An ominous omen

Louis Proyect lnp3 at
Sun May 14 08:30:42 MDT 2000

New York Times, May 14, 2000


Nihon Keizai Shambles

Last week Japan's Nikkei -- the stock index that takes its name from the
Nihon Keizai Shimbun, the country's leading financial newspaper -- fell
almost 9 percent. Now normally it's a mistake to read too much meaning into
the fluctuations of this or any other market index (especially because the
index was revised to include more tech stocks just in time for the big tech
slump). If the 30 percent rise in the Nikkei between June and April didn't
foretell a real turnaround in Japan -- which it didn't -- then the 15
percent decline since April doesn't necessarily predict a new recession.
But in this case the stock plunge is telling us something: namely, that the
economic strategy of Japan's government is falling apart.

Japan, uniquely among the world's major nations, has managed to recreate
30's economics at the dawn of the 21st century. Much of the nation's huge
productive capacity remains unused because consumers and businesses just
don't spend enough. And the usual answer to a demand-side slump, reducing
interest rates, hasn't worked: the Bank of Japan has cut the equivalent of
the Fed funds rate all the way to zero, and yet the economy remains

True, Japan has avoided full-scale depression. Deficit spending, on a scale
no nation at peace has ever tried before, has kept the economy afloat. But
such huge budget deficits cannot be sustained indefinitely; so the central
question for Japanese policy is, What will allow the economy to come off
fiscal life support?

Western economists, including me, have urged Japan to supplement deficit
spending with an aggressive monetary policy: the Bank of Japan, on this
view, should both pump money into markets and promise that the grinding
deflation of recent years will be replaced with moderate inflation. But the
B.O.J. has not only refused to act; its governor has repeatedly indicated
that he intends to raise interest rates as soon as possible. So what's the

Japanese officials -- unembarrassed by a long history of prematurely
declaring economic victory -- talk breezily about "self-sustaining
recovery." That's a hope, not a policy. All that deficit spending could, in
principle, "jump start" private demand, producing a recovery of consumer
and business confidence so large that the economy would keep growing even
when the government spending ended; but that's a very speculative prospect,
and a steady drumbeat of adverse economic reports leaves no reason at all
to believe that it's happening. (One friend likens the determination of
Japanese officials and bullish investment analysts to downplay the
consistent bad news to that of the knight in "Monty Python and the Holy
Grail" who remains belligerent even as one limb after another gets hacked
off: "Just a flesh wound!")

Lately, however, Japan optimists have had a new answer to the naysayers:
technology! Any day now, they say, the new economy is going to arrive in
Japan, generating not just a surge in productivity, but a surge in demand.
Businesses will start spending trillions of yen on new equipment;
individual investors, made wealthy by the soaring prices of technology
companies, will start spending on luxury goods; and the time of troubles
will be over.

And that's why the falling Nikkei is such an ominous omen. Mainly it
reflects the "Nasdaq effect" -- the worldwide decline in technology
exuberance over the last two months. But whereas the United States didn't
need that exuberance -- in fact, the decline in tech stocks has made the
Fed's job easier, by turning down the flame under our overheated economy --
Japan was counting on technology to save it from stagnation. As good as
Japanese technology may be -- and much of it is very good indeed -- the
prospect that technology will rescue Japan's economy is now receding.
Instead, the country is right back where it started: with an economic
malaise that shows no sign of going into spontaneous remission, whose
symptoms are mitigated only by deficit spending that cannot continue at
these levels. Meanwhile another year has gone by, and the mountain of
government debt has gotten 30 trillion yen or so higher.

It's a sad story, which carries a moral for us all: technology is not a
magic elixir. The Internet, mobile phones and all that are exciting and
important, but those who count on them to solve all their problems are
likely to be disappointed.

Louis Proyect
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