Japan's attack on economic orthodoxy

The politics of Shinzo Abe continue to fascinate.  It is actually quite amazing that Japan has been so conventionally orthodox when it comes to macroeconomic policy.  Japan hasn't deviated from conventional thinking all that often in the post WW II period but when she has—such as when MITI organized the rise of her automobile industry through central planning and cartels—she has been astonishing successful.  Given such a track record, Japan should be much more daring and even arrogant in her economic thinking.  Yet she has just spent over two decades allowing her economy to be hollowed out in the name of the global conventional wisdom.  Yeah, I don't get it either.  So along comes Abe who is quite the nationalist and one of the manifestations of that nationalism is that he is refusing to follow the economic norms.

Krugman, who is about as surprised at this move from orthodoxy as I, takes the story from here.  All I can say is, Go Japan!  The conventional wisdom is literally killing us so it is refreshing to see someone try something new.

Japan Steps Out

By PAUL KRUGMAN  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 wisdom.

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. more

Japan's Latest Stimulus Could Create 600K Jobs

Sam Ro | Jan. 11, 2013

This week, Japan approved a ¥10.3 trillion fiscal stimulus package. That translates to around $116 billion dollars.

And that's definitely going to have a material impact on growth.

Here's Societe Generale economist Kiyoko Katahira:

Abe’s stimulus package to push up GDP by 2% and create 600 thousand new jobs

The Japanese Cabinet office on Friday approved emergency economic stimulus measures amounting to 10.3 trillion yen, equivalent to some 2.2% of GDP. The total package is worth some 20 trillion yen, including projects by local governments and private companies. The government also expects the package to push up GDP by 2%, and to boost employment by 600,000. The official announcement of the package was largely in line with what was revealed in the press over the past few days.

That's a lot of jobs.  more