Response to Prof. Miyao's Comment on the Tasker Paper

Craig Freedman (Professor, Macquaire University, Australia)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 1, 2003: posted here with the author's permission.

In response to Dr. Miyao's comment on Mr. Tasker regarding asset deflation (http://www.glocom.org/debates/20030428_miyao_com/), I would like to point out that aggregate demand and the value of assets are clearly related. Surely housing and stock prices would pick up if the economy did. Follow the ups and downs of the housing market in the UK as a simple example. At the same time the value of those assets, especially the change in their value, has an impact on aggregate demand. Mr. Miyao is correct I think in pointing out that this impact is often under rated. The policy question is which side of the equation is more important to attack first.

My assumption is that the focus should be on aggregate demand. For Japan, the key here is the long standing problem of non-performing loans. In most, if not every country that I know, financial deregulation is followed by a financial crisis. It happend in the US, in Australia and in Japan. Sweden faced the same sort of problem in 1992 as Japan did at that time. Japan stands out as the one country that failed to deal with the issue. Yes, I know that the Japanese government has talked about dealing with it, they have set up structures that were supposed to deal with it, but never to this day has any Japanese government actually confronted the problem. They could if they wanted to. The have the example of The Long Term Credit Bank as one possible approach to adopt.

I'm not sure I follow a couple of Takahiro Miyao's examples. This may simply be my own lack of understanding. My memory is that Alan Greenspan in the early 90s agreed to lower interest rates after the Clinton administration worked out a package to reduce government deficits. Dropping interest rates helped boost the US economy which was already reviving prior to the Clinton administration. The initial economic downturn itself was aided by Greenspan's decision to raise interest rates in order to nip in the bud what Greenspan saw as inflationary pressures.

Lastly it had always been my impression that only WWII pulled the US out of its Great Depression by assuring a high level of aggregate demand. Before that, the FDR New Deal had failed to create sustained economic growth. Though I know others might disagree with me here.