Japan Shows Us The Way

A week ago, Paul Krugman wrote that Japan’s stable if sluggish economy and low unemployment could start looking pretty good compared to the Voodoo economics advocated by US Republicans. The counterintuitive case for Japan as an economic model just became more compelling with the Bank of Japan’s intervention to lower the yen. As reported on the front page of today’s Report on Business:

Critics of the free-market approach to exchange rates welcomed Japan’s apparent abandonment of that orthodoxy. “The Bank of Canada should do the same thing,” said Erin Weir, an economist at the United Steelworkers union in Toronto, who has argued that officials in Ottawa should intervene to weaken Canada’s dollar. “Japan’s actions confirm my point that currency devaluation is a viable option.”

At 97 US cents, the Canadian dollar is significantly overvalued. The OECD’s latest figures indicate that the domestic purchasing power of a loonie equals 85 US cents. So, today’s exchange rate gives foreign-made products a cost advantage of up to 14% versus Canadian-made products.

The obvious consequence is a big trade deficit. A deteriorating trade balance was the main cause of Canada’s economic slowdown in the second quarter. Statistics Canada’s last Labour Force Survey reported job losses in industries sensitive to the exchange rate.


The main objection to currency devaluation is that it increases output and employment in one country at the expense of other countries. Interestingly, no one raises this objection to corporate tax cuts, which explicitly aim to attract investment away from other jurisdictions.

The Bank of Canada intervening to lower the loonie would simply bring it closer to fundamentals. No one could reasonably accuse Canada of creating an unfair competitive advantage through exchange rates.

Of course, every country trying to devalue simultaneously would be futile. A traditional argument was that all G-7 countries, including Canada, had to tow the line of non-intervention in order to dissuade Japan from intervening. But since that ship has sailed, our central bank should now feel freer to clip the loonie’s wings.


  • To somehow think that we can compete with the monster south of the border has cost us a whole pile of high value adding employment and production capacity.

    It is by no accident that beggar they neighour has been our industrial strategy for the last 20 plus years. Yet we get ideologues in power who think otherwise and the result is the destruction of our manufacturing sector. The current decline in manufacturing started 2 full years before the financial meltdown. In fact you could blame it on the the appreciation of the dollar and the non-interventionist dollar strategy that the tories unleashed onto the economy- this combined with the oil based dollar that set in- stripped us of a those precious jobs.

    As we have stated in the progressive circles, one should not be afraid of a high dollar- however this has a time frame attached to it- you cannot just let the dollar rocket through some serious, lets call them- capital stock destruction thresholds. The tories are out of control and we continue to be propped up by a consumer credit based spending economic base. It is hardly a sustainable economy- it is time for some serious action.

    I give you this equation- the more the concept of industrial strategy is negatively correlated to the brain waves of our Tory economic rulers- the lower our standard of living will fall. Given the likes of Flaherty and Clement- well enough said.

  • They won’t do it. Their model says that an interest rate which keeps inflation between 1-3% automatically delivers up a CDN dollar exchange rate that is within its natural bounds. That is why Carney changes the target value as it changes rather then setting an exchange rate target.

    Moreover, given the war that was fought to make price stability narrowly understood as inflation the sole mandate of the BOC the chance that will add to the list is low.

    Simply put, neither their model; nor the political history and evolution of the BOC institutional mandate suggests movement on the CDN exchange rate. And yes I know what it says in the BANK act but what that functionally means was long ago sorted out between finance and the BOC.

    Something much more funky than the hollowing out of the manufactured exports sector would have to be at stake.

    Which part of the neo-staples FIRE hub economy do you not understand? The mantra is no longer; “Compete or Die,” it is, “Die Already.”

  • My argument is about what the Bank of Canada should do. You are correct about what it likely will do.

