The Salvation of Japan
Matthew Yglesias: slate.com
Japan’s broad stock market index is up more than 36 percent since Abe took office in late December. Household spending, housing starts, and industrial production all jumped the last time data were released. Japan is on the move again.
What’s the secret to its success? Mostly determination. Japan was marooned in a sea of macroeconomic despair. Short-term interest rates were at zero, the dread lower bound. But years of slow growth and failed fiscal stimulus programs had also saddled the country with the highest debt-to-GDP ratio on the planet. Conventional monetary policy was out of ammo, and running an even larger budget deficit with so much debt already on the books seemed insane. Abe decided, essentially, that when the macroeconomy gives you lemons, you make lemonade.He brushed off the doubters and plunged ahead with new fiscal stimulus—reversing a big tax hike implemented by his predecessor—allaying doubts about debt sustainability by combining it with monetary stimulus. He fired the Bank of Japan’s president, and brought in an outsider. Haruhiko Kuroda promised to do “whatever we can do” to curb deflation and said he wanted to see the inflation rate rise. The stimulus program will be affordable because under Haruhiko the Bank of Japan is committed to printing as much money and buying as many bonds as are out there. At least until inflation rises from its longtime near-zero level up to 2 percent.
As a result, the yen has fallen about 12 percent so far this year making it easier for Japanese exporters to compete with rivals in South Korea, China, or elsewhere.
Even though that’s a lot, it would be wrong to see the Abenomics effect as simply currency depreciation. After all, the 36 percent increase in the value of Japanese stocks is much larger than the currency impact alone. And the data from household spending and home construction shows clearly that while a falling yen may be goosing Japanese exports, the stimulus program is having a broader effect on domestic demand as well. Everything, in other words, is going according to plan.
Fortunately austerity hasn’t been practiced with the same savagery in the US as it has in Europe with devastating consequences, and the Fed continues to wisely take stimulus measures which have helped keep the economy growing. There is little doubt, however, that the deep spending cuts forced by sequestration will slow the economy when millions of Americans are still out of work.