Tuesday 24 April 2018

Political games may leave US in a Japan-style crisis

Japan's Prime Minister Shinzo Abe with Taoiseach Enda Kenny this week.
Japan's Prime Minister Shinzo Abe with Taoiseach Enda Kenny this week.

Nicholas Wapshott

Japan was once the world's tyro economy, rocketing to 10pc annual growth in the 1960s before gradually slowing to 4pc in the 1970s.

By the end of the last century however, Japan was in deep trouble. Growth screeched to a halt, an asset price bubble burst, and the country resorted to a bold Keynesian experiment, pumping money and demand into the economy through massive public works programmes.

It didn't work.

They switched to "structural reform" measures, to deregulate the economy and dismantle the hidebound traditions found in Japanese corporations, and added more quantitative easing.

Nothing seemed to do the trick. Growth remained sluggish and deflation took hold.

Then the banking crisis of 2008 and its aftermath caused worse suffering in Japan than almost anywhere in the world.

Exports, which have traditionally spurred Japanese growth, collapsed by 27pc in 2009. It was time for a radical experiment.

Last year, Japan's Prime Minister Shinzo Abe introduced a drastic programme known as Abenomics, a heady cocktail of massive QE, doubling the amount of money in the system in just two years, making exports cheaper by curbing the tendency of the yen to increase in value, increasing government spending, and raising taxes.

It was an experiment without parallel. Without help from the IMF or outside influences, Japan set about kick-starting its way out of its debilitating trough. After a year of swallowing Abe's medicine, some slender signs of recovery are emerging. Last month, Japanese exports surged to their biggest annual increase in three years, not least thanks to the fall in the value of the yen, down 14pc against the dollar.

Price deflation is giving way to modest inflation, the first in five years and it is on its way to Abe's target of 2pc. Output is increasing.

It is not all bright news. Wages are falling behind prices and there is not enough investment. But Abe is confident that if the world economy picks up, Japan will not only benefit but be able to play its part in returning the world to prosperity.

That is a big if.

So long as America's economy remains flat, Japan's break for growth cannot gather pace. Indeed, it is likely to falter. The rest of the world, too, is awaiting America's lead. The Chinese look to Japan as an example of what can go wrong if wages start to outstrip growth. The economic miracle hits the buffers. It ends in a lost decade, or longer.

Europe, meanwhile, is busy looking after itself, restructuring and paying off debt, which hinders worldwide growth, while it waits for America, as ever, to pull it out of the ditch.

But America is in no position to provide stimulative measures. Hampered by a rump faction in Congress devoted to a dogmatic misunderstanding of how economics works and a belief that the whole notion of government intervention is wasteful and unnecessary, the Obama administration is powerless to prod the economy to move faster.

It may suit some congressmen to stand in the way of an American recovery. When times are tough, incumbent parties find it hard to be re-elected.

Yet as the Republicans assemble a shortlist of maverick, unelectable, extreme, wacky presidential candidates that could survive a Tea Party-dominated primary season, they are placing the White House way beyond their grasp.

The subversives who dictate congressional tactics hope to achieve their small-government goals by obstruction and obfuscation, however much of that may harm the very people who have put them in Congress.

Enlightened self-interest has given way to ignorant self-harming. Smothering government initiatives could soon turn America into Japan, leaving Americans with decades of low growth and all the material misery that entails. So long as a minority of the majority holds its leadership in the House hostage, the country is not only likely to repeat Japan's mistakes, but will drag the rest of the world back into the mire. (Reuters)

Irish Independent

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