Axis Losers: Comparing Germany And Japan

Axis-LosersDespite suffering defeat in World War II, both Germany and Japan achieved postwar economic growth described as miraculous. Yet both nations now grapple with longstanding economic stagnation.

The bubble that had levitated the Japanese economy through the latter 1980s began deflating in 1991, with the ensuing economic stagnation dragging on now for over a decade. Since 1991, annual economic growth in Japan has limped along at just 1% year-over-year in real terms. In recent years, moreover, the nominal growth rate has been negative as the nation remains caught in a vortex of deflation.

Stressing that there can be no growth without reform and describing itself as the government “determined to push through reforms,” the administration of Koizumi Junichiro took office in April of 2001. Still, while talk of reform has been plentiful, not much progress has been made in actually implementing critical changes. Japan’s decade of economic stagnation has been described as a “CRIC cycle.” When a “crisis” develops, the government makes a “response,” which is followed by “improvement,” but then by “complacency.” The necessary reforms then fail to gain headway, resulting in a new “crisis.” According to this view, such a cycle has repeated for over a decade, leaving Japan’s basic economic and social structure outdated.

This writer is in basic agreement with that analysis. Responses to crises have been focused mainly on short-lived maneuvers to create additional demand, such as expanded government spending primarily on public works. Such measures did not involve radical structural change. As a result, they yielded only short-lived economic spurts now and then. Neither the trend of economic growth nor the potential for such growth showed any improvement, with the spending only serving to exacerbate the deficit.

After realizing its much-desired unification in October of 1990, Germany entered the decade flush with optimism, only to see economic conditions stall. Regarded as Germany’s “second unification,” the consolidation of European Union currencies into the euro was feted in 1999, but as actual currency integration approached in the latter 1990s, Germany’s relative decline in Euroland was already becoming evident. Germany’s economic growth rate was stalling, and the competitiveness of her exports was suffering. Even German companies stepped up their investments elsewhere in Europe.

Like Japan, Germany faces excessive foreign direct investment, with domestic industry hollowing out as companies transplant factories out of the country.

Unlike Japan, Germany has not fallen into a deflationary spiral with nominal economic growth doggedly in the red. However, the nation’s unemployment rate tops 10%. While Japan’s unemployment rate stands at record highs in historical Japanese terms, it remains in the 5-6% range.

With the close of the Cold War, even as countries worldwide competed in tensely to retool their economic systems for free competition, Japan and Germany maintained socio-economic systems of “‘equal results for all” to an extent that even the former socialist nations could not achieve, and a fundamental cause of economic stagnation in both nations has been the erosion of the economic and social vitality born of competition. Some cynical observers even remark that socialism has succeeded better in Japan and Germany than anywhere else in the world.

The word “competitiveness” has become a shibboleth in global political and business circles in the twenty-first century. Countries building market economies for the first time are, on the whole, nations where wages are far lower than those in Japan and Germany, and they have workers intensely motivated by the prospect of improving their lives. Along with the word “globalization,” “mega-competition” is another word which has come to symbolize the post-Cold War world. In the economic successes of Japan and Germany over the half-century following the end of the Second World War, socio-economic trends, systems and practices that stressed stability over competition and equality over differences took deep root.

Another cause of economic distress that Japan and Germany share is the structural burden that has accompanied post-bubble retrenchment. Moving beyond that will require thoroughgoing reform of the labor market, the employment system, the medical care and health systems, the educational system, the taxation system and the financial system of each country. The prosperity that these two nations experienced over the hall-century since the Second World War has brought a seeming “paradox of success.”