Japan does not appear to have explored all policy options available to revive its economy, Anatole Kaletsky, editor-at-large of The Times of London, said as he compared Britain’s response to the latest financial crisis and what Japan did after the collapse of its bubble boom in the 1990s.
The scope of Japan’s asset-inflated bubble that busted in the early 1990s was much greater than that of the property bubble in the U.S. and other economies that preceded the Lehman Brothers collapse of September 2008, Kaletsky told the March 5 symposium.
But the scale of the subsequent crash was far greater in the latest crisis as within a period of two or three months of the shock “we saw literally every financial institution in the West on the brink of bankruptcy,” he said.
Even though it may be too early to judge only a year and a half after the crisis, Kaletsky said the Western economies handled the latest crisis better than Japan did with its own problems in the 1990s. “In a sense (the Western economies were) lucky that the crisis was so rapid and so severe that it forced a much more rapid and drastic policy response than the one that Japan did,” he said.
On monetary policy, the Bank of England reduced interest rates to essentially zero by March 2009 and introduced the quantitative easing policy the following month, he said.
“The Bank of England did everything it could in terms of interest rates” within seven months after the Lehman shock — or within 18 months after the subprime loan problem surfaced in the United States in 2007, he noted.
“In Japan, actually, interest rates were increased for two years after the bursting of the (late-1980s) bubble. They did not start falling until 1992 . . . and only got to 0.5 percent by October 1995 and they only reached zero in 1999. So in Britain it took 18 months before the monetary policy to do everything it could; in Japan it took between six or nine years,” he said.
One thing that’s surprising about the widespread pessimism about Japan’s economic prospects, Kaletsky said, is the sense among many people in Japan that there’s nothing that really can be done about the situation.
“(The sense) that you’ve tried everything and that has not fully worked . . . I feel that judging from British experience there are a number of things that could be done” in each category of economic policies available, he said.
On monetary policy, Kaletsky said the Bank of Japan “should commit itself to zero interest rates at least for the next three to five years” just like the BOE has effectively done and “should go back to quantitative easing and doing it in a very big way.” This will involve the risk of inflation, but “inflation is a problem that the Japanese economy would like to have right now,” he added.
Kaletsky said the British pound’s steep fall against the dollar following the Lehman shock gave a “very considerable stimulus” to the British economy and urged Japan to “adopt an explicit policy of trying to weaken the yen and should make it clear to the markets that if necessary it is prepared to use intervention and monetary policy in a deliberate attempt to weaken the yen and boost economic growth.”
He said such a “conscious exchange rate policy” will have a chance in the next few years “because it is something that now might be acceptable to the United States,” where concern persists that its huge budget deficits could erode global confidence in the dollar. Japan is in a strong position “to assure the Americans that far from allowing the dollar to weaken, Japan’s position is to have a stronger dollar and to help the U.S. in keeping the dollar from falling,” he noted.
On fiscal policy, both Britain and Japan have huge budget deficits now because of the stimulus measures they needed to survive the global crisis. But Kaletsky said the deficits and the rapidly rising government debt “should not cause the alarm that they do” and added that what is needed is “a long-term project for fiscal consolidation.”
In Britain, that should be “relatively easy because government spending has increased so rapidly over the last five years and most of the adjustment will happen through the reduction of public spending,” he said.
In Japan, tax rates “will have to go up” at some point given that they remain “extremely low by international standards,” he added.
Britain’s current budgetary position is far from enviable, with its projected budget deficit of 13 percent of gross domestic product this year likely to be the worst government shortfall among developed economies, said Edmund Conway, economics editor for The Daily Telegraph.
The country’s net debt is forecast by the government to rise to about 80 percent of GDP within a few years — compared with 40 percent when the crisis started — though some pessimists say the government forecast is too low, he said.
“But Britain has something that not many other countries have — a broad-based consensus that in order to survive, the government must inflict major cuts on the budget,” Conway noted.