But, there was no war, no industry destroying earthquake. In four months output has fallen, Japanese industrial capacity is more or less unchanged. The factories are still there they just aren’t running. Indeed, according to the employment statistics, the factories are still more or less fully staffed. Japan could bounce back and produce at 2008 levels tomorrow.
I hope this happens. I think it is an open question as to what happens next.
Generally, when a country has a large fall in production, IP falls for a while, reaches a low point, and then starts to grow from that new jumping off point. Generally at a faster pace than before the downturn, but importantly, IP also does not return instantly to its previous level. In the data, it seems to take between one and two years for every 10 percent fall in output.
Here is a picture of Mexican IP surrounding the Peso Crisis. During the crisis, IP fell about 13 percent; 17 months after the collapse IP returned to its pre-crisis level and within 24 months had returned to its previous trend.
The 2001 crisis in Argentina is perhaps the closest comparison to Japan’s current situation. IP fell almost 20 percent from peak to trough. The economy hit bottom and grew robustly. Nonetheless, IP took 32 months to return to its pre-crisis level.
During the Great Depression in the United States, IP fell about 50 percent and took ten years to return to its pre-crisis level. A cross-section of Asian economies experienced large falls in IP during the Asian financial crisis. My brief scan of that data indicates the same rule of thumb, although they seem to have been on the faster end returning in levels in about 1 year per 10 percent fall.
Japan’s Path to Recovery
In the rosiest of scenarios, when the economy is ready to recover, Japan bounces back to its old level. Let’s say this happens this month. Then the world goes on. Japan as a country takes a 15 percent pay cut for the year, not enjoyable but livable. This could happen. As I said above, Japan has its industrial capacity intact.
But, output does not just fall. Despite Kevin Warsh’s dismissal of the current downturn as a Panic, output does not fall without cause. I continue to believe that the downturn is at its heart a manifestation of the world’s need to restructure (read this post).
Rosy scenario number two is an Asian Financial Crisis style bounce back: one year for every 10 percent fall in output. Take a look at the next picture. To bounce back in 4 years, Japan’s economy has to grow at almost three times its average growth rate of the 1980s—remember when Japan was taking over the world. That bounce back looks no more believable than the drop.
The gloomy scenario is that Japan grows at its average rate of the 1980s. In this case, it takes 11 years to recover to its pre-crisis level. This is a Great Depression scenario.
The nightmare scenario is the growth rates since 1990. In this case, Japanese output does not return to pre-crisis level until the year 2064. Today’s babies will be worrying about retirement.
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3 comments:
I think that we really can't rule out a stronger rebound in Japan than we've seen before anywhere else. As you say, countries don't bounce back immediately, but countries also don't lose 30 years of production growth overnight... until right now. Step 1 is unprecedented, so speculating about step 2 is, to a large extent, shadow boxing.
If global restructuring is in the offing, we might see a bounceback to a lower level than we had before the dive, followed by (possibly faster than) trend growth--some combination of the rosy scenarios. The wealth effect will push equilibrium U.S. consumption down, and because Japan is a net exporter to the U.S., Japanese production will be pushed down. And to the extent that U.S. households are going to want to work more to make up for the wealth they don't have anymore, and that Japan and the U.S. produce some similar products, price effects might push the equilibrium Japanese output down. But these effects won't push it down to where it is now, especially because the Japanese are going through a similar wealth effect.
Of course future Japanese policy is a wildcard, and I know nothing about that.
Your answer feels right. The drop is so extreme how can it be maintained. It's hard to learn about unprecedented changes from historical data.
I think I am right over the possibilities, but I am torn between the scenarios. I just don't know how to weight the different outcomes.
Shadow boxing ...
ES
The package announced last week "mamizu" of 1.1trio Yen looks to lift the forecast for growth in '09 by approx 1.1-1.3%. Likely to "lift" growth to just -3% for 09 vs previously expected -4.3%. The value of all stimulus looks to be approaching 10% of GDP.
here is my question: surely if there were limits to the overuse of consecutive stimuli and monetisation we would be seeing it in Japan? Long term rates remain very low, BoJ plans to soak up alot of the issuance that wll facilitate the extension of stimulus.
japan has a quadruple wammy: high debt, deflation, global demand collapse and chronic demographics.
We could add to that a seemingly paralysed political elite.
So.. why does Japan seem so relatively stable? Yen has weakened a bit but not much. Yes, equities look poor but not much worse than other developed economies in this crisis. Debt prices seem high and sovereign CDS low.
This seems very odd to me. I read analysts actually forecasting ongoing Yen appreciation as higher real interest rates drive fx hoarding in a risk averse world. My assumption is the relatively high domestic savings rate is the deciding factor, but surely there are limits to the propensity to lend to the government.
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