Japan’s lessons for America’s budget warriors…

Comparison between US 2008 crisis vs Japan’s 1990 crisis is expected to continue for a long long time.

John Makin of AEI points to lessons for US. He says US should avoid fiscal austerity and stimulate economic activity. It should not follow policies of Japan’s stop and go approach towards stimulus.

Since the collapse of Japan’s housing bubble in 1990, the country has suffered more than two decades of deflation, stagnant growth, and ballooning public debt. Like Japan, the United States has been suffering from weak economic growth since 2007 because of the bursting of a real estate bubble; both countries have experienced rapid growth of deficits and public debt accompanied by a decline in interest rates. Japan’s deflation has only worsened its public finances situation, leading to a decline in tax revenues.

Responding to Japan’s long-lasting economic woes, the country’s new prime minister, Shinzō Abe, has pushed the Bank of Japan to print more money and enacted an ambitious public spending stimulus package that amounts to 2.6 percent of Japan’s gross domestic product (GDP). Despite the similarities in the two countries’ economic situations, the United States should not respond the same way as Japan because it does not share that nation’s deflation.

Congress and President Barack Obama should take away from the Japanese situation that excessive austerity regarding fiscal policy can slow growth and not improve the situation of public finances. The United States should instead reform the tax code and enact entitlement reform legislation to increase tax revenues and stimulate economic growth.

He has a nice take on politics of BoJ:

After experiencing nearly 20 years of economic stagnation and deflation, Japan has elected a new prime minister, Shinzō Abe, who has promised to get Japan’s economy moving again. Abe, the head of a recently elected new parliamentary government, has already pushed through a massive public spending (stimulus) program worth about $150 billion—or 2.6 percent of gross domestic product (GDP), about equal to the average scale of post–financial crisis US stimulus packages—in a country legendary for its massive accumulation of government debt. Simultaneously, Abe has sharply elevated the pressure on the Bank of Japan to print more money and end Japan’s deflation by pushing inflation to about 2 percent.

To accomplish this goal, Abe has threatened the reticent Bank of Japan with a new governing law that would take away much of its cherished independence. The current governor of the Bank of Japan, Masaaki Shirakawa, who as recently as February 2012 promised an aggressive program of reflation and then reneged, citing years of inflation, is in Abe’s sights. Shirakawa’s term as the Bank of Japan’s governor ends early in April of this year, and Abe has left no doubt that inflation fighters need not apply for the job. More likely, one of the numerous, persistent critics of Shirakawa’s too-timid deflationary policy, the most prominent of whom is University of Tokyo professor Kazumasa Iwata, will be appointed to replace Shirakawa. Iwata was deputy governor of the Bank of Japan in 2007, when he was the sole policy board member to vote against hiking interest rates. The interest rate hike, motivated by then-governor Toshihiko Fukui’s unfounded fear of inflation, proved disastrous, coming just before a global financial crisis that substantially harmed Japan’s economy.

Hmmm.. All blame on Shirakawa…

 

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