1. Lecture 17. REVIVING JAPANESE ECONOMIC GROWTH
Economics 1490
THE WORLD ECONOMY:
GROWTH OR STAGNATION?
with
Professor Dale W. Jorgenson
Lecture 17. REVIVING JAPANESE ECONOMIC GROWTH
October 26, 2017
Harvard University Department of Economics
Fall 2017

2. THE WORLD ECONOMY:
GROWTH OR STAGNATION?
A. Comparing Economies
B. U.S. Crisis and Recovery
C. European Slowdown
D. Asian Economic Miracles
E. Sustainability of Economic Growth
F. World Economic Outlook

3. D. ASIAN ECONOMIC MIRACLES
16. Is Asia’s Miracle a Myth? 
17. Reviving Japanese Economic Growth
18. The Rise of Developing Asia
19. China: The World’s Largest Economy
20. India: The Most Rapidly Growing Economy

4. TIME LINE FOR THE JAPANESE ECONOMY
Premier Ikeda's Income-Doubling Plan Led to the Economic Miracle of , Increasing Japanese GDP by 3.7 Times.
The Japanese Economy Continued to Grow Rapidly Until the Collapse of Real Estate and Stock Market Bubbles in 1990.
Monetary Policy Remained Very Restrictive, Leading Ultimately to a Prolonged Recession and Deflation Lasting Two Decades.
The Bank of Japan failed to expand its balance sheet after the U.S. Financial and Economic Crisis, Leading to Yen Appreciation and a Severe Economic Downturn.

5. THE PLAZA ACCORD
The Plaza Accord of 1985 was a crucial turning point for the Japanese economy. In 1985 the yen was undervalued by about 17%, based on a comparison between our output-based PPP for GDP and the yen–dollar exchange rate. In the late 1980s the rapid strengthening of the yen relative to the US dollar reversed this relationship, leading to an overvaluation of the yen by 25% in The revaluation of the yen continued through 1995, leading to an overvaluation of 78%! This was followed by a gradual devaluation through 2004, leaving the yen overvalued by 24%, very close to the 1990 level.
The Japanese economy spent more than a decade overcoming the huge overvaluation of the yen that followed the Plaza Accord. This was accomplished mainly by domestic deflation, rather than devaluation of the yen. The price of GDP in Japan, relative to the US, declined by 4% annually through 2004 from the peak attained in The decline in the PPP for GDP at 2.5% per year was the result of modest inflation in the US of 1.4% and deflation in Japan of 1.1%. In addition, the yen–dollar exchange rate fell by 1.5% per year.
Jorgenson and Nomura, 2007

6. PPPs AND PLIs FOR GDP AND KLEMS

7. PPPs FOR GDP AND KLEMS,

8. INDUSTRY-LEVEL PLIs FOR GDP, 2005
Source: Jorgenson, Nomura, and Samuels (2015).
Note: PPP for GDP-output based (our estimates) is yen per dollar and the PPP for GDP-expenditure based (Eurostat-OECD) is yen. The average annual exchange rate is in 2005.

9. THREE CHALLENGES FACING THE JAPANESE ECONOMY
Since the 1970s Japan has been unable to export its domestic savings in excess of domestic investment.
In the mid-1980s yen appreciation resulting from the Plaza accord made Japanese exports much less competitive.
Bursting of the real estate and stock market bubbles in 1990 and 1991 led to stagnation through 2004 (lost decades).

10. THREE MAJOR ISSUES CONFRONTING JAPAN
Productivity Growth In Japan Has Stagnated since 1995 with a Brief Revival from Before the Financial and Economic Crisis.
Japan’s Labor Force Has Fallen in Size since 1999 and the Japanese Population Began to Decline in 2010.
Government Revenues Will Rise in Relation to the GDP to Finance Needed Expenditure and Support an Aging Population.

11. FIRST PHASE OF ABENOMICS
First Arrow: Aggressive Monetary Policy
Second Arrow: Flexible Fiscal Policy
Third Arrow: Growth Strategy

12. GROWTH STRATEGY
The Traditional Approach to Growth Strategy in Japan Is to Subsidize Favored Industries.
When Industries Mature They Try to Block Competition through Government Regulations.
The New Industrial Policy Is to Drill through “Bedrock” Regulations to Stimulate Competition.

13. IMPLEMENTING THE GROWTH STRATEGY
Reform Agriculture by Diminishing the Influence of Agricultural Cooperatives and Participating in Free Trade Agreements
Increase Competitiveness for Current Energy Sources While Exploring New Energy Sources
Stimulate Competition by Eliminating “Bedrock” Regulations for Wholesale and Retail Trade, Other Services, and Finance and Insurance

14. PRODUCTIVITY GAPS BETWEEN
JAPAN AND THE U.S.

15. SUMMARY OF THE FIRST PHASE OF ABENOMICS
Deregulation of entry in trade and services is necessary to stimulate innovation and investment in information technology.
Japan already has the highest quality labor force in the world in terms of workplace skills measured by literacy and numeracy.
Japanese labor laws for employment protection have resulted in an inefficient allocation of a shrinking labor force.
Trade agreements reduce protection and increase incoming and outgoing foreign investment.

19. WORKING-STYLE REFORM TO PROMOTE EFFICIENCY
The Traditional Japanese Employment System Freezes Labor Mobility in Japan through Salaries Based on Seniority and Lifetime Employment
The Efficient Deployment of Japan’s High-Quality Labor Force Is Undercut by Wages that Do Not Reflect Productivity
Incentives for Women to Postpone Marriage to Pursue a Career and for Families to Postpone Having Children Reduce Fertility

20. ADOPTING A SUSTAINABLE FISCAL POLICY
Financing of Social Insurance Obligations, Especially Support of the Elderly, Will Require an Increase in Government Revenue in Relation to the GDP
A Shift in the Tax Burden from Investment to Consumption Will Stimulate Private Investment and Promote More Rapid Productivity Growth
Revenue Enhancements Must Be Introduced Gradually to Maintain Aggregate Demand as the Growth Rate of the Japanese Economy Accelerates

21. SUMMARY OF PRODUCTIVITY AND JAPAN’S REVITALIZATION
Eliminate Bedrock Regulations to Promote Productivity Growth and Create a Robust Economy
Reform the Traditional Employment System to Enhance Efficiency and Raise Fertility
Reform Taxation to Stimulate Private Investment and Meet Social Insurance Obligations

23. GROWTH STRATEGY 2017 (Adopted June 9, 2017) 1. Boost Productivity.
2. Drive Innovation and Trade.
3. Energize Corporate Activities

24. PRODUCTIVITY GAPS BETWEEN
JAPAN AND THE U.S.

25. PRODUCTIVITY GAPS BETWEEN
JAPAN AND THE U.S.

26. BOOST PRODUCTIVITY Reform the Traditional Work Style
Invest in Human Resources
Embrace Diversity in the Labor Force

27. DRIVE INNOVATION AND TRADE
Provide Personalized Medical Care
Provide Faster Distribution Services for Business
Increase Productivity in the Infrastructure Business
Promote Development of Financial Technology in Japan

28. ENERGIZE CORPORATE ACTIVITIES
Corporate Tax Reduction
Strengthen Investor Confidence in Corporate Governance
Drive Inward Foreign Direct Investment

29. SUMMARY OF THE SECOND PHASE OF ABENOMICS