Europe views Japan as model for combating deflation

John de Boer (University of Tokyo & GLOCOM Platform)

As stock prices continue to plunge and worries about deflation mount in the US and Europe, there is an increasing tendency in Europe to view Japan's reaction to its 12 year depression as a model to be followed. This sentiment was most recently echoed by a British minister who uttered the following words on a recent trip to Japan, "if this is a recession, I'd like to have one in my constituency". According to the UK based Guardian, this viewpoint is being heard with increased frequency throughout and beyond Europe as they "grapple with the sort of economic problems that Japan has lived with - in some style - for more than a decade" (Jonathan Watts, "Tokyo teaches painful lesson", The Guardian, 20 August 2002).

Despite the Japanese economy having been in shambles for over a decade with stocks having lost 70% of their value, land prices down on average by 80% and golf-club memberships plummeting by 90%, the Guardian claims that, "the bad times have never looked so good". It reported that although asset values have shrunk by 1400 trillion yen (equivalent to the entire output of the British economy for more than 10 years), with public debt at a record 140% and Japan's credit rating on par with some of its ODA recipients, few traces of these woes were evident when thousands of Europeans traveled to Japan for the World Cup Finals. Instead what they saw were bustling streets full of "stylish shoppers and gleaming cars". These tourists were further impressed by the fact that Tokyo was in the midst of a building boom with a record 2.2 million square meters of office space being created in the next year.

While many Europeans recognize the argument posed by some monetarist economists in the West that such spending and the infusion of government cash to keep ailing banks and companies afloat is "merely delaying the day of reckoning", more have started to refute that argument after visiting Japan. In its place, a view that free-market capitalism is "at best useless and at worst counter-productive in a depression" (Jonathan Watts) is gaining ground. Some analysts, such as Richard Koo, chief economist at the Nomura Research Institute, have taken this one step further to state that, "Japan has achieved a second economic miracle in keeping its economy afloat for so long with interventionist government spending". Many Europeans seem to be in agreement.

According to the Guardian, the idea of using Japan as a potential model for holding back the flood waters gained momentum ever since the US Federal Reserve published a paper entitled "Preventing deflation: lessons from Japan's experience in the 1990s". The conclusion reached in that paper was that "deflation is more debilitating to economies - and harder to control - than inflation". This gave birth to a new perspective is that the Japanese government's fiscal stimulus policies have succeeded in holding in place deflationary pressures and with them the brunt of the damage.

Of course Japan's differences with other economies have been pointed out. Japan is the world's greatest creditor nation and the Japanese have managed to increase their savings over the past 12 years allowing the government to borrow from its own citizens. This has virtually contained Japan's woes within its own economy. The consensus is that no other major economy has the resources to do this. That is why as Japan continues to push through its continuing depression, its situation is increasingly seen as the "envy of the world". After years of criticism, voices are starting to say that after all, Japan may have been getting it right for the past 12 years.