Tags: Japan | inflation | US | Fed

Japan's Dilemma Carries Lesson for US

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Wednesday, 29 May 2013 07:42 AM Current | Bio | Archive

Here in the United States we worry about inflation. In Japan, they want inflation. Strange? Yes, and the closer you look at the Japanese economy, the stranger it gets. The United States may not be far behind.

Dial back your memory to the 1980s. Japan's export-driven economy seemed set for world domination. Flush with dollars to spend, Tokyo-based companies snapped up U.S. real estate and Japanese tourists crowded American theme parks. The Nikkei seemed unstoppable.

Then in 1989, it stopped. The Nikkei still hasn't recovered. The "stocks always come back" theory isn't working very well.

Japan's economy has gone exactly nowhere in 24 years. For most of those years, the Bank of Japan has maintained a free-flowing monetary policy similar, in some ways, to our own Federal Reserve's "quantitative easing." Has it worked? If the goal was to stimulate growth, then no, it hasn't worked. If the goal was to postpone collapse as long as possible, then you might call it a success.

Postponing disaster is not the same as avoiding it. Eventually you run out of time. Japan may be near that point, and Prime Minister Shinzo Abe has the misfortune of being the man of the hour.

Abe's plan sounds remarkably similar to what we're doing on this side of the Pacific. Step one is for the government to spend a lot of money. Step two: the Bank of Japan finances the government's deficit with newly manufactured liquidity.

The yen-creation machine will run out of gas unless Japan's economy starts to grow. But growth would drive up interest rates, sending an already astronomical debt into a different universe.

How does it end? Every imaginable scenario is bad. There is one silver lining, however. Maybe the Japanese end game will demonstrate what doesn't work, and maybe U.S. politicians and bankers will stop going down the same path. I hope they don't take another 20 years to figure it out.

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PatrickWatson
Here in the United States we worry about inflation. In Japan, they want inflation. Strange? Yes, and the closer you look at the Japanese economy, the stranger it gets. The United States may not be far behind.
Japan,inflation,US,Fed
320
2013-42-29
Wednesday, 29 May 2013 07:42 AM
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