From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Wed Nov 20 2002 - 02:39:35 EST
Japan's Policy Trap: Dollars, Deflation, and the Crisis of Japanese Finance
by Akio Mikuni, R. Taggert Murphy, R. Taggart Murphy, Michael H. Armacost
* Publisher: The Brookings Institution; ISBN: 0815702221;
(September 1, 2002)
Book Description
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 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
Japan's 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.
About the Author
Akio Mikuni is one of the most universally respected analysts of the
Japanese economy in the global financial community. He is the
president and founder of Mikuni & Co. Ltd, Japan's leading
independent, investor-supported bond-rating agency. Mikuni was named
one of the fifty most influential individuals in Asia by Business
Week in 1999. He also has been the subject of profiles in the
Financial Times and Fortune.
R. Taggart Murphy, a former investment banker, is foreign professor,
College of International Studies, Tsukuba University, Japan, and a
nonresident senior fellow in the Foreign Policy Studies program at
the Brookings Institution.
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