Sunday, February 22, 2009

New York Times' Misleading Article On Japanese Savings

The New York Times has an article on Japan which essentially blames its crisis on insufficient consumer spending.

The truth is however that low consumer spending is a result of low economic growth, not a cause. If really low consumer spending was the cause of the crisis the you would have expected its household savings rate to have increased. In reality, it has fallen dramatically, from 14% in the early 1990s to 2.2% in 2007 (latest year available, I suspect it fell further in 2008).

To the extent the savings rate is related to the economic crisis, it is because the savings rate is too low, and not too high, as the low savings rate means that the investment rate will be too low.

It is true that the decline in the savings rate is to a large extent related to Japan's rapidly ageing population, which means that fewer people are saving for retirement and more people consuming their retirement savings. But that doesn't change the fact that savings are at an historic low in Japan, and that weak consumer spending growth therefore is a result and certainly not the cause of Japan's economic problem.

While the article does mention in the graphic that consumers are "neither saving nor saving", the impression you get from the headline and most of the article is that savings are too high.

The article also tries to blame the alleged excess savings on deflation which supposedly makes consumers postpone purchases so that they can buy things cheaper in the future. Yet apart from the already mentioned fact that savings are historically low in Japan, the problem with that theory is that it really applies to any country with positive real interest rates, and real interest rates aren't higher in Japan than most other countries.


Post a Comment

<< Home