Economics focus - the ultimate blog

10 Leaders The Economist January 2nd 2010
2 ing countries, can take eect outside the UN process. That
could mark a new pluralism in climate politics, allowing coalitions
of the willing to form for specic purposessuch as
slowing deforestation, or stemming emissions from shipping.
There are risks to slicing up the problem into smaller pieces.
Bundling everything together, so that all parties need to oer
some give in order to get their take, is a time-honoured format
for negotiations; and stepping back from doing everything in
one forum may mean doing less overall. But the world has
twice, at Kyoto and at Copenhagen, tried to deal with the problem
in one go, and failed. Smaller groups such as the G20 or
the Major Economies Forum oer a better prospect for haggling
over dicult issues. The UN process still has a role, in ensuring
a workable and trusted system of accounting for car-
Japan’s two lost decades
An end to the Japanese lesson
EW Year rally expected
Non Tokyo market next
week. That was a typically
boosterish Japanese newswire
headline on December 29th
1989, the day that one of the
world’s biggest ever asset-price
bubbles reached bursting point.
Exactly 20 years later the Japanese are still paying the price for
such hubris (see page 52). The Nikkei 225 index, which peaked
at 38,916, now languishes at just over one-quarter of that level
(though once again there is talk of a New Year rally). Japan’s
economy has barely grown in nominal terms after two lost
decades, and is again suering from deation. Where Japan
was once bearing down on America, it now feels the hot
breath of China on its neck. Remember Japan as Number
One? These days the country’s chief claim to fame is having a
gross government debt burden approaching 200% of GDP.
For the Japanese this has all been deeply troubling. But in
the past two years, as the Western world has faced many of the
same problems that Japan has been grappling with since 1989
(the collapse of asset prices, a surge in distressed debt and a
looming threat of deation), Japan has provided some useful
lessons on how governments should, and should not, tackle
potentially systemic nancial meltdowns.
Thanks to the precedent set by Japan, many of these lessons
were quickly put into practice. Acting far more swiftly than the
Japanese authorities did (the Japanese had the misfortune of
having to learn through trial and error), Western policymakers
provided liquidity to their banks and forced them to rebuild
capital, while pumping in generous doses of scal stimulus to
oset the collapse in private-sector demand. And like the Bank
of Japan, they slashed interest rates and took extraordinary
measures to try to keep credit owing. The ecacy of these
steps has led to growing optimism about the world economy.
So what is the Japanese lesson now? In many ways, the
analogy is no longer terribly helpful. That is partly because the
pupils are in a worse pickle than the teacher ever was. The
most vulnerable countries, such as Greece, now face a risk that
Japan never did: that markets will lose faith in their creditwor-
bon, and in debating and approving or rejecting agreements
whose details will largely be worked out elsewhere.
Many problems lie aheadand not just as a result of Copenhagen’s
failures. The main danger lies in the American
Senate, which at some point over the next few months will decide
whether to approve or reject legislation to set up a capand-trade
system to put a price on carbon. That will have more
impact than any international conference, including Copenhagen,
on the future levels of greenhouse-gas emissions. But
global negotiations will need to continueand the participants
need to learn one useful lesson from Copenhagen. Climate
change is too big a problem to be swallowed in a single
bite. Smaller groups, dealing with more manageable-sized
chunks, have a better chance. 7
Japan has taught the world a great deal about coping with the nancial crisis. Now the West is on its own
thiness. Japan, for all its woes, has beneted from a huge pool
of domestic savings and investors happier to keep their money
at home than abroad. Meanwhile, the scale of the global upheaval
makes Japan’s problems, which had little impact overseas
and took place against a backdrop of global growth, look
small by comparison. And with huge decits in so many nations,
the risk of a sudden loss of scal credibility is more acute
than it ever was in Japan.
But there are other ways in which the pupils are in better
shape. That is partly because they have less rigid systems. In
the more adaptable Western economies there has been less resistance
to structural changes in order to maintain productivity.
There are also usually fewer political barriers to dealing
with bad private-sector debts than there were in Japan. Moreover
Westerners are also reaping the rewards of having acted
more decisively than the Japanese didespecially when it
came to pumping money into the economy and cleaning up nancial
balance-sheets. With fewer zombie banks, fewer signs
of entrenched deation and much earlier signs of growth, the
West is in uncharted territory: it has arguably already got to a
stage that Japan never really did.
Nothing more will I teach you today
That makes it very dicult to keep on drawing particular lessons
from Japan’s sad plight. It does, however, still leave a general
lesson common to all economic disasters: don’t be suckered
by false signs of economic recovery. In Japan’s case, such
hopes have led it repeatedly to tighten scal policy before private
demand was strong enough to sustain a recovery. That entrenched
deation. Japan also left its banks too short of capital
to cope with subsequent shocks.
Policymakers in the developed world still have an enormous
task on their hands. Many banks have huge writedowns
to make on their loans, economies are burdened with
excess capacity and households’ debt levels remain high. It
would be disastrous to tighten policy too soon, as Japan’s example
shows. But Japan provides no useful guidance on when
the right time would be. For that, there is only trial and error.
And the more errors there are, the more the West’s next decade
may look like Japan’s two lost ones. 7