  • On its website under editorials the Globe has a transcript of an interview they just did with Carney. The Governor says that if the exchange rate is out of line with economic fundamentals they will look at it. He says that after giving the house line well summarized by Travis above.
    BTW Carney engages with Martin Wolff on his views on Basle III. I wonder if the Globe noticed he did not bother to mention their own economic commentator, better known as firm promoter of “if it bleeds it leads” when he was Editor of the Ottawa Citizen, and a puzzling choice for providing economic analysis through the worst conditions since the 1930s when the NYT has Krugman, and the FT Wolff. Puzzling that is if you think the paper is striving to bring expert opinion to bear on issues that matter, rather than pandering to the views of their advertisers and owners. Luckily for their readership Jimbo is in the house on a regular if not frequent enough basis.

  • However- thinking about this again- and looking at some US employment data brings to light a couple of issues.

    Since 2000 the US has lost almost 40% of its manufacturing employment- (blew me away I didn’t realize it was that high). Between 2001 and 2004 it shed nearly 4 million manufacturing jobs and then stabilized into a much slower decline until 2007 and then it fell of the table withe the great recession and shed another 3 million manufacturing jobs.

    So one does have to rethink it a bit- in order to rebuild a manufacturing/high value adding base within our country with a low dollar, given the integration to the US economy- we may actually need to have a manufacturing base in the US. However- it is but a shell of its former self. Oddly enough- it is through this period- that the US had one of the lowest unionization density rates within the manufacturing sector. Yet still they “blame the unions”.

    That is not to meantion that we currently have, in both the US and Canada, the highest rates of long term unemployment since the depression. Makes you think a bit more about the financial crash. If you go with the premise that the housing bubble was a lead causality- then one must look to the de-industrialization forces that were underway- 2001-2004 and the slower decline from 2005-2007. (which was most likely offset by the enourmous boom in construction employment) However a thriving construction sector cannot serve as your leading growth sector- which it did – for 05-07. That is, unless you can somehow keep giving out mortgages to laid off manufacturing or downstream manufacturing workers.

    In the end- you could strengthen the argument that it was the loss of this manufacturing base that was one of the major roots that brought about the meltdown and the resulting vicious cycle that we are witnessing.

    In the end- potentially we need to conclude that- until there is a restoration in high waged/ high value adding employment- we will not see a recovery that means much to main street.

  • Oh I almost forgot- my point is with the above comment- after reading Krugman’s assessment of the meltdown in Japan- and thinking about the fact that the Japanese never lost the industrial base the way the US or Canada has during this meltdown- would lead me to believe that we will see a very different trajectory by Japan when faced with the task of climbing out of this great recession.

  • sources for the data are here:





    I am sure there are measurement differences and such, however examining Japan you will see they pretty much flattened in manufacturing, from 12 to about 10.5 million. USA on the other hand dropped from 17 to 11 million.

  • To get a more relevant metric take manufacturing employment as a percent of the total workforce. That controls for Japan’s population decline and American population increases.

  • yes for sure Travis, I typically do, but the point for me is just the sheer volume of job loss. 17 million to just over 10 million in he US- wow that is some de-industrialization that I do not think many seem to comprehend. Even say a Krugman- you can stimulate the economy- and pretend that macro can somehow save your ass- but ultimately this is a micro problem.
    We are talking almost half the American value adding has disappeared in the US- at least in terms of employment. That is an awful lot of high value adding jobs to take out in less than 10 years.

    And even more, as you say in terms of the overall economy. So it is not difficult to see why the first stimulus plan in the US was, as they say mainly half measures- and also kind of peripheral shovel ready kind of things.

    Wal mart jobs are just not going frix the economy south of the border.

    The other main point- when the US economy went- so to did our manufacturing- at least during the last round of de-industrailization – kind of 2007 onwards.

    Policy people are not getting it- and more importantly neither are the business crowd- without a renewal in business investment into a massive round of innovation that produces jobs that are whole lot higher quality than wal-mart jobs- I just do not see a way forward that will not eventually rip us socially apart.

