Japan's Noh Economy
There goes the sunshine theory. After a week's correlation between rain, sleet and snow with falling stock prices out of Wall Street, the sun shone over New York yesterday and . . . the DJIA went off 436 and the Nasdaq crashed through 2,000. Needless to say, we don't credit any of this with the New York Times spinning out two front-page stories Saturday that President Bush will dilute the cut in the top tax rate and sign Al Gore's version of the Kyoto Treaty.</br></br>Well, we try to be cheerful if possible, and in the spirit of could-be-worse, we'll let the U.S. gulp air today and turn our attention to modern economic history's longest near-death experience: Japan. We read that Japanese Prime Minister Yoshiro Mori is actually being kept in his post so as not to disrupt a March 19 working visit to the White House. In the Noh play of Japanese politics, Mr. Mori will be permitted to wear the mask of leader a while longer to disguise the internal discord.</br></br>Alas, the divisions in Japan's body politic are there for all to see. Finance Minister Kiichi Miyazawa's comment last Thursday that state finances are "near collapse" must be taken as a sign of his growing frustration with the Liberal Democratic Party's failed attempts to jump-start the economy with trillions of yen in neo-Keynesian spending.</br></br>With the LDP apparently bereft of ideas for fixing the economy, Mr. Mori's meeting with the Bush team could prove important. Even if the Japanese PM is a lame duck, American advice will be conveyed back to the inner circle. While Treasury Secretary Paul O'Neill hasn't publicly lectured the Japanese as the Clinton brain trust was wont to do, he no doubt recognizes that a deep crisis in Japan would have a huge impact on the U.S. economy. So what advice should he offer?</br></br>Even among those who recognized the futility of Japan's deficit spending, there has always been much disagreement over what should replace it. Monetarists and some demand-side economists have emphasized the damage that deflation and deflationary expectations have done to the economy. Since both inflation and deflation are monetary phenomena, adjusting the supply of money is the key to the problem. So they advocate printing money so that deflationary expectations would be erased, even at risk of a small dose of inflation.