The Economist has noted recently, in the case of Japan (and this applies to Argentina for that matter) the eerie similarity with the austerity prescriptions in the wake of the Oct. 1929 Crash in the USA, in the '29-'32 period. The Economists' recommendations for avoiding this scenario were virtually the same, adding only that Koizumi should serve up the BOJ's head on a platter if the central bank did not comply
On the one hand:
>IMF executive directors ''were concerned that Japan
>could reenter a cycle of slowing activity, rising
>bankruptcies, and a deteriorating banking system,
>which would, in turn, exacerbate the global
>downturn,'' the Washington-based institution said in
>an annual report assessing Japan's economic
>conditions.
and:
>The IMF said its directors recognize Koizumi's drastic
>reform program could adversely affect output and
>employment in the short run.
>
>However, Japan ''has little choice but to embark on
>the long-delayed restructuring needed to achieve
>sustained medium-term growth,'' the report said.
And on the other:
>It called on the BOJ to take further monetary-easing
>steps, saying the current policy would not be enough
>to stave off deflationary pressure resulting from
>economic reform.
(Actually the deflationary pressure was already there (and building), the austerity (by way of bank debt writeoffs) only threatens to add to the pressure.)
>''Most directors...suggested that the BOJ should not
>delay in raising its quantitative target for current
>account balances, while being prepared, if necessary,
>to increase purchases of longer-term government
>securities to meet the higher target,'' the report
>said.
For austerity ("reform") to make sense in the present economic conjuncture, the second policy, monetary easing, is naturally required. But it is difficult to see how this cash will eventually find its way into the hands of Japanese consumers, in the face of an overvalued US dollar.
Without a steadily declining dollar, it is hard to see how this cash won't just flow out overseas. A wider bandwidth could end up meaning a larger outbound flow.
>On Japan's fiscal policy, the IMF said Japan should
>not be in a hurry to trim government spending at a
>time when the economy remains weak. Koizumi is known
>as a strong advocate of fiscal rebuilding.
Translation: Keep pouring concrete! The better to cement the fortunes of the LDP as well, and avoid yet another, political, danger at present.
-Brad Mayer