Professor Nobuhiro Kiyotaki teaches Intermediate Macroeconomics, Money and Banking, Macroeconomic Theory, and Advanced Macroeconomics at Princeton University. He also specializes in monetary theory, business cycle analysis, and government financial policies. Kiyotaki, who is a fellow of the Econometric Society and awarded the 1997 Nakahara Prize of the Japan Economics Association, has made significant contributions in New Keynesian macroeconomic models and studies in the interaction between credit, asset prices and aggregate production.

Between 1950 to 1973, Japan was the current day China, with a margin of 10% growth per year. After 1974, the growth rate slowed down to about 4% a year by 1991, but it was still respectable. After 1992, the growth rate became stagnant, less than 1% a year. The result has had a significant impact on the lives of the Japanese people, the younger generation in particular. When the economy stopped growing, the job prospects for younger people became very bleak. Because Japanese companies rarely fire permanent employee, all the adjustment of a weaker economy goes to the new hiring. For the younger people, the quantity as well as the quality of jobs deteriorated dramatically. If you look around at Japan today, most old people still work at secure jobs, and the wage profile is flat for younger generations. Actually, the nominal wage is the same as it was in 1989. It isn’t the old timers who are declining – it’s the younger people. This now has an extremely negative effect.

Japan has had a lot of trial and error in different policies. Fiscally, the country has been relatively expansionalist. The current fiscal deficit is about 8% of the GDP, which is a rather sizeable portion, so continuing the fiscal stimulus package is a bit dangerous. I have a horrible feeling that this is not a good solution, especially because our savings rate is dropping pretty fast. In fact, the current personal saving rate is lower than the U.S. It used to be much higher, but with an aging population, the young are poorer than the old and are not able to save up as much. Nevertheless, Japan is still running an account surplus because of the corporate sector. The corporations end up making profits, but in reality are not spending as much in investment back into the economy as it looks like in their savings. Most of the larger companies are doing overseas investments, typically in equity. It shows up as financial assets in their savings, but in reality they are all doing joint ventures and investing in child companies.   In any case, the saving rate is dropping, and we can expect a sustainable current account deficit in just a few years’ time. That means that the government will not be able to run the current deficit, so they really need to start sorting out the fiscal deficit problem.

At the same time, the Japanese monetary policy has been relatively successful in the last two years.   Prime Minister Shinzo Abe and Governor Haruhiko Kuroda are pushing for an aggressive monetary policy. Japan has recovered from a deflation of -1% to a +1% inflation rate. The stock market is booming, and the yen is depreciating. The Yen actually appreciated a lot during the recent financial crisis, so it is now starting to depreciate to its previous level.

In terms of long run prospects, Japan still has to do a lot of things. Basically, it has to start growing again, and in order to do that, it needs a more competitive policy. Japan has a lot of neighbors, so it should capitalize on comparative advantage. Let the other countries do what they are good at, and focus on what Japan is good at. The best bet at recovery is through trade and foreign direct investment, with both Japan investing more overseas, and accepting more foreign investment. Actually, Japan is pretty closed in terms of foreign direct investment into Japan, and I think it is a path that should be promoted more. People argue that foreign direct investment is very useful in terms of obtaining new technology, creating more jobs, and stimulating healthy economic competition. Traditionally, the Japanese government is suspicious of foreign ownership, and keeps them at bay through implicit and explicit restrictions. Now it is less restricted in terms of trade, but there are still some implicit regulations. I was a bit pessimistic a few years ago, and now less so. Hopefully, things will start moving again.

They should also focus on sorting up social insurance. We have national health insurance and pension system, though is pretty unsustainable, which should be a goal in the future.    Officially, the average retirement age is around 65, but effectively a lot of these people end up taking up a second, less demanding, job.   There is an increasing average age in the work force, which is fine as long as they are not working crazy hours. You cannot ask old timers to work with the same intensity as they did when they were young, but they are still completely capable of working.

The beginning of everything that led to the financial crisis and the lost decades of 1990s and 2000s, was a huge boom in the 80s: we had a huge asset –price boom period. The land value more than doubled in 10 years. Stock prices quadrupled, and Tokyo stock market was at a time bigger than the U.S. stock market. Japanese land prices were crazy. There was a time when people claimed that the Imperial Palace was more valuable than California. Then, we had a spectacular crash. Stock market dropped less than 1 quarter, than come back to around half. The land price slid down from 1992 to now nonstop, and is at around half. This has a big impact on banking sector specifically, since banks use real estate as collateral for loans. When the land value goes up, you can borrow more. When you can borrow more, it results in more liquidity, which brings up the land value all over again. So we have this huge positive feedback loop going on. The government essentially mismanaged this situation during the boom time. The interest rate was kept very low, because there was large current account surplus. Assigning a macro policy to reduce the current account surplus was a bad idea.

Then, there was the problem of the trade disputes. Japan had a big dispute with the U.S. and Europe in the 80s and the 90s, but instead of reducing the issue through expansionary monetary policy, they should have improved trade policy. When the government finally started to tighten the monetary policy in 1989, it was too late and we entered the stock market crash.

