Japan – Canary in the Coal Mine for the Great Decline of the Western Economies

Abstract

Japan is the most significant economy in the world today, because it exemplifies fifty years of declining economic growth for the major advanced economies. This paper provides an overview of distinct models for economic growth, inflation, interest rates, and the yield curve and applies them to Japan’s economic and financial circumstances.

Japan’s growth decline is due to lower net investment, which is now almost zero. Japan’s low economic growth is not due to its low population growth; low population growth is due to low economic growth. Low inflation will continue. Inflation from monetary stimulus diminishes geometrically – now virtually zero in all western economies. Inflation from non-monetary causes depends on economic and population growth – both very low for Japan. Fixed income and equity investment returns are now largely governed by central bank intervention without which yields would be higher and above zero, while equities would be lower.

Japan can break the downward economic spiral and attain 3% growth with 2% inflation by reducing government spending relative to GDP as Sweden and Ireland successfully have done. Should Japanese government spending rise significantly from current levels, the country will be trapped in negative growth and deflation.