Visitors to Japan are often surprised by how prosperous it seems. It doesn’t look like a deeply depressed economy. And that’s because it isn’t.
Unemployment is low; overall economic growth has been slow for decades, but that’s largely because it’s an aging country with ever fewer people in their prime working years. Measured relative to the number of working-age adults, Japanese growth over the past quarter century has been almost as fast as America’s, and better than western Europe’s, NewsNow reported.
Yet, Japan is still caught in an economic trap. Persistent deflation has created a society in which people hoard cash, making it hard for policy to respond when bad things happen, which is why the businesspeople here are terrified about the possible spillover from China’s troubles.
Deflation also has created worrisome “debt dynamics”: Japan, unlike, say, the United States after World War II, can’t count on growing incomes to make past borrowing irrelevant.
So Japan needs to make a decisive break with its deflationary past. But it is not easy. Shinzo Abe, the prime minister, has been making a real effort, but he has yet to achieve decisive success.
Printing Money
One might think that ending deflation is easy through printing money. When central banks such as the Federal Reserve or the Bank of Japan print money, they generally use it to buy government debt. In normal times this starts a chain reaction in the financial system: The sellers of that government debt don’t want to sit on idle cash, so they lend it out, stimulating spending and boosting the real economy. And as the economy heats up, wages and prices should eventually start to rise, solving the problem of deflation.
These days, however, interest rates are very low in most major economies, reflecting the weakness of investment demand. The Fed has bought more than $3 trillion in assets since 2008; most of the cash it has pumped out there has ended up just sitting in bank reserves. How, then, can policy fight deflation? Well, the answer being tried in much of the world is so-called quantitative easing. This involves printing a very large amount of money and using it to buy slightly risky assets in the hope of doing two things: pushing up asset prices and persuading both investors and consumers that inflation is coming, so they’d better put idle cash to work.
America is recovering, but it has taken a long time to get there. Europe’s monetary efforts have fallen well short of expectations. And so far the same is true of “Abenomics,” the bold—but not bold enough—effort to turn Japan around.
After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of the authorities try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policymakers are willing to stick their necks out and break with convention.
The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.
