Is Japan set to lead after 20 years of torpor?

December 19, 2012

As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.

In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift  in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.

Last weekend’s landslide election of Shinzo Abe, a potentially powerful prime minister, was largely a result of his promise of a revolution in monetary policy designed to jolt the Japanese economy out of its 20-year stupor. If Abe delivers on his election rhetoric – still a big “if”, especially in a country where power is wielded mainly by bureaucrats rather than elected politicians – the global impact could be huge.

At a practical level, Abe has promised to force the Bank of Japan to print money and weaken the yen until Japan’s inflation rate accelerates to 2 percent and growth is restored. If he acts on this promise, the effect will be to strengthen the dollar, not only against the yen but also against the euro and other major currencies. If the yen weakens substantially, high-end exporters in Germany and the rest of Europe will stop gaining market share from Japanese rivals to offset their loss of competitiveness in the U.S. market. The same will be true for Korean and Chinese exporters, which have been crushing Japanese competitors hobbled by the strong yen.

Less obvious, but even more important, could be Japan’s impact on the global debate about macroeconomic management. The era when monetary policy was simply about controlling inflation is over. The consensus on macroeconomics created by the Reagan-Thatcher political revolution and the near-simultaneous monetarist revolution in economic thinking has broken down.

The singular focus on inflation made sense in the 1980s, when rapidly rising prices were the biggest problem facing most economies. Politicians, led by Ronald Reagan and Margaret Thatcher, realized that the only sure way to stop inflation was to create previously unthinkable levels of unemployment by relentlessly raising interest rates. Since nobody wanted to take political responsibility for firing workers, economists had strong incentives to come up with theories that proved unemployment was natural and inevitable, that macroeconomic policy could do nothing about it and that the sole effect of monetary policy was on inflation. A natural and convenient corollary was to absolve governments of responsibility for monetary management and shift this to politically independent central banks.

Since economists understand incentives, it was not long before they unanimously embraced the three key policy implications of the 1980s monetarist revolution: acceptance of a “natural” rate of unemployment, exclusive reliance on inflation targeting and political independence for central banks.

Any economist or political analyst who suggested anything different – for example, that politicians should coordinate monetary and fiscal policy to manage unemployment, as well as inflation – was laughed out of university economics departments, as well as finance ministries and central banks. This purge is now over.

In the past few weeks, central bankers have broken the taboo against acknowledging any responsibility for unemployment. Federal Reserve Chairman Ben Bernanke has committed the Fed to a 6.5 percent unemployment target and Mark Carney, the governor of the Bank of Canada and soon of the Bank of England, has proposed targeting the growth of gross domestic product. These were earth-shattering events for economists who have spent the past 30 years training themselves and their students to deny that monetary policy could have any lasting effects on unemployment or economic growth.

But while a revolution is under way in the attitude to economic targets, the new tools and instruments required to hit these targets have hardly begun to be discussed. The unemployment and GDP targets suggested by Bernanke and Carney are empty promises in the absence of policy tools that could convincingly boost jobs and growth in the present deflationary environment. Which is where Japan comes in.

No other economy has (yet) suffered anything like Japan’s 20 years of economic stagnation. It would not be surprising, therefore, if truly radical measures to deal with deflation were pioneered in Japan. Outside Japan, no central banker or politician has yet gone beyond pumping money into bond markets through quantitative easing. And nobody has suggested, at least officially, that central banks should directly lend to governments or finance one-off tax cuts.

These truly radical policies, which amount to handing out newly created money to businesses and households, are sometimes described as “helicopter money” or “quantitative easing for the people.”

Such policies would be certain to pull the world out of deflation, but public discussion of such policies remains impossible in the U.S. and Europe because they break the last remaining monetarist taboos: monetary financing of government spending or tax cuts, and the political independence of central banks. These two forbidden options – ending central bank independence and then ordering the BoJ to print money for infrastructure spending or tax cuts – have now taken center stage in Japan.

By breaking the taboos created by the monetarist revolution of the 1970s, Japan could accelerate and reinforce the revolution in economic thinking that started in 2008. After 20 years of Japanese torpor, could the world be transformed again by ideas “Made in Japan”?


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How can a people “lead” anything if they have no children?

Like other ethnic / racial groups with a sub-replacement birth rate, the Japanese are fading and will continue to fade until that turns around or they are history. “Corporate” States can continue in the face of the depopulation of their primary ethnic group, but what does that matter to the disappearing group? I does not, should not.

There is no reason to believe that any of the population groups who are not replacing themselves with live births will do anything but vanish. The world is changing, and in another century no one will care that these groups ever existed.

Posted by usagadfly | Report as abusive

Good article.
However, Japan’s demographic problem is critical, and cannot be ignored. The country has no growth strategy in this sense, and no sensible immigration policy to speak of.
Monetary policy alone doesn’t achieve much, as we already know.

