Nathan Lewis, an economist at Polyconomics, has written an article in the Financial Times of London arguing that the root problem in the Japanese economy is deflation:
There is no solution to the bad-debt problem without a solution to Japan's basic economic problems: monetary deflation, economic contraction and falling asset values. Monetary deflation is caused wholly by the Bank of Japan, which has allowed the yen to rise steadily in value since 1985. The bank should increase the monetary base with the stated goal of lowering the yen's value to a point where it is neither deflationary nor inflationary. A 10 per cent fall in the yen's value would be an appropriate start. If the BoJ depressed the yen excessively, it would create inflation, which could be avoided by contracting the money supply. In spite of arguments to the contrary, the BoJ has complete control over the money supply and, by extension, the value of the yen.
This argument makes sense for a reason previously discussed here: Even the foreign banks in Japan that are not encumbered by debt are decreasing their lending in Japan. If the problem was the inability of financially strapped banks to provide more credit then one would expect the foreign banks to expand their operations to fill in part of the void. Instead, the deflation causes more and more companies to get into financial trouble and no matter how many bad debts the banks clear from their books other existing debts turn bad as more companies can't handle falling prices.
|Share |||By Randall Parker at 2002 October 16 01:48 PM Economics Political|