Saving Japan

A SPECIAL PAGE ON JAPAN

The state of Japan is a scandal, an outrage, a reproach. It is not, at least so far, a human disaster like Indonesia or Brazil. But Japan's economic malaise is uniquely gratuitous. Sixty years after Keynes, a great nation - a country with a stable and effective government, a massive net creditor, subject to none of the constraints that lesser economies face - is operating far below its productive capacity, simply because its consumers and investors do not spend enough. That should not happen; in allowing it to happen, and to continue year after year, Japan's economic officials have subtracted value from their nation and the world as a whole on a truly heroic scale.

The fault does not, however, lie merely with those officials. Japan has also been badly served by the economics profession, both in Japan and outside. The great majority of economists - including those who specialize in issues of economic stabilization and growth - seem oddly uninterested in Japan's plight, as if the failure of conventional macroeconomic policy in the world's second largest economy were a subject of merely parochial interest, with no lessons for the rest of us. Of those who do make pronouncements on Japan, many if not most have taken the easy way out: blaming the victim, absolving themselves of responsibility for proposing solutions by asserting that Japan's problems are deep, structural, beyond the reach of technical fixes. Well, maybe; but maybe not. Sometimes big problems have small causes; sometimes a simple technical fix can work miracles.

Last spring I decided to sit down and think seriously about Japan's ills, putting aside conventional wisdom and my own prejudices, following the logic of economic analysis wherever it led. And it led to a surprising conclusion: that there is indeed a simple fix for Japan's slump - and that the structural obstacles to a quick recovery lie not in the economy itself but in the minds of policymakers.

What is particularly remarkable about the debate over Japan is that it is a case where straightforward economic analysis and policy orthodoxy are in direct conflict. If you apply the most conventional of macroeconomic models to Japan's unusual plight, you come up with recommendations that are anathema to central bankers and finance ministers. And in this case, I am firmly convinced that the models are right and the officials are wrong.

This page offers direct links to those of my writings that bear directly or indirectly on the problems of Japan. I group these essays into "models" - conceptual frameworks (some but not all mathematical) that attempt to make sense of Japan's predicament - and "diatribes", which focus more on the question of why Japan's policymakers (and too many economic pundits, Japanese and Western) have been unwilling to break out of the habits of thought that are, in my view, the only reason that predicament persists.

Models

Japan's trap (May 1998)

Further notes on Japan's liquidity trap (June 1998)

Setting sun (June 1998)

Babysitting the economy (August 1998)

Japan's bank bailout (October 1998)

Japan: still trapped (November 1998)

Inflation targeting in a liquidity trap: the law of the excluded middle (February 1999)

Can deflation be prevented? (February 1999)

Deflationary spirals (February 1999)

It's baaack: Japan's slump and the return of the liquidity trap ( Text ) ( Figures and tables )

Time on the cross: Can fiscal policy save Japan? (September 1999)