Masaaki Shirakawa: The transition from high growth to stable growth -
Japan's experience and implications for emerging economies
Remarks by Mr Masaaki Shirakwa, Governor of the Bank of Japan, at the Bank of Finland
200th Anniversary Conference, Helsinki, 5 May 2011.
* * *
I. Introduction
Thank you very much for inviting me to the Bank of Finland's 200th Anniversary Conference1.
It is an honor to take part in this panel session.
After considering how I could contribute to the session "Global Shifts" as a discussant, I felt it
would be best to compare the experience of the Japanese economy from its high-growth
period onward, with that of the emerging economies which are currently growing at a very
rapid pace. Although it is not well-known, Japan's automobile industry first ventured into the
European markets through Finland back in 1962. At that time, Japanese automakers had
little name recognition, and one firm, in order to prove the safety of its car to Finnish
consumers, had the car driven off a ski-jumping hill. I have been informed that the car landed
safely and the driver was not harmed. The 1960s, when such episodes of Japanese firms
were born, was the heyday of the Japanese economic miracle.
Though needless to say, currently the emerging economies are the high-growth countries. In
the past 10 years the global economy has grown at an annual rate of +3.6%. There is a large
gap among countries. The BRIC countries have averaged +7.9% growth while non-BRIC
countries have grown at +2.1% (Slide 1). If one simply extrapolates these numbers, by 2040
the BRIC countries would have more than an 80% share of the global economy, but we all
know that is not realistic. As past economic history has shown, high-growth economies also
begin to mature at some point in time. Japan was no exception.
II. Japan's patterns of economic growth
High-growth period
Japan's post-war economic recovery began from a situation where capital stock equivalent to
86% of GDP had been lost due to World War II. It is usually understood that Japan's period
of high growth began in the mid-1950s and ended in the early part of the 1970s. During this
15 year period, the average rate of economic growth was nearly +10% (Slide 2). Let me
highlight three factors which I believe enabled such rapid growth.
First, favorable demographics (Slide 3). Total population increased at an annual rate of +1%
during this period and the relative youth of the working-age population supported both
production and consumption. At the beginning of the economic boom period, the farming
population reached approximately 40% of the total population and the migration of surplus
labor from the rural areas to the cities enabled the rapid growth of a high productivity
manufacturing sector.
Second, the use of competitive forces. It is sometimes pointed out that the government's
industrial policy or so-called "Japan Incorporated" was the key factor behind Japan's
economic miracle. I believe such public sector influence is overstated. When we look at the
history of Japan's leading firms, it is not rare to find cases where they entered into new areas
dissenting against the government's industrial policy or cases where they did not receive any
favorable treatment. There are also examples where industries and firms which were
wellprotected gradually lost their vibrancy. Strong competition supported Japan's high-growth
period by stimulating entrepreneurship and promoting technological innovation which
enabled Japanese firms to catch-up with those in advanced economies.
Third, the benefits of global free trade. When one looks at the contribution of individual
components to GDP growth, domestic demand is by far the main factor (Slide 4). However,
this does not refute the important role that the overseas economy played. Japan produced
large amounts of producer and consumer goods for the expanding global market, such as
steel, electronic appliances and automobiles. The foreign exchange obtained through exports
was used to import raw materials necessary to support domestic economic development.
The basic condition which made such a growth model possible was the continued growth of
the world economy and the maintenance of the global free trade system.
The bubble and its collapse
Japan's high-growth period ended in the early 1970s and the pace of growth gradually
slowed. However, during the 70s and 80s, Japan still maintained a relatively high-growth rate
when compared with other major advanced economies (Slide 5). Favorable demographics
and strong global competitiveness were the basic components which continued to support
economic growth. However, after the collapse of the bubble and the ensuing financial crisis
in the 1990s, the pace of growth fell below that of major advanced economies. Three
elements led to the prolonged period of economic weakness following the collapse of the
bubble.
First, of course, there was the direct effect of the collapse of the bubble. Balance sheet
problems in the private sector constrained expenditures and the credit intermediation
capabilities of the banking sector, saddled with non-performing loans, deteriorated. This led
to weak growth during the 1990s, but was not the cause of the tepid growth during the past
decade.
Second, the business model which had supported the strong growth of Japanese firms was
no longer compatible with the changed economic environment. The strength of Japanese
firms was the pursuit of operational efficiency enabled by large scale production and sales.
You all know the detailed management of production and inventories through the "just-in-time
process" and the "Kaizen system" which has become a part of the English language. Such
pursuit of efficiency gains is naturally important. But as other countries such as the Asian
emerging economies rapidly catch-up with advanced economies through technological
progress, global competition becomes more intense and increased profits cannot be
generated simply through such efficiency gains. According to a study which analyzed the
production costs of iPhones (Slide 6), of the 500 dollar sales price of the iPhone, component
costs add up to 173 dollars and assembly costs account for only 6.5 dollars. Accordingly,
gross profits reach 321 dollars. In other words, the added value for coming up with a product
concept and developing it into a product is now quite significant.
