Japan had one lost decade, but not two

Matt Yglesias thinks that Japan did indeed have two lost decades (1990-2007). But I disagree with the arguments he makes. I believe that 2002-2007 were good years for Japan.

First of all, Matt cites the fact that Japan's employment-to-population ratio fell steadily from 1990. However, this must be weighed against the fact that Japan is aging extremely rapidly. In particular, the retirement of Japan's baby boomers began in 2005, since the retirement age for many Japanese workers is 60, not 65 as in the U.S.

Next, Matt cites a fall in Japan's hours worked per employed person, from about 2,100 in the late 80s to about 1,750 in the late 2000s. However, a reduction in hours worked can be part of a long-term trend toward more leisure. In fact, as Matt himself pointed out in a post about the Great Depression, the U.S. experienced a long-term fall in hours worked during the period from 1920 to 1980, most of which were good years economically:

(Note that this graph shows something slightly different than the graph Matt shows for Japan, so the levels can't be directly compared.)

In fact, given Japan's legendary culture of overwork, a fall in hours - if it is real, and not simply a reflection of an uptrend in unpaid, unreported overtime - is probably a good thing.

The fact is, despite the trends that Matt cites, Japan's real per capita GDP growth did slightly better than that of the U.S. (and about as well as Europe) during the period from 2000-2007:

Paul Krugman also points this out. Actually, I lived in Japan in 2004 and 2005, and I remember how well everyone said the economy was doing (including the econ professor I worked for).

If Japan had a "lost decade" in the 2000s, then the whole developed world had one as well. And given the variety of policies being enacted around the world (historically low interest rates and high budget deficits in the U.S., for example), it seems a bit of a stretch to conclude that the whole world suffered a simultaneous lost decade resulting from a simultaneous policy mistake that led to a worldwide aggregate demand deficiency. (Not that AD wasn't an issue in Japan; in fact, Japan's period of robust growth in the mid-2000s followed a policy of quantitative easing and an uptick in inflation.)

So I agree with Krugman. Japan had one lost decade (the 90s), but not two.

Update: Krugman also argues that Japan could have done a lot more and recovered a lot faster than it did. I agree with that. But I think that the success of the Koizumi years (early- and mid-2000s) should not be ignored, since it represents probably the best policy experiment we have regarding the effectiveness of quantitative easing.

Update 2: More on the subject, from CEPR. It seems that Japanese productivity growth outpaced America's from 1990-2007! Wow, I hadn't known that! How people can see numbers like that and still believe that economic stagnation is caused by technology shocks is beyond me...