FWIW, I agree with Peter's assessment of Japan's situation, and add a comment from my previous post on the short-lived "Lessons from Japan" thread, to the effect that Japan faces international political constraints against significant further devaluation of the yen, reinforcing the "Keynesian" nature of Japan's current crisis. [The Bush administration's steel tariffs will worsen this situation further if they go through.]
The interesting question, in light of Peter's assessment, is why the Japanese government can't use traditional Keynesian fiscal tools to pull itself out of the recession. Gil > Let me try another tack here. My understanding has been that Japan has > been historically locked into a pattern of development characterized by > high savings rates and high investment shares of GDP (the > "exhilirationist" model). Each validates the other, and both are made > feasible by a large trade surplus: this prevents the high rate of > savings from becoming a Keynesian burden and it generates the induced > demand for investment. > > According to this view, Japan is in the midst of a protracted adjustment > crisis, which can either be explained by increased competition with > other east Asian exporters for the available (i.e. US) markets, or by > the "maturation" thesis, according to which domestic consumption can no > longer be constrained and the economy loses its export advantage. In > either case, much of the capital stock is revealed as "misinvested" -- > and this on top of the bad bets made during the bubble period. The > Japanese system of pooling financial risk supposedly slows down the > adjustment process; hence the outside calls for restructuring via > write-offs and default. > > If this is true, the problem shows up in Keynesian fashion (reduced net > exports), deflationary pressure (competition with lower-wage producers > in the region), and persistent financial fragility. > > Comments? > > Peter > >
