© 2018 by Robert Person.  The views expressed on this website are my own and do not represent the official policy of the U.S. Army, Department of Defense, or U.S. Government.

Apr 15

Japan's debt crisis and use of Heterodox strategies

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https://www.asiatimes.com/2019/03/article/japans-debt-passes-250-of-gdp/

 

 

The following article discusses national debt situation in Japan. Recently Japan’s debt has raised to 250% of Gross Domestic Product (GDP). The article explains that Japan is a pioneer when it comes to novelties in monetary system. Japan was the first country in 1999 to use 0% interest rate and implement quantitative-easing policies. These policies proved to be successful and were later adopted by United States, Frankfurt, and many other developed countries. The article argues that Japan, despite enormous debt, is not in crisis because it has been successfully using “Modern Monetary Theory” (MMT) for past 20 years. In using MMT, Japanese central bank has dominated the bond market, not allowing punters to set Japanese government bond prices. Thus, using following policies, despite high deficit and debt Japan is able to maintain stability. As taking debt and ignoring government deficit has become a common practice, Japanese government is disincentivized to make any major structural changes that will stimulate economic competitiveness. The article acknowledges that practice of Japanese government has been proven to be wrong historically. Increasing government spending by borrowing and printing money failed in Weimar Republic, Robert Mugabe, Nicolas maduro’s regimes. It is unpresidential for a country to induce such large amount of money in the economy and not end up in high inflation crisis. However, Japanese example remains to be exception to the rule and represents interesting economic phenomenon.

The following article discusses the unique example of japan which compared to many other countries has enormous debt and is still able to maintain economic stability. When debt in Greece reached 180% it went through, major economic crisis. Inflation skyrocketed and country fell in economic crisis. Contrastingly Japan today has 70% higher debt than Greece had during crisis, and is still able to maintain stability. With MMT Japan is borrowing money in order to increase it’s spending to boost the economy. MMT is one of the heterodox macroeconomic theories that deviates from conventional IMF’s strategies. One of the Heterodox strategies were used in Latin America and they failed. Argentina and Brazil in 1980s had high inflation due to high spending. To cut inflation, governments started controlling wages, prices, and established fixed exchange rate. The following solution only worked for six months, and after that inflation skyrocketed. Japan today is still able to maintain the stable inflation rate despite high spending and largest debt in the world. As we know japan currently has floating exchange rate, this means that the value of currency depends on private demand of business. Additionally, according to Oatley article about “state centered approach to monetary and exchange-rate policies” Japan’s central bank is one of the heavily regulated banks in the world. This means that Japanese executive government is in charge of both monetary and fiscal policies. Thus, Japanese MMT approach is different from that of Brazil and Argentina. Unlike to Latin American countries Japan still has floating not fixed exchange rate. Also, Japanese government has control over central bank which gives government over both fiscal and monetary policies. Integrated use of fiscal and monetary policies might be the reason why the Japan’s economy still remains stable. I think that Japan’s approach is revolutionary for contemporary global economy. One would expect that borrowing too much money to lead to economic crisis. When countries borrow and supply too much money in the economy, usually the demand for currency decreases, leading to high inflation. This is what happened to Weimar Germany. Printing too much marks decreased the demand to a currency to a point where the country fell in high inflation. Contrastingly the japan is doing the exact same thing and is getting the opposite results. Hence, macroeconomic policy of japan proves if countries heavily regulate monetary and fiscal policies it can borrow large sums of money and still be stable using MMT approach. This logic seems fraud when we see the failures of Latin American countries. However, Latin American countries policies were only focusing on fixing prices and wages and did not consider other variables. The reason Latin American countries failed might be that their regulation was not as heavy and comprehensive as that of Japan. Thus, heavy and comprehensive regulations of both monetary and fiscal policies might be the Japanese answer that solves debt problems for the countries.

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