Gross Domestic Product and the growth rates of Gross Domestic Product do not tell the whole story about any economy. However, they are two parameters that get a lot of attention both in the news media and among economists and economic analysts. Japan has slid behind China in terms of annual GDP over the last two decades and its growth rate has languished. As we look forward to the next decade or so, will the American economy start resembling the Japanese economy in many ways ? Let's look at some similarities. Japan has a very high public debt to GDP ratio, around 200%. The US public debt to GDP ratio is around 100% and may well reach the kind of level Japan has now in another decade, even if the US Congress succeeds in cutting the annual budget deficit to around 0.6 trillion from the current deficit of more than a trillion. Low taxes failed to spur Japanese GDP growth to the extent the Japanese policy framers wanted and Japan has recently decided to pay more attention to its spiralling debt to GDP ratio. The US obsession with low taxes is producing consequences that are similar to Japan. The GDP growth numbers have been either bad or unimpressive. What makes it worse is the fact that whatever GDP recovery has happened recently has not led to good net job growth rate in the US. Large government budget deficits tend to create pressure on the current account and the trade balance of a country. Japan was a strong net exporter. However, its trade balance has come under pressure recently and its large government budget deficit may well be a major contributing factor. The US has been a net importer and persistence of the government deficit will keep creating pressure on this front. As the composition of Chinese economic production and the composition of China's exports and imports change in the coming years, the export and import numbers of the United States and some other countries may see a lot of changes. One needs to keep in mind the fact that both the export and import amounts and the trade deficit matters. The sustainability of the US trade deficit and current account deficit depends on the willingness of non-US entities to buy US assets. Unimpressive GDP growth rates, crises in financial institutions, unsteady corporate profits and vulnerable public finances do not create the right conditions for the inflow of foreign money into the US. While Japan has avoided some of these problems due to its strong export strength in the past, it may also start encountering some of the problems that the US has been having.
In other words, the US and Japan have a lot to learn from each other's economic experiences. How these two countries tackle the problems of high public debt to GDP ratios, pressure on trade balances and current account balances, reliance on foreign money and the contradictions between reliance on foreign money and unimpressive economic performance at home will affect the future economic trajectories, not just of these two countries, but also the economic future of the world.
A few crucial things need to be kept in mind while comparing Japanese economic problems with similar economic problems in the US.
1. Japanese net public debt is around 110% of GDP, much lower than its gross public debt of around 200% of GDP. The percentage difference between gross and net public debt of the US is not that high. So, among very big economies, as opposed to smaller European countries, the US may well have the most serious public debt problem, even more serious than Japan, as we speak.
2. Only 6% of Japanese public debt is in foreign hands. On the other hand, China owns about a trillion dollars worth of US treasury bonds and Japan about 1 trillion dollars worth.
3. The unemployment rate in Japan is around 4.5%, which is much lower than the current US unemployment rate of around 8%. This has implications not just for policies designed to promote higher GDP growth etc, but also for public finance. The need to bring unemployment numbers down and the need to keep fiscal deficits under control will create tensions in the fiscal policy area.
4. Poverty rates in the US and Japan are similar if one goes by the criteria used in the respective countries. However, the fact that this poverty is accompanied by much higher unemployment in the US means that it becomes much more difficult to come up with policies designed to keep both low while ensuring public fiscal stability.
5. The current account deficit of the United States is sustainable only if private and government entities in the US keep attracting enough foreign money. The United States is likely to face bigger problems in this area than Japan in the near future.
by C. Jayant Praharaj ( send comments to [email protected] )
In other words, the US and Japan have a lot to learn from each other's economic experiences. How these two countries tackle the problems of high public debt to GDP ratios, pressure on trade balances and current account balances, reliance on foreign money and the contradictions between reliance on foreign money and unimpressive economic performance at home will affect the future economic trajectories, not just of these two countries, but also the economic future of the world.
A few crucial things need to be kept in mind while comparing Japanese economic problems with similar economic problems in the US.
1. Japanese net public debt is around 110% of GDP, much lower than its gross public debt of around 200% of GDP. The percentage difference between gross and net public debt of the US is not that high. So, among very big economies, as opposed to smaller European countries, the US may well have the most serious public debt problem, even more serious than Japan, as we speak.
2. Only 6% of Japanese public debt is in foreign hands. On the other hand, China owns about a trillion dollars worth of US treasury bonds and Japan about 1 trillion dollars worth.
3. The unemployment rate in Japan is around 4.5%, which is much lower than the current US unemployment rate of around 8%. This has implications not just for policies designed to promote higher GDP growth etc, but also for public finance. The need to bring unemployment numbers down and the need to keep fiscal deficits under control will create tensions in the fiscal policy area.
4. Poverty rates in the US and Japan are similar if one goes by the criteria used in the respective countries. However, the fact that this poverty is accompanied by much higher unemployment in the US means that it becomes much more difficult to come up with policies designed to keep both low while ensuring public fiscal stability.
5. The current account deficit of the United States is sustainable only if private and government entities in the US keep attracting enough foreign money. The United States is likely to face bigger problems in this area than Japan in the near future.
by C. Jayant Praharaj ( send comments to [email protected] )