Saturday, December 29, 2012

Japan has been in the economic doldrums since before it was cool. While the United States and Europe waited until 2007 or so to have a real estate crash followed by a prolonged period of slow growth and high unemployment, Japan got in on the act in the 1990s. The country got a brief respite of export-led growth for a couple of years in the aughts under former Prime Minister Junichiro Koizumi, but then was rapidly dragged back down into the muck by the worldwide economic collapse. At this point things have been so bad in Japan for so long that foreign commentators have largely stopped even hoping for a turnaround, just vaguely gesturing at the idea that perhaps a recovery in Europe and America could help Japan out. But at a time when most eyes are on the U.S. fiscal cliff and E.U. negotiations over Greek debt, the real economic game-changer may be Japan’s Dec. 16 election.

That’s because Shinzo Abe, the overwhelming favorite to lead the Liberal Democratic Party to victory, is running on a bold platform of unlimited quantitative easing and more inflation. If this works—and the odds are that it will—Abe will not only cure a great deal of what ails Japan, he’ll light a path forward for the rest of the developed world.
Yglesias does seem to leave out fiscal policy:
But the old monetary theory about what might solve Japanese stagnation has never been put to the test. Now Abe’s finally going to give that old-time advice a try. Japanese politics is murky, and even if he wins the election he may not end up with the political and institutional clout to make it happen. In fact, as Election Day draws nearer, he’s alreadywalking back some of his rhetoric under pressure from the business establishment. But if he does manage to stick to his guns, the odds are good that it will work. Monetary expansion should reduce the price of the yen and goose exports. More importantly, it will push domestic real interest rates down and spur investment. Creating firm expectations that yen-denominated prices will be higher in the future than they are today should encourage firms and households alike to acquire real goods sooner rather than later. And all this ought to encourage everyone to be investing and spending more.

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