Japan’s new monetary policy has already attracted its share of criticism, even from US president Barack Obama–who warned that the yen would end up excessively depreciated. However, Federal Reserve chairman Ben Bernanke gave it a much warmer welcome. Who’s right?
Leaving aside that Obama was probably only trying to appease American exporters’ complaints, the chain reaction against the decision of the Bank of Japan was to be expected: every time a country pushes ahead to exit the crisis, the others worry about their own competitiveness. Brazil chides the US, now the US chides Japan.
Japan has recorded no trade deficit in at least 30 years, its international investment position being one of the strongest among developed nations. But its public debt accounts for 240 percent of the GDP!, mostly owned by Japanese creditors and so with little risk of external default. The Japanese economy has suffered under deflation for the last 20 years: as a consequence, its nominal GDP has stalled. What this combination of high external net asset rate, trade surplus and flat nominal GDP means is simply that there are more domestic savings than investment.
Savings are so strong that they finance the public deficit and invest abroad. Some analysts believe the explanation would be that the Japanese population is rapidly ageing, but savings excess not always piles up over very liquid assets instead of productive investments–which would generate jobs and growth.
To be sure, what happens here is a disconnection between savings and investment. The national economy seems exhausted while savings finance external assets, a problem that classic economic theories don’t consider as such because too strong savings should bring interest rates down and prop up investment activity. Yet, in Japan, interest rates being low and government debt offering little profitability cannot scare savers, who nevertheless prefer to buy bonds–a safe haven when deflation increases real over nominal interest rates. And that’s the liquidity trap for Japan.
The central bank proposes now to reach a stable inflation of 2 percent, and to convince savers that it is serious about that, it will double its assets in one year. Perhaps it won’t be necessary, but the goal is obvious: when savers feel less comfortable with their bond holdings, they will follow the money elsewhere in the productive economy.
Consumption could rise, and debt per GDP would fall. Credit will become more expensive for the government so fiscal consolidation will be necessary in the long term, anyway. What is important is that public debt drops and the economy recovers. And to achieve that, Japan has chosen the opposite strategy than the eurozone’s authorities: instead of cutting nominal debt down, the Bank of Japan wants to support nominal GDP.
If it works for them, Berlin and Brussels will have to rethink whatever their current plan is, provided they really have one.