[OPE-L:8025] Japan's Policy trap

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Wed Nov 20 2002 - 02:39:35 EST

  Japan's Policy Trap: Dollars, Deflation, and the Crisis of Japanese Finance
by Akio Mikuni, R. Taggert Murphy, R. Taggart Murphy, Michael H. Armacost

     * Publisher: The Brookings Institution; ISBN: 0815702221; 
(September 1, 2002)

Book Description
Until quite recently, the Japanese inspired a kind of puzzled awe. 
They had pulled themselves together from the ruin of war, built at 
breakneck speed a formidable array of export champions, and emerged 
as the world's number-two economy and largest net creditor nation. 
And they did it by flouting every rule of economic orthodoxy.

But today only the puzzlement remains-at Japan's inability to arrest 
its economic decline, at its festering banking crisis, and at the 
dithering of its policymakers. Why can't the Japanese government find 
the political will to fix the country's problems? Japan's Policy Trap 
offers a provocative new analysis of the country's protracted 
economic stagnation.

Japanese insider Akio Mikuni and long-term Japan resident R. Taggart 
Murphy contend that the country has landed in a policy trap that 
defies easy solution. The authors, who have together spent decades at 
the heart of Japanese finance, expose the deep-rooted political 
arrangements that have distorted Japan's monetary policy in a 
deflationary direction.

They link Japan's economic difficulties to the Achilles' heel of the 
U.S. economy: the U.S. trade and current accounts deficits. For the 
last twenty years, Japan's dollar-denominated trade surplus has 
outstripped official reserves and currency in circulation. These huge 
accumulated surpluses have long exercised a growing and perverse 
influence on monetary policy, forcing Japan's authorities to support 
a build-up of deflationary dollars.

Mikuni and Murphy trace the origins of Japan's policy trap far back 
into history, in the measures taken by Japan's officials to preserve 
their economic independence in what they saw as a hostile world. 
Mobilizing every resource to accumulate precious dollars, the 
authorities eventually found themselves coping with a hoard they 
could neither use nor exchange. To counteract the deflationary 
impact, Japanese authorities resorted to the creation of yen 
liabilities unrelated to production via the largest financial bubble 
in history. The bursting of that bubble was followed by massive 
public works spending that has resulted in an explosion in public 
sector debt.

Japan's Policy Trap points to the likelihood that Japan will run out 
of ways to support its vast pile of dollar claims. Should the day 
come when those claims can no longer be supported, the world could 
see a horrific deflationary spiral in Japan, a crash in the global 
value of the dollar, or both. The effects would reach far beyond 
Japan's borders. Mikuni and Murphy suggest that a reduction in 
Japan's surplus must be accompanied by a reduction in deficits 
somewhere else-most obviously through far-reaching shifts in the 
American economy.

About the Author
Akio Mikuni is one of the most universally respected analysts of the 
Japanese economy in the global financial community. He is the 
president and founder of Mikuni & Co. Ltd, Japan's leading 
independent, investor-supported bond-rating agency. Mikuni was named 
one of the fifty most influential individuals in Asia by Business 
Week in 1999. He also has been the subject of profiles in the 
Financial Times and Fortune.

R. Taggart Murphy, a former investment banker, is foreign professor, 
College of International Studies, Tsukuba University, Japan, and a 
nonresident senior fellow in the Foreign Policy Studies program at 
the Brookings Institution.

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