Well don’t any of you ever accuse us of being behind the curve on this blog. The Financial Times is now running a story about how some “whacky politicians” (sorry, members of the the ruling Liberal Democratic party) in Japan are dusting down plans for the government to introduce its own private currency to rival the country’s official one (aka the Yen) issued by the Bank of Japan. To understand what this post is about, and see its relevance to potential events in the eurozone (and in particular in Spain, given the presence of Argentina-style politicians like Miguel Sebastian in the government), see this post here. Of course, maybe they have just been carrying out an extremely literal reading of Gauti Eggertsson’s “How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible” right down to the small print.
The big difference between Japan and either Spain or the US is, of course, that Japan is a huge current account surplus country, and thus does not rely on external agents to soak up all its debt. But then again, at the time of going to press, Taro Aso is a much more convincing desperate madman at the steering wheel than Barack Obama is.
Aso’s popularity continued to slide as he faces criticism — even by some lawmakers within the LDP — for his handling of the recession in the world’s second-largest economy.The Mainichi Shimbun said support for Aso’s government slipped two points from December to 19 percent, making him the second-least popular premier since the newspaper first conducted such polls in 1949.
A plan to print some Y50,000bn ($546bn) worth of a new currency to fund pump-priming projects has been drawn up by influential politicians in Japan in a sign of desperation in the ruling Liberal Democratic party over the country’s failing economy. To be released on Friday, the proposals to issue government notes come amid rising frustration among politicians with the independent Bank of Japan. It has been reluctant to bow to pressure to run the yen printing presses faster to stimulate the economy.
The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects. The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.
“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,†said Koutaro Tamura, an upper house Diet member who will chair the new group.
The proposals are causing all sorts of controversy in Japan. Prime Minister Taro Aso said on Monday evening that “We are not at all at the stage of considering such an idea”, while Chief Cabinet Secretary Takeo Kawamura warned that if the government prints money, it could lead to inflation and weaken the yen against other major currencies. BOJ Gov. Masaaki Shirakawa was also pretty critical of the proposal, saying it could “cause great damage” to the central bank’s balance sheet and monetary policy as well as market confidence in the yen.
“The plan would require very careful consideration because it could result in jumps in Japan’s long-term interest rates, with market participants losing trust in the government’s commitment to repaying its debts,” Shirakawa said.
Well basically weakening the yen, and raising market participants inflation expectations (or their fear that government will irresponsibly monetise its debt) is just what the Eggerston proposal is all about, so these two would hardly seem to be objections to the idea, and while it is unlikely that the plan will get very far in the short term (rather than prodding the BoJ into more aggresive action), Japan’s crisis is very severe, and getting worse by the day, so clearly they are going to need to do something.
> It has been reluctant to bow to pressure to run
> the yen printing presses faster to stimulate
> the economy.
I’m not much of an economist, I’m afraid, so I have to ask; how does printing money increase economic activity?
The amount of wealth in the economy is unchanged. The face value of the currency is unchanged. The wealth value of each unit of currency diminishes, so shop prices rise, savings are worth less and debts shrink, e.g. a transfer of wealth from those who save to those who borrow has occurred. (Note; this is profoundly unethical).
I don’t see how any of this causes significant economic activity. The amount of wealth is the same, it’s simply redistributed.
If your money is inflating away, you must buy now. Savings (except through stocks) are impossible.
My gut reaction is that that must be insane.
I may be wrong – I’m no economist – but it seems to me inflation literally destroys wealth, for the value of savings is not inflation linked. I find it hard to concieve that deliberately destroying wealth will cause economic recovery, when it is the investment of wealth which enables the generation of new wealth.
Indeed, I think all numerically held wealth should automatically be linked to inflation so that such wealth cannot be destroyed.
Hi Xavier,
“My gut reaction is that that must be insane.”
This is what they want you to think. Japan hasn’t been able to generation any inflation worth speaking of since the mid 1990s, indeed prices have generally been falling (including property and land). This has produced important distortions in the whole economy, indeed arguably low Japanese interest rates played a significant role in the “abundant global liquidity” problem that kept creating asset booms like Iceland in recent years.
They want Japanese people to think they have finally gone mad, and that inflation is now inevitable, and start behaving as Oliver’s theory suggests they should. Economics has, hadn’t you noticed, started to enter the world of Alice in Wonderland.
My point is that this approach may be possible in Japan as they are entirely self financing, but certainly isn’t possible as a way of fighting deflation in a country like Spain which is entirely dependent on external financing.
Sorry it’s just become such a complex world. I sympathise with your bemusement I really do.
Arguably the level of complexity in the economic system just shot up to a level that makes it very difficult for the person in the street to have the first idea what is going on. Looking at the kind of debates going on on Krugman’s blog, a lot of would-be (micro) economists don’t seem to have a clue either.
Macro economics is a very tricky subject, unfortunately the livelihoods of hundreds of millions of people now depend on getting this absolutely right.
This may b
“My gut reaction is that that must be insane.â€
Indeed, to all intent and purpose this may soon become Bernanke and Obama’s plan too, to convince you they have gone mad and are about to fire up a huge inflation burst.
Of course they won’t, but if I explained to you why that would take away the point of the whole illusionist’s trick: when the guy throws those knives at the young lady on the spinning wheel it is very important that all the customers believe it is for real 🙂
Printing money will help the government consolidate it’s position as they will become the only game in town. Business investment will dry up as printing money creates many small bubbles that long term investors will hurt by; and shy away from. Taxes will go up for the successful, and the economy will move underground. Government resources will be increased to find/tax that last bit of underground economy and we slide down the slippery slope.