Why US economists are obsessed with 'Japanification'
Economists are terrified of how slow growth, low inflation and low interest rates could hit the economy. The FT's US economics editor Brendan Greeley explains why
Produced, filmed and edited by Gregory Bobillot
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Every January, more than 10,000 economists fly somewhere in America for the conference of the American Economics Association. This year, it was in San Diego, which was fun, because it was very easy to tell who was a San Diegan and who was an economist. The conference is also a way to figure out what economists are worried about.
This year, they looked west across the Pacific Ocean, and they worried about something they call Japanification. It's a funny term, and some people don't even like to use it, because it has more than one meaning. It can be a shorthand for what happened to Japan over the last two decades - slow economic growth, low inflation, and extremely low interest rates for a long time. Those three facts don't give you a complete picture of what's actually happening in actual Japan, but they do terrify macroeconomists. And so Japanification is more often used as a way to point out that these things could or will happen to everyone else.
I think "Japanification" is a useful term, and I think what it really says is that Japan is the preview movie for the whole rest of the world, especially in terms of demographics. So if you think about the percent of population that's over age 65, what that does to consumption, what that does to inflation, what that does to labour force participation.
In Japan, the population is ageing. And in other developed economies, populations are ageing, too. Here's what that means.
When you have a larger percent of the population over age 65, you necessarily have a lower percentage of people working. And what that means is you have a lower level of demand in the economy, and that impacts inflation. Inflation impacts interest rates. And when we have a low, what the Fed would call r-star, or that neutral interest rate, when that is lower, you have less policy space to act, and you need to enact other policy frameworks in order to effectively deploy monetary policy when growth slows or when there's a recession.
The reason economists in San Diego were worried about Japan is not because Japan is a terrible place to live. Life expectancy, for example, is higher in Japan than in the US, the UK, Canada, and Germany. It's well higher than the average across all high-income countries. But when populations get older, interest rates decline, inflation declines, and that makes it harder to do monetary policy the way we always used to - by raising and lowering interest rates.
So economists worried about Japanification don't think that Japan, the place, is a catastrophe. They're worried that their own central banks won't have any room left to cut interest rates, as happened in Japan. This is Ben Bernanke, the former chair of the Federal Reserve. He gave a keynote in San Diego. He basically said that if interest rates get too low in the US, as they are in Japan, when the next recession hits, the Fed might have to get more creative.
I think the Fed and other central banks are caught in a very difficult position here, because on the one hand, they can't announce too loudly they have no tools left, because part of the magic of central banking is to pretend that you have a bazooka behind your back that you can bring out and to prevent expectations from disintegrating and falling. So it's magic.
Maybe "Japanification" is the wrong word, because actual Japan is actually a nice place to live. And in one important way, it's a better place to live than the United States.
We'd prefer not to call our problem "Japanification."
Because Japan does not have the problem that widening inequality is leading to the stagnation of people's incomes in the middle of the income distribution, while people in the top are growing or improving their situation very rapidly, whereas that's the situation in the United States.
Ben Bernanke's worried about what low growth will do to monetary policy, particularly when a recession hits. That makes sense, because he was in charge of monetary policy the last time there was a devastating recession. But low growth and low interest rates don't just have monetary consequences. They have political consequences. And the irony of using the word "Japanification" is that what's happening to Japan, low growth, may be a harder problem for Washington to solve than it has been for Tokyo.
Now what's the main difference between us and Japan? I would say the difference is that in the United States, as in many other industrialised countries, inequality is widening very rapidly. This means that if our rate of growth overall is very slow, as it is, and if inequality rising means that most of the fruits of that slow growth accrue to people who are already at the top of the scale, then the broad bulk of the population is not doing very well.
California is a nice place to visit, certainly in January when you're coming from Boston or Chicago or Frankfurt or the kinds of places economists tend to live, nicer in January than, perhaps, Tokyo even. But what's happening in Japan, low growth, may be even scarier right here in San Diego on this side of the ocean.