Skip to main content

Advertisement

Advertisement

What if Abenomics works?

For three years, economic policy throughout the advanced world has been paralysed, despite high unemployment, by a dismal orthodoxy.

For three years, economic policy throughout the advanced world has been paralysed, despite high unemployment, by a dismal orthodoxy.

Every suggestion of action to create jobs has been shot down with warnings of dire consequences. If we spend more, the Very Serious People say, the bond markets will punish us. If we print more money, inflation will soar. Nothing should be done because nothing can be done, except ever harsher austerity, which will someday, somehow, be rewarded.

But now it seems that one major nation is breaking ranks — and that nation is, of all places, Japan.

Mr Shinzo Abe, the new Prime Minister, returned to office pledging to end Japan’s long economic stagnation, and he has already taken steps orthodoxy says we must not take. And the early indications are that it is going pretty well.

Some background: Long before the 2008 financial crisis plunged America and Europe into a deep and prolonged economic slump, Japan held a dress rehearsal in the economics of stagnation. When a burst stock and real estate bubble pushed Japan into recession, the policy response was too little, too late and too inconsistent.

To be sure, there was a lot of spending on public works, but the government, worried about debt, always pulled back before a solid recovery could get established. By the late ’90s, persistent deflation was already entrenched.

In the early 2000s, the Bank of Japan tried to fight deflation by printing a lot of money. But it, too, pulled back at the first hint of improvement, and the deflation never went away.

There is another lesson in Japan’s experience: While getting out of a prolonged slump turns out to be very difficult, that is mainly because it is hard getting policymakers to accept the need for bold action.

That is, the problem is mainly political and intellectual, rather than strictly economic.

SEEKING HIGHER INFLATION

Enter Mr Abe, who has been pressuring the Bank of Japan into seeking higher inflation and has also just announced a large new programme of fiscal stimulus. How have the market gods responded?

The answer is, it is all good. Market measures of expected inflation, which were negative not long ago — that is, the market was expecting deflation to continue — have now moved well into positive territory. But government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this means that Japan’s fiscal outlook has actually improved sharply.

True, the foreign-exchange value of the yen has fallen considerably — but that is actually very good news, and Japanese exporters are cheering.

In short, Mr Abe has thumbed his nose at orthodoxy, with excellent results.

Now, people who know something about Japanese politics warn me not to think of Mr Abe as a good guy. His support for stimulus may have more to do with old-fashioned pork-barrel politics than with a sophisticated rejection of conventional wisdom.

But none of that may matter. Whatever his motives, Mr Abe is breaking with a bad orthodoxy. And if he succeeds, something remarkable may be about to happen: Japan, which pioneered the economics of stagnation, may also end up showing the rest of us the way out. THE NEW YORK TIMES

Nobel laureate Paul Krugman is a professor of economics and international affairs at Princeton University.

Read more of the latest in

Advertisement

Advertisement

Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.