© 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







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.

New Posts
  • In his article for Foreign Affairs David Cohen talks about the Trump administration's policy towards sanctions. He talks about how the conditional sanctions the Trump administrations has placed on Iran and now Venezuela will be ineffective because the changes the administration is trying to coerce will essentially mean regime change for the two nations. Cohen goes on to state that these will be ultimately ineffective because the relative cost of the sanctions is lower than the cost of losing power. This means that the leaders of Iran and Venezuela are more willing to bear the pain of the sanctions than lose the regime. This goes along with the lesson we had on sanctions in a couple of ways. First we learned that sanctions are used either as a method of deterrence or coercion. This means that the sanctions inflict financial and economic pain to make the target of the sanctions take or not take an action. These sanctions are meant to cause political changes that will in essence mean a change of regime which is why they will fail. They are effective in causing pain; however, there is not enough sanctions in the world to make it worth losing power. Article link: https://www.foreignaffairs.com/articles/united-states/2019-04-29/sanctions-cant-spark-regime-change
  • https://www.nytimes.com/2019/05/09/us/politics/china-trade-tariffs.html Just before a scheduled round of trade negotiations began on Friday, President Trump announced that he was still going to levy additional tariffs on Chinese imports valued at approximately $250 billion. President Trump claimed that these tariffs would bring billions of dollars back to US manufacturers, but the main focus seems to be inflicting pain on China, as opposed to bringing prosperity to the US. China and the US have not been able to reach an agreement that would minimize or end outright the "trade war" between the two, which stems from the Trump Administration's belief that China is not doing all it can to protect American investments and intellectual property in China, as well as the belief that a large trade deficit with China is inherently bad. The Trump Administration's use of tariffs as a negotiating tool is inelegant, but effective. Unilateral tariffs immediately affect the Chinese export industry, whose products become less competitive in US markets. While this inflicts pain on Chinese exports, whose largest market is the US, it also affects US consumers, who have to pay higher costs for consumer goods. Additionally, because China retaliates with target tariffs (on politically-relevant goods like Kentucky Bourbon and soybeans from the Heartland), US exporters are equally hurt by the trade war. The only immediate winner is the US, who collects revenue from the applied tariffs; however, long-term, US domestic industry should improve, as they will become more competitive when Chinese imports are more expensive. Slowly, we are starting to see this happen: Dan DiMicco, the chairman of a lobby group "Coalition for a Prosperous America," explained that American manufacturing is already experiencing gains in their domestic market shares.
  • https://www.washingtontimes.com/news/2019/may/8/feds-release-168k-illegal-immigrant-family-members/ In Stephen Dinan's article in the Washington Times, he explains the unforeseen immigration due to illegal border crossings. ICE border patrol has released 168,000 illegal immigrant family members this fiscal year, and the number is expected to increase as the border situation increases in volatility (Dinan). Dinan reports that 87% of families in this new pilot program skip their court hearings, and with an ill-equipted government to track them down judges deport them in absentia (Dinan). Dinan argues that this increase in illegal immigration in family units is caused by a 2015 court ruling that stated parents who travel with children must be released in 20 days. Since this is too little time try them in court, the families are set free (Dinan). This article is very relevant to this block in IPE as it highlights a crucial phase that the world is going through. As policies towards free and open borders begin to gain more and more traction, we can expect the number of border crossings into the country to continue. As we talked in class, this may actually be a good thing for the economy, as low skill labor is substituted due to a higher rate of college attenuation and graduation. Dinan says that most migrants interviewed are not criminals, they are just seeking jobs, and know that if they bring children they will find asylum in the US (Dinan). One of the unintended consequences is that some of these migrants are being used to smuggle drugs and weapons into the country, and in some extreme cases, children are being sold to impersonate children of felons migrants of south american countries to gain access with ease. As globalization brings countries closer together and as the trend for free an open borders continues incentivizing cheap labor, it will be interesting to see the effects of these policies 10-15 years in time.