Mervyn King Holds Up Japan as a Success Story
I missed this gem from the Inflation Report. Well done Ben Chu for asking good questions again.
Ben Chu, The Independent: Governor, you said earlier that there is no precedent for an
economy sort of coming to a stop after a crisis, that there will always be a recovery it’s just a question of time. But in Japan they’ve had subpar growth for the past two decades after their own asset price bubble burst. Is that an example which the MPC has been considering and are there any lessons to be learnt about monetary policy from Japan, or even perhaps fiscal policy?
Mervyn King: Well I don’t you want to give a long talk about the lessons from Japan. I think it’s worth remembering that because of the demographics in Japan one often forgets that income per head has carried on rising. So it’s not the case that they’ve had stagnant incomes which was the question that was put to me earlier. And clearly after the 1930s we saw rapid growth pick up
So I think the evidence is that you know economies can recover, but they do have to deal with the problems created by the financial crisis first. And as I’ve also said for many, many months, if not years, this has been particularly difficult because it’s not a crisis in one country; this is a problem of the international financial system, at least the developed world. And the imbalances in the international financial system, which still continue, were partly responsible for the problems in the first place and we still have to find a way of dealing with those and a microcosm of that is actually what’s happening within the euro area.
So there’s still a long way to go to resolve these imbalances which were part of the fundamental cause of the crisis, which is one reason why it’s taking so long.
King is wrong – or at least deeply misleading – about income per capita in Japan. As Scott Sumner has frequently reminded us, nominal income per capita in Japan has been the very definition of stagnant; a little under ¥4m per head in 1992, a little under ¥4m per head in 2009 on the IMF’s numbers. If King is talking about real income he must distinguish between supply-side and demand-side changes; Japan has had mostly the former, not the latter.
To see monetary policy-makers holding up Japan as some kind of success story is almost beyond parody. It is the kind of thing which makes me want to plunge lots of money into those 30 year gilts with healthy looking 3% yields. Welcome to modern
Japan Britain, where bond prices can never fall!
And then… “it’s not a crisis in one country”. That’s right everybody! Don’t forget the Eurozone is doing even worse than us, though it’s hard to believe, and the US is doing only a little better. Let us pretend that recession-proof countries like Poland and Australia don’t exist, of course, because then domestic policy errors might be more obvious.
I’ve no idea by what mechanism the naughty “international financial system” is causing a demand deficiency in the UK but “a big boy did it and ran away” was never an excuse which worked for me, so why should it work for King?
You have the con, Merv, steer the damn ship and stop blaming the icebergs for your own mistakes.