Working Paper 23-02

A comparative introduction to the economies of Australia and Japan

William Mitchell

October 2023

Centre of Full Employment and Equity
The University of Newcastle, Callaghan NSW 2308, Australia
Home Page: http://www.fullemployment.net
Email: Bill.Mitchell@newcastle.edu.au

The Centre of Full Employment (CofFEE) is an official research centre at the Universityof Newcastle, NSW.

William Mitchell is Professor of Economics and Director of Centre of Full Employment
and Equity at the University of Newcastle, Australia and Docent Professor of Global
Political Economy, University of Helsinki, Finland. He is also an International Fellow at
Kyoto University, Japan.

CofFEE Home Page: http://www.fullemployment.net
Email: Bill.Mitchell@newcastle.edu.au2

1.

Introduction

This paper was presented at Kyoto University, Japan on November 4, 2022.
In this paper, we consider some of the salient differences between economic outcomes inAustralia and Japan, which further lead us to ask questions about the social and politicalinstitutions in each country and how they mediate economic behaviour. Australia’s
performance is not all that different to many other Western countries even though thestructure of the economy is based on primary commodity exports with a small,insignificant industrial sector. The relevance of that relates to the dynamics of the termsof trade, which in Australia’s case are driven by movements in primary commodity prices,where other nations, that export industrial goods tend to have more stable terms of trade.
Is there anything Japanese policy makers can learn from Australia’s recent history? This
comparative discussion is a precursor to a more detailed study of the future of Japan – itschallenges and policy options.

2.

Economic growth – the so-called ‘decade’ in Japan

Figure 1 shows real GDP for Australia and Japan indexed to 100 in 1990, the turning
point for the Japanese economy, as the real estate bubble was about to burst. During the
1980s, both economies underwent significant change with respect to financial market
deregulation, which spawned asset bubbles. Economic growth was similar in bothcountries.
The recession in Australia in 1991 was the result of excessive monetary tightening andan obsession by the then federal government with pursuing fiscal surpluses. The recession
was the worst downturn since the Great Depression of the 1930s. The bubble burst forJapan came just after and while the Japanese government prevented a recession, theoverall growth rate slumped and has been relatively low since that time.
The flat GDP growth rate for Japan is the basis of the assertions that the nation endureda ‘lost decade’, which became extended into the current period. Since 1990s, the size of
the Australian economy has grown around two and a half times, while the Japanese
economy has only grown by around 25 per cent.

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Figure 1 GDP growth, Australia and Japan, 1990-2021, 1990=100

Source: IMF World Economic Indicators.
Figure 2 Population growth, Australia and Japan, millions

Source: Australian Bureau of Statistics, Japan Statistics Bureau.

4However, it is important to put the ‘lost decade’ narrative into a wider perspective. Figure
2 shows the respective population growth. In 1980, the population of Australia was 14.8
million and by 2022 it was recorded at 25.9 million and the annual growth rate is about
1.6 per cent on average per year. There was a slump in the population growth during theearly years of the pandemic, as the government closed the external border and migration
was highly restricted. In stark contrast, Japan’s population is now shrinking slowly andthere are projection that by 2025, the Japanese population will be around 121 million(Cabinet Office estimates).
Comparing Figure 1 and Figure 2 helps us understand why economic growth is slower inJapan relative to Australia and puts the claims about a ‘lost decade’ into a moremeaningful perspective. Bringing those two dimensions together yields GDP per capita,
which tells us how the size of the economy has moved in relation to the underlying
population dynamics (see Figure 3).
Prior to Japan’s asset crash in 1991, GDP per capita was growing much more quickly inthat nation relative to Australia. The 1991 crisis ended that period of increasing prosperity
and GDP per capita increased slowly after that in Japan. In the early 2000s, GDP per
capita was growing almost at the same rate in both countries. The Global Financial Crisis(GFC) was more damaging for Japan than it was for Australia, in part, because thegovernment fiscal support was relatively larger in the latter. We can also see evidence
that the Japanese sales tax hike in May 1997 when household consumption growth
slumped, and GDP declined. We discuss this in more detail later.
The salient point though in the context of this comparative analysis, is that over the 40year period, the evolution of GDP per capita in both countries does not justify categorising
Japan as a failed economy, along the lines of the ‘lost decade’ narrative, while at the sametime holding Australia out as a well-performed economy.
If we conclude that the evolution of GDP per capita, which is an average measure, hasbeen broadly similar over this period, then the next point of enquiry focuses on how
national income has been distributed over the period. If we consider the Gini coefficientmeasure, then Japan records a lower level of income inequality than Australia forcomparable data.
The summation is that while GDP growth in Japan is very low, population growth issimilarly low, which means that the nation can sustain stable or improving material
standards of living. Australia, by contrast, must record higher rates of GDP growth tomaintain a similar time path for GDP per capita because its population growth is much5

