Opinion

Edward Hadas

Japan’s experience should comfort policymakers

Edward Hadas
Feb 23, 2010 22:22 UTC

The conventional wisdom is that Japan has never really recovered from the bursting of the stock market and real estate bubbles in 1990. That view is basically wrong.
Sure, prices have never recovered. The stock market is still almost 75 percent below its peak and land prices are down 60 percent. After two decades of nearly stable consumer prices, the Japanese government is once again badgering the central bank to do something to create a bit of inflation.
This appeal, like so many before it, is likely to end inconclusively. Japan will continue with its longstanding pattern of near-stable prices, slow growth and gargantuan government deficits. But the economy is basically in pretty good shape.
Sure, an annual GDP growth rate of 1 percent since 1990 sounds unimpressive. But the number of people below retirement age has been shrinking by 0.4 percent a year. Annual growth in U.S. per capita GDP over the same period was 1.4 percent – not much different from Japan.
Other economic indicators suggest Japan is managing pretty well. Even in mid-recession, car sales are only 20 percent less than at the 1990 peak. Housing starts are down 50 percent, but the population was rising then and is declining now. The 5 percent unemployment rate is modest by Western standards. And the 1.4 percent yield on the 10-year government bond hardly sounds like a vote of no confidence in the government or the country.
The country’s financial burden — gross government debt at 200 percent of GDP — could yet prove too much to bear for a rapidly aging and steadily declining Japanese population. But for now, Japan should be more a sign of hope than gloom for the United States, UK and euro zone countries that have endured a severe financial collapse.
However, Japan had advantages in dealing with a financial collapse. It has a high savings rate, a big trade surplus and a powerful tradition of cultural and political unity. Few Western countries have all of these. Most also face almost Japanese-style demographic challenges. They will be fortunate to do as well as Japan.

Markets right to take Fed move badly

Edward Hadas
Feb 19, 2010 14:30 UTC

The Federal Reserve deserves some sympathy. The U.S. central bank did everything it could to stage-manage its minimal tightening moves, announced late on Feb. 18. But markets reacted as if to serious bad news.

The changes really are small. The main one was to increase the Fed’s discount rate, which is not currently crucial to the financial system, by a token quarter of a percentage point. That widens the spread between the policy interest rate, currently zero, and the discount rate, which is used for emergency lending to banks, to half a percentage point. Before the crisis, the gap was a full percentage point.

The Fed tried to keep markets calm. It had hinted the move was coming and the press release announcing the changes started by explaining that they were a response to the “continued improvement in financial market conditions”. To hammer the point home, the Fed added that the moves “do not signal any change in the outlook for the economy or for monetary policy”.

Greece may vindicate Europhiles, not Euroskeptics

Edward Hadas
Feb 15, 2010 19:58 UTC

It isn’t just the Sophocles connection that makes it easy to think of Greek fiscal woes as a tragedy in the making. A chorus of euroskeptics has been chanting a persuasive ode of despair. They wail that a currency union without a fiscal union is always doomed. The no-bailout clause, the cheating Greeks and the mean spirited Germans — woe, woe, woe are the euro zone and the euro.

The skeptics interpret each hesitation as a sign of trouble. So they gloat that the European Union’s statement last Thursday was weaker than hoped and the market was unexpectedly skeptical. But while their assessment is almost instinctive, these are no random ululations. Their case is cogently argued, mostly from the western side of the English Channel. The logic is that workers in the euro zone will not take wage cuts or losses on savings, so overpaid or overleveraged members of the single currency cannot hope to restore normalcy. There is also a dark reading of history.

Look at the failures of the Latin and Scandinavian Monetary Unions in the early 20th century.

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