Merryn's Blog

Japan diary: There are worse fates for the West than to end up like Japan

People say that the last thing the West wants is to end up in a Japan-like deflationary spiral. But it would be better than some of the alternatives, says Merryn Somerset Webb.

141014-tokyo

I'm in Japan (again). Tokyo has never felt like it is in a deflationary depression (not since I first arrived here in 1992, anyway), and driving in from the airport, it is hard to believe that the economy is in trouble now, either.

There are new buildings everywhere if you haven't been to Tokyo for a year it always takes a few days to get your bearings. The queue to get into the Disneyland car park on Sunday morning appeared to be several miles long nastily backing up the motorway in the opposite direction.

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And the traffic jams on the way up to Hakone later in the day suggested no shortage of enthusiasm for buying new cars (in some very pretty pastel colours) and spending money on onsen hotels (what should be a two-hour drive took four).

Nor does it seem that the great tradition of overspending on weddings is over at the famous Fujiya Hotel, where we stopped for a night to soak in some spring waters and admire the view before this week's typhoon hit* there appeared to be several rather gorgeous ones on the go at once.

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For a clue as to why all this might be, we need to look at GDP figures. But not the ones everyone else looks at.

Look at real GDP in Japan, and at first glance it doesn't look great: since 1991 it has grown more slowly than almost any country you care to mention (although events of the last few years mean it has now done slightly better than Italy).

But look at GDP per head (which is surely all that matters) and Japan's low population growth means that things are rather different. I've written about this before, but it is important enough to bear repeating particularly as M&G Investments have sent me a nice chart on the matter which shows that "the Japanese economic experience has actually been quite positive in terms of increasing living standards for the average Japanese citizen over the last 25 years."

But that's not the whole story either.

You could argue that a truer measure of GDP doesn't just take account of the number of people in a country, but also the "shifting function of the long term demographics of the population". A country with a baby boom will experience strong GDP in the boom, and weaker GDP at the end of a population bulge (as workers retire and both consumption and investment fall).

So "in order to take into account the true GDP per head, one has to put this into context, by looking at the size of the working population, not just the size of the actual population". On this basis, Japan looks pretty good showing much the same growth as Germany over the last 25 years.

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Which, along with the fact that it still has a higher GDP per capita than the UK and is still the third largest economy in the world, probably explains why it doesn't feel like a country that has been at or near recession for 25 years.

Economists often say that the last thing we in the West want is to end up like Japan. Anyone who spends a lot of time here might say that, for now at least, it would be a lot better than some of the alternatives.

*I'm back in Tokyo now waiting for the typhoon, which is supposed to hit us here at about 3am.

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