higher. Thus, discussions that focus on Japan’s low rate of GDP growth fail to understandthe context of low population growth. If Australia’s GDP growth fell to rates common in
Japan over the last two decades or so, then its unemployment rate would rise significantly
because the population growth, combined with productivity growth places a much higher
real GDP growth requirement for the unemployment rate to remain stable.
Figure 3 GDP per capita, Australia and Japan, 1980 to 2021, 1980=100

Source: IMF World Economic Outlook, see also Figure 2.

3.

Trends in Capital Formation

What have been the comparative trends in business investment and capital formation in
general? Figure 4 shows the private investment to GDP ratio from the March-quarter 1994
to the June-quarter 2022 for Japan and Australia. The ratio has been very stable in Japanfor a long period – averaging 15.8 per cent since 1994. By contrast, the investment ratio
in Australia has been significantly more variable over this period, which relates, in partto the dramatic fluctuations in its terms of trade that are driven by volatility in primarycommodity markets. While Japan is an exporter of finished industrial goods, which
experience low price variances in international markets, Australia remains a primarycommodity exporter and endures often violent fluctuations in commodity prices in both
directions, which feed into exchange rate volatility.

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The large increase in the private investment ratio for Australia from the turn of the century
to around the GFC was due to a ‘once-in-a-hundred-year’ mining boom, which was driven
by a surge in world demand for Australia’s mineral exports and dramatic increases inworld prices for these commodities.
If we netted out the impact of Australia’s mining boom, then the investment ratio for the
non-mining sector in Australia is not dissimilar to that of Japan. We get a sense of thatpost GFC, when world primary commodity prices (particularly for iron ore) fell back tomore normal levels and Australia’s mining boom came to an end. Then the private
investment ratio for the entire economy (including the mining sector) fell back to a level
like that observed in Japan.
Figure 4 Private Investment Ratio, Australia and Japan, March 1994 to June 2022, per
cent

Source: Australian Bureau of Statistics, National Accounts; Cabinet Office, Japan.
Figure 5 shows the evolution of the public investment ratio for Australia and Japan overthe same period. This ratio captures the government spending on infrastructure scaled
against the size of the economy. With fiscal austerity the norm over this period,
governments sought fiscal reductions by cutting public infrastructure spending rather thanrecurrent spending because it was politically easier to hide the short-term political
impacts. It is harder for the public to detects cuts to infrastructure spending and the7deterioration in the services emanating from the capital stock is often relative slow to
manifest. Since the GFC, Australian governments (federal and state) ramped up capital
works programs, initially as a fiscal stimulus during the GFC, but then to begin theprocess of repair of essential infrastructure after years of neglect as surpluses were
pursued. Japan’s history is very different. After the bubble burst, the Japanese
government sought to reduce its fiscal exposure through quite sharp reductions in capital
expenditure. That adjustment ended during the GFC and the public investment GDP
proportionality has been relatively stable since with a notable increase during the
pandemic.
Figure 5 Public Investment Ratio, Australia and Japan, March 1994 to June 2022 per cent

Source: see Figure 4.

4.

Household consumption expenditure and the impact of tax changes

Figure 6 compares the quarterly growth in household consumption spending from the
March-quarter 1994 to the June-quarter 2022 for Australia (top panel) and Japan (bottom
panel). We left out several quarters in the early period of the Covid-19 pandemic fromthe graph because they were extreme outliers and distorted the graphs. The averagequarterly growth over this period was 0.85 per cent for Australia and 0.17 per cent forJapan – a considerable difference.

