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Paul Krugman: Japan Steps Out

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  • Ed Pearl
    http://www.nytimes.com/2013/01/14/opinion/krugman-japan-steps-out.html?nl=to daysheadlines
    Message 1 of 1 , Jan 14, 2013
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      Japan Steps Out

      lkrugman/index.html> Paul Krugman

      NY Times Op-Ed: January 13, 2013

      For three years economic policy throughout the advanced world has been
      paralyzed, despite high unemployment, by a dismal orthodoxy. Every
      suggestion of action to create jobs has been shot down with warnings of dire
      consequences. If we spend more, the Very Serious People say, the bond
      markets will punish us. If we print more money, inflation will soar. Nothing
      should be done because nothing can be done, except ever harsher austerity,
      which will someday, somehow, be rewarded.

      But now it seems that one major nation is breaking ranks - and that nation
      is, of all places, Japan.

      This isn't the maverick we were looking for. In Japan governments come and
      governments go, but nothing ever seems to change - indeed, Shinzo Abe, the
      new prime minister, has had the job before, and his party's victory was
      widely seen as the return of the "dinosaurs" who misruled the country for
      decades. Furthermore, Japan, with its huge government debt and aging
      population, was supposed to have even less room for maneuver than other
      advanced countries.

      But Mr. Abe returned to office pledging to end Japan's long economic
      stagnation, and he has already taken steps orthodoxy says we mustn't take.
      And the early indications are that it's going pretty well.

      Some background: Long before the 2008 financial crisis plunged America and
      Europe into a deep and prolonged economic slump, Japan held a dress
      rehearsal in the economics of stagnation. When a burst stock and real estate
      bubble pushed Japan into recession, the policy response was too little, too
      late and too inconsistent.

      To be sure, there was a lot of spending on public works, but the government,
      worried about debt, always pulled back before a solid recovery could get
      established, and by the late 1990s persistent deflation was already
      entrenched. In the early 2000s the Bank of Japan, the counterpart of the
      Federal Reserve, tried to fight deflation by printing a lot of money. But
      it, too, pulled back at the first hint of improvement, and the deflation
      never went away.

      That said, Japan never had the kind of employment and human disaster we've
      experienced since 2008. Indeed, our policy response has been so inadequate
      that I've suggested that American economists who used to be very harsh in
      their condemnations of Japanese policy, a group that includes Ben Bernanke
      and, well, me, visit Tokyo to apologize to the emperor. We have, after all,
      done even worse.

      And there's another lesson in Japan's experience: While getting out of a
      prolonged slump turns out to be very difficult, that's mainly because it's
      hard getting policy makers to accept the need for bold action. That is, the
      problem is mainly political and intellectual, rather than strictly economic.
      For the risks of action are much smaller than the Very Serious People want
      you to believe.

      Consider, in particular, the alleged dangers of debt and deficits. Here in
      America, we are constantly warned that we must slash spending now now now or
      we'll turn into Greece, Greece I tell you. But Greece, a country without a
      currency, doesn't look much like the United States; surely Japan offers a
      more relevant model. And while doomsayers keep predicting a fiscal crisis in
      Japan, hyping each uptick in interest rates as a sign of the imminent
      apocalypse, it keeps not happening: Japan's government can still borrow long
      term at a rate of less than 1 percent.

      Enter Mr. Abe, who has been pressuring the Bank of Japan into seeking higher
      inflation - in effect, helping to inflate away part of the government's debt
      - and has also just announced a large new program of fiscal stimulus. How
      have the market gods responded?

      The answer is, it's all good. Market measures of
      expected inflation, which were negative not long ago - the market was
      expecting deflation to continue - have now moved well into positive
      territory. But government borrowing costs have hardly changed at all; given
      the prospect of moderate inflation, this means that Japan's fiscal outlook
      has actually improved sharply. True, the foreign-exchange value of the yen
      has fallen considerably - but that's actually very good news, and Japanese
      exporters are cheering.

      In short, Mr. Abe has thumbed his nose at orthodoxy, with excellent results.

      Now, people who know something about Japanese politics warn me not to think
      of Mr. Abe as a good guy. His foreign policy, they tell me, is very bad, and
      his support for stimulus may have more to do with old-fashioned pork-barrel
      (tofu barrel?) politics than with a sophisticated rejection of conventional

      But none of that may matter. Whatever his motives, Mr. Abe is breaking with
      a bad orthodoxy. And if he succeeds, something remarkable may be about to
      happen: Japan, which pioneered the economics of stagnation, may also end up
      showing the rest of us the way out.


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