The prevailing opinion that Japan’s economic performance since the turn of the century reflects a lack of dynamism is often supported by the paltry 15 percent rise in the country’s real output. While most economists correctly view real output as a key metric concerning economic performance, it can be somewhat misleading if relevant demographic trends are not taken into account as well.
With Japan’s real output checking in at an average of just 1 percent per year over a period of 15 years, it perhaps should come as no surprise that there is substantial disparity between opinion and reality: Accounting for Japan’s demographic factors reveals an economy that is performing exceptionally well under circumstances that are far from optimal.
Instead of solely relying on real output to measure Japan’s economic performance, economists benefit from a much clearer picture by looking at relevant demographic trends and focusing on the growth rate per working-age person. At two percent, the growth rate among Japan’s working-age population rated much better than the United States and Europe, with the US checking in at just one percent in the growth rate per working-age person.
Looking at it in this way, it becomes evident that the American economy’s 35 percent growth since 2000 was driven at least in part by demographic trends that saw substantial growth in the working-age population. It also reveals that these advantageous demographic trends were not leveraged in the most optimal fashion. Given Japan’s economic performance in the face of suboptimal demographics, it is clear that there is much to be gained from a careful study of Japan’s economic approach.
One of the principal factors enabling Japan to achieve growth without inflation lies in its ability to deal with substantial public debt through internal financing. With a countrywide savings surplus, Japan has been able to handle a debt-to-GDP ratio greater than 150 percent. Of course, this is not without its downsides, particularly since a rising debt-to-GDP ratio poses the risk of quickly growing unmanageable in a low-growth economy with large fiscal deficits.
The potential downside of the Japanese economic model might be mitigated through a strategy employed in Europe, where a deficit cap of three percent of GDP is mandated by the Stability and Growth Pact. Economic analyses seem to indicate that the deficit cap has succeeded in ensuring the debt-to-GDP ratio remains stable and does not go beyond the point of control.