Byline: Peter Tasker
Japan can come back. Here's how.
You are a little-known politician who has stirred the public with promises of change. You win a thumping elec-toral victory. You succeed a tired and discredited administration whose policies helped create the worst economic crisis in decades. And then your problems start: The vested interests won't give an inch. People seem unsure of what kind of change they want, or if they want any at all. The economy is still in bad shape, and now you are getting the blame.
That's the situation facing Japanese Prime Minister Yukio Hatoyama as he contemplates corruption scandals, doubts about his leadership, and crumbling poll numbers. Ahead of him lies a mission as tough as President Obama's task of preparing free-spending Americans for the coming age of austerity: he has to persuade the pessimistic Japanese to save less and consume more. To do this he has to ignore the doom-mongering of the ratings agencies and the media. He has to tune out the advice of the experts, who have been largely responsible for Japan's slow-motion economic train wreck. He needs to stop worrying about government bond yields, which are at the lowest levels in world history, and start worrying about the stock market, which is no higher than it was in 1984.
Most of all he needs to remember why people voted for him. They had had enough of the Liberal Democratic Party's strategy of squeezing the household sector while protecting the interests of exporters. They were told the policy of gaman--enduring pain without complaint--would lead to a stronger, more self-sufficient economy. The global crisis shattered that promise. Japan took a larger hit to GDP than any other developed country, despite playing little part in the debt-fueled excesses. If you party hard, you can't complain about the hangover. Japan stayed on the financial equivalent of bottled water, yet ended up with the biggest headache of all.
What should Hatoyama do? The most important thing is to end deflation, which raises the real cost of debt, causes companies and families to hoard cash, and snuffs out the animal spirits of entrepreneurs. The central bank could help stop this downward spiral by pouring more money into the economy, but it refuses to accept that it has a role to play. Instead, since 1997, when …