The Myth of Japan's 'Lost Decades'

By Eamonn Fingleton

TOKYO, Japan -- In this slot a few days ago I posed some historical questions that, judging by the email I have been receiving, have perplexed a lot of readers.

Let me now fast-forward to our own time and try some questions that will probably prove almost equally perplexing. They concern the Japanese economy, that erstwhile juggernaut of world trade of the late 1980s, which, we are told, has been mired in stagnation ever since.

Question 1: Given that Japan's  current account surplus (the widest and most meaningful measure of its trade) totaled  $36 billion in 1990, what was it in 2010: (a) $18 billion; (b) $41 billion; or (c) $194 billion?

Question 2: How has the yen fared on balance against the dollar in the 20 years up to 2010: (a) fallen 11 percent; (b) risen 24 percent; (c) risen 65 percent?

The answer in each case is (c). Yes, all talk about "stagnation" and "malaise" to the contrary, Japan's surplus is up more than five-fold since 1990. And, yes, far from falling against the dollar, the Japanese yen has actually boasted the strongest rise of any major currency in the last two decades.

How can such facts be reconciled with the "two lost decades" story? I don't think they can. There is clearly a contradiction here, and after studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth.

Certainly anyone who visits Japan these days is struck by the obvious affluence even among average citizens. The cars on the roads, for instance, are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices, for instance, are more or less standard on many models).  Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest -- something like ten times faster on average than American speeds.

True, not all of Japan's indicators are equally impressive. The Tokyo stock market, for instance, has never recovered from its 1990s slump. Neither has the real estate market. (In the latter case, however, there is a silver lining in a major boost to living standards, in that young home buyers now get far more space for their money. In any case the implosion since 1991 has merely restored some sanity to valuations that had  previously become -- very temporarily -- outlandish).

On the negative side, there is also the fact that Japan's economic growth rate, as least as calculated officially, has averaged little more than 1 percent a year in the last two decades. For those who propound the "stagnation" story, this is their strongest card. But it does not accord with the common observation --  undeniable to those who have known the country since the 1980s -- that the Japanese people have enjoyed one of the biggest improvements in living standards of any major First World nation in the interim.

If we believe the evidence of our eyes, we necessarily must look again at those economic growth figures. Preposterous though it may seem to an unacclimatized Western observer, it appears that Japanese officials have been deliberately understating the nation's growth. But why would they do such a thing?  For those who know Japanese history, a clue lies in trade policy. The fact is that, constantly since the 1870s (with the exception of a brief interlude in the late 1930s and early 1940s), Japan's pre-eminent policy objective has been to keep ramping up exports. That policy came very close to derailment in the late 1980s as a groundswell of opposition built up in the West. By the early 1990s, however, the opposition had largely evaporated as news of the crash led Western policymakers to pity rather than fear the "humbled juggernaut." It is a short jump from this to the conclusion that Japanese officials have decided to put a negative spin on much of the economic news ever since.

What is undeniable is that just as corporate executives enjoy great latitude to juggle their profits up or down for different disclosure purposes (generally up for shareholders, and almost invariably down for the Internal Revenue Service), government officials enjoy even greater latitude to vary a nation's ostensible growth rate. The fact is that the calculation of economic growth depends on a myriad debatable assumptions (value judgments are critical because most growth these days takes the form of better goods and services, rather than more, e.g. better health care) and, while most governments like to plump up the numbers, it is a simple matter to plug in ultra-conservative assumptions.

At this point I ought to declare an interest: as a financial journalist and author who has lived in Japan since 1985, I have argued all along that the asset values crash was a self-contained phenomenon that did not slow the progress of the real economy. I have some authority for taking a contrarian view as I was probably the only Tokyo-based commentator in the late 1980s who publicly predicted the crash. (I have to add that, of course, I get a lot of flack for my challenge to the "lost decades" story. But that is nothing compared to the scorn that greeted my predictions of the crash in the late 1980s. To my knowledge, all the foreign analysts in Tokyo were bullish in the last months and, of course, their views were faithfully echoed in the Western press. The mantra, repeatedly endlessly by "respected experts," was that the Tokyo Ministry of Finance would keep Japan's real estate values and stock market prices firmly propped up forever. Extraordinary as it may now seem, almost everyone believed this. Yet many of the same people who propagated this story then turned around within a couple of months and became unabashed proponents of the "basket case" story.)

My argument is a complicated one and it is not possible to clinch the sale in a few words. But I can offer a few pointers. Anyone who knows East Asia knows that what is not said is often far more informative than what is said. It is interesting, therefore, to note that when Japanese leaders -- and their many semi-official spokesmen in places like Washington and London -- discuss Japan's seemingly endless litany of woe, they never mention the continuing spectacularly strong long-term trend in the trade numbers. Yet trade was the one issue that earned Japan the "juggernaut" soubriquet in the 1980s. Think about it: when did you last hear a Tokyo talking head mention, for instance, that the current account surplus is up five-fold in two decades? Or that Japan is unique among major First World nations in that it runs a balanced trade account (actually on some calculations a bilateral surplus) with China? Or that, on a net basis, its holdings of U.S. Treasury bonds and other foreign assets have multiplied probably ten-fold since the 1980s?

At the heart of my analysis is a story of extraordinary progress by Japanese manufacturing. The reason you don't hear much about Japanese manufacturers these days is that the best of them have moved from making consumer goods to concentrate on so-called producers' goods -- items that though invisible to the consumer happen to be critical to the world economy. Such goods include the highly miniaturized components, advanced materials, and super-precise machines that less sophisticated nations such as China need to make final consumer goods. The label on everything from cell phones to laptop computers may say "Made in China" but actually, via producers' goods, highly capital-intensive and knowhow-intensive manufacturers in Japan have quietly done much of the most technologically demanding work.

In the early years after World War II the United States utterly dominated the higher reaches of the producers' goods business. Under pressure from foreign competition, however, American players one by one have closed down or outsourced in the last quarter of a century. The competition has come principally from Japan, which now enjoys broadly as dominant and geopolitically important a position as the United States did in the 1960s.  Even if you don't hear much about this from the Tokyo talking heads, it is hard to miss it in global trade figures. (Fact: America's current account deficit multiplied five-fold in the 20 years to 2010 and the reason in large measure is because American corporations have exited the producers' goods business.)

I feel so strongly about all this that I have more than once over the years challenged the principal proponents of the "lost decades" story to a debate. I first tried in 1998; and then again in 2002. On each occasion there were no takers.

As 2011 marks the twentieth anniversary of the Tokyo real estate crash, I have decided to try again and have identified a list of ten key individuals, mainly authors or securities analysts or both, who have contributed disproportionately to the story of a failing Japan.

In an effort to make this worthwhile, I am making this offer: if any invitee is prepared to come forward for a debate in Washington, I will donate $5,000 to his or her favorite charity. This could be a famously worthy cause such as Save the Children, the American Red Cross, or the American Society for the Prevention of Cruelty to Animals. By the same token, it could also be a little known non-profit such as a university endowment fund that my opponent happens to care deeply about.

I will spare readers further details but for anyone who is interested I have posted the full story at my website,

Eamonn Fingleton is the author of In the Jaws of the Dragon: America's Fate in the Coming Era of Chinese Dominance.