Greenwood
To save Japan from deflation spiral, Japanese government have increased it's public investment.
According to MIT professor Paul Krugman's "Japan Trap" Japan is trapped in "liquidity trap". There are 3 ways to get rid of it. Those are structural reform, fiscal policy to increase of government spending and monetary policy to increase money supply. He says that all of them will not work.
He wrote that The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.
I don't think the Bank of Japan can behave like that.
But Paul Krugman assured that ”it is not necessary that Japan do anything. In the quasi-static IS-LM version of the liquidity trap, it appears as if the slump could go on forever. A dynamic analysis makes it clear that it is a temporary phenomenon - in the model it only lasts one period, although the length of a "period" is unclear (it could be three years, or it could be 20). Even without any policy action, price adjustment or spontaneous structural change will eventually solve the problem. In the long run Japan will work its way out of the trap, whatever the policy response. But on the other hand, in the long run ...
If we don't care the period, some time, we can get rid of it. How long? No one knows.
One thing is certain that despite massive public investment, we cannot expect quick escape from current situation. Then many doubt creeped into my mind as follows:
- Many new highway system will be constructed in scarcely populated place like in Hokkaido, yet, highly needed highway system around metropolitan area were halted. Who will pay back bond for those roads not used in future?
- The reason of difficulty of road construction around Tokyo are high land cost and NIMBY attitude of the people. But still, there should be a smart idea of drilling tunnel through Tanzawa mountains and connect Tokaido and Tyuoudo. A French contractor once proposed the idea but Ministry of construction showed any interest. Why? Because the planner put more importance to keeping their face and put less weight on the true needs of the people.
- City water and sewage system, power cable, information networks are planed and installed separately. All exposed in the air. It is ugly. Money should be used more smartly.
- Land reclaiming is undertaken to fill natural sallow water. Making island connected by coarse way or bridge can reserve natural waterfront and kind for both man and nature. Kansai airport is a good example.
- Due to massive investment in mountains for sand dam, beach in Japan was eroded by stoppage of new sand supply. To cope with this situation, our government is dumping enormous amount of concrete to make break water in parallel to shore line. This is ugly and cause water stagnation and environmental degradation. Why not in stall jetty right- angle to the shore line. It will better and give pleasure for weekend fisherman.
- It is reported that in USA, no new dam will be installed.
Follow up articles on Japan's Liquidity trap are available in Prof. Krugman's home page.
It seems that Japanese policy maker is bound by old theory of John Maynard Keynes established under fixed exchange rate. But according to new theory of Mundell and Fleming under changing exchange rate, action taken should be different. This is what John Maynard Keynes himself pointed out in his book "The General theory of Employment , Interest and Money", that any statesman and government officials can not learn new theory after 30 years old.
After January 17th 1999,Mr.G found many conflicting opinion in the publications. Report of follow up is here.
January 17, 1999