The Great Debate

Almost exactly a decade ago, Ben Bernanke visited Tokyo as a member of the Federal Reserve Board – he was not yet the powerful Fed chairman – and gave some shocking advice to his Japanese counterparts. Surveying the country’s abysmal record of deflation, Bernanke recommended that the Bank of Japan set an explicit inflation target and embark on a massive program of buying government debt to help achieve that goal.

It took a perplexingly long time for the advice to be heeded. Last week, Japan’s new central bank governor, Haruhiko Kuroda, announced that he hoped to achieve 2 percent inflation within two years from the current deflation of -0.70 percent.

To accomplish this, the BOJ will double the size of the money supply to $2.8 trillion in two years by buying long-term government bonds, increasing its balance sheet by 1 percent of gross domestic product a month this year and 1.1 percent next year.

In short, Japan will attempt to do in two years what Bernanke and the Fed have done under their program of quantitative easing in five years. For the cautious Japanese, it was a breathtaking departure from recent practice, which had been constrained by fears that pushing up the inflation rate might bankrupt the BOJ because its large government bond holdings would lose value when interest rates went up.

While these measures are almost universally applauded, it’s an open question whether they will be enough to fix what ails Japan. No two countries are alike, so using a solution that worked well in the United States may prove less than a perfect fit for the Japanese. For example, increasing the money supply is no guarantee that banks will lend and people will start buying consumer goods, the ultimate end of a deflationary liquidity trap. In addition, the Japanese prescription depends in part on the revival of Japan’s export trade – all that monetary easing has led to a sharp decline in the value of the yen, which is supposed to boost the fortunes of companies like Sony and Toyota. But that may prove elusive as long as economies in Europe and the United States struggle with high unemployment.

By Ian Bremmer
The opinions expressed are his own.

Though I’ve already written about the recent Munk debate in Toronto elsewhere, it’s worth taking some space to expand on my position, and why the U.S. truly is not going to experience a Japan-style lost decade of economic stagnation.

(The debate was on this resolution: Be it resolved North America faces a Japan-style era of economic stagnation. I joined Larry Summers in arguing the Con side against Paul Krugman and David Rosenberg.)

Let’s start with the political realities: Japan experienced 50 years of single-party rule. In the last 22 years, the country has had 17 prime ministers. Recently, the Democratic party there defeated the long-time incumbents, the Liberal Democrats, only to find that they had no idea how to govern the nation. They had no idea how the ministries worked, no relationships with industrialists or financial institutions, no grasp on the levers of power in society, and no strong policy apparatus. If the U.S.’s political situation looks bleak, consider that alternative.

By Larry Probus, the CFO of World Vision, U.S. The opinions expressed are his own.

Felix Salmon’s blog, “Don’t donate money to Japan,” appears to make a compelling argument for not donating to charities responding to the tragic earthquake and tsunami in Japan. Salmon says, “Earmarking funds is a really good way of hobbling relief organizations and ensuring that they have to leave large piles of money unspent in one place while facing urgent needs in other place.”

There is an element of truth to this argument, but as often is the case, simple answers to complex questions are usually wrong.

Devra Davis, PhD, MPH, president of Environmental Health Trust, is an award-winning scientist and writer on environmental health issues, author of “The Secret History of the War on Cancer,” and “Disconnect” who served as the founding director of the Board on Environmental Studies and Toxicology at the U.S. National Academy of Sciences, 1983-93. The opinions expressed are her own.

The discovery of ionizing radiation at the turn of the nineteenth century revolutionized science and society. Within two weeks of their being created at the end of 1895, the stunning x-ray images of his wife’s bejeweled hand that physics professor Wilhelm Conrad Röntgen had taken appeared in major newspapers around the world. From Paris, to London and Tokyo, scientists and celebrities engaged in a world-wide medical vogue with fashionable x-ray parties featuring popular demonstrations of moving skeletons.

This extraordinary discovery in fact came with extraordinary risks. The same technology that could light up lurking solid tumors of the lung and stomach and save lives on the battle field also damaged the ability of bone to make healthy red blood cells and induced an array of crippling deformities. Girls who worked hand-painting clock dials with luminescent radioactive paint and wet their brushes with their tongues to craft fine lines lost their jawbones years later.  Men who chipped uranium out of the earth eventually grew pale as their blood became swamped with white blood cells and bereft of iron by aplastic anemia and leukemia.