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Focusing on Japan, the red negative bars are the quarters that were immediately impacted
by the sales tax increases in April 1997 from 4 to 5 per cent, in April 2014 from 5 to 8
per cent, and in October 2019, after two postponements, the tax shifted from 8 to 10 per
cent. The sales tax rises were driven by the political pressure mounting on the government
from commentators who claimed the government’s fiscal deficit was too large and thenation risked insolvency. As a currency-issuing government such an outcome is, ofcourse, impossible and reflects the poverty of mainstream macroeconomic thinking. But
the Japanese government bowed to the pressure and invoked tax cuts to appease the‘markets’, The results were entirely predictable. After setting the economy back on a new
growth path after the 1991 bubble burst, the decision to elevate sales tax in April 1997,
immediately saw household consumption spending and GDP growth contract. The same
pattern of damage followed the hikes in 2014 and 2019 and demonstrated that growth inJapanese household consumption expenditure is not only, modest relative to, say,
Australia (as above), but also highly sensitive to sales tax changes. We explore the reasonsfor that heightened sensitivity later in this section.
By way of contrast, growth in household consumption expenditure in Australia is muchstronger relative to the Japanese experience. The arrow with the annotation 0% to 10%
represents the introduction of the Goods and Services Tax (GST) in July 2000, which saw
a new tax on many consumption goods and services levied at a starting rate of 10 per cent.
The GST was thus a sales tax akin to the tax rises in Japan. The introduction of the GST
immediately had a negative impact on household consumption growth but nothing likethe impact that sales tax increases in Japan had.
What might explain the different sensitivity of household consumption expenditure tosales tax increases in Australia and Japan. Why do Japanese households react so adversely
to relatively modest sales tax rises by comparison to the way Australian households react.

9Figure 6 Quarterly household consumption expenditure growth, March 1994 to June
2022, per cent(a) Australia(b) Japan
Source: see Figure 4.

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Figure 7 shows household debt as a proportion of disposable income for Australia andJapan from 1995 to 2020 and helps us understand why the tax sensitivity of household
consumption expenditure varies across those two nations. Australia ranks high among theOECD nations on this measure and household debt has risen from around 67 per cent in1990 to 188.5 per cent in September 2022. By way of stark contrast, household debt todisposable income in Japan is highly stable at just over 100 per cent.
Further, in both nations, wages growth has been very low over the period shown in Figure
7. What becomes clear is that Australian households kept spending when the GST was
introduced, whereas Japanese households dramatically reduced consumption spending,because the former are much more willing to increase their debt exposure when theirdisposable income is squeezed. Australians borrow to maintain spending capacity
whereas Japanese households cut back spending.
Figure 7 Household debt to disposable income, Australia and Japan, 1995-2020, per cent

Source: OECD Main Economic Indicators.
While the increasing burden of debt can have negative consequences (for example, it
makes household solvency much more sensitive to interest rate changes), it remains thatthe greater propensity to take on household debt renders the Australian economy with agreater ability to absorb these type of sales tax increases relative to Japan. It is surprising,11

therefore, that the Japanese government used sales tax increases to boost revenue when
they should have known that Japanese households were not going to use increases in debt
to absorb the impingements on their disposable income. It is fairly clear, that sales tax
increases in Japan will push the economy towards recession.
This means that when designing optimal policy interventions in Japan, the choice of sales
tax variations would seem to be a poor policy choice because the probability thatstagnation will follow is very high.

5.

Unemployment differences

While the evolution of GDP per capita in recent years is very similar for Australia andJapan, there is a fundamental difference in the way the two nations deal with
unemployment. Despite the major bubble burst in 1991, the GFC, the natural disasters(for example, Tōhoku earthquake and tsunami, the Fukishima Daiichi nuclear disaster),and the pandemic, Japan has always sustained relative low unemployment rates comparedto Australia (see Figure 8).
Figure 8 Unemployment rates, Australia and Japan, 1980 to 2022, per cent

Source: IMF World Economic Outlook.
Low unemployment in Japan is an important part of its social balance and employers
consider their workers to be assets rather than costly liabilities. Security of tenure is12valued by both workers and employers, which is one of the reasons why Japanese workers
have tolerated the extremely low wages growth over the last several decades.
By way of contrast, Australians have been conditioned under neoliberalism to toleratehigher levels of unemployment. That tolerance was created by substantial publiccampaigns by the government and business to convince citizens that the unemployed were
not interested in working – that it was their fault that they were without work. Australians
were told that the problem of unemployment was not a systemic failure to create enoughjobs, but, rather, an individual unwillingness to work by the unemployed. They were lazyor ill-disciplined. That reframing of the problem of mass unemployment – from thesystemic crisis understanding of the Keynesian era, to the individual choice explanationsof the neoliberal was a classic case of ‘divide and conquer’ where people were encouraged
to believe there were plenty of jobs despite the high unemployment. The social
propaganda that reinforced this message allowed the government to avoid taking
responsibility for the problem.
It is doubtful that such a strategy would work in Japan given the cultural centrality ofwork and the collective nature of society.

