How to Reshape Japan Inc.

With the global economy now in a deep funk Japan’s export machine is idling. The latest evidence came this week, when Japan reported a trade deficit of 725.3 billion yen ($7.3 billion)—the first such shortfall in 28 years. The announcement was a stark reminder of how dependent the world’s second-largest economy was on the buying habits of companies and consumers overseas.

That has spurred a lively debate in recent months about the need to reshape Japan’s industries. The government’s Council on Economic and Fiscal Policy has made the discussion a top priority in the past month.

Tokyo could have used the latest stimulus package of public spending and tax cuts to spur a remodeling of industries. Instead it opted to spend a lot on public works, such as extending airport runways, building new train lines and subsidizing urban development.

The CEFP may soon recommend a policy that helps companies for developing green technologies—electric cars, smart electricity grids, solar panels, and energy-saving appliances. That would give companies the incentive to bet aggressively on nascent green technologies that they might otherwise be reluctant to channel resources to just yet. It could also lead to a new phase of factory building to replace some of the plants that Sony, Toyota, Toshiba, Panasonic have moved overseas.

To be sure, the country’s biggest companies have been shifting production facilities overseas to offset the effects of currency swings on their earnings.

How dependent was Japan on overseas markets for its growth? For six years exports soared. They grew 75%, from 48.6 trillion yen in the fiscal year through March 2002 to 85 trillion yen in the year through March 2008. Then the financial crisis hit and the recession set in: In the latest year through March 2009, exports slipped 16.4% to 71 trillion yen.

Business Week April 2009

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Higher inflation could help to rebalance China’s economy

CHINA’S inflation rate has become one of the world’s most closely watched numbers. This week’s release showed that inflation rose to 4.9% in January, up from 1.5% a year earlier. The increase was smaller than expected, but has not quelled fears that as inflation creeps up the government will need to slam on the economic brakes.

The recent surge in Chinese inflation has been driven mainly by food prices, but non-food inflation has also risen to 2.6%. Wages are increasing at a faster rate. For many years China’s large pool of surplus labour held average pay rises below the rate of productivity growth. But as fewer young people enter the workforce, wages are now rising faster than productivity. Arthur Kroeber of Dragonomics, a Beijing-based research firm, argues that if higher inflation reflects faster wage growth, this will help China, not hurt it.

Indeed, a bit more inflation could help to rebalance China’s lopsided economy. Its biggest imbalance is too little consumption, largely because wages have fallen as a share of national income. When wages rise more slowly than productivity, an economy produces more than it can consume, resulting in a current-account surplus. If wages now outpace productivity, workers’ share of the cake will rise, boosting consumption and helping to reduce China’s external surplus. Wage-driven inflation would also help to narrow China’s trade surplus by pushing up the price of its exports.

In adjusting current accounts, what matters is the real exchange rate. Movements in nominal exchange rates often do not achieve the desired adjustment in real rates because they may be offset by changing domestic prices. China’s government cannot be complacent about rising prices. It should anchor expectations by setting an explicit inflation target. Interest rates on bank deposits need to be raised in line with inflation to encourage households to keep their money in the bank .

The Economist February 2011

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Which G7 economy was the best performer of the past decade?

THE euro zone may be limping, but its largest member is sprinting. Germany grew at its fastest pace for two decades in 2010. An expansion rate of 3.6% put it ahead of most other rich economies, including America, whose GDP grew by 2.9% last year.

At first glance, the popular perception of Germany as a laggard seems borne out by the numbers. Germany’s GDP has expanded by an annual average of only 0.9% over the past ten years, just half the pace in America. But that is misleading. America’s economy grew more quickly partly because its population rose by almost 1% a year, thanks to immigration and a higher birth rate. In contrast, the number of German citizens is shrinking. That matters because a better gauge of prosperity is not growth in GDP, but growth in GDP per person or average income.

This measure produces a very different ranking. Over the past decade Germany had the fastest growth in GDP per person among the G7 club of rich economies; America was in only fifth place. Using GDP per head also casts new light on the recent recession. Measured by the fall in output per head from the fourth quarter of 2007, Germany’s recession was no deeper than America’s.

Germany has topped the G7 league over the past decade mainly because it avoided a credit bubble. But to maintain its performance over the next decade it needs to boost both domestic spending and its services sector. The good news is that most of Germany’s growth last year did come from domestic demand, not exports. Business investment took the lead, but in the fourth quarter real consumer spending was almost 2% higher than a year ago. The lowest unemployment rate for almost 20 years is likely to push up wages this year and to encourage households to spend more of their income. A recovery which is “Made in Germany” would enable the country to keep up the pace.

The Economist February 2011

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