Economic Policy Lessons from Japan
LONDON, United Kingdom (Reuters) - US and eurozone governments drowning in debt should look no further than Japan to learn what happens when political deadlock stifles decisive policy-making.
As Japan prepares to usher in its sixth prime minister in five years, Moody's this week cited the political revolving door in Tokyo as one reason for cutting the country's credit rating, to AA3, for the first time since 2002.
The conclusions to be drawn from Japan's two decades of anemic growth come with caveats: Its parties are not as ideologically divided as Democrats and Republicans in the United States; and political stasis has not led to the sort of bond market attack that felled Greece, Ireland, and Portugal.
But the downgrade, which followed America's loss of its totemic AAA rating from Standard and Poor's, chimes with the view that the current travails of mature industrial democracies are due as much to poor leadership as they are to too much debt.
Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington, traced Japan's stagnation to an incapacity to forge the political coalitions needed to overcome entrenched interests opposed to reform.
"In that sense, the challenge that Japan has in large part failed to address over the last 20 years resembles the challenges that both the United States and parts of Europe are beginning to face," Noland said. "The Japanese example stands as a very cautionary tale about the long-run costs of not getting it right."
Back in 2002, Ben Bernanke argued that Japan's losing battle with deflation was a special case, a by-product of a protracted failure by politicians, businessmen, and the public to agree on how to spread the costs of writing off debt and enacting reforms.
"In the resulting political deadlock, strong policy actions were discouraged, and cooperation among policymakers was difficult to achieve," said Bernanke, then a Federal Reserve governor and now its chairman.
Stephen King, chief global economist at HSBC in London, said that, with political leaders increasingly in denial and hoping that something will turn up, Bernanke's analysis now extended more widely.
"What we are now discovering is that there are similarities between political discord in Japan and what we're beginning to see in the States and in Europe," King said. …