6.

A sectoral balances perspective

The sectoral balances framework, which is derived from the national accounting
framework provides an alternative way of viewing the financial balances of thegovernment sector, the private domestic sector, and the external sector (Mitchell et al.,2019 provide a full derivation of the framework).
The summary relationship is given as:(1)(S – I) = (G – T) + (X – M)

where S is household saving, I is business investment, G is government spending, T is tax
revenue, X is exports, and M is imports.
This accounting relationship must always hold and is brought into equality throughnational income changes because S, I, G, T and M are all considered to be sensitive tosuch changes in various ways.
The relationship can be simplified further such that:(2)(G – T) = (S – I) – (X – M)

This gives the familiar conclusion that the government fiscal deficit (surplus) must always
equal, dollar for dollar, yen for yen, the non-government sector surplus (deficit). Thus, a13

growing fiscal surplus signals that the non-government sector is spending more than its
income and accumulating debt as a result. Fiscal surpluses push the non-government
sector into increased deficits and the liquidity squeeze that results can only be
extinguished through reductions in non-government financial wealth.
Figure 9 shows the sectoral balances for Japan from 1980 to 2022, expressed a per centof GDP. The external position has been mostly stable, with a surplus fluctuating mostly
within a 1- or 2-point range. The external stability allows us to see that the private
domestic sector surplus is a near mirror image of the government deficit. Each time thegovernment has tried to reduce its deficit, the net overall savings in private domestic
sector have declined quite sharply. That is because the government deficits provide
support to the accumulation of net financial assets in the private domestic economy. Eachtime, the government tries to reduce its net spending, the resulting liquidity squeeze inthe non-government sector, forces a reduction in net financial assets in that sector.
The implication here is that, given the strong propensity to save in Japan and the relatively
stable external surpluses, the government must run continuous deficits to fund the overallsaving desires of the private domestic sector. The variance in those desired fiscal deficits
depends on the shifts in the external position – when the external surplus is lower, thefiscal deficits have to rise, to maintain income growth, and vice versa.
Figure 9 Sectoral balances, Japan, 1980 to 2022, per cent of GDP

Source: IMF World Economic Outlook.
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Figure 10 shows the sectoral balances for Australia from 1988 to 2022 as a per cent of
GDP. They represent quite a contrast to the evolution of the balances for Japan andreinforce more emphatically why continuous fiscal deficits are essential to maintainstability in Australia. Over the long period for which we have data, the Australian
government has been in deficit around 85 per cent of the time. Fiscal deficits are the norm
for Australia, whereas periods that the government has recorded surpluses are not normal
and are associated with typically undesirable behaviour in the private domestic economy.
Since the mid 1970s, Australia has also run external deficits of around 3-4 per cent of
GDP. They vary with fluctuations in the terms of trade, which just reflect the movements
in primary commodity prices. Australia is a capital importing nation and that drives theexternal position.
Figure 9 Sectoral balances, Australia, 1988 to 2022, per cent of GDP

Source: IMF World Economic Outlook.
It is only in recent years that Australia has recorded external surpluses on the back ofbooming commodity prices. The boom will be ephemeral and the structural bias towards
external deficits will reassert itself once the boom expires. Most forecasts are predicting
a return to external deficits of around 3 per cent of GDP in the coming years.
Focusing on the other two balances, we see, as in the case of Japan, the strong mirror
image relationship between the fiscal balance and the private domestic balance. After the15

