Japan's Policy Trap : Dollars, Deflation, and the Crisis of Japanese Finance

Until quite recently, the Japanese inspired a kind of puzzled awe. They had pulled themselves together from the ruin of war, built at breakneck speed a formidable array of export champions and emerged as the world's number two economy and largest net creditor nation, and they did it by flouting every rule of economic orthodoxy. Today, however, only the puzzlement remains - at Japan's inability to arrest its economic decline, for its festering banking crisis and the dithering of its policymakers. Why can't the Japanese government find the political will to fix the country's problems? This volume aims to answer why. The authors contend that the country has landed in a policy trap that defies easy solution. Deep-rooted political arrangements preclude the "obvious" measures urged on the country by so many observers. At the heart of Japan's dilemma, paradoxically, lies the most visible symbol of the country's economic success: its enormous, dollar-denominated trade surpluses. These huge accumulated surpluses have long exercised a growing and perverse influence on monetary policy, forcing Japan's authorities to support a build-up of deflationary dollars. Until quite recently, the Japanese inspired a kind of puzzled awe. They had pulled themselves together from the ruin of war, built at breakneck speed a formidable array of export champions, and emerged as the world's number-two economy and largest net creditor nation. And they did it by flouting every rule of economic orthodoxy. But today only the puzzlement remains—at Japan's inability to arrest its economic decline, at its festering banking crisis, and at the dithering of its policymakers. Why can't the Japanese government find the political will to fix the country's problems? Japan's Policy Trap offers a provocative new analysis of the country's protracted economic stagnation. Japanese insider Akio Mikuni and long-term Japan resident R. Taggart Murphy contend that the country has landed in a policy trap that defies easy solution. The authors, who have together spent decades at the heart of Japanese finance, expose the deep-rooted political arrangements that have distorted Japan's monetary policy in a deflationary direction. They link Japan's economic difficulties to the Achilles'heel of the U.S. economy: the U.S. trade and current accounts deficits. For the last twenty years, Japan's dollar-denominated trade surplus has outstripped official reserves and currency in circulation. These huge accumulated surpluses have long exercised a growing and perverse influence on monetary policy, forcing Japan's authorities to support a build-up of deflationary dollars. Mikuni and Murphy trace the origins of Japan's policy trap far back into history, in the measures taken by Japan's officials to preserve their economic independence in what they saw as a hostile world. Mobilizing every resource to accumulate precious dollars, the authorities eventually found themselves coping with a hoard they could neither use nor exchange. To counteract the deflationary impact, Japanese authorities resorted to the creation of yen liabilities unrelated to production via the large Annotation Until quite recently, the Japanese inspired a kind of puzzled awe. They had pulled themselves together from the ruin of war, built at breakneck speed a formidable array of export champions, and emerged as the world's number-two economy and largest net creditor nation. And they did it by flouting every rule of economic orthodoxy. But today only the puzzlement remains -- at Japan's inability to arrest its economic decline, at its festering banking crisis, and at the dithering of its policymakers. Why can't the Japanese government find the political will to fix the country's problems? Japan's Policy Trap offers a provocative new analysis of the country's protracted economic stagnation. Japanese insider Akio Mikuni and long-term Japan resident R. Taggart Murphy contend that the country has landed in a policy trap that defies easy solution. The authors, who have together spent decades at the heart of Japanese finance, expose the deep-rooted political arrangements that have distorted Japan's monetary policy in a deflationary direction. They link Japan's economic difficulties to the Achilles' heel of the U.S. economy: the U.S. trade and current accounts deficits. For the last twenty years, Japan's dollar-denominated trade surplus has outstripped official reserves and currency in circulation. These huge accumulated surpluses have long exercised a growing and perverse influence on monetary policy, forcing Japan's authorities to support a build-up of deflationary dollars. Mikuni and Murphy trace the origins of Japan's policy trap far back into history, in the measures taken by Japan's officials to preserve their economic independence in what they saw as a hostile world. Mobilizing every resourceto accumulate precious dollars, the authorities eventually found themselves coping with a hoard they could neither use nor exchange. To counteract the deflationary impact, Japanese authorities resorted to the creation of yen "Until quite recently, the Japanese inspired a kind of puzzled awe. They had pulled themselves together from the ruin of war, built at breakneck speed a formidable array of export champions, and emerged as the world's number-two economy and largest net creditor nation. And they did it by flouting every rule of economic orthodoxy.". "Mikuni and Murphy trace the origins of Japan's policy trap far back into history, in the measures taken by Japan's officials to preserve their economic independence in what they saw as a hostile world. Mobilizing every resource to accumulate precious dollars, the authorities eventually found themselves coping with a hoard they could neither use nor exchange. To counteract the deflationary impact, Japanese authorities resorted to the creation of yen liabilities unrelated to production via the largest financial bubble in history. The bursting of that bubble was followed by massive public works spending that has resulted in an explosion in public sector debt.". "Japan's Policy Trap points to the likelihood that Japan will run out of ways to support its vast pile of dollar claims. Should the day come when those claims can no longer be supported, the world could see a horrific deflationary spiral in Japan, a crash in the global value of the dollar, or both. The effects would reach far beyond Japans borders. Mikuni and Murphy suggest that a reduction in Japan's surplus must be accompanied by a reduction in deficits somewhere else - most obviously through far-reaching shifts in the American economy."--BOOK JACKET. The Policy Trap -- The Preservation Of Bureaucratic Power -- Monetary Policy And Mercantilism -- Hoarding Gold, Hoarding Dollars -- Experimenting With Bubbles -- Of A Great Bubble And Its Collapse -- The Downward Spiral -- The Policy Trap Revisited -- The Anomalies Of Contemporary Japan -- The End Of The Japanese System? Akio Mikuni, R. Taggart Murphy. Includes Bibliographical References (p. 263-278) And Index. As Japan enters its twelfth consecutive year of economic stagnation, it has begun to dawn on the world that something peculiar is going on.