What's up with Japan? (G, evidently)
There is a very interesting monetary policy experiment happening in Japan these days. The outcome of the project will surely be discussed in future macro textbooks. While we are waiting for events to play out, I thought it might be of some interest to provide some context in terms of Japanese GDP data since 1980.
The first diagram reports the behavior of expenditure shares. C is private consumption (including imports), G is public consumption (including imports), I is both private and public investment (including imports), X is exports, and M is imports. By definition, the GDP can be decomposed into its expenditure components as follows: Y = C + I + G + X - M.
Recall that the great slowdown in growth occurred in 1990-91. Here is the picture:
Since the great slowdown, (C/Y) increased from 53% to 60% and (G/Y) increased from 13% to 20%. That's one heck of a consumption boom!
That consumption boom has been financed by a dwindling expenditure share accruing to domestic investment. In 1990, (I/Y) was about 32%, today, it is about 21%.
The next diagram plots real GDP, with its components C, I and G all normalized to 100 in 1980.
We see the great boom early on in the sample, fueled by domestic investment spending. Over that period of time, both private and public consumption grew at essentially the same rate as income (GDP).
Since the time of the great slowdown, the trajectories of these expenditure components have diverged significantly (so much for the "balanced growth" assumptions we frequently embed in our theories!).
What really stands out in this data, to my eye at least, is how G and I appear to have gone their separate ways.
It would be of interest to dig deeper into the data to find out what is going on. What is all that G being used for? Was it too low to begin with and is now just approaching its desired level? Is the increase in G crowding out investment I? Or are there other forces responsible for this pattern--and does the increase in G represent a desirable response to these other forces?
And, of course, the big question for monetary policy wonks: Is a massive asset-purchase program on the part of the Bank of Japan really what that economy needs? Or are policy interventions better directed elsewhere?
The first diagram reports the behavior of expenditure shares. C is private consumption (including imports), G is public consumption (including imports), I is both private and public investment (including imports), X is exports, and M is imports. By definition, the GDP can be decomposed into its expenditure components as follows: Y = C + I + G + X - M.
Recall that the great slowdown in growth occurred in 1990-91. Here is the picture:
That consumption boom has been financed by a dwindling expenditure share accruing to domestic investment. In 1990, (I/Y) was about 32%, today, it is about 21%.
The next diagram plots real GDP, with its components C, I and G all normalized to 100 in 1980.
We see the great boom early on in the sample, fueled by domestic investment spending. Over that period of time, both private and public consumption grew at essentially the same rate as income (GDP).
Since the time of the great slowdown, the trajectories of these expenditure components have diverged significantly (so much for the "balanced growth" assumptions we frequently embed in our theories!).
What really stands out in this data, to my eye at least, is how G and I appear to have gone their separate ways.
It would be of interest to dig deeper into the data to find out what is going on. What is all that G being used for? Was it too low to begin with and is now just approaching its desired level? Is the increase in G crowding out investment I? Or are there other forces responsible for this pattern--and does the increase in G represent a desirable response to these other forces?
And, of course, the big question for monetary policy wonks: Is a massive asset-purchase program on the part of the Bank of Japan really what that economy needs? Or are policy interventions better directed elsewhere?
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