By Anya Schiffrin
The opinions expressed are her own.

Sitting in Japan in the days after the Friday earthquake and watching the official broadcaster NHK cover the disaster has been an unusual experience. There has been the typical blanket television coverage of this tragedy but the flavor of the reporting is different than it would be in the U.S. “Restrained” is how one friend described it. Over and over we’ve seen the same awful footage of the enormous dirty wave sweeping up cars and houses as it inches slowly along the land.

There are the inevitable interviews with displaced people and experts in their offices. But there are very few graphics or charts, no catchy logos and certainly no dead or injured on the screen. Just as U.S. presidents take off their ties when they visit the troops, Japanese officials appearing on television wear the blue uniforms of someone doing physical labor but with their logo of their ministry or office sewn on their pocket. “It’s theatre” a Japanese friend said dismissively as we watched television last night. But the purposefulness and determination of the government officials were evident — and even my skeptical friend agreed that this commitment would be well-received by the electorate.

At Columbia University we recently began a study with Professor Jairo Lugo in the UK comparing the New York Times and UK Guardian’s coverage of natural disasters. One thing that was immediately clear is how quickly newspaper coverage of natural disasters becomes coverage of the state. This is so even in the US where there is long standing skepticism about the state, and — these days — a widespread view that the government should play a limited role.

QE2 — a second round of quantitative easing — means that soon the U.S., Japan and Britain will all be busily exporting their deflation, raising the question: Just how much pain can the euro zone take?

If by November we have three of the largest economies printing money and buying up their own debt, the outcome — in fact the intention — will be to drive their currencies lower against their trading partners, opening new international markets for their goods and, by raising the price of imported goods, fighting deflation before its debilitating psychology can take hold.

That is the plan, at any rate, and, unless something else happens, it will force the euro up against all major currencies, including, as it is tied to the dollar, the Chinese yuan. The euro has risen about 9.5 percent against the dollar in the past month, a trend that ultimately will murder European exporters and its stock market.

For the growing number of Americans who see China heading for inevitable global dominance, nudging aside the United States, a brief walk down memory lane helps put long-term predictions into perspective.

Not so long ago, Japan was seen as the next (economic) number 1. American executives studied the 14 management principles of The Toyota Way, developed by the automobile manufacturer that grew into the world’s biggest car maker and is now recalling millions of defective vehicles.

Between the mid-1980s and early 1990s, books with titles such as Trading Places – How We Are Giving Our Future to Japan and How to Reclaim It (by Clyde Prestowitz) were required reading in Washington. Learned panelists expounded on the wondrous efficiency of “Japan Inc.”

(James Saft is a Reuters columnist. The opinions expressed are his own)

The bad news for holders of U.S. debt, in case you missed it, is that China has sold so many Treasuries that it is no longer America’s leading lender.

The worse news is that there is a new creditor-in-chief, and it is Japan, an aging country with its own government debt bubble to contend with.

China sold about $34 billion of Treasuries in December, taking its holdings to $755 billion, while Japan increased its purchases and now is in the top spot of the Treasury Department’s scroll of merit, with $768 billion. China’s holdings peaked in April, since when the trend has been gently downward.

- Jane Foley is research director at Forex.com. The opinions expressed are her own.-

A willingness to differentiate between risk on a country or at a regional level is an important part of the repair process in financial markets.

Credit worthiness is at the core of any assessment of risk and naturally credit worthiness can sort "risk" into a hierarchy which should be instrumental to the pricing of assets and currencies.

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

Everyone agrees that China’s economy must be rebalanced, but few have bothered to delve into the costs. Japan’s experience has shown that even well-meant changes could sow the seeds for a bubble.

China cannot stay with its current economic model forever. But as the economy has become extremely unbalanced, to some extent even more so than Japan’s in the 1980s, rocking the boat too much risks tipping it over. Instead of rushing into changes, it would be better to make reforms gradually.