Japan's Export-Driven Economy: A Cautionary Tale for All

When people say, “Japan should stimulate its economy,” what they’re really talking about is increasing GDP. But think about what it means to increase GDP: you want people to spend more money.

But in Japan, the combination of the sales tax hikes, lower incomes and inconsistent economic growth means Japanese consumers are keeping their wallets tightly shut.

And maybe they shouldn’t spend more money. Maybe they should save. Maybe they should change the way their economy’s organized instead of spending trillions of dollars again on further stimulus plans.

The second question to ask is: will the stimulus program even boost the economy? And this gets into the quantitative easing program that we’ve talked lots about before.

While the latest liquidity injection may have boosted the Japanese economy enough to limp out of their latest recession, there is a wide-spread doubt that it will boost Japan’s export-driven economy in the long-term.

Today’s Wall Street Journal quotes Richard Katz, editor of a newsletter on the Japanese economy and an outspoken Abenomics skeptic. “‘Things go up and things go down, but there’s a difference between cyclical and long-term trends,” said Katz. “There’s no sign this is a change in the basic trend.’”

Really, there’s little that the central bank can do to stimulate the economy. Interest rates are already way low, so it’s not as if people are going to go out and spend and borrow a bunch of money because the interest rates are even lower. And most of the quantitative easing absorbs bonds, thereby reducing the income of the non-government sector – they’re not earning the interest income on those bonds.

Quantitative easing has, as I’ve maintained for a while now, a deflationary bias. It actually is contractionary in its effects.

So, another effect of this stimulus is they’re hoping to drive down the yen. And with Japan’s export-driven economy, the idea is they’ll help stimulate their exports. Here, we find another problem with Abenomics. Over the past decade or so, reports the Economist, many Japanese manufactures have moved abroad, with a third of the output from Japanese firms being made overseas.

Therefore, continues the Economist, “A weak yen is not the tonic for exports that it used to be.”

And that’s not the only disconnect between Japan’s exports and the yen. “Although the weak yen allows Japanese firms to cut the price of exports in foreign-currency terms without reducing their earnings in yen, few have done so,” writes the Economist. “Instead, they are keeping international prices constant, and pocketing the extra yen.”

And again, we have to question: why bother devaluating the yen to try to boost exports? What’s the point of doing it? Most people think that exporting’s better than imports. And even the language itself reflects that. You’ll see people talk about a “trade deficit.” It means that they’re importing more than they export. But when you really think about it, imports are really benefits and exports are costs.

Economist Warren Mosler puts it pretty well. He says the wealth of an economy is all that it can take in and consume for itself, minus what it costs to get those goods.

So exports are really what it costs to bring in the imports. And therefore, people have it exactly backwards. Imports are the real benefit. And Japan is basically making itself a slave to the rest of the world by forcing this export-driven model on its own people.

After 20 years of doing this, what has Japan gotten? Basically they have a huge pile of everybody else’s paper that they’ve collected – mainly U.S. dollars – which they then invest in Treasuries. And the rest of the world has enjoyed Japanese cars, Japanese electronics, and so on. So Japan’s a good illustration of the perils of having this economy so dependent on exports.


Chris Mayer
for The Daily Reckoning

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