“Japan’s experience is a sobering real-world reminder of why forceful and timely action is appropriate,” Boston Fed president Eric Rosengren said in his desperation to rationalize the Fed’s QE3 decision. It would restart the printing press in a massive way. It would be a flood of money—in contrast to the “muted” response from Japan to its two decades of economic stagnation.
And it has already been successful, he said: “I would say in sum that regardless of the event window chosen, stock prices are up substantially, mortgage rates are lower, and exchange rates are lower.” Thus, he’d named the three goals of QE3: manipulate stock prices into the ether, repress yields on mortgages (and on everything from savings to corporate bonds), and demolish the dollar.
Then he claimed that “appropriate fiscal policies”—namely even larger deficits—could “provide significant positive effects” to battle Japanese-style stagnation.
Alas, no country has done that better, for longer, and to a greater extent than … Japan. Two decades of deficit spending haven’t had any lasting success in stimulating the economy, though they goosed various sectors temporarily. And they left behind a political culture of deficits-don’t-matter and an insurmountable pile of debt.
Japan perfected the art of ZIRP (zero-interest-rate policy) years before it became a noun. The 10-year Japanese government bond (JGB) has yielded less than 2% for many, many years. Currently, JGBs yield 0.81%, less than half of the 10-year Treasury note’s 1.78%. Yields on short-term Japanese debt, savings accounts, time deposits, etc. have been at practically zero for just as long.
And Japan plowed into “quantitative easing” before that euphemism was even invented. The Bank of Japan’s balance sheet is stuffed with over ¥80 trillion (well over $1 trillion) in JGBs, in addition to other assets it bought along the way. That’s about 25% of Japan’s GDP, while the Fed’s balance sheet holds assets that amount to “only” 22% of GDP.
Rosengren, having kept an eye on the housing market, must have been agog at its recent “recovery.” OK, there were prior “recoveries” that crashed, but this one is different. Japan too had a real estate bubble. After it burst in 1990, there were several “recoveries.” Yet it just marked 21 consecutive years of declines.
Culturally, the Japanese are attached to land, not houses. A house is usually a “one-generation” structure designed to be torn down by the next generation. Hence, the Ministry of Land, Infrastructure, Transport, and Tourism reports land prices. As of July 1, residential land prices dropped 2.5% from last year—after having dropped 3.4% in 2011 and 3.7% in 2010. Commercial land prices dropped 3.1%.
But there are two scourges that Japan has not inflicted on its people: high unemployment and inflation. By US standards, unemployment is phenomenally low: 4.3% in July. However, Japanese society approaches work differently, and unemployment numbers may not be comparable to US numbers. By all accounts, it is currently much harder for young people to enter the workforce as jobs have become scarce—and less remunerative. More work for less pay. Same as in the US.
And Japan has enjoyed price stability for the last 15 years. Periods of minor inflation alternated with periods of minor deflation—though the numbers hide painful price increases in a variety of items, including gasoline, cars, doctor copays, or services like water.
So I wonder what Rosengren was thinking when he said, “Japan’s experience is a sobering real-world reminder of why forceful and timely action is appropriate.” The Fed’s four-year frenzy of “forceful and timely actions” coincided with the greatest stimulus frenzy in Congress where annual deficits of over $1 trillion have become the norm. Yet, they accomplished little in the real economy. Same thing in Japan. But they did get Japan into a mess from which there is now no good exit.
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