1 Japan’s Economic Prospects Richard Katz The Oriental Economist Report © NYU March 4, 2007

2 I. Without Productivity Revolution, Potential Full-Capacity Growth Limited to 1.5% per year (optimists say 2%)

3 Working Age Population Shrinking

4 …Faster Than Total Population If the labor force falls 0.7% a year and the total population falls 0.1%, then even if per worker GDP stays the same, per capita GDP will fall 0.6% a year

5 Productivity Sole Source of Growth

6 Productivity Figures Are Cyclical In slumps, GDP falls faster than hours; in recoveries the reverse is true. Recent claims of productivity acceleration neglect this factor.

7 No Trend Hike in Productivity

8 ROA: Big vs. Small

9 Japan's Manufacturing Productivity 30% Below US Level

10 Japan Grows More Slowly Despite Investing More Than Others

11 Competition and Firm Mobility Breed TFP Growth

12 In Japan, Entry and Exit Play a Minor Role In TFP Growth

13 Japan Firm Mobility Lags Behind G7

14 Exit Rate Still Low, Entry Rate Declining As of 2002

15 Competition Too Weak In Inefficient Side of Dual Economy

16 Within Mfg., Worst Sectors Show Least Improvement:

17 Sectors with Worst Productivity Show Least Improvement:

18 Japan Falls Behind Other G7 in Output Per Worker

19 II. Demand Growth Is Unbalanced Too Much Dependence on Business Investment and Trade Surplus Too Little Consumer Demand

20 Demand Ultra-Dependent On Investment and Trade Surplus

21 Wage Share of GDP Plunges

22 Income is Deficit-Financed

23 Household Savings Rate Drops

24 Firms Are Excess Savers

25 Budget Deficits, Trade Surplus Offset Excess Savings Black line in this slide equals total excess savings in previous slide

26 Trade Surplus Record % of GDP

27 Real Yen at 20-Year Low

28 Falling % of Global Trade Surplus

29 III. Japanese Medium-Term Growth Dependent on American Prospects, Especially US Imports

30 Nikkei 225 Echoes S&P 500

31 Last Seven Years: 70% Correlation Between US and Japanese GDP

32 Japanese Global Exports Mirror US Global Imports

33 Japanese Exports to China Mirror Chinese Exports to US

34 Japanese Exports to Asia Mirror Asian Exports to US

35 Capex Mirrors Exports Two Quarters Earlier

36 US Imports Decelerating

37 US trade deficit down 18% from peak

38 IV. Japan’s Declining Weight in the World

39 Japan’s Declining Weight in World GDP (PPP)

40 Japan’s Declining Weight in Asian GDP (PPP)

41 Japan Falls Behind China in Global Imports

42 Japan Not Asia’s Main Customer