between the manufacturing and the non - manufacturing sectors has been a basic feature of the japanese development process after the meiji restoration. it has caused mild inflation in the high - growth era under the fixed exchange rate system, and given rise to the internalexternal price differential problem under the flexible exchange rate system. i am inclined to the view that one of the aims of structural reform after the plaza accord in 1985 was to narrow the productivity gap. the effort to raise labor productivity in the non - manufacturing sector to the level of the manufacturing sector will result in a higher economic growth rate over the coming decade, although it works to delay the timing in overcoming deflation in terms of the core consumer price index, due to sustained downward pressure on the unit labor cost. the rise in productivity will nevertheless tend to increase the natural interest rate ; that is, the equilibrium rate of return on capital stock in the absence of monetary disturbance. if it exceeds the real long - term market interest rate, then deflation will cease to exist. this doctrine was elaborated about one hundred years ago by the swedish economist knut wicksell. his proposition can be summarized as “ the higher the expected growth rate, the easier it is to exit deflation. ” krugman ’ s argument can be regarded as a corollary to this proposition. in this sense, the sustainability of recovery is the key to overcoming deflation. on the demand side of capital stock in the process of the ageing population, the decreasing working - age population leads to diminished demand for productive investment, because the capital stock required to maintain the capital equipment per worker decreases. in many countries, we observe that the change in the share of the working - age population in the total population is associated positively with the productive investment ratio. according to the study by poterba ( 2001 ), this positive association can also be observed with respect to the level of asset prices ( measured by the dividendprice ratio ), although the relationship between the rates of return on various assets and the working - age population share is ambiguous. 3 several experts in demography argue that economic miracles such as those in asia and ireland are simply due to the rise in the share of the working - age population. in the case of japan, the working - age population ratio increased from about 60 percent to about 70 percent in the high - growth era ( from 1955 to 1970 ). in china, the working - age population ratio increased from 55 percent in 1975 to 60 percent in

did earlier in the post - world war ii period. exports, of course, were a much smaller share of world gdp in those years. and many, perhaps most, producers, as exchange rates moved in their favor, accordingly chose to pick off only the low - hanging trade fruit, so to speak. such opportunistic exports obviated large up - front financial commitments to foreign markets. as trade barriers have been lowered over the decades, much has changed, evidenced by the emergence of critical mass in many export markets, the growing importance of multinational firms, and the rise of production processes that are integrated across borders. * * * the interaction of a wide range of economic forces, which adjust at national borders to create what we call the current account balance, has proved difficult to predict with any precision, primarily because of the difficulty of forecasting exchange rates. these same forces have lessened our ability to anticipate the consequences of a buildup of either a surplus or a deficit. in addition, numerous issues that have arisen with respect to the adjustment of the u. s. current account remain unresolved. one is the effect of asian official purchases of dollars in support of their currencies. such intervention may be supporting the dollar and u. s. treasury bond prices somewhat, but the effect is difficult to pin down. another issue is the influence of still - growing globalization, arguably one of the key factors that has facilitated the financing of the u. s. current account deficit. there is little evidence that the growth of globalization has yet slowed. the dramatic advances over the past decade in virtually all measures of globalization have resulted in an international economic environment with little relevant historical precedent. 7 i have argued elsewhere that the u. s. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the american economy will likely facilitate any adjustment without significant consequences to aggregate economic activity. 8 that argument will be tested, i suspect, by possibly new twists and turns that will emerge in a seemingly ever - more complex international economic and financial structure. the r² of a simple regression using quarterly data since 1952 is 0. 5. adding a trend to reflect the influence of other factors such as the greater income elasticity of demand of u. s. imports relative to that of exports raises the r² to 0. 7 and does not reduce the significance of the connection between home mortgage debt and the current account. to be sure, the rapid globalization of the latter part of