The View | Japan is wrong about its economy. Deflation was a symptom, not the cause
- The economy stagnated as it was no longer as competitive, but misfiring central bank policies that propped up inefficient conglomerates made things worse
- As Japan’s carmakers struggle to stay relevant and with monetary policy finally turning, the country must correct its course soon or face a dire future
Japan has mistaken its competitiveness problem for a monetary one. For decades, its central bank’s fight against deflation kept interest and exchange rates low, and in keeping a large and persistent fiscal deficit, government spending subsidised demand.
Over the past three decades, many well-known economists have travelled to Tokyo to offer their advice on how to revive the Japanese economy.
The basic idea is that deflation depresses household demand because it makes it profitable to hold on to cash. Companies, in turn, become hesitant about capital expenditure – the major long-term investment needed for growth – thus, setting off a vicious circle.
The solution is to print enough money to cause inflation, which would reverse the psychology and revive the virtuous circle of rising household demand and capital expenditure.
