When newly elected Japanese Prime Minister Shinzo Abe promised new deficit spending and pedal-to-the-metal monetary inflation, the progressive Keynesians were excited. And indeed, debasing the yen seemed to work for a few months, with analysts saying US policymakers should follow Japan’s lead. Yet now Japan’s recovery seems to be collapsing, leading its Cabinet to approve yet another “stimulus” package. Does anyone else have a sense of deja vu?
Abe has been Prime Minister of Japan since December 2012. You can see what has happened to the Yen/USD exchange rate under his brief tenure:
During Abe’s first year in office, the yen has fallen about 20 percent against the US dollar. Yet Abenomics was hailed as a good thing by several progressive Keynesians early on. For example, in May 2013 Paul Krugman held up “Japan the Model,” writing:
[T]he ongoing economic experiment…is so important, not just for Japan, but for the world.
In a sense, the really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.
…So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good…
The good news starts with surprisingly rapid Japanese economic growth in the first quarter of this year — actually, substantially faster growth than that in the United States, while Europe’s economy continued to shrink. You never want to make too much of one quarter’s numbers, but that’s the kind of thing we want to see.
Meanwhile, Japanese stocks have soared, while the yen has fallen. And, in case you’re wondering, a weak yen is very good news for Japan because it makes the country’s export industries more competitive.
…So the overall verdict on Japan’s effort to turn its economy around is so far, so good. And let’s hope that this verdict both stands and strengthens over time. For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.
Other progressive Keynesians made similar pronouncements with even more confidence. For example, Matt Yglesias wrote in May: “Japan’s economic reform…has important lessons for us. Japan fell into the trap of prolonged high unemployment and zero interest rates long before the United States did. It’s in many ways fitting that they now seem to be leading the path forward to recovery.”
For a third example, in August Dean Baker wrote:
Fortunately for the Japanese people, the folks currently running their economy are more interested in sound economic policy than pushing scare stories about debt and deficits. Rather than rushing to reduce the deficit, Japan’s new prime minister, Shinzo Abe, went in the opposite direction. He deliberately increased spending to create jobs.
…While we are still in the early days of Abe’s program (he just took office at the end of 2012), the preliminary signs are positive. The economy grew at a 2.4% annual rate in the second quarter, after growing at a 3.6% rate in the first quarter. By comparison, GDP in the United States grew at an average rate of just 1.4% in these two quarters.
…At this point, America’s deficit hawks are jumping up and down screaming that the boost to Japan’s economy is just a “sugar high”, and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don’t see any real evidence of the deficit hawks’ doom story as of yet.
…In short, it is hard to tell a story about how Japan will suffer as a result of the measures its government is taking to boost growth and create jobs. These policies are 180 degrees at odds with the deficit fixation that dominates Washington policy debates.
In the quotation above, I show how Baker is explicitly contrasting Abenomics with the “deficit hawks” running US policy. I can point to plenty of examples of Krugman and Yglesias warning that budget “sequestration” in the US would hurt the tepid recovery. This is of course a natural implication of their Keynesian worldview: The US economy should have slowed, perhaps even slid back into recession, during 2013, because of idiotic budget cuts. In contrast, the deficits and monetary inflation in Japan should have bolstered their growth.
Well, as Dean Baker says, anything is possible in the future. But the current numbers say that Japan’s robust real GDP growth has fallen sharply to 1.1 percent by the third quarter, and despite the weaker yen Japan’s November trade deficit was the largest on record, with a string of consecutive monthly trade deficits not seen in decades.
In contrast, the latest estimate for US real GDP growth in the third quarter was a very robust 4.1 percent.
Now I haven’t seen our Keynesian pundits address Japan recently, but I think I know their position without even looking: The US economy would have grown even faster still had the Congress not foolishly cut spending or engaged in the pointless and destructive government shutdown. Furthermore, Abenomics really is working out great, just like they said, only Abe hasn’t run deficits quite big enough, or debased the yen quite enough. But trust them, they have science on their side.