Japan Stagnation Case Study

Explanation:From the preeminent example of an “economic miracle,” Japan has become the preeminent example of stagnation. There is not one lost decade, there are now more than two—dating back roughly to 1991, and with no end in sight. Japan is hardly the only economy facing problems, but its failures have unfortunately proved to be the world’s most durable.[1] The policies have been debated for centuries, but the fundamental sources of long-term growth are plain. For Japan, the prospects for land and labor are mixed, at best, and the contribution of capital has been erased by an addiction to government borrowing. Innovation is properly and widely understood to be vital.

The growth boosted by innovation does not necessarily refer to gross domestic

One error is the obsession with the balance of payments and exchange rates. Utilizing a cheap yen for GDP gains through net exports reduces purchasing power and makes Japan artificially and unnecessarily dependent on foreign markets.[2] External surpluses provide a pile of foreign money to invest overseas even while trillions are being borrowed at

As a result, the return on capital in Japan is impossibly distorted.[5] This is not about a higher price due to government intervention in capital markets. Any such “crowding out” has been prevented by excess liquidity provided by monetary authorities. This is about quantity. The government has

become increasingly dominant as both user and provider of capital. It borrows and spends hugely during all-too-frequent downturns, while the size of the economy remains fixed.[6] That would damage growth if the market power were concentrated in a private actor. (No private actor would be allowed to be so large.)

But a private actor would at least seek profit, creating wealth. The government spends for many reasons, including extremely valuable goals such as enforcing contracts. It can create the conditions for wealth accumulation, but it does not seek wealth. Rather than financial return being the primary factor, capital is borrowed and spent without regard to return. The absence of foreign capital only makes matters worse,[7] since yet more domestic capital is drained off for low-return initiatives. Public borrowing blunts the contribution of capital to the