Lessons from Japan

Targeting zero inflation worked for the Japanese

Imagine living in a country that has had virtually no inflation for the past two decades, low or even negative interest rates and home prices that today are about equal to where they were twenty years ago. Imagine a country devoid of homeless camps or people living on food stamps and state run welfare programs.

That country is Japan. You can buy a home in Japan today for a bit more than in 2004 and for many years in between 2004 and today for a lot less.

Per capita GDP in Japan has risen steadily for decades.

Japan per capita GDP

Japanese inflation has been near zero since 2004. Despite minor year to year changes, prices in Japan are about where they were twenty years ago.

Japanese citizens incomes varied by age group in 2004 and do so today as well.

While incomes have not grown much in the twenty year period, Japanese citizens have aged during the twenty years so that someone who earned 369,000 Yen in 2004 would now earn 583,000 Yen, an increase of about 2% per year in real terms.

In North America and Europe, where economists promote growth as the key to improving incomes, real GDP per capita has disappointed. In United States, real GDP per capita has grown from US$52,000 in 2004 to US$67,000 in 2024, a growth rate of 1.2 percent per year.

Like Japan, income of Americans tends to grow with age and today the average income of Americans 35 - 44 years of age is US$55,000 while for those twenty years older in the 55-64 year age group, the average income is US$62,000. Growth of income with age adds about 0.5% to the growth in annual income in addition to growth in per capital GDP. On balance, Americans are no better off than Japanese.

While the U.S. has a slight edge in GDPe growth, the result in the U.S. system includes unaffordable housing and food inflation that threatens food insecurity for many households. In Japan, homelessness affects less than 4,000 people (.003 percent of the population) while the United States the number approaches 600,000 (almost 1.5 percent of the population).

A criticism of Japan is that the country is host to numerous so-called “zombie companies” that continue to operate despite inability to repay debts and low productivity, kept alive by the banks. It is hard to see why that is worse than social assistance such as welfare which is a U.S. phenomenon. As of June 2022, over 60 million Americans received welfare in one form or another. Japan spends far less than America on social assistance programs, with most elderly looked after by their families rather than reliant on the state.

There are major cultural differences between Japan and United States and not much chance United States would adopt policies similar to those in Japan or that Americans would line up with such policies if they were adopted.

But maybe Japan could teach United States some lessons. While the Japanese have paid a price in terms of economic growth, the population of Japan is free from the social issues which confront North American countries including persistent inflation, unattainable housing, growing homelessness, and a sizeable number of people living on the dole. One policy that could be exported from Japan to America is setting an inflation target of zero and not pretending that minor changes in Fed policy rates are the control knob for the economy. Japan’s approach did not see zero inflation every year but saw inflation range from negative 2.5% to positive 3.5% as Japanese policy makers adjusted to the boom-bust cycle inherent in business activities. In my opinion, policies that promote price stability even with minor deviations to deal with business cycles are preferable to those that legislate and encourage persistent price rises.