    Prison building, private security and military are such a wasteful way to invest the surplus into. Phrack we are at such a critical time! Yet we hear such idiocy as austerity and other magical recovery stories.

    Bottom line- there is a whole lot of heavy lifting to be done- and it has not even begun to start. It is getting to be quite an anxious time!

  • Hi Paul,

    Sorry my comment was not meant as a criticism but rather to reinforce your point. Although I would exercise caution. Despite large employment losses in the manu sector in the US, manu as a percent of GDP had been pretty stable throughout the 90s and early 00s. If you want the data drop me line over at my blog.

  • I understand and I did take it as a positive critique. I typically measure it as you do as well and I do have a look at GDP. I do wonder though about GDP per worker.

    As that is what I am guessing is an argument that although employment has dropped, output has stayed the same. It is kind of weird when you think about it- could the US have shed just under 40% of the manufacturing employment and output remains fairly smooth (as a percentage of GDP).

    I understand the notion of capital to labour substitution rates but really could we have had that much in 10 years? Or even since the great recession started.

    However we do know that since the great recession- there has been quite a bit of a drop in both outputs and employment.

    I am going to have to go through this and have a longer look at the numbers- it was a bit of a cursory look. I just hope I am not chasing statistical shadows.

    I guess if the numbers are right- that is, since 2000 the US has lost nearly 40% of its manufacturing employment, it has still managed to produce similar outputs. Hmmmm- I am not convinced. (however there are some issues such as NAICS coding- i.e. as industry hives off the value chain- it expands the informal boundaries of the firm into NAICS codes that are not classified as manufacturing). But that cannot be that large.

    Anyway, I am putting together a bit of a report on employment transformations through this crisis and I was trying to center where manufacturing was before the crisis hit. ( late 90’s was a highpoint for Cdn manufacturing employment- wow some impressive numbers)

  • I am not sure for after 2003, I will go pull the numbers. Also I will look at Man VA / Total VA to check if what is sustaining output is merely the reselling of components manufactured elsewhere.

    Yah and those employment numbers for the late nineties were widely proffered as proof that NAFTA was a success. Nobody wants to talk about what happened since. My sense of it is that much of that had to do with a low exchange rate.

  • Hey Paul,

    I threw up a graph on manu VA / total economy for the US over at rppe. The short of it is that manu saw a 50% decline in its share of VA from 1970 until 2007. I will go find the static output numbers. If you want the underlying data just email me.

  • I have not looked at manufacturing employment in a long time. If I recollect correctly, well over 20 years ago Statscan changed the way they counted manufacturing jobs, including semi-processing of raw materials for instance, fairly rudimentary activities, compared to machine tooling or electronics.
    After the FTA was implemented, our manufacturing sector went into recession the following April. It stayed there until the great devaluation got the economy going again. Since then we have become a petro-economy, with natural resource price hikes carrying us along.
    A good sectoral based look at manufacturing jobs in Canada over the last 35 years would be a terrific thing to have. Go to it Paul.

  • Thanks Travis for posting an excellent chart on your blog.

    Kind of odd that given the numbers, about the only policy one hears from Washington is China”s dollar policies.

    Given the manufacturing decline you would have thought a lot more industrial strategy would be acted on. Maybe with Leo G. at the table, you may hear a bit more of the early 90″s style labour strategies.

    I was immersed in the 90’s labour strategies and I do believe labour played a huge role in addressing change back then. It would be great to see that evolve again. It will not happen here, unless at the provincial level.

    I will give this a go next week- plate us full right now.

    Travis if you want lend a hand I am all ears.

  • Hi Paul,

    I am in the middle of doing a comparative analysis of changes in the sectoral composition of selected advanced capitalist economies. So if you need anything drop me a line. I will be throwing up a series of graphs with some commentary / questions over the next weeks. So drop by. Also if you have any specific queries or data you want let me know. I just threw up a graph on US employment shares by sectors.

    Ciao for now.

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