Asian Dysfunction
America is hardly the only advanced economy characterized by, on the one hand, wily central bankers intent on doing all they can to spur growth, and, on the other, elected officials, dedicated to one dogma or another, and thus incapable of striking the political compromise necessary to restore fiscal balance, thereby encouraging private consumption and investment.
This week, Japan became the latest country to play one of its monetary policy cards. Masaaki Shirakawa, Governor of the Bank of Japan, announced his Bank's own (aggressive) expansion of quantitative easing (QE), the unconventional monetary policy tool of choice now that short-term interest rates are near zero in Japan, and elsewhere. He pledged to buy 10 trillion yen (about $128 billion) of financial assets (government bonds and other securities) with the objective - as with other QE programs - of further lowering long-term interest rates, flooding the domestic economy with money, and thus stimulating that missing ingredient, demand.
The Japanese economy ( a quick primer - the second largest in the world until overtaken by China in 2010, and almost equal in size to the German and French economies taken together) has for two decades been stuck in a cycle of stagnation and deflation - the so-called "lost decades". Years of remarkable post-war growth came to an abrupt end with the bursting of a property asset bubble in the early 1990's (does this sound at all familiar?). Recovery has been elusive. Two mainstream political parties have presided - the LDP (Liberal Democratic Party) which lost power in 2009 after decades of near-uninterrupted rule, and the currently-governing DPJ (Democratic Party of Japan). To describe either of these parties as sclerotic is an understatement - one particularly cryptic Japanese protestor was heard as decrying them - quite to the point - as "well beyond their sell-by dates". Both are grey and cynical, having governed over a period of seemingly endless fiscal policy stimuli, with little result other than to bring the country's outstanding public debt to 230% of GDP.
So, Japan, like America, faces political gridlock, economic stagnation, unprecedented levels of public debt (although Japanese debt, unlike America's, is financed largely through domestic savers), an aging population, and export concerns as the yen remains strong and China, Europe and America slow. Central bankers are the only game in town, it seems, though their firepower is now limited. (One hope for Japan is an upcoming general election, when a new political party, the Japan Restoration Party, led by the 43-year-old mayor of Osaka, should gain influence if not governing power nationally.)
Global recession looms again, unless America, still the world's dominant economy, and Japan decide to use fiscal policy constructively.