Japan's Malaise Was Made In America
The long bureaucratic struggle over whom to name as the next Governor of the Bank of Japan is over. Prime Minister Koizumi has chosen a career BOJ insider, Toshihiko Fukui, a man who is unlikely to rock the boat. The BOJ's hidebound policies are usually blamed for Japan's deflation. That guilt is real, argues Deepak Lal, but there is another culprit: American economic policy toward Japan.
It is now widely recognized that an unintended consequence of the "Asian" economic model was an increasingly inefficient allocation of capital. Japan's chronic slump is a case in point. Artificially low domestic interest rates in the late 1980s promoted capital-intensive investment, driving down the rate of return on capital from an average of around 12% in 1952-1973 to less than 2% in 1996.
But what still needs to be explained is the timing of Japan's boom and bust over the last 15 years, as well as the reasons for the duration of the country's ongoing slump. In their excellent book Dollar and Yen , Ronald McKinnon and Kenici Ohno provide an answer: the recurrence of endaka fukyo , a "strong yen recession," which the authors attribute to a "strong yen syndrome" rooted in persistent trade frictions between the US and Japan.
We hope you're enjoying Project Syndicate.
To continue reading, subscribe now.
Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.
Already have an account or want to create one to read two commentaries for free? Log in