Paul Krugman had a piece from last week about the stark divergences in economic performance amongst some of the major industrialized economies in the first quarter of the year. The countries that drank the austerity kool-aid are, of course, in the bottom of the pack (austerity kool-aid is the worst flavor around…not only does it kill you but it taste like shit too). Interestingly, at the front of the pack was Japan with a robust %4+ annualized growth rate. And why is that? Well, in part because Japan was so physically devastated by the tsunami and Fukushima disasters last year that the clean up effort couldn’t help but provide a large stimulus to the economy. As Krugman puts it:
May 17, 2012, 7:35 am
Spending and Growth
So Japan, which is spending heavily for post-tsunami reconstruction, is growing quite fast, while Italy, which is imposing austerity measures, is shrinking almost equally fast.
There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …
Yes, there does indeed seem to be a lesson here about macroeconomics and the important role government spending can play on the ablity of countries to withstand and bounce back from major natural and financial shocks. Afterall, the causes of the eurozone crises are largely all in their heads – some of them dick heads – with a housing/financial bubble coupled with unaddressed eurozone structural/currency union issues at the core of the crisis. It’s not like the continent experienced a massive natural disaster and a multiple nuclear meltdowns. Japan, on the other hand, is still facing an ongoing meltdown situation and yet it’s outperformed the rest of the developed world. So there does indeed seem to be a lesson here and, unfortunately, that lesson appears to anger the finance gods. Sacrifices must be made:
Fitch Downgrades Japan’s Sovereign Rating
By HIROKO TABUCHI
Published: May 22, 2012
TOKYO – The ratings agency Fitch on Tuesday lowered its assessment of Japan’s sovereign credit to A+, an investment grade just above the likes of Spain and Italy, and criticized Tokyo for not doing more to pare down its burgeoning debt.
The downgrade, Fitch’s first for Japan since 2001, underscores the sheer scale of the country’s debt burden, as well as political and demographic challenges that have hampered efforts to tackle it.
Japan’s public debt will hit almost 240 percent of its gross domestic product by the end of the year, Fitch warned.l
The new rating also heightens the pressure on Prime Minister Yoshihiko Noda to rein in spending and raise taxes at a delicate time, when the Japanese economy is still recovering from natural and nuclear disasters last year.
Mr. Noda has warned that Japan could eventually face a debt crisis akin to that afflicting Europe and is staking his job on a plan to double the consumption tax rate to 10 percent by late 2015. That increase, he has argued, is necessary to pay for soaring welfare costs and pension payments.
Fitch said that a lack of new policies to stabilize public finances could lead to a further downgrade. But it also said that progress in fiscal policy beyond expectations, or markedly stronger economic growth, could lead to better ratings.
In a report published Tuesday, the Organization for Economic Cooperation and Development joined in the finger-wagging over Japanese debt, urging Tokyo to stick to its plans for a tax increase.
“A detailed and credible fiscal consolidation plan, including both revenue increases and spending cuts, is essential to maintain confidence in Japan’s fiscal situation,” the O.E.C.D. said. “A top priority is to implement the government’s proposal to hike the consumption tax rate.”
On dear, with the IMF and the O.E.C.D. sneezing austerions all over the place and Japan’s Prime Minister calling to double the consumption tax from 5% to 10% it looks like even Japan is catching austerity-itis too. Yes, Japan, time for austerity. Double that consumption tax while interest rates are at record lows. Because that worked really well the first time:
February 12, 2012 7:37 pm
Europe can learn from Japan’s austerity endgame
By Peter Tasker
The road to fiscal hell is sometimes paved with the best intentions. As Europe’s politicians seek to win electorates round to brutal budget cuts, they would do well to look to the experience of Japan, which shows how counter-productive austerity can be in a post-bubble recession.
When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 per cent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt has swollen to a sumo-sized 200 per cent of GDP.
How did it get from there to here? Not by lavish public spending, as is sometimes assumed. Japan’s experiment with Keynesian-style public works programmes ended in 1997. True, they had failed to trigger durable economic recovery. But the alternative hypothesis – that fiscal and monetary virtue would be enough – proved woefully mistaken. Economic growth had been positive in the first half of the “lost decade”, but after the government raised consumption tax in 1998 any momentum vanished. Today Japan’s nominal GDP is lower than in 1992.
The real cause of fiscal deterioration was the damage done to tax revenues by this protracted slump. Central government outlays as a percentage of GDP are no higher now than in the early 1980s, but the tax take has fallen by 5 per cent of GDP since 1989, the year that consumption taxes were introduced.