Peering into our future…

August 28, 2009

A WSJ article on Japanese elections comes with the following table.


Japan has spent 20 years fighting deflation with loose monetary policy and deficit spending. To what end?

Keynesians point to Japan’s experience as evidence that the U.S. government can borrow much more before interest rates rise. I suspect they’re right. But what’s the point if, at the end of all of that, we’re saddled with unpayable debts?

Sure, deficit spending prevented more violent economic upheaval last year. But the more debts we build up, the longer and deeper the downturn will prove to be over time.

The article has many interesting details…

  • The party that’s been in power for 59 years will likely lose the elections to another, which promises “ambitious spending programs” despite Japan’s huge debt.
  • Incomes continue to fall. Inflated artificially by a credit bubble, Japan’s per capita income once ranked 4th in the world, but has since fallen to 14th.
  • Declining birth rates mean younger Japanese don’t have the voting power to reduce entitlement spending that’s asphyxiating the economy.

My hope is that America finds the political will to deal with debt. If we don’t, even matching Japan’s sorry trajectory will be tough.


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[…] “Japan has spent 20 years fighting deflation with loose monetary policy and deficit spending. To what end?”  (Rolfe Winkler) […]

Posted by Friday links: taxing transactions Abnormal Returns | Report as abusive

Could you elaborate on how Japan’s interest rates have been so low, for so long, given the enormous debt. Does the public, with their high savings rates, buy it up via the banks?

Seems like a violation of supply and demand.

Also, what are the fundemental factors that could lead to rates similarly staying low in the U.S.? Contrarily, what factors suggest the Fed won’t be able to keep rates low (i.e. at some point won’t they have to defend the $/fight inflation).


Posted by HHB | Report as abusive

I think that would be the best case scenario for the U.S. after all the economic disasters have ran their course. The only positive thing we have that Japan didn’t have is that we have the world’s reserve currency to fall back on.

Posted by CompaJD | Report as abusive

Since we have to finance externally, it’s not a given that we can do it w/o raising rates/disaster.

If you just pump money into losers, which is what japan did and what obama wants to do, how do you expect to get growth.

The losing companies must be put out of their misery/restructured and there must be incentives to grow. Our current regime is not intent on doing either of those things.

We will either follow japan’s path or worse. We will not have a better result than them, at least not on the current path.

Posted by yo | Report as abusive

I was not aware Japan spent much on entitlements for the elderly. I have read recently that Japan has been plagued by a crime wave of sorts by elderly Japanese forced to steal to get by. If so, then maybe we would be better off, if down the debt highway we must travel, to not emulate Japan with massive infrastructure projects that do not have seemed to have helped Japan find its footing, in favor of more transfer payments to the less well off.

While it pains me to suggest this, we have to take into account that we, as a society, are much less cohesive than Japan and that a prolonged period of falling living
standards with unequal impact on our various social and ethnic communities could become very dangerous to our society. Moreover, I am very skeptical that our present government has any notion or what infrastructure is needed or wouldn’t become much more than pork to apportioned politically rather than economically. OTOH, putting money in people’s hands, even if it is just borrowed money, does replicate a market and provides a better indication of where resources should go than a House Appropriations Committee.

Posted by sangellone | Report as abusive

All that ZIRP in Japan did was allow the asset prices in other countries to increase through expanded leverage. However, I think it is a mistake to assume that the adoption of ZIRP in open economies around the world (or at least in much of them) will have the same effect. The Japanese money had somewhere to go (it could be borrowed and used for leverage overseas). Asset prices could fall in Japan but they would increase everywhere else (anywhere else with access to loans from Japan). However, the each new economy which adopts ZIRP or near-ZIRP provides less and less boost to the world’s asset prices–if players are already borrowing at zero percent, they can’t really get anymore leveraged. . .

The point is, I don’t think our experience will be like Japan’s anymore than one’s second time under fire in combat is like one’s first (or sexual experience, if you prefer). I don’t know how it will be different, but I’m sure it will.

Posted by But What do I Know? | Report as abusive

Rolfe, you seem to be confusing low interest rates with easy money policy. On the contrary, apart from a couple isolated years, Japanese monetary policy has been consistently tight. Scott Sumner (The Money Illusion blog) has some good things to say on this issue, as does Alan Meltzer. Meltzer became very frustrated in the ’90s while advising the BoJ because they refused to move to monetary easing despite obvious signs of deflation.

Posted by David | Report as abusive

What the numbers show to me is that a rising stock market does not translate to anything good for the average person. Here in the U.S. the stock market rises as more people lose their jobs. In Japan there generally is much better job security to offset that. In the U.S. the social networks are underfunded and failing. So as the Main Street recession/depression deepens, you will see more social unrest. And I don’t mean idiots screaming about health care reform who don’t understand they’ll need such help to keep them alive. You’ll see many more desperate and ignorant people attacking everything in sight and perhaps migrating to a third political party.

Posted by sharonsj | Report as abusive

David, the facts don’t bear out your conclusion. Japan was wreakless with its monetary policy. Pretty much all the government’s responses were Keynesian in nature (meaning pretty loose monetary policy). Thats why its debt to GDP is now 200%. Plus they implimented a huge quantative easing policy that blew billions.

The paper “The Cause of Japan’s Boom and The Reasons for Its Prolonged Bust” by Benjamin Weingarten is a good overview of what happened. Page 6 and 7 might be some interest to you because it talks about various interventions. rten.pdf

Then again a low interest rate policy almost always means an easy monetary policy. How else do you think the FED lowers and raises interest rates?

Posted by Geoffrey | Report as abusive

Dear friend,
I can accept of your article by 50 percent ratio.
One basic reason for Japan!s economic crisis is that,whatever they used to produce is for export purposes.
She was mainly depended on American Markets.To add that,Now,China is producing,assembling on many electronic,communication devices,agricultural implements,auto spare parts and very strong on small manufacturing products on very cheaper,highly competitive bidding-all created some panic,set back in Japan!s exports.
Many financial institutions were in shaky positions.
Now, I came to know that,very long Ruling party is defeated by her main,strong Opposition Party in recent general elections.
New Prime Minister will bring a stable economic structure and do more protection to its citizens.

Posted by krishnamurthi ramachandran | Report as abusive