Finally, there was a big banking crisis and big security company collapse in 1997-1998. Japan had to pay higher interest rate than of foreigners. It takes banks a long time to clean up nonperforming loans, but they finally cleaned up in early 2000, and it took more than 10 years. A financial crisis dragging more than 10 years is one thing.   The decline of the job market is another.

Companies didn’t fire people. Instead, they stopped hiring youngsters, which means they stopped training them too. One of the strengths of Japanese companies is the training young workers on the job, so that young people can gain skill and experience relatively fast. When you don’t hire the younger people, they stop gaining these applicable skills, which has a profound long-term consequence. It was not just a bad monetary policy, or a mishandling of the banking crisis that led to the low growth. It was also all of these effects translating to new hires, who stopped accumulating new skills on the job, that the economy stopped growing.

The unemployment rate is deceivingly low, but it is because of the inclusion of temporary jobs without security or the opportunity to accumulate experience. There are a lot of overqualified young people with bad wages or temporary jobs. In the 80s, pretty much everyone who graduated from college would land a permanent position. In recent years, 2/3 will get a permanent job, and 1/3 get temporary jobs. Those with temporary jobs cannot increase the number of marketable skills they possess.

I feel like the fastest route to revive the economy is to stop deflation, which Japan has succeeded in, to a degree. Secondly, companies should start looking around. The more successful companies have started to hire more permanents. The job market is slowly getting better for young people, since companies have started to realize that the number of young people is decreasing. The sense of urgency is everywhere.

The government should promote foreign direct investment into Japan by overseas companies. Perhaps the easiest way is to give a small subsidy to international schools. Basically, the foreign people who are considering moving to Japan falter because they wonder if their children will get a good education there. Especially, if they are planning to stay for a few years, they don’t want their kids to turn Japanese.

There is actually a similar trend in the economy and job market of Europe. If you talk to the Spanish or the Italians, their labor market protects old timers, and consequently penalizes the youngsters. The younger generations can’t find a secure job, so they tend to live with their parents, don’t start their own independent family, don’t have kids. The population gets older and older, and the cycle continues. The declining population of young people is very much related to the job market.

The East Asian tradition respects for elders, which is good for me, but not necessarily good for younger people. We have to relax that restriction, and companies are actually already starting to do that. Your wage used to go up with age, but the raise now ends around 50. When people try to continue their job after they are 60, they have to transfer to a lower position, with a lower wage.

Actually, the U.S. is definitely the exception: it has a very dynamic economy, and every time it starts slowing down, the country finds a way to overcome it.   I think one of the secrets that keep them so , they are open and competitive, and so some people who are entrepreneurial can start a company and can grow fast. That type of dynamic slows down in other parts of the world. The dangerous part, I would say, will be when Japan starts bottoming out, and Europe seems to enter similar scenario as well. Europe should find a way to get around.

The startup culture in Japan used to be very big, especially after the war, when many of the major companies you see today were started. Part of the reason for that, I think, was because there was a large population of young people who were very educated and very poor, with very little to lose. I have a classmate in elementary school whose father is one of the founders of Sony. From time to time, I would visit their house, as a kid. This guy is actually very interesting. He is curious about so many things – I think he has a PhD in applied physics, and he really knows his technology. I would go to their giant house, where there were lots and lots of prototypes just lying around. He would ask us which TVs we liked best, and I would point at one. It was 1966, when he showed us experimental home video, and then said, he can take a picture of us playing because this record may become valuable many years later. These people were pretty entrepreneurial and unique. Actually, Japan still has this kind of culture. For example, Kyoto has a lot of spinouts from bigger companies, and is surprisingly entrepreneurial. You have a lot of old timers asking younger people with ideas to present what they are doing. The company cultures aren’t a whole lot different from academic culture: people interact a lot, exchange and criticize ideas, create a learning atmosphere. Basically, you just need to have courage to become a venture capitalist.

I think one of the largest potential parts for improvement is women labor participation. The proportion of women working permanent jobs in Japan is much lower than in other developed countries. I think that since the population of the younger generation is decreasing, we should increase hiring of women. There are plenty of females working in temporary jobs, but we should focus on increasing the number of professional women in permanent jobs. There are a lot of talented women in Japan.

If anything, it is better to let them be. My cousin is a venture capitalist. When the government said that it should subsidize ventures, his answer is that if we receive help from the government, then we are no longer a venture. He doesn’t want the individual spirit of the company to be disturbed by the government.   If the government does their own job well, providing public goods like basic education and infrastructure, then startups can work themselves. Basically, for this kind of thing, you have to do a lot of trial and error. If the government interferes with help, or starts to tell you what to do, it will disturb their entrepreneurial decisions. In fact, they should let foreign people to enter and compete in the market too.

Japan is finally starting to bottom out, and the economic atmosphere is definitely a lot better than it was a few years ago. Even so, people are still worried about the long run prospects. At the end of the day, the older generations still have to work. You cannot retire so early anymore.


Written by thefinancier

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