Assistant Professor of Economics at the National University of Singapore TomooKikuchi yesterday presented his model which accounts for Japan's current stagnant economy and charts possible scenarios for its future.
In his talk, titled "Self−fulfilling Beliefs, Poverty Trap and Endogenous Cycles," Kikuchi analyzed his native Japan's recent economic history, which has fluctuated repeatedly over the past few decades and has stagnated in the 21st century.
Kikuchi, a visiting scholar at Tufts this semester, pointed to the dramatic decline in savings rates in the Japanese population as an oft−cited indicator of a fundamental shift in the Japanese economy.
He explained that beginning in the late 1990s, the savings rate shrank from 11.4 percent to 3.9 percent in only five years, and has since stabilized to the levels of the European Union and the United States.
"You might think that this decline is a result of a shift in the fundamentals of the Japanese economy," Kikuchi said. "But that is not necessarily the case."
He argued that the primary structure of the Japanese economy has not changed much over recent years and attributed its recent stagnation to a theory advanced by KiminoriMatsuyama, a Japanese economist who now teaches at Northwestern University.
Matsuyama argues that the economy is highly impacted by "sunspots," or periods in which the market may vary in ways unrelated to economic fundamentals.
"It seems that in order to explain the decline in savings rates, you have to analyze preferences, business cycles, demographic and institutional factors," Kikuchi said.
Kikuchi added that for years, Japan's population has been steadily aging, while its birth rate has decreased, which affects its economy because older Japanese citizens are less inclined to invest as much of their savings in the market, and younger generations have become discouraged by low profitability and borrowing constraints.
According to Kikuchi, changing economic expectations in Japan can lead to a cycle of alternating low and high economic levels.
"A cycle emerges if beliefs switch indefinitely," he said, adding that such a switch has occurred in Japan's recent history.
"The economy jumps from a low steady state to a high steady state when you have cycles."
Self−fulfilling negative expectations can lead to a poverty trap in which growth remains low, he added.
Kikuchi explained that this model accounts for Japan's varying economic performance over the preceding decades, as well as the current "low steady state" it has been in for much of the 21st century. However, he stressed that there was hope for the future of the Japanese market.
"The model presents a scenario in which the Japanese economy could jump back to a high steady state," he said. "The problem is this model tells us nothing about the growth rate of the Japanese economy."
He added that the economy is too often subject to "changes in institutional, social or cultural characteristics, which are formed outside of the market," for any predictions about Japan's economic future to be reliably established.
Two Tufts professors attending yesterday's event praised Kikuchi for the economic model presented in his lecture.
"The tools he was using in his arguments are very standard tools," Professor of Economics Yannis Ioannides said.
"Even if you weren't an expert in economics, you would still be able to think about his general logic. He presented his model in a way that made sense and was easy to follow."
Associate Professor of Economics Edward Kutsoati agreed, noting that Kikuchi's model could be extrapolated more generally to other economic systems.
"There were a few things he could have fixed in his model," Kutsoati said. "But he did a good job in establishing how an economic setting may function at large, not only in Japan. His story could be well applied to a much broader global scene."
