The Japanese Stagnation has become the classic macro case study. For at least a decade it was featured so prominently on our PhD Comprehensive exams that one of my fellow graduate students asked “If the Japanese economy ever recovers does that mean we don’t have to take Macro anymore”

Yet ever now again people ask, maybe macro policy Japan isn’t that bad. Maybe its all structural. They are an aging population after all. 

Matt Ygleisas considers the question

I sometimes think Japan may just be Texas in reverse. The Texas economy is growing sharply because people are moving there, which seems to have confused Richard Fisher into not noticing that it’s in the same severe recession as the rest of the United States. Japan’s labor force is shrinking because of low birthrates, very high life expectancy, and an unusually severe case of aversion to immigrants. Japan also clearly did have a very real recession in the 1990s after the stock market crash. But at first blush it doesn’t seem obvious that present-day Japan actually does have large quantities of idle resources. Japanese firms seem to have coordinated around expectations of sluggish growth and investment, but why wouldn’t growth be sluggish if the workforce is shrinking?

I don’t think that can explain it. Here for example is growth in Japan’s working age population versus growth in employment. Population in blue, employment in red.

FRED Graph

In addition, I think some of the deterioration in working conditions is hidden by the fact that Japan is becoming older and older people have lower unemployment rates.

Here is unemployment for younger people in Japan

FRED Graph