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<The Japanization through the disinflation>
The risks of global disinflation seem to have been recognized by financial and economic policymakers of various countries recently.
On the latter half of November, financial policymakers of Japan, Euro and US showed such a view one after another. As a result of that, the FRB will be likely to be going to continue QE3 which had been worried about its early closure. The ECB decided to cut policy interest rate to the lowest level with overcoming opposite opinions of a part of market participants who were worrying about distortion caused by lower interest rate.
In the background of such a tendency, there may be a view that today’s global economy are on the verge of shrinking and balanced contraction due to chronic lack of demand. These situations cannot be understood by neoclassical economics models which suppose equilibrium of supply and demand, and the plot of issues is similar to experience of our country in this 2 decades.
In fact, I wrote about something like that on the article “The fate of the competition of quantitative easing” 3 years ago. The essence of issues which are lying under both of the end of 90s of our country and today’s global economy is extinction of artificial bloated demand.
<The similarity between late 90s and today>
At the end of 90s, our economy had been cornered by the credit crunch occurred by the nonperforming loan problem, coupled with Asian currency crisis, consumption tax hike and turning into reduction of labor force population.
Business trends of the private corporate sector were focusing to eliminate excesses in 3 areas that is employment, production capacity, and debt. Its result can be seen on investment-savings balance by institutional sectors, where the corporate sector has turned into fund surplus and excess savings of the household sector have reduced. In addition, the redistribution function had been weaken by the political conversion to neo-liberalism of those days, including collapse of domestic interregional income redistribution and circulation system.
Those look like correct if seeing individually, but as a result of that, demand which had been bloated by debts or benefits decreased, and that also caused reduction of earning of creditors.
On the other hand, series of the financial crisis triggered by the subprime loan problem have brought a similar plot to the global economy.
The financial crisis has cast doubt on “Credits (in economics meaning)”. In the previous world, the global economy has bloated by US as a market of the world which has been able to expend more than its earning due to being the key currency country. In fact, a transition of current account balance of each nation shows clearly something like that.
However, the financial crisis cast doubt on sustainability of such economy supported by credits. Then, US changed direction toward external rebalance such as revival of manufacturing and middle classes, or doubling of exports. Euro areas which had balanced external even if there were internal imbalance were forced to reduce deficits by doubt about sustainability of common currency.
A spread of such mercantilism had caused shrink of the global demand, and the growth of emerging or resource-rich countries had been disturbed by reduction of external demand.
< Do we have to change over a view?>
An essence of the Japanization is neither deflation nor low-growth. Moreover, it’s not low interest rate or high unemployment rate. All of these are just phenomenon, and we have to think about what that means.
Its essence is nothing but lack of demand. Its trigger was the non-performing loan problem in the end of 90s for our country and the subprime loan problem in 2007 for the global economy. It casts doubt on sustainability of economy bloated by credits, and a spread of mercantilism as its result has strengthened these issues. Moreover, the race to the bottom caused by competition in attracting capital will accelerate such a tendency.
Therefore, we may not be able to find out its solution if being inside the present paradigm of economic thought.
Maybe, such a situation will force us to reconsider a view of economics. It’s something like rise of neo-classical economics triggered by stagflation which means limitation of Keynesian’s welfare states.
Of course, it will have to change from the conventional view of economy which regards equilibrium as a steady state. What happens now is that disequilibrium seems to become a steady state, though they have regarded it as trifling and temporary deviation from equilibrium.
In its background, there is something like divergence between goods market and capital market which they have regarded as “veil”, just like mentioned in “Economics of Disequilibrium” or “How should we consider about the world after the Lehman Shock?“.
<What will the Japanization bring to us?>
Even if being under such Japanization, is there any way to revive the global economy?
Basically, it’s not so difficult to find such a way. After all, the present issue has been caused by the mood where everyone, such as people, companies, regions or nations, want to become a creditor. Of course, every economic entity cannot become a creditor at the same time because there must be debts in the background of credits.
Therefore, all we have to do is offering an incentive to expend more and imposing a penalty on hoarding to a certain degree.
However, such a way to solve may have various difficulties.
That is one of validity of reflation, but its actualization is not so easy just like this country’s experience. Even if huge money is supplied, it will be another problem whether such money generates effective demand. It’s also a problem of income distribution structure because that depends on destination of such money.
Accordingly, it’s also necessary to approach distribution structure, maybe. Although one of measures easy to understand may be asset taxation, it also has bad effects to capital accumulation such as capital flight. Of course, there is capital transaction tax just like a part of Euro or South America as a coping method, but it also has a problem like forestalling or free ride.
Above all, there should naturally be some limits of degree because driving force of economic development has depended on something like incentives of people to get economic wealth. After all, all of today’s economic issues seem to reach problems of dilemma between individual interests and overall optimization.
What’s interesting is that the Japanization occurred in association with changes of status of debtors. Then, global disinflation will accelerate such changes because it means increase of debt load in real term.
Perhaps, the global Japanization may require us to handle money or capital better than before. Can we find a way to accord with such a request?
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