Japan in Their Own Words (JITOW)/日本からの意見

The U.S. Should Put Its Own Fiscal House In Order
ONO Goro  / Professor Emeritus, Saitama University

November 10, 2010
Dogged by concerns of a double dip recession, governments of developed countries have sought to devalue their currencies to bolster their exports, and emerging countries have fought back by adopting a devaluation policy of their own. As a result, the world is faced with a Prisoner's Dilemma caused by a ruinous competition for cheaper currencies.

Led by the United States, the developed countries are trying to pin the blame on emerging countries by forcing them to raise the value of their currencies, mainly targeting China and the yuan. Such a move has spawned a deep mistrust between the developed countries and emerging countries that can only be a detriment to the global economy.

In dealing with the current situation, the world has much to learn from Japan's past experience when it was faced with a similar situation as a country that was then closer to today's emerging camp. To learn from Japan, it is essential to consider its case with a historical perception that is often neglected out of diffidence toward the United States. While quantitative analysis may be the preferred methodology of the times, it is only useful in a postmortem under ceteris paribus -- all other things being equal or held constant -- conditions. It is useless in the current situation, where a reconsideration of the very preconditions are in order.

From a historical perspective, in both instances the creation of the economic bubble and the confusion that followed in its wake were caused by the way the United States managed its economy in complete neglect of fiscal discipline and the massive excess liquidity that was created as a result.

That is not to say that emerging countries may guide their currencies toward levels far lower than their actual market value. That would spell mutual ruin. Except in cases requiring temporary refuge from emergencies, foreign exchange rates should be dictated by actual market values to the greatest extent possible.

Then again, if we tolerate the inflation and economic bubble caused by excessive liquidity generated by the United States, both developed and emerging countries will inevitably experience what Japan went through during its "lost two decades." The United States should therefore stop meddling with the currency of emerging countries and begin by restoring discipline to its own finances. That is indeed the responsibility of a country that has benefited greatly from seigniorage – gains derived by the difference between short- and long-term interest rates - as the holder of a key currency.

At the time, Japan had already reached the stage of economic maturity and was losing its growth momentum, and so embraced the excess liquidity created by the U.S. economy as "good fortune," allowing itself to fall into the bubble. And it was only natural that the superficial demand created by the bubble evaporated when the bubble burst.

Even so, many economists – just as they are doing so now – addressed the gap in demand and supply caused by the collapse of the bubble by advocating a path based on the myth of Japan's past success, calling for the "creation of effective demand through fiscal initiatives" and "expansion of capital investment through low or zero interest rates." Thus they led the country into economic turmoil. At the time, I published my opinion in the economic journals, insisting that "Keynesian policies are ineffective in a mature economy and will only invite financial collapse, and low interest rates will postpone structural reforms." So in my view, the predicament we face today is exactly as expected.

The United States and China have both sought to "learn from Japan's mistakes." However, the U.S. government seems to be moving in the opposite direction from where they should be headed by deciding that the cause of the mistake was "too little too slow." Meanwhile, despite U.S. criticism, China's policy – although problematic from the standpoint of international cooperation – shows it has learned well from Japan's mistakes.

Two decades ago, the United States caused the Soviet Union to collapse and acquired the power to decide the conditions of international politics and economics as the sole hegemon of the world. This enabled the United States to cultivate its financial and related industries in detachment from its real economy and maintain superficial growth, even after the economy had matured and lost its growth potential.

However, we have since seen the steady development of the European Union, the emergence of several new powers and the growing international presence of numerous developing countries. Today, in a rapidly evolving multi-polar, multi-value world, even the United States is no longer a superpower that can unilaterally set the conditions. The United States must accept this fact and act with moderation in compliance with new conditions being established by the progressively multi-polar world, simply as one of the major powers.

Let me also add that the United States should humbly accept that its own brand of democracy and market economy are no longer universal, and embrace a system that offers greater universality for the future world. Such a system is likely to have a flexible structure built around basic conditions that are shared around the world, while allowing for a certain degree of individual differences. At the same time, newly emerging countries and developing countries that are heading down the same road as Japan and the United States should learn from these precedents and start moving in a direction that is more universally acceptable. That said, perhaps it is Japan itself that needs to learn from its own lesson and to promptly correct its stance of blindly following the United States.

The writer is Professor Emeritus at Saitama University
The English-Speaking Union of Japan

小野五郎 / 埼玉大学名誉教授

2010年 11月 10日












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English Speaking Union of Japan > Japan in Their Own Words (JITOW) > The U.S. Should Put Its Own Fiscal House In Order