Third, demographics have changed (Slide 7). Our country's working-age population, in other
words population between the ages of 15 and 64, began to decrease in the mid-1990s. Our
society is ageing at a very rapid pace. The share of people 65 and above went from 9% in
1980 to 23% in 2009. Such rapid ageing has never been seen in past economic history.
Japan had experienced the "population bonus" based on working-age population during the
high-growth period. But now it has entered the "population onus" stage2.
III. Comparison of high-growth periods: Japan and emerging economies
Based on such an understanding of Japan's growth pattern, I would next like to conduct a
simple comparison of the high growth that China and India are currently undergoing with
Japan's past experience (Slide 8). China's rapid growth started at the beginning of the 1990s
and the pace of growth for the first 15 years is almost exactly the same as Japan. The
difference is that China has continued to grow on average at a pace above +10%. With
regard to India, the growth rate is slightly lower than that of current China, or Japan during its
boom period. This is perhaps because India has yet to enter the population bonus stage
(slide 9).
During a high-growth period, the supply of labor from rural areas plays a key role. When we
compare the urban population rate of Japan and China, China's current level is roughly
similar to Japan's level in the 1960s. Looking at the car ownership rate as a reflection of a
consumption boom due to strong household income growth, once again China's level is
similar to that of Japan in the 1960s. When seen from this simple comparison, I believe that
the Chinese economy will continue its high growth for some time. With regard to India, the
population bonus period will arrive around 2015, so its growth rate may accelerate further3.
However, as Japan's experience shows, when income levels increase together with strong
economic growth, each society faces various new challenges. A smooth transition from high
growth to stable growth is quite a challenge. From the perspective of a country which has
been facing these challenges for some time, I would like to share with you some of the
lessons we have learned.
Preventing bubbles
The first challenge is preventing the emergence of bubbles. When an economy experiences
strong growth over an extended period, society often becomes over-confident. This seems to
be human nature. Japan's bubble during the latter half of the 1980s, was the result of a
complex interaction among multiple factors. However, the fundamental reason was the
overconfidence which cloaked the entire country and the ensuing dramatically aggressive
economic behavior. At that time, Japan's growth rate was higher than other advanced
economies and the inflation rate was quite subdued. Japan was the perfect model student
(Slide 10). It may sound ridiculous, but according to an estimate released at that time, the
aggregate value of land in central Tokyo was equivalent to that of the entire United States.
Financial supervision was also insufficient. Lending to real estate, construction and non-bank
financial sectors increased sharply and lending conditions softened including the evaluation
of collateral. The prolonged period of monetary accommodation also played a role. One
reason why accommodative monetary conditions continued was the low inflation rate. The
other reason was the serious concerns toward a stronger yen and the strong overseas
pressure to reduce the current account surplus. A strong argument was put forward that
accommodative monetary policy was crucial in order to prevent a stronger yen and to bring
down the current account surplus.
Reviewing business models
The second challenge is what we may call the review of business models. There is no
universally optimal business model which is continuously applicable across time and borders.
It is true that, during the economic boom period, the business model of Japanese firms
matched the conditions of the world economy at that time. However, once a business model
is successful, it is not easy for both the country and the firm to review it in line with changes
in the environment. What is important is that regardless of whether it is a country or a firm,
the ability to reinvent itself reflecting its stage of development plays a key role.
Preparing for demographic change
The third challenge is preparing for changes in demographics. Rapid ageing of the
population would reduce labor supply and lead to a drop in the growth rate. A drop in
domestic demand would be unavoidable. From a fiscal perspective, as long as the costs of
public pensions, health care and nursing are covered by contributions from the working
generation, and if the benefit levels for the elderly are not adjusted, ageing will lead to higher
fiscal deficits. Concerns about demographic changes were already raised in the late 1980s,
but at that time it was only considered vaguely as an issue for the distant future. However, as
our experience shows, ageing has huge implications. It is evident that the vibrant emerging
economies in Asia will age in the not-too-distant future (Slide 11). In the short run,
demographics of the elderly are a given. Thus, reviewing the current social welfare
framework in order to make it viable on a sustainable basis, taking into consideration the
longer-term changes in demographics, is an enormous challenge.
IV. Conclusion
When one looks back into history, the "Global Shifts" examined by Professor Eichengreen
are happening continuously. I believe Japan's catching-up with the advanced economies
through its post-war miracle and its ensuing transition to slow growth, as well as the current
high growth of China and India, can be understood as examples of the "Global Shifts"
(Slide 12). High growth cannot last forever. In concluding, I would like to emphasize that what
is important here is to introduce a smooth transition from high growth to stable growth. Even
emerging economies which are currently enjoying high growth will likely face, in the future,
the same challenges that Japan is currently struggling with. For this, preventing bubbles,
reviewing business models and preparing for changes in demographics are especially
important.
Thank you for your attention.
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