re: Yen still overvalued\Japanese "Keynsianism"

[Paul_A <paul_a@xxxxxxx>]

I wrote:
>> Isn't this a bit out of date?  The Japanese had been bashed for not
>running large fiscal deficits but for the last few years DID turn to fiscal
>Keynsianism, and on a large scale (sorry, I don't have the numbers handy).<<

Jim Devine writes:
>If it's out of date, I'd like to know. I'm not a student of Japan as much as
>I'm curious. I'd heard that the fiscal deficits were stop-and-go in nature,
>perhaps being cyclical rather than structural in nature (i.e., being due to
>stagnation rather than as an effort to fight stagnation).

Some rough numbers illustrate:
Budget deficit 1994: 		2.2% of GDP
Budget deficit 2000: 		8.0% of GDP
{IMF Country Report Japan}

Don't you think it is fair to say that for most mainstream Keynesians this
represents the 'pedal to the metal' range and thus a fair test of a
stimulus package?  Certainly the current reports of the IMF (admittedly,
not Keynsian) have tried to raise (incite?) the fear of financial market
refusal of any further debt if this policy is continued.  That is an
unusual step to take when dealing with one's second most powerful member
state (not unusual when they are small).

The deficit increase came from a shift in policy stance rather than
cyclical fluctuations (Japan hasn't seen a downturn, only stagnation;
perhaps mainstream Keynesians will claim this as a victory, but politically
it is not a sustainable one).  The deficit buildup was a bit halting, but
only as one imagines these things will be as a political and economic
crisis unfolds.

I think it is also fair to say that Koizumi represents those who now want
to try a more neo-liberal tack. After all, over the last 25 years this is
what has happened in most countries when orthodox Keynesianism is perceived
to have failed.


I wrote:
>>What is significant - and scary - is how little it has worked.  Perhaps
>this has been the largest test of "Keynsianism" in modern history (well, the
>standard 'hydraulic' version of Keynes). Certainly it is the first case of a
>major industrial economy turning to this standard perscription for a
>mid-size crisis (since these only appear every few decades).<

Jim Devine wrote
>If an active Keynesian fiscal stimulus program is failing, that's
>earth-shaking to the Keynesian perspective.
>
>Krugman, who dismisses fiscal stimulus out of hand, never uses the "fiscal
>policy has failed to stimulate demand" line. Instead, he complains about the
>worthless investment projects the Japanese government engages in (bridges
>that go nowhere, etc.) This suggests that even anti-Keynesians don't see the
>demand-stimulus piece of fiscal policy as ineffective.

My recollection of Krugman's 'planned inflation' proposal and his analysis
is vague.  I also see him as an aggressive part of the neo-Keynsian crowd,
but you know him much better - and so so much longer ;)   I do recall he
briefly explained away the failure of fiscal stimulus by saying Japan was
in a classic "liquidity trap".  Yet presumably this would mean a flat LM
curve rather than a vertical one so it didn't make sense to me.  I saw his
'planned inflation' proposal as a backdoor incomes policy, ironically a
step more towards some of the post-Keynsian crowd.  Anyone familiar with
any neo-Keynesians trying to come to grip with this at a theoretical level?
 [My sense is there are not many economists trying which in itself is
meaningful.]  I suppose one has to reach for 'special case' weakenings of
the multiplier.

Personally, I don't doubt that one can torture the neo-Keynsian curves so
that the theory fits. But this may be a case where one of the most central
policy tools doesn't work in a middle-level crisis that seems not to have
that many "special circumstances".  Events like that can have a big impact
on a theory's future.

[P.S.  I am also no student of Japan and would love to hear what others may
make of this.]

Paul A.