Much like BoJ governor Haruhiko Kuroda, Paul Krugman thinks that the key for Japan when it comes to overcoming decades of deflation is a positive outlook.
“Japan needs to reach a point where everyone believes that it has pulled out of deflation. And then if that can be believed, then it may be able to stay out of trouble thereafter,” he told an audience in Tokyo last September.
That rather ridiculous pronouncement is reminiscent of something Kuroda said last summer: "I trust that many of you are familiar with the story of Peter Pan, in which it says, 'the moment you doubt whether you can fly, you cease forever to be able to do it.' Yes, what we need is a positive attitude and conviction."
In other words, Krugman and Kuroda believe that Japan can wish its way out of deflation. Krugman’s comments in Tokyo came around 10 months after he visited Japan in 2014. On that trip, he’s said to have helped convince PM Shinzo Abe to delay a planned sales tax hike. “That nailed Abe’s decision -- Krugman was Krugman, he was so powerful,” Japanese economist Etsuro Honda said, recounting a meeting between the economist and the premier.
Well, 16 months has passed since that fateful visit and virtually nothing has changed in Japan. In fact, the Japanese have since taken a further plunge down the Keynesian rabbit hole by taking interest rates negative and not only is inflation still languishing at essentially zero, stocks are some 20% off their highs and this month the yen actually hit its highest levels since Kuroda announced the second round of QE two Octobers ago.
With the entire enterprise now falling apart, and with JGBs yo-yoing around like penny stocks as traders try to game BoJ POMO, Krugman was back in Tokyo this week to attend a panel discussion on the global economy with Abe and senior Japanese policy makers. There, the good professor called for Abe to scrap the sales tax hike and introduce more fiscal stimulus. NIRP, he said, is probably “a good idea.”
Excerpts from Krugman’s speech can be found below.
We are now in the world of pervasive economic weakness. In many ways, we are all Japan now. This complicates policy for everyone including Japan.
We are seeing the difficulty in achieving goals through even very bold and unconventional monetary policy. Kuroda-san here, we will clearly need to speak about that. Monetary policy needs help from fiscal and possibly other policies but certainly on the fiscal side, and certainly does not need to be struggling against fiscal policy moving in the opposite direction. That is not just a Japanese issue but very much a global issue at this point.
Despite everything, despite everything that Mr. Kuroda is doing, the rise in the yen, which is a very unfortunate development from Japan’s point of view, is driven by the weakness of other major economies.
Monetary policy has been, in most places, the only game in town. It’s their line because fiscal policy has been politically paralyzed. Here, less so, but still in fact, of the three arrows by far the largest, so far has been monetary. Mr. Kuroda has done most of the lifting here. We are seeing the limits of monetary policy. We are seeing that it becomes difficult when you try the unconventional methods, we can argue this but it seems to be having diminishing effect. Negative interest rates, it is remarkable that that turns out to be possible. I do think it was the right move to make but it is very hard to push it further. The effects are proving to be limited. If we look elsewhere, if we look in Europe, despite another very able essential banker, the ECB seems to be losing traction. Here, as you know better than I, inflation expectation seems to be fading. Wage growth is not what it should be. We are seeing that the policy that has been the principle lever for trying to deal with this global weakness is not as effective as we had hoped and not as effective perhaps as it seems to be recently.
Everything we have seen for the past seven years suggests that fiscal policy remains effective, especially effective in these circumstances. It has been very difficult to apply it, a few years of bad debt, political conflict, the Europe is divided among counties, the United States is divided between parties, but fiscal policy is effective and the global environment right now is one where economies really, really need fiscal support. The idea that one should be prioritizing long-run budget issue over fiscal support now seems to me to be extremely misguided. Obviously I am talking about the consumption tax here. Two points are following on all of that. You notice that I did not say anything about structural reform. That is not because I am against it but because structural reform seems largely beside the point on this crucial issue of boosting demand. Some kind of structural reform might spur private investment, which is good but that is rarely what is emphasized. Some other kinds of reform, the Abenomics, by expanding the future labor force helps to offset the demographic headwinds that the economies face. So all of that is good but I do worry that sometimes the talk of structural reform becomes an excuse not to deal with the primary immediate issue of sufficient demand, of fighting deflation or low-flation, inadequate inflation, which has got to rely on monetary policy. But as I said, that has limits and on fiscal policy which needs to be more focused on that immediate need than it has been.
Ok, so there’s a whole lot of words to make one overarching point: the exceptional measures central bankers have undertaken in pursuit of boosting inflation and recovering demand lost to the global financial crisis aren’t working.
As usual, Krugman doesn’t understand why anyone is worried about long-term sustainability when there’s so much room to be completely irresponsible in the myopic pursuit of short-lived surges in aggregate demand and inflation. Fiscal stimulus - i.e. helicopter money, i.e. pay people to dig holes and then pay other people to fill them up again - is what's needed, Krugman figures.
When it came time for the Q&A, Abe gingerly told Krugman that Japan is getting slightly concerned about its debt burden, which, when measured in yen, has so many zeros that it barely fits on a 32” monitor. “About two years ago, I had a pleasure meeting with you, Professor Krugman. At that time, Japan was able to be going out of the deflation then we have set for ourselves the 2% inflation goal,” Abe began. “We were talking during that time that a rocket has to go out of the atmospheric region, which means that an escape velocity has to be earned in order to lift the Japanese economy out of deflation and we were looking for a good speed to do that.,” he continued. And then we got this: “We worry about the accumulated debt. That is a source of another concern. What to do about it?”
Yes, “what to do about it,” Professor Krugman? Predictably, Krugman’s answer was “spend more”:
The case for spending now is quite strong despite the debt. It is true for multiple reasons. Fiscal stimulus is very important as an aid to monetary policy in breaking out of deflation. the concerns about the debt, I don’t want to wave away entirely but one thing we have learned from Japan but also from other advanced countries is that stable advanced nations that borrow in their own currencies have a very long road for them to have a fiscal crisis. People have been betting against JGBs since about 2000. All of them have suffered financial disaster. The robustness of the market is very strong. It is even hard to tell a story. If someone says Japan would be like Greece, tell me how that happens. You have your own currency. The worst that could happen would be that the yen would depreciate which would be a good thing from your point of view. I do not think that is a thing to be worried about.
Whatever you say Professor. But sooner or later this madness has to end. Japan has been kicking the can for decades and demographic shifts would seem to suggest that the tax base will shrink while dependency on the state will rise. Meanwhile, the economy is stuck in what certainly appears to be a perpetual, never-ending recession while the country's gargantuan debt pile presages a spectacular implosion sometime in the not so distant future.
When Japan descends into failed state status two years from now, we wonder if Krugman will still be the revered figure he is today among Japanese policy makers. We also wonder whether, once everyone "ceases to believe they can fly," it will be Kuroda or Abe who gets the blame for turning one of the world's most "advanced" economies into a banana republic.