Toyota Only Part Of Japan's Economic Woes

Toyota's problems are just a blip compared to the more systemic issues Japan's economy faces — that's what economist Robert Madsen argues. He joins host Guy Raz for a conversation about Japan's troubled economy.

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GUY RAZ, host:

Deeper problems for Toyota, but what about for Japan? Toyota is the country's biggest automaker, and its biggest market is right here in the United States.

Robert Madsen, a Japan scholar at the MIT Center for International Studies, says the Toyota crisis is just a tiny piece of what he calls much bigger problems for Japan's economy. And what are they?

Mr. ROBERT MADSEN (Senior Fellow, Center for International Studies, Massachusetts Institute of Technology): Well, one problem is the global crisis has hit Japan far harder than everybody else. Peak to trough, Japan's GDP probably fell by seven or seven and a half percent, which makes it...

RAZ: Fell by seven or seven and a half percent.

Mr. MADSEN: Yeah, which makes it three times as bad as what's happening to the United States right now.

RAZ: Now, the 1990s in Japan has, of course, been called the lost decade. This was an extended period of economic stagnation, right?

Mr. MADSEN: yes.

RAZ: But my understanding is that Japan managed to crawl out of it around 2002. What I don't understand is: Why is what is happening now hitting Japan harder than here in the United States if other countries, like European countries, for example, seem to be weathering the crisis better?

Mr. MADSEN: This is a very broad question. Those of us who kind of grew up after World War II are used to a situation globally where there's more demand than supply. And that means that people bid up prices of goods and services. Inflation is a problem.

But historically, that's an anomaly. Historically, the much bigger problem has been deflation. If you look at the 19th century or early 20th century, people saved too much. There was too little demand for goods and services. Prices tended to fall. And frankly, Japan resembles that sort of 19th century economic problem.

RAZ: There's too much savings in Japan.

Mr. MADSEN: Exactly. What happened was the savings rate in Japan was very high in the 1980s, and it did not come down. And of course, if people don't spend, economies shrink. So what happened in the 1990s was Japan had no alternative but to increase government spending very dramatically. So the government has a debt that's twice as big as the economy.

Now, as you mentioned, from 2002 to 2007, the country got out of its mess a little bit, but that wasn't because of anything which happened within Japan. That was because of the surge in growth in the United States and in China.

RAZ: In other words, we were buying more Japanese products.

Mr. MADSEN: Exactly. Now, the problem is that when the subprime crisis triggered this global financial meltdown, Japan lost that external demand. Foreigners weren't buying Japanese goods and services anymore. So the country fell right back into its 1990s illness.

RAZ: Now, in other parts of the world, there are decision being taken or that were taken that are having ripple effects not only here in the U.S. but also in Japan, and I'm thinking about what's happening in Europe right now. Can you explain the connection between what's happening in Europe and the consequences, the potential consequences, for us here in the U.S. and people in Japan?

Mr. MADSEN: What you're alluding to, I think, is the Greek crisis, where the Greek government has a massive national debt, not massive by Japanese standards, but massive, and the deficit is huge, and creditors are starting to say I'm not going to lend to you.

So what's happening is the Greek government could conceivably default and may have to leave the Euro. If that were to happen, in fact if we get anywhere near that, you would see financial pressures mount on other countries that have big debts and deficits like Spain, Portugal, Ireland.

So within a month, you could have serious crises all across the southern tier of Europe. Now, to that extent, investors are going to say I don't really trust the Euro because the thing could fall apart. They will therefore take their investment money, put it into the dollar or the yen, which are perceived as the two safe haven currencies. That would push up the value of the yen and the dollar, make it much more difficult for exporters in both countries to earn money.

RAZ: So is Japan of the 1990s or even Japan of today a cautionary tale for the United States?

Mr. MADSEN: Yes, Japan is very much a cautionary tale. The problem is we don't know what it means. We have two different economies, the U.S. and Japan, that have experienced similar problems, had have responded in dissimilar ways. So far, the U.S. response appears to have been better, but we don't really have an example of aggressive government action actually solving the problem.

So I would say that right now, we can't say whether or not we've done much better than Japan. It will take a few years before we have enough evidence to look back and reach that conclusion.

RAZ: That's Robert Madsen. He studies Japan at the MIT Center for International Studies. And he also covers the country for the Economist Intelligence Unit.

Robert Madsen, thanks for joining us.

Mr. MADSEN: A pleasure.

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