Is Japan set to lead after 20 years of torpor?

TOKYO —

As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled.

As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.

In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.

The Dec 16 landslide election of Shinzo Abe, a potentially powerful prime minister, was largely a result of his promise of a revolution in monetary policy designed to jolt the Japanese economy out of its 20-year stupor. If Abe delivers on his election rhetoric - still a big “if”, especially in a country where power is wielded mainly by bureaucrats rather than elected politicians - the global impact could be huge.

At a practical level, Abe has promised to force the Bank of Japan to print money and weaken the yen until Japan’s inflation rate accelerates to 2% and growth is restored. If he acts on this promise, the effect will be to strengthen the dollar, not only against the yen but also against the euro and other major currencies. If the yen weakens substantially, high-end exporters in Germany and the rest of Europe will stop gaining market share from Japanese rivals to offset their loss of competitiveness in the U.S. market. The same will be true for Korean and Chinese exporters, which have been crushing Japanese competitors hobbled by the strong yen.

Less obvious, but even more important, could be Japan’s impact on the global debate about macroeconomic management. The era when monetary policy was simply about controlling inflation is over. The consensus on macroeconomics created by the Reagan-Thatcher political revolution and the near-simultaneous monetarist revolution in economic thinking has broken down.

The singular focus on inflation made sense in the 1980s, when rapidly rising prices were the biggest problem facing most economies. Politicians, led by Ronald Reagan and Margaret Thatcher, realized that the only sure way to stop inflation was to create previously unthinkable levels of unemployment by relentlessly raising interest rates. Since nobody wanted to take political responsibility for firing workers, economists had strong incentives to come up with theories that proved unemployment was natural and inevitable, that macroeconomic policy could do nothing about it and that the sole effect of monetary policy was on inflation. A natural and convenient corollary was to absolve governments of responsibility for monetary management and shift this to politically independent central banks.

Since economists understand incentives, it was not long before they unanimously embraced the three key policy implications of the 1980s monetarist revolution: acceptance of a “natural” rate of unemployment, exclusive reliance on inflation targeting and political independence for central banks.

Any economist or political analyst who suggested anything different - for example, that politicians should coordinate monetary and fiscal policy to manage unemployment, as well as inflation - was laughed out of university economics departments, as well as finance ministries and central banks. This purge is now over.

In the past few weeks, central bankers have broken the taboo against acknowledging any responsibility for unemployment. Federal Reserve Chairman Ben Bernanke has committed the Fed to a 6.5% unemployment target and Mark Carney, the governor of the Bank of Canada and soon of the Bank of England, has proposed targeting the growth of gross domestic product. These were earth-shattering events for economists who have spent the past 30 years training themselves and their students to deny that monetary policy could have any lasting effects on unemployment or economic growth.

But while a revolution is under way in the attitude to economic targets, the new tools and instruments required to hit these targets have hardly begun to be discussed. The unemployment and GDP targets suggested by Bernanke and Carney are empty promises in the absence of policy tools that could convincingly boost jobs and growth in the present deflationary environment. Which is where Japan comes in.

No other economy has (yet) suffered anything like Japan’s 20 years of economic stagnation. It would not be surprising, therefore, if truly radical measures to deal with deflation were pioneered in Japan. Outside Japan, no central banker or politician has yet gone beyond pumping money into bond markets through quantitative easing. And nobody has suggested, at least officially, that central banks should directly lend to governments or finance one-off tax cuts.

These truly radical policies, which amount to handing out newly created money to businesses and households, are sometimes described as “helicopter money” or “quantitative easing for the people.”

Such policies would be certain to pull the world out of deflation, but public discussion of such policies remains impossible in the U.S. and Europe because they break the last remaining monetarist taboos: monetary financing of government spending or tax cuts, and the political independence of central banks. These two forbidden options - ending central bank independence and then ordering the BOJ to print money for infrastructure spending or tax cuts - have now taken center stage in Japan.

By breaking the taboos created by the monetarist revolution of the 1970s, Japan could accelerate and reinforce the revolution in economic thinking that started in 2008. After 20 years of Japanese torpor, could the world be transformed again by ideas “Made in Japan?”

(c) Copyright Thomson Reuters 2012.

Author Infomation

Anatole Kaletsky
Anatole Kaletsky
  • 7

    gaijinfo

    What is this guy smoking, and what planet is he from? There are so many basic economic fallacies in this article I don't know where to begin.

    The world saved by unique Japan's bold economic ideas? Really?

    The West has been printing money like crazy for years, and now Japan has a case of "me too!" like some five year old chasing the adults.

    This guy thinks that's revolutionary? This smells like another case of Japan copying the west, twenty years after the fact, renaming it, and then calling it a Japanese creation.

    Outside Japan, no central banker or politician has yet gone beyond pumping money into bond markets through quantitative easing. And nobody has suggested, at least officially, that central banks should directly lend to governments or finance one-off tax cuts.

    What does this guy think pumping money into bond markets is, other than lending money to governments? How else would the Fed own most of U.S. debt?

    These truly radical policies, which amount to handing out newly created money to businesses and households, are sometimes described as "helicopter money"

    Yes, truly radical. Does this guy know that people refer to Bernanke as "Helicopter Ben" because he quoted Milton Friedman (the monetarist to came up with the helicopter metaphor)? How is copying an idea that's been around for forty years considered "truly radical"?

