Recovery in Japan: Threading the Needle
Jun 15th 2013 10:16AM
Updated Jun 15th 2013 1:00PM
Washington Post columnist Neil Irwin stopped by to discuss his book, The Alchemists: Three Central Bankers and a World on Fire. It's a great read on the history of central banks, including how they responded to the financial crisis and the challenges they face in the future.
Japan's economy has dropped from the second to the third largest in the world. In this video segment, Neil shares some of what the island nation's leaders are up against, and what they're willing to try in an effort to get their economy back on track. A full transcript follows the video.
Morgan Housel: We talk about printing money here in America, but what they're doing in Japan right now is on a totally different scale. It makes the Fed look like sissies. Does Japan know what they're ... is this the ultimate Hail Mary, or do they know what they're doing?
Neil Irwin: I think it is a Hail Mary. The Japanese economy, they've had 20 years of low-level deflation. It's amazing how much the things they're trying to do now under the Abe government in Japan -- it's stuff that Ben Bernanke and other American economists were saying they ought to do in 1999, 2000, 2001 -- and now they're diving in and going for it.
The Bank of Japan, on the central bank side, Kuroda, the new governor, is determined to get inflation to 2%. That's their target. They're going to do whatever they have to do, buy whatever they have to buy, to pump enough yen out into the economy to do it. It's mixed with activity on the fiscal side from the government.
The great hope is that by resetting expectations -- that Japan will have 2% inflation, it'll get out of its deflationary spiral, the stock market's already way up, asset prices are way up, the yen's down; that helps exporters -- that all these things together will finally get the world's third-largest economy out of its rut and get it back on a better course.
I hope they're right. I hope they've calibrated it right and can manage that thing. It's a little bit like threading a needle, though, because if you go too far on some of that stuff you could get in big trouble pretty fast.
Japan has a debt of about 200% of GDP, the largest in the world. Let's say inflation expectations get to 2, but then they get to 3 or 4 or 5%. Well, suddenly your nominal interest rates are going to rise; the debt burden the government faces is huge.
You can imagine that's just one of many ways in which you could see, if they're either too successful that they could end up in a bad spot. At the same time, they had to try something. What they've been doing for the last 20 years has not gotten them anywhere. There's a reason they used to be the second-largest economy in the world, and now they're No. 3.
Housel: They have a very old economy, too. Their overall population is shrinking. To the extent that their economic problems are structural, can they be fixed with monetary policy?
Irwin: It's absolutely true that a central bank, whether it's the Bank of Japan or the Federal Reserve, they can't fix structural things. If American workers are not getting the right education they need to compete in the modern economy, that's not something Ben Bernanke can do anything about.
If Japan, which they do, has terrible demographics -- an aging population, no real in-migration, no immigration -- those are realities that limit the potential of their economy to produce at the rate it used to. Mr. Kuroda, the governor of the Bank of Japan, could do nothing about that.
That said, I think most analysis says Japan is functioning below its potential, even after you adjust for all those structural issues.
There's always some guesswork involved in judging where an economy is performing relative to its potential, given whatever structural problems it might have. It's the job of the central banker to try to get output to whatever that potential is, given structural issues, and I think there's still some room to run in Japan and the United States.
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