Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph.It would be happy if our bitter experience in the 1990s were a triumph. Unfortunately, he is wrong. His only source is a book by Richard Koo, an economist who is not respected very much in Japan. His new book, The Holy Grail of Macroeconomics is full of factual errors.
He insists that the wasteful spending policy of Japanese government in the 90s rescued Japan from depression. The fact is shown in Fig. 1. Real GDP growth of Japan became negative after the first fiscal stimulus in 1992. After the biggest stimulus in 1998, GDP fell negative again. With additional stimulus in 1999, growth became slightly positive, but fell negative in 2001. Apparently the spending of a hundred trillion yen didn't much help.
Fig. 1
The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.This is wrong, too. Fig. 2 shows the real GDP growth from 1996 to 1997 in Japan. It shows that GDP rose in 10-12 in 1996 because consumers bought expensive goods before the tax hike in April 1997. Then GDP fell as a rebound in 4-6 and 7-9 in 1997. It recovered to the normal level in 10-12. In 1998, the GDP collapsed because of the credit crisis triggered by the bankruptcy of two major financial institutions in November in 1997.
These are conventional wisdom among Japanese economists. If Wolf read, for example, Ihori et al., he would find that Koo's argument is completely refuted by professional economists. Their paper is written in Japanese, but FT must have translators. If you talk about Japanese economy seriously, you should read serious articles mostly written in Japanese. We don't talk about British economy with reading only one paperback in Japanese.
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