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Trust not in Shinzo Abe, ye monetarists! by Noah Smith
Scanning Google News I note that most of the western press is focusing on Abe's hawkish foreign policy views rather than his dovish monetary ones. To get a bit speculative, I think there may be a conncection here. Observationally, it seems that fat and happy political establishments have an irrational preference for slow growth, tight money, and balanced budgets. From time to time sheer economic desperation will give us a Junichiro Koizumi or a Franklin Roosevelent but Koizumi didn't last and FDR plunged the country back into recession in 1937 with contractionary policy. Foreign policy crisis is the main thing that drives a national establishment toward heterodoxy and growth. Nobody tried to finance either world war on a sound money basis, and in most respects Keynesian theory followed wartime practice rather than vice versa. And during the Cold War it was very important to elites in the United States and Western Europe to not merely establish that market capitalism could push the production possibility frontier outwards, but that it would actually deliver sustained improvements in living standards and an approximation of full employment.
A perception that between a fast-growing China and a possibly-retrenching USA, Japan is facing a growing national security crisis is exactly the kind of thing that can rouse a country from its dogmatic slumbers.Smith says it's not just his foreign policy that is "conservative" or rightwing.
Krugman on Capital Controls and Mahathir Mohamad.
Malaysian Prime Minister Mahathir Mohamad has been the wild man of the Asian crisis, blaming all his problems on manipulations by Jewish speculators, denouncing the prescriptions of the International Monetary Fund as part of a Western conspiracy to recolonize Asia, and so on.Krugman's blogpost about the IMF and capital controls.
In Japan, a Test of Inflation Targets by Floyd Norris
Currency Wars Aren't Zero Sum by Ygleisas
Yglesias links to a Japan Times piece:
Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December's Lower House election and he becomes prime minister.
Abe, who heads the largest opposition party, also said he would appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa's term of office is set to expire next April.
"We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market," Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. "We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time."
The remarks by Abe, a former prime minister, are backed by many LDP members who have called for massive public works spending to stimulate the economy, but are considered controversial by other parties given Japan's precarious fiscal state and snowballing government debt.
Under current law, the government is obligated to cover fiscal spending with tax income but it is also allowed to issue special construction bonds for public works, for instance to fund new roads and bridges, as politicians claim such infrastructure will be used for years and insist future generations should have to bear the financial burden.
Forcing the BOJ to buy government bonds has been long considered taboo because the move caused hyperinflation and devastated Japan's economy immediately after the end of World War II.
The fiscal law prohibits the central bank from underwriting government-issued bonds. Any purchases of construction bonds by the BOJ could be considered tantamount to the bank financing fiscal deficits, and could thus cause interest rates to spike.
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