By Paul Jackson
Koo claims that the LDP eventually came round to his way of thinking and stopped trying to meddle with monetary policy and put pressure on the BOJ.
But back to today’s DPJ-led government, which is struggling to find cash for its campaign pledges by cutting waste amid nose-diving tax revenues. Financing additional measures to boost domestic demand would mean yet more public debt, which is already approaching 200 percent of GDP (way above the level of even Greece). Hence the desire for an economic tool (monetary policy), to tackle deflation that doesn’t require the issuing of more bonds. And if the central bank doesn’t take a ‘mutually compatible’ stance with government policy on this matter (as stipulated in the independence-limiting Article 4 of the Bank of Japan Act), then at least there’ll be someone to blame.
But when it comes to the issue of Japan’s national debt, Koo flatly rejects the notion that it presents any kind of financing problem.
‘At the moment, with long bond yields at 1.36 percent on the 10-year JGB, all these arguments that Japan has a financing problem are absolute nonsense. If the long bond yield is 14 percent like it was in 1997 then I know that this country has a horrendous financing problem. But at 1.3 or 1.4 percent, the market is saying “Please go on, we need the JGB.” A country with the lowest government bond yield having financing problems? I mean these people [who say that] really have nothing better to do.’
As for the notion that Japan has already used fiscal policy with little effect other than to run up the huge national debt in the first place, Koo makes the point in his book that the use of fiscal policy during a balance sheet recession is absolutely vital for propping up an economy. It’s the only effective way of boosting the money supply, since any extra liquidity pumped into the financial sector will have no takers.
It might not look as if fiscal policy helped Japan much after the bursting of its economic bubble, but the alternative would have been catastrophic, Koo says. He calculates that 1.5 quadrillion yen was wiped off Japanese assets in the wake of the bubble—that’s 3 times the size of the nation’s economy. Without fiscal stimulus, Japan’s GDP should have shrunk to between a half and a third of its size, he claims. But in fact, GDP did not fall below its bubble peak, something he describes in the book as ‘nothing less than a miracle.’
When fiscal consolidation was attempted in 1997 and 2001 under the Hashimoto and Koizumi governments, it came too early, according to Koo. The result was that the economy suffered, tax revenues fell and the budget deficit actually increased. Koo therefore believes that fiscal stimulus should remain in place until it’s clear that companies have repaired their balance sheets and started borrowing again instead of paying down debt. That’s the signal for an exit strategy to be employed.
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Paul
Great topic and article. But money does work – suppose the BOJ “fixed” the yen at 150/$ and promised to buy all the dollars you presented at that rate. My guess is Japan would see a real burst in inflation + some decent growth for a while due to exports and import substitution. I doubt that changes much in the medium term, but money can work to generate inflation undoubtedly….
john
The entire problem with the western banking system is that the bank owns the government! It doesn’t matter who sits in the presidents seat if the central bank controls the money because if they really want to the central bank can collapse the economy and the politicians don’t get reelected! Politicians in theory at least have some responsibility to the people but not the fed or other central banks in the western banking system. It’s time the governments took back the power to issue money for the people and out of the hands of the banksters!
Dana Surmane
Watching Japan for thirty years has been troubling. I think one of the reasons that the U.S. is in so much trouble is that the stimulus money was essentially stolen — not used to get people working at all. The same sort of thing seems to always happen in democracies. As we all seem to be clumping us against the same fence, you begin to wonder what the next step really is. Anyway, thank you for giving Richard Koo a chance to air his intriguing views. Still, I think that the critical problem that he and most of the theorists have is in not being able to come to terms with the reality that no present government is capable of committing itself to an honestly administrated long-term stimulus or fiscal policy. With that much cash and/or tax benefit largesse available to politicians, it just serves to corrupt them faster. Sometimes we all seem to be heading toward the North Korean form of government and finance.
σ1
This is a great article and I will be sure to read the book. It tackles both of the great misconceptions about Japan – the relative efficacy of fiscal v monetary policy, and the “out of control” public debt.
I do have to say though that in the long run surely there is something to be said about the “quality” of fiscal policy. I understand that some “shovel ready” spending is necessary to ensure any given crisis does not spin out of control, but in spending public money the government should always be very mindful of where the long term efficiencies comes from – I think this has been the big failure of the LDP, and now the DPJ. The LDP was much more interested in the political implications of the use of public money and indulged in pork barrel politics – public benefit be damned. The DPJ does not seem so beholden – but I am not seeing any long-term, daring or coherent fiscal spending/innovation agenda just yet.
Kevin Cousins
Richard Koo’s book “The Holy Grail of Macroeconomics” is I believe the key to understanding the current environment. Read it together with McKinsey’s “Debt and deleveraging: The global credit bubble and its economic consequences” and you have an excellent framework for macro trading over the next few years.
Despite being easy to read, it may also be an important step forward in economic theory.
Agata
Thanks a lot for the advice. I will gladly read also the second book. Japan is good example that a new approach is essential. So time to get some knowledge on those new ideas which can become even more important in the future. Regards.
Agata
Very good article and really interesting point of view – nice to read something different. Now I really want to read Mr Koo’s book.
Barry Ritholtz
Fascinating article — thanks for the interview with Koo