Posted by reality-again | Report as abusive

Lead to the bottom, perhaps!

Once their traditional market, the US, collapses, they will have no one to sell anything to, so they will collapse shortly afterwards.

No, China will not help them — too many bad war memories to overcome, plus the current fight between Japan and China over the resources in the South China Sea is raising tensions again.

No, Europe has never been a big market for Japanese products, and China will freeze them out as soon as the US collapses.

Posted by Gordon2352 | Report as abusive

You should make up your mind beforehand what your topic is going to be. This article combines two completely different topics and glosses over both.

Your statement that ” … 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank” is ludicrous, since it completely ignores the real world, plus offers no substantiating documentation to prove anything you say in the entire first paragraph.

Your statements about inflation and the independence are particularly ludicrous.

Try doing some research before writing.

For example, this article entitled “Hotel California” by Doug Noland on the Prudent Bear website is a reality check. ditbubblebulletinview?art_id=10737

Posted by Gordon2352 | Report as abusive

@usagadfly, @reality-again: UNLESS, monetary and fiscal policy actually have an influence on rates of reproduction!
Have you never heard anyone say they can’t afford children, either from a purely financial perspective, or from the perspective of not being able to take time off from work to do this — because of having to work from one meal to the next? Or, have you never heard women saying they can’t have more children because their homes are too small for that or because they can’t afford to move out of their parents’ homes, even after they marry and both husband and wife are working full-time? I have heard this said or suggested with surprising frequency.

I’m going to be really controversial now and say that many liberal “equal opportunities” policies can have pernicious effects on demographics and long-term GDP growth rates. For example, wealthy retirees and gay couples with no biological children of their own to raise often out-compete or out-bid families for family-sized homes with decent gardens, so that millions of children have to live in cramped accommodation whilst millions of retired people struggle to maintain properties that are far too big for them!
I believe everyone should have a dignified life and people have a right to their own property; but what seems “fair” for one person is not always “fair” in another sense of the word. If we condemn half of our nation’s children to miserable, cramped accommodation and poor nutrition because we don’t care to give their parents a “living wage”, this will not train them to produce or consume at optimal levels in the coming economy, and the GDP growth of the nation will be stunted by the limited personal growth opportunities of millions of under-financed people; while the arbiters of monetary trade live wealthy and comfortable lives (VISA and Mastercard cream approximately 2% off the top of each and every card transaction. Can you imagine it — a level of economic power asymptotically approaching 2% of the whole economy; for what? Some clever encryption and key management? Is this reasonable? Is one part of our economy — the grease on the monetary wheels as it were — so much more important than another — the cleaner or security guard or librarian working at the local school?)

This money had better be targeted to the right places — none of that nonsense about dropping “quantitative easing” onto the bond markets and letting that spontaneously diffuse into the general economy…

Posted by matthewslyman | Report as abusive

Are you serious?
Do you mean you want the world to experience the unpredictability in fiscal policies from the 7th consecutive one-term leadership like Japan?

Do you mean you want the world to experience a shrinking overall economy like Japan?

Do you mean you want the world to be led by a country which is so corrupt that the leaders KNOWINGLY chose profit for shareholders of Tepco, and KNOWINGLY allowed the safety of nuclear plants to go below their own previously warned safety level?

Worse, do you mean you want us to be like Vietnam, barely avoided getting their electricity controlled by shoddy, corrupt Japanese entrepreuners who were just about ready to build the same below standard Vietnamese nuclear energy plants, until the plans were scrapped upon the revelation of the substandard conditions at the scandalous Fukushima!

Do you want us to be led by transparency-lacking, completely insider controlled Japanese Olympus type board of directors, who fired the whistleblower who exposed their fraudulent representation of financial statements to shareholder?

Do you want us to be led by the Japanese leaders that control their stock market listing, who KNOWINGLY allowed Olympus to be listed AND KNOWINGLY allowed Olympus to fire the honest whistleblower CEO, sending a message that any Japanese companies committing similar criminal fraud will receive help to cover up, and assistance to minimize any consequence of their fraud? Worse, Japan is actively supporting Olympus’s punishing of the whistleblower, sending the message that Japan stands up lying about the books, as long as the companies are Japanese, and the whistleblower is a non-Japanese foreigner?

And I’m just getting started with the list.

Posted by Janeallen | Report as abusive

People living in Japan including Shinzo Abe himself among others just want Japan’s economy to recover to a decent level – thus going to take necessary measures as camphor injection, nothing more or less than that for another several months before the Upper House election in summer.
Come August 2013, Abe will form a new team to begin depriving those with old vested benefits of their privileges – if he fails, a new premier will emerge within the party(LDP) as it had been so.

Posted by Cliff_O | Report as abusive