UPDATE: Thanks to Scott Sumner who alerted me in his comment below that I had not properly checked the data for Japanese GDP on the St. Louis Fed website. There was one series covering real GDP annually from 1960 to 2010 and another quarterly series from 1994 to 2011, which is what I used. The second series was listed as GDP, so I assumed that it meant nominal GDP. But when I checked after reading Scott’s comment, I found that indeed it was real GDP as well. Then using a separate series for the GDP deflator I calculated nominal GDP. I make corrections in the post below and have modified the title of the post accordingly.
Peter Tasker has an excellent op-ed (“Europe can learn from Japan’s austerity endgame”) in Monday’s Financial Times, pointing out that Japan for the last two decades has been pursuing the kind of fiscal austerity program now being urged on Europe to combat their debt crisis.
When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 percent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt as swollen to a sumo-sized 200 percent of GDP.
Fiscal austerity did not begin immediately, but “Japan’s experiment with Keynesian-style public works programmes” ended in 1997. The public works programs did not promote a significant recovery, but in the six years from 1992 to 1997, real GDP at least managed to grow at a feeble 1.3% annual rate. But in the two years after austerity began — public works spending being cut back and the consumption tax raised, real GDP fell by 2.1% (1998) and 0.1% (1999). Despite fiscal austerity after 1997, the budgetary situation steadily deteriorated, government outlays rising as percentage of GDP while tax revenues are 5% lower as a percentage of GDP than in 1988 when the consumption tax was introduced.
also asserts observes that Japan’s nominal GDP is now lower than it was in 1992. The data on the St. Louis Fed website do not seem to bear out that claim. According to the St. Louis Fed data, nominal real GDP in the third quarter of 2011 was 13.1% higher than in the first quarter of 1994, which is the starting point for the St. Louis Fed data series of Japanese nominal GDP. Nominal GDP over the same period fell by 5.2%. Thus, over the 17.5 years for which the St. Louis Fed reports Japanese NGDP, the average annual rate of growth of NGDP has been 0.74 -0.3%. That is the future the Eurozone countries are looking at unless the European Central Bank is willing to take aggressive steps to ensure that nominal GDP growth is at least 5% a year for the foreseeable future. An increase in Japanese NGDP growth wouldn’t be such a bad idea either. As I have observed before (also here and here), the European debt crisis is really an NGDP crisis.