Saturday Morning Japanese Economic History

Japan was for many years the paradigmatic example of how poor monetary policy could put one’s economy into a semi-permanent depression. But on Wednesday, the Abe government announced a strong new effort to reflate the economy. Noah Smith has the goods:

Now, 60-70 trillion yen is about $600-700 billion, which is about the size of America’s recent “QE1” and “QE2”. Japan will basically do an new “QEx” every year. In addition to buying long-term government bonds (which the Fed did in QE2), Japan’s central bank is going to buy stock and real estate. This is exactly the sort of reflationary policy that Miles Kimball recommended as a cure for depressions, back when I took his macro class. In any case, the move is very very big. George Soros says that the BOJ’s plan is “three times as big” as the Fed’s attempts at QE. People from big banks and research companies are saying much the same thing.

Anyway, so Abe defied my expectations and really implemented a serious policy change. Now, we get to see how well monetary policy really works, in an economy with a deflationary trap and well-anchored deflationary expectations. A dramatic (though uncontrolled) natural macroeconomic experiment is being carried out in Japan – probably the biggest thing since Volcker whipped U.S. inflation in the early 80s.

Aside from being a notable bit of good cheer for a country on the edge of derping itself into another recession for no reason, this is a great excuse for a bit of Japan history from Mark Blyth’s book Austerity. Similar to how US elites have this maddening fixation on cutting the budget deficit now now now, back in the 30s it was much the same, with the even less justifiable gold standard:

[Finance Minister Junnosuke] Inoue got his wish and Japan rejoined the gold standard in 1930, right at the point that the rest of the world’s economy was contracting. The result was the Showa Depression, the greatest peacetime collapse in economic activity in Japan’s history. Japan’s growth rate fell to -9.7 percent in 1930 and -9.5 percent in 1931, while the yen rose approximately 7 percent against the dollar. Demand in the United States for Japanese manufactures fell as the yen appreciation and the general collapse strangled trade. Average Japanese household income fell like a stone from ¥1,326 in 1929 to ¥650 in 1931.


Interest rates were raised “into the teeth of the depression” and government spending was cut almost twenty percent from an already low level.

Eventually, a military supporter assassinated the prime minister, Hamaguchi, and after a coup plot was uncovered, the government resigned. The new government reversed course and Japan grew strongly from 1932-36. But the amazing thing is how not even the total failure of his policies and a spate of murders of those who espouse them convinced Inoue to give up the austerity: he “was still campaigning for a return to the gold standard when he was assassinated in 1932.”

Ideas are powerful things.

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Ryan Cooper

Ryan Cooper is national correspondent for the Week, and a former web editor for the Washington Monthly.