  • 4

    herefornow

    And while the world has largely lost interest in Japan,

    No other economy has (yet) suffered anything like Japan’s 20 years of economic stagnation.

    Possibly the only two abolute statements of fact in tihs piece. The rest is just pure wishful thinking/wild speculation.

  • 4

    JeffLee

    Politicians, led by Ronald Reagan... realized that the only sure way to stop inflation was to ... relentlessly raising interest rates.

    Wrong. Reagan had little to do with it. The Fed was the one with the high int rate policy, and it is independent of the White House. The Fed chief was Paul Volker, and he was appointed by Jimmy Carter. Do your research, buddy!

  • 3

    Geoffrey Walker

    Abe is like a doctor standing at the bedside of a terminal patient saying that an hour of jogging a day is what is required to return you to good health. I give Abe at most 12 months.

  • 3

    gaijinfo

    One of the main reasons governments are so keen on inflation (and try so hard to convince the public that it's a good thing) is that it will make their monstrous debts easier to pay off.

  • 3

    as_the_crow_flies

    Is Japan set to lead after 20 years of torpor?

    No.

  • 2

    malfupete

    wishful thinking at best, nothing Japan is planning to do now is new or revolutionary.. perhaps he was trying to write satire?

  • 1

    GW

    Anatole, wake up wake your having a DREAM!

  • 1

    Serrano

    "weaken the yen"

    Cripes, hurry up and get that done already, willya? Heck, it was only 27 years ago that a dollar bought over 240 yen.

  • 0

    volland

    Still, the yen has already fallen almost 15% against the western currencies, which means a 15% increase of yen for japanese products, mainly cars. I changed all my Euros into yen at 140 a few years ago, I changed them back 2 weeks ago at 104, and it is today already back at 111.... you do the maths. Abe's job is not to help the normal japanese citizen, he is the general manager of corporate and banking Japan.

    It will be interesting to see, what happens, once the value of the yen starts to drop signifcantly..

  • 0

    wtfjapan

    @ DOG the US is quite simply not going to allow Japan to this for longer than 12 months, before she labels Japan a currency manipulator. yes and the US with there massive quantitive easing isnt a manipulator!? LOL. Euro, Yuan, Yen, Dollar will all be battling it out to see who can crash there currency the furthest in the next few years. for the US to call any of those countries a manipulator just make them look like hypocrites.

  • -1

    LiveInTokyo

    If the yen weakens substantially, high-end exporters in Germany and the rest of Europe will stop gaining market share from Japanese rivals to offset their loss of competitiveness in the U.S. market. The same will be true for Korean and Chinese exporters, which have been crushing Japanese competitors hobbled by the strong yen.

    So his plan will absolutely guarantee this? If there is one thing most people will tell you about life ... nothing is ever guaranteed. If this plan doesnt work, hes guaranteed Japan a whole lot of pain.

  • -1

    wipeout

    Abe is an idiot, witness his comment last week to reporters last week after he had just finished speaking to the US President, **'I just got off the phone to President Bush' **

    That sounds like a slip of the tongue. A mildly embarrassing one, but he's no more likely to think that Bush is currently president of the United States than Obama really believed there were 57 of them rather than 50. It seems fair to overlook such mild lapses - after getting a quick laugh out of them - than to judge a person's character by them. Unless they do it all the time.

    As your comment demonstrates, we all slip up. You made several errors of grammar and spelling. We all do it, yet most of us do know how to spell. I am politely assuming you do too, but forgot to check what you wrote.

  • -1

    volland

    @ wipeout

    You are of course right if this would be the greatest problem we and the rest of the world will have in future with Mr Abe, then we could indeed be happy.

    The sad news is, it is not... As you can learn from his monetary politics and the already soaring stock-marrket, be prepared for rising prices and don't wait for a raise. But it is the military that worries me... I will slowly start selling off things, my money has already been changed into other currencies two weeks ago.

    I can only suggest: Everybody keep your eyes open....

  • -2

    volland

    @LiveInTokyo

    Many things change and nothing is guaranteed, but if Toyota can sell its cars at an exchange rate of 100 Yen for the $, then its profit will be 25% higher than when they only get 80 Yen for the same amount of $$ the cars costs. Japan is in the catastrophic situation that is has to import almost all of the energy it uses, oil and gas. This has to be paid for in real money. So Japan depends on a high trade surplus, for this it has to export, export and export some more. If Japan has to take up credit at foreign banks to pay for oil, it will have to pay "real" interest rates. You have no idea what the amounts of your utilities bill look like, and how to pay them... Support for turning off the neclear power plants will vanish as fast as it came. Ecology is good and great, but only as long as someone else pays for it. It is everywhere like that, it will be no different in Japan.

  • -2

    volland

    @dog

    That is almost true, only, you are ignoring the fact that we live a neo-liberal globalised economy.

    Nowadays, the only thing that counts is today's profit and maybe tomorrow's. Maximising short term profits is all that matters. What happens next year, after the next election, or, the biggest joke of them all: what happens to the poor next generation, is of no real interest. Using that phrase may help you get elected, but nowhere will you see any real action about this.... If you check out the election results all over the world, and certainly the one in Japan, you will see this.

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