Now it has happened. The first major industrialised country has had enough of stagnation and is trying an alternative economic policy. Japan’s new government, run by Shinzo Abe, has announced a significant public spending programme and put political pressure on the central bank, the Bank of Japan, to do its part to change course by engaging in a more aggressive monetary policy. From a European perspective this is a very interesting change of course (albeit one that is completely underreported in most national media – are there too many people wedded to the failed austerity approach?). The first reactions to the change of course have also been positive. The Financial Times reports:
Shinzo Abe has great expectations for his stimulus package. Japan’s new prime minister thinks his Y10.3tn ($116bn) fiscal boost will provide a “rocket-start” to the economy, leading to fast economic growth and rapid job creation. So far, investors appear to agree with him: when the plan was unveiled last Friday, the Nikkei index rose by 1.4 per cent.
Paul Krugman in the New York Times gives us some background to the Japanese story:
Some background: Long before the 2008 financial crisis plunged America and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent.
To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established, and by the late 1990s persistent deflation was already entrenched. In the early 2000s the Bank of Japan, the counterpart of the Federal Reserve, tried to fight deflation by printing a lot of money. But it, too, pulled back at the first hint of improvement, and the deflation never went away.
And there’s another lesson in Japan’s experience: While getting out of a prolonged slump turns out to be very difficult, that’s mainly because it’s hard getting policy makers to accept the need for bold action. That is, the problem is mainly political and intellectual, rather than strictly economic. For the risks of action are much smaller than the Very Serious People want you to believe.
In this context see also today’s column by Simon Wren-Lewis on the sustainability of government debt.
So it finally looks like the “fellowship of the austerians” is showing signs of weakness. The Japanese story will most likely provide us with some very interesting lessons, especially about the room for manoeuvre in economic policy. If the most indebted industrialised country can engage in a massive stimulus programme without driving interest rates up, other countries can do this too. It is, as Paul Krugman indicated, a question of political courage and will!