Bank of Japan Easing


Given that rich country monetary policy (except in Sweden, Australia, and Canada) has been too tight for years, and it’s been especially too tight in Japan, I can’t but approve of the Bank of Japan’s decision to ease in response to the earthquake/tsunami/meltdown problems hitting the country.

That said, I think this is primarily worth thinking about precisely because of how different this set of problems is from the “normal” ones of a great recession. Japan, after all, just got hit with a series of very real negative shocks. Buildings have fallen down. Buildings that are still standing have been damaged by water. Cars, trucks, and other pieces of useful equipment have been ruined. Roads, docks, and other pieces of transportation infrastructure have been blocked by debris. Several nuclear power reactors aren’t generating electrical power. Tens of thousands of human beings are dead or injured.

These are not problems that can be solved on the demand side. If Japan is producing less two weeks after the earthquake than it was producing two weeks before the earthquake, that will be because the quake and associated traumas have in fact degraded the country’s ability to produce goods and services. This is exactly what didn’t strike the United States and Europe during the financial panic of 2007 and 2008. The United States is producing a low less than it could be producing primarily because a large number of people, the unemployed people, aren’t producing anything at all. And yet we have functioning office buildings they could sit in. We have factories running at below capacity they could work in. We have trucks and cranes and other machines they could operate. We haven’t been hit by an earthquake, our power plants aren’t exploding, our roads aren’t blocked by displaced automobiles, we’re just not putting everyone to work. That’s the very definition of a country with inadequate aggregate demand, and we should be fighting the situation with every tool at our disposal. Instead the debate in congress is about how much short-term spending to cut, and voices slamming the Fed for being too loose continue to be heard louder than those slamming it for being too tight.