1982 recession, as Monetarism became the dominant macroeconomic paradigm,
Australian policy makers sought to eliminate the fiscal deficits and put the government
sector into surplus. They erroneously believed this would create ‘national savings’, which
would stimulate productive investment. As a result of the austerity policies that were
pursued, and given that the external sector was in deficit and draining growth prospects,
the liquidity squeeze forced the private domestic sector into deficit.
Around this time, financial market deregulation accelerated, and it became much easierfor households to access credit and accumulate debt. The combination of the liquidity
squeeze from the fiscal contraction and the easier credit access meant that households had
to increasingly borrow funds to maintain their consumption expenditure.
That period came to an end with the 1991 recession, which was the worst downturn inAustralia since the 1930s Great Depression. The government was forced into deficit andoverall saving in the private domestic sector returned to surplus. However, in 1996, aconservative (neoliberal) government was elected and intensified the pursuit of fiscal
surpluses. The fiscal contraction during this period was significant.
As a result, the household saving ratio fell quickly into negative territory and household
debt rose sharply (see Section 4). The household saving ratio had averaged around 10 per
cent of disposable income before then. The only reason that the national government was
subsequently able to sustain 10 surpluses in 11 years was because aggregate demand was
being driven by the private domestic debt accumulation. Later in the period, the mining
boom, discussed above, also provided support for spending in the face of the continuing
fiscal withdrawal.
However, had the Australian households responded in the same way as Japanesehouseholds to the squeeze on disposable income, then the fiscal surpluses would have
evaporated very quickly and driven the economy in recession.
That period came to an end with the onset of the GFC, which forced the government backinto deficit and provided the income support for the private domestic sector to return tosurplus.
The lesson for all governments here is that if the private domestic sector desires to net
save overall and plans its spending behaviour accordingly, then it a damaging strategy to
aim for surpluses, if that requires a substantial squeeze on private domestic liquidity andescalating private debt levels. The lesson from Australia’s history is that the only way
growth can continue with the imposition of fiscal austerity is for the private domestic
sector to increasingly accumulate debt. That can only be a finite state and eventually the16private domestic balance sheets become so precarious that the credit-fuelled spending
growth comes to an end and recession ensues. It is true that the external sector surplusesin Japan reduces the size of the fiscal deficits that are required to maintain growth. But
the fact remains, it is highly unlikely that Japan will ever be able to run fiscal surpluses
for any length of time without causing a major recession.

7.

Qualitative research into happiness

In Japan, wages growth has been very low for an extended period and despite the low
inflation, real purchasing power in some occupations has also declined. Japanese workers
are also tolerant of this situation. But are they happy and are Australian workers better
off in terms of happiness because their wages have not been as suppressed as the wagesof their Japanese counterparts have been?
The World Happiness Report, published by the Sustainable Development Solutions
Network compiles data from a global survey and provides insights across several
measures into how citizens consider their progress in life. The individual elements arecompiled into a single Happiness Index.
Helliwell et al. (2022: 1-2) outline the meaning and intent of the explanatory componentsthat are aggregated to produce the summary Happiness Index:§

GDP per capita is a purchasing power parity measure.

§

Healthy life expectancy measures how long people live on average.

§‘Social support (or having someone to count on in times of trouble)’.

§Freedom to choose – is a measure of the degree to which an individual can makechoices.

§

Generosity measures the extent to which individuals donate to charities.

§

Corruption perception measures perceptions of corrupt behaviour in government andprice corporations.

Figure 11 reports the results for the 2022 survey for Australia and Japan. The average in
2022 for all countries in the survey was 5.2, which means that both Australia and Japanare above average. Australia was ranked twelfth overall of the 146 countries surveyed,while Japan was ranked fifty-fourth overall. Finland came out as the happiest country(rating 7.821), while Afghanistan was the unhappiest (rating 2.404).

17Figure 11 World Happiness Report survey results, 2022, Australia and Japan

Source: World Happiness Report 2022.

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In terms of the explanatory components, it appears that Japanese people are less inclined
to value GDP per capita, and much more inclined than Australians to value being healthy
and having a good health system. Australians are more generous it seems than theJapanese and record a higher social support result. Finally, Australians are much moreaware of corruption in their public and private institutions relative to Japanese citizens.
The research task ahead is to explore these dimensions further and integrate them into thebroader comparative analysis.

8.

Conclusion

In this introductory comparative analysis, we have sought to highlight some of thesimilarities and differences between the behaviour of the Japanese economy relative to
the Australian economy.
The analysis is intended to tease out further research questions that can be explored.

References
Helliwell, J.F., Huang, H., Wang, S. and Norton, M. (2022) ‘Statistical Appendix for
Happiness, benevolence, and trust during COVID-19 and beyond’, World Happiness
Report 2022.
Mitchell, W.F., Wray, L.R. and Watts, M.J. (2019) Macroeconomics, Red Globe Press,
London.

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