The Economic Fallacy of ‘Zombie’ Japan

Japan has been getting a raw deal from the so-called economic experts. Consider this: in the midst of the great recession, the United States is suffering through nearly 10% unemployment, rising inequality and poverty, 47 million people without health insurance, declining retirement prospects for the middle class and a general increase in economic insecurity. Various European nations also are having their difficulties, and no one knows if China is the next bubble due to explode.

How, then, should we regard a country that has 5% unemployment, the lowest income inequality, healthcare for all its people and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in numeracy and literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the US and China by a country mile.

Doesn’t that sound like a country from which Americans and others might learn a thing or two about how to get out of the hole in which we’re stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case so much as Japan: it’s been hard to find any reference to the country without some mention of its allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called “Japan syndrome“, sounding like a disease to warn policymakers, as in “you don’t want to end up like Japan.”

No one has been more influential in defining this narrative than Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still today, Krugman has skewered Japan’s economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations and titles like “Japan’s Trap” and “Setting Sun”, bluntly stating:

“The state of Japan is a scandal, an outrage, a reproach … operating far below its productive capacity, simply because its consumers and investors do not spend enough.”

But let’s look at some of the Japanese metrics during that time. Throughout the 1990s, the Japanese unemployment rate was – ready for this? – about 3%, half the US unemployment rate at the time. During that allegedly “lost decade”, Japan also had universal healthcare, less inequality, the highest life expectancy, low infant mortality and low rates of crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritise, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models?

In the current debate over fiscal stimulus versus deficit reduction for economic recovery, various economists now are criticising Germany. Krugman has written that the Germans “seem to be getting their talking points from the collected speeches of Herbert Hoover”. Krugman, a stimulus hawk, is criticising Germany for the same thing for which he has criticised Japan – not spending, or consuming, enough to stimulate its economy.

Yet, in the early 1990s, when the US was plagued by large deficits and recession, the Clinton administration didn’t employ Krugman-type fiscal stimulus. Instead, it cut the deficit. By the end of the decade, the US budget showed a sizable surplus and the economy was booming.

Japan’s economy has been and remains successful. So is Germany’s. They have reached an economic steady state in which they don’t need roaring growth rates to provide for their people. But for the economic Cassandras, apparently, it doesn’t matter if people’s needs are being met; what matters is whether their theories and equations balance.

Unfortunately, there is a common sense aspect to this that gets lost amid the rhetoric. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. In other words, the real game is no longer strictly about economic growth; it’s about sustainability and learning to do more with less. The era of US-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development.

This is not an easy challenge, yet it is the course that Japan and Germany have chosen. Americans would be wise to learn from them. If the US didn’t have such a trickle-down economy that has produced so much inequality – if it was, in fact, better at sharing its wealth – perhaps it wouldn’t need so much fiscal stimulus and growth.

Steven Hill

New America Foundation

Steven Hill has recently published Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age

Originally published in The Guardian. Republished with the author’s permission.


  1. Jerry says

    Don’t do as Glenn Beck and the others who run around telling 1/2 truths. Maybe you could finish your story in a part 2 article. Discuss how a weak currency has been driving manufacturing in Japan. Everyone in Japan has money in the bank right? What good did it do them when it(yen) was worth nothing? Now that the Yen has started to go up against the dollar what is unemployment? You forgot to mention this model economy now has doubled the unemployment rate! What are they doing about it? Printing money. Yet when Obama does it he is the anti-christ. What about Krugman? He said what? Stimulus or “printing money”. Yet he is the devil. So, if Japan is the model why are they following us?

  2. Mike Klein says

    Funny how Japan’s national debt was not mentioned in this article. How does the fact that Japan’s national debt of 192% compared to GDP work into the paradigm that Japan seems to be a model of sustainable economics?

  3. says

    A stimulating article, but give us a break. The Japanese are human, and even unnecessarily fallible, even in the arenas where supposedly they are teaching us a lesson. For instance, Japan = ‘environmental responsibility’?? Why then is the Japanese govt. fostering an unsustainable whaling industry that insists on ‘researching’ the whales to extinction, not only in seas near Japan, but globally even in the Southern Ocean.

  4. TANSTAAFL says

    Wow! That anyone could read this and think it is reasonable is astounding to me. I don’t know where to even begin. Ok, let’s try this – “lowest income inequality”. Does anyone know how this is actually measured and what it means before they jump all over the “Eat the rich” bandwagon? For starters, it doesn’t take into account age or mobility. What I mean is that 20 somethings out of college do not make as much as their parents, however, as they become more experienced and educated their incomes rise. The disparty of income between a 20 year old and that same person at age 50 is measured as spit out as “inequality of income”. Does anyone really believe that is what this means? also, it doesn’t indicate when people move down, only the total number at each wage level. In the latest stats in the US, for example, less than 20% of earners at the highest income range remained their at the next measurement. That means 80% dropped and nearly as many moved up. Is that not what we want – to be able to move up as we become more productive workers, save more, and increase investments and capital. So low income inequality simply means – you can’t improve your situation even after years in the workforce. is that really what you want? I am so tired of progessives and Keynesians misleading the economically ignorant in their quest for state-run lives with no opportunities for upward mobility or self improvement.

  5. Bennet Cecil says

    Japan and the US are both in peril because of large national debts. If their economies and governments were functioning properly they would have not be so deep in the hole. Voters in both countries elected politicians who spend and borrow instead of fully funding or trimming government programs.

    Trickle down is not a correct description of an economy. Money is exchanged for goods and services. It facilitates trade between farmers, grocers, plumbers etc. It does not trickle down unless you are referring to politicians who plunder from workers and then buy votes.

  6. Don Duitz says

    Brilliant! I was very interested in Japan’s stats. It’s good to see what a well managed capitalist democracy can do and how its done to provide for a prosperous society. How did we lose what we taught them???


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