Inadequate Easing in Japan


One of the oddities of the current crisis is that throughout the 1990s it was absolutely conventional wisdom in the United States of America that Japan, though suffering from some real structural issues, was making things much worse for itself than necessary by failing to coordinate fiscal and monetary policy to stimulate adequate demand. The extent of that conventional wisdom is why many of us thought the same thing couldn’t happen in the United States. And yet as soon as the USA experienced a big crash, suddenly the conventional wisdom started looking like old-timey Japanese conventional wisdom—”nothing can be done, the problems are structural, blah blah blah.”

In that light, it’s interesting to see that western media coverage of Japan still adheres to the old western orthodoxy about the desirability of stimulative policies. Here’s the NYT:

Prime Minister Naoto Kan proposed new stimulus steps, while the central bank, under pressure from the government, eased its already easy monetary policy. But analysts called the measures too timid in the face of the problems facing Japan’s export-oriented economy. A yen that has paradoxically surged to 15-year highs despite weaknesses in the country’s economy, coupled with the damaging phenomenon of falling prices known as deflation, continues to hinder hopes of a strong recovery, analysts said.

“There seems to be a sense of fatalism. The B.O.J. continues to play the same old game of making incremental, but ultimately meaningless, policy changes in response to political pressure,” said Richard Jerram, economist for Japan at the global investment bank, Macquarie.

And here’s the Washington Post:

Both analysts and the markets were underwhelmed by the central bank’s measures. Following the announcement, the yen actually strengthened – rising to 85.12 on the dollar. The Nikkei index, meanwhile, lost its early morning gains following the central bank’s announcement. For the day it rose 1.76 percent.

The BOJ measures were pretty much as expected,” said Edwin Merner, president of Tokyo’s Atlantis Investment Research. “It helps a little bit – if it’s followed by government action. The government could be adding measures that don’t cost anything. Cutting taxes. Guaranteeing loans for overseas contracts. They could do those things. But they’re not.”

Nothing wrong with any of this coverage. Indeed, I agree with it wholeheartedly. But the exact same basic principles apply to the United States. Economies facing low and declining inflation combined with high unemployment and massive excess capacity benefit from expansionary monetary policy. Monetary policy that merely aims at preventing further collapse is timid and inadequate. Policy should aim at rapidly bringing as much of that excess capacity as possible back into use.