The Japanese economy: Both barrels?

Posted: January 18, 2013 in economy
Tags: , ,

JAPAN seems to be preparing to embark on a major effort to right its economic ship. As it does so, an interesting debate is emerging over just what the Japanese economy needs. Japanese Prime Minister Shinzo Abe has applied strong pressure on the Bank of Japan, and it is rumoured that the Bank will respond. At its next meeting, the Bank is expected to raise its inflation target to 2% (from a 1% goal), while also scaling up its asset purchases. Meanwhile, the government is moving to enact a major fiscal package.Are both necessary? Adam Posen, until recently a member of the Bank of England’s Monetary Policy Committee and critic of British austerity, argues that Japan doesn’t need more fiscal stimulus but can get the job done with monetary policy alone. Paul Krugman, by contrast, argues that at the zero lower bound a combination of fiscal and monetary expansion is exactly what’s necessary to get the economy moving. Who is right?The answer depends on what one thinks is ailing the economy. In fact, there’s a lengthy list of problems, many of them structural. But I think it’s worth beginning with demand, specifically, the path of nominal output. Consider:

Nominal GDP growth faltered in the late 1990s, corresponding to Japan’s “lost decade” and its initial descent into deflation. NGDP growth then recovered in the 2000s, a period during which Japan matched other …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/01/japanese-economy?fsrc=rss

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