as much as we draw conclusions from its similarities all right now it's time to put japan the third largest economy in the world on the economics explained national leader board starting off as always with size japan has a gdp of just over 5 trillion us dollars which would be impressive by itself but even more so when you consider that it's had this impressive figure for nearly 30 years now anyway it gets a 9 out of 10. gdp per capita is also very strong at just over 40 000 us dollars per person this makes it a securely advanced economy but it still does fall behind places like the us germany and australia it gets an 8 out of 10. growth has famously been very poor the country's economy really hasn't had consistent growth since the 90s the good news is that it's not going backwards so it gets a 2 out of 10. stability and confidence is very strong it is a stable democratic and diversified nation with a strong currency and good international relations it gets a nine out of ten finally industry well what does that say makes everything from world-class cars to some of the most valuable media franchises in the world japan gets an easy 10 out of 10. all together this gives japan an average score of 7.6 out of 10 putting it into second place on the economics explained national leader board well done japan this video was made possible by public in addition to being a commission free brokerage and a transparent one at that publix app makes personalized investing easy with their thematic investing functionality say you're a big believer in renewable energy and you want to invest in this emerging industry but don't know the first place to start public makes this easy simply go to the themes section in publix app and just like that you can view a curated list of innovative companies that are making moves in the renewable energy space you can also construct a portfolio consisting exclusively of companies in the artificial intelligence industry or perhaps the self-driving car industry there are so many different investing themes to choose from check out the app for yourself 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Channel: Economics Explained

Views: 508,855

Keywords: economics, the economy of japan, the economics of japan, the economy of japan explained, the economics of japan explained, japan economics explained, economics explained japan, japan economy explained, japan economy, japan economy economics explained, japan economics, how japan economy works, how the japanese economy works, japanese economics, japanese economy, japanese economy explained, japanese economics explained, japan deflation, inflation, quantitative easing

Id: rag4pHU7fcU

Length: 17min 43sec (1063 seconds)

Published: Thu Mar 03 2022

Reddit Comments

[u/LorcanVI]

This video has nothing to do with the title page of limitless growth in a finite world. Still a good video, but misleading.