Japan has become the boogeyman of U.S. monetary policymakers. A country which in the mid-1980s was on the march to conquer global consumer markets with its manufactured products, and even to supplant the much more populous United States as the world’s largest economy, unexpectedly saw its economic growth sputter. The Tokyo stock market slumped in 1989, and the bubble in the real estate market burst in the early 1990s. Since then, Japan has been in a painful stagnation, with economic growth averaging less than 1 percent over the past two decades.
The specter of a Japan-like stagnation is now haunting the United States. For Ben Bernanke, the Chairman of the Federal Reserve, the situation has an aspect of Greek tragedy. In the late 1990s, while still an economics professor at Princeton, he thundered against the timidity of the Japanese central bank, which failed to implement massive infusions of liquidity to counteract deflationary pressures and thus to jolt the Japanese economy back to economic growth.
An Opportunity to Act
Now, Dr. Bernanke has been hoisted on his own rhetoric. He finds himself at the helm of the U.S. central bank at a time when the United States faces a similar set of problems. A sudden bursting of a number of bubbles in the U.S. economy has raised the bleak prospect of years of sluggish economic growth. He can now try out his own prescriptions, and his unconventional quantitative easing methods have already added some $2 trillion of liquidity to the U.S. banking system. But banks remain reluctant to lend to businesses and consumers, and the unemployment rate is hovering just below 10 percent. In October, Bernanke admitted that his Fed, like the Bank of Japan in the 1990s, had not done enough. The Fed has hinted that it will resume the practice of buying government bonds from financial institutions, and some analysts believe that the Fed balance sheet could expand by another $1 trillion.
At the same time, Keynesian economists such as Nobel Laureates Joseph Stiglitz and Paul Krugman have complained that the Obama Administration’s fiscal stimulus was woefully insufficient. Even as the Federal budget deficit surpassed $1 trillion for the second year in a row, reaching $1.3 trillion in fiscal 2010, they still claim that more government spending — as much as $1 trillion — is required. They too point to Japan as a cautionary tale.
Krugman recently wrote, for example, that after the Japanese bubbles burst, companies and consumers reduced their spending in order to pay back debts they had incurred in the real estate debacle. With aggregate demand thus constrained, his view is that the Japanese government should have boosted public spending to jump-start growth.
However, with all due respect to such an authoritative lineup of economists, it seems that the situation in Japan was very different from what we’re seeing in the United States. First of all, Japan had a very high savings rate and a low debt-to-GDP ratio when it embarked on fiscal stimulus measures. U.S. consumers, on the contrary, were dissaving already in the mid-2000s, and both Federal deficits and the debt burden were onerous before the economic downturn struck. Japan was, moreover, a major exporter, with a considerable current account surplus. The United States, on the contrary, is consuming substantially more than it produces, and while Japan is a major supplier of investment capital to the rest of the world, the United States is the world’s largest debtor.
Finally, Japan has never had a high unemployment rate, whereas the U.S. labor market rapidly shed jobs, losing as many as 700,000 jobs a month in late 2008, and the jobless rate seems to be stuck at a very high level for the foreseeable future.
Bernanke’s criticism notwithstanding, the government in Tokyo and the Japanese central bank actually tried a variety of the same stimulus measures which the United States is currently embarking upon. Over the past 20 years, Japanese interest rates have been mostly near zero, and the government has been spending heavily on a variety of fiscal stimulus packages, building and rebuilding highways, bridges and railroads. Its debt burden is now the heaviest in the world relative to the size of its economy, approaching 200 percent of GDP.