Japan’s liquidity trap and its cousins


Recently the Bank of Japan released this handy chart showing sectoral financial balances (savings minus investment) in the three major regions of the advanced capitalist core.

It shows – just for the record – that borrowing by the business sector in the US, Japan and the Eurozone is abysmal. The retained earnings of corporations vastly exceed their net spending on fixed investment.

Flow of funds - Japan USA and Europe

Such figures have become familiar throughout Japan’s ‘Lost Decade’ (now in its twentieth year).

Japan’s persistent liquidity trap is not a matter of conjunctural factors applying in the Keynesian short-run; the causes of flagging investment are structural.

I’ve written before of how, since Japan’s elastic labour supply exhausted itself in the 1970s, and with productivity catch-up completed, the prospective rate of return hasn’t been sufficient to motivate new projects that would tie up fungible money capital in risky and illiquid form.

Japanese labour productivity

Japanese output-capital ratioJapan - profit rate

The investment propensity of Japanese capitalists is therefore sluggish and insensitive to low interest rates. Increases in credit availability (e.g. quantitative easing) are simply absorbed as cash holdings, used in the carry trade or pumped into financial markets to fuel asset bubbles.

Stagnant growth, and with it subdued accumulation, have ensued.

Japanese deflation - Skott and Nakatani

Japan’s enduring slowdown has been a way of arresting the accumulation process in the distributional interests of property owners. A policy of restrained accumulation (diverting the surplus product away from new investment by e.g. reducing retained earnings through higher dividend payouts, interest payments, and unproductive luxury spending) prevents demand for labour and other inputs from increasing to levels that will threaten profit margins.

(By contrast, China is said to save and invest over 50 percent of national income. As noted previously on this blog, this high accumulation rate will see China become labour-constrained within the next decade, repeating the Japanese trajectory.)

The result is that Japan’s base of productive capacity has been eroded.

The spread since 2001 of similar conditions to North America and the Eurozone (as shown in the BoJ’s chart) also points to a deeper malaise. It suggests the presence of deep technological problems for world capitalism: above all the slowdown in innovation in the capital goods sector since the 1970s.

Output-capital ratio US

Since then, as in Japan, profitability has acted as a constraint on investment: in 2009, the US stock of fixed capital was 32 percent lower than it would have been had postwar rates of accumulation been maintained.

These underlying issues with domestic accumulation and weak investment show up as global imbalances (see ‘rest of the world’ in the BoJ’s chart, or the IMF’s 2005 World Economic Outlook). The ‘savings glut’ and other disproportionalities fuel volatility in currency, real estate and other asset prices, increasing financial fragility.

Moreover, as Adam Smith warned long ago, the diversion of the Japanese, US and European surplus product away from productive investment also threatens the position of these ‘mature’ economies relative to that of their external rivals. If the fixed-capital stock of a country is hollowed out, its position on the current account will worsen and its net stock of foreign assets will dwindle.

Ultimately, therefore, the ‘mature’ economies have seen their flagging investment levels disturb their respective positions in the hierarchy of international relations. The governments of these countries have responded by seeking to modify or revoke the basic rules of international law, diplomacy and inter-state relations.

This, I’ll explain in a future post, is what lies behind the turn of US and European elites to militarism and extra-territorial wars of aggression.


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3 Responses to “Japan’s liquidity trap and its cousins”

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