U.S. News --- CAPITAL: Japan Shows Trials of Escaping Post-Bubble Funk
Federal Reserve Chairman Ben Bernanke is under attack for doing too much to reduce unemployment and lift inflation.</br></br>His Japanese counterpart, Masaaki Shirakawa of the Bank of Japan, is under attack for doing too little.</br></br>Japan is a puzzle -- and not only to foreign visitors who wonder how a stagnant economy can feel so prosperous. Academics wonder how Japan avoided the deflationary spiral their theories predicted and, instead, suffered only a decade of low-grade deflation. Foreign central bankers and market analysts wonder why the Bank of Japan won't do more. Japanese politicians wonder if they can force the central bank to be more aggressive. The ruling party has an Anti-Deflation League, and a band of parliamentarians want to give the BoJ a target for inflation to press it to create some.</br></br>Since 1997, the price level in Japan has fallen more than 3%. Had the BoJ achieved 1% inflation each year, prices would have risen 14%. After accounting for price changes, the Japanese economy has grown at a rate of only 0.9% over the past two decades. And, as the Bank of Japan said this week, "The recovery seems to be pausing." Still, it predicted hopefully that Japan will "return to a moderate recovery path" as emerging economies and commodity producers propel global growth.</br></br>In Japan, a little inflation would be welcome. It would make inflation-adjusted interest rates lower. (If interest rates are 1%, and deflation 2%, then real, or inflation-adjusted, interest rates are 3%. But if inflation is at 2%, then real interest rates are minus 1%, which makes borrowing much more attractive.) It would make paying Japan's huge debts easier. It would tend to cheapen the yen, aiding exports.