Throughout the years, we’ve been citing the work of Nomura economist Richard Koo quite a bit.
Koo is the author of “The Holy Grail Of Economics” which uses the great multi-decade Japanese malaise to flesh out his concept of a balance sheet recession, wherein monetary policy is largely impotent due to the fact that the private sector is seeking to reduce debt, and thus not response to lowering the cost of money.
In such a situation, he’s a big advocate of fiscal stimulus, so as to replenish private sector balance sheets.
As such, he’s become one of Japan’s foremost economists, and his ideas have relevance in the Europe and the US, which also have balance sheet issues.
But the “Abenomics” experiment is putting his theory to the test, and would seem to put a lot at stake for him professionally. While there is a fiscal aspect of Abenomics, the big mechanism is aggressive easing by the Bank of Japan, something that should theoretically be ineffective with rates near 0%.
Nick Rowe, who blogs at Worthwhile Canadian Initiative, writes:
This is not the “beginning of the end” of the Japanese economy. But it might be, and I hope it is, the beginning of the end of Japan’s long recession.
And if this is indeed the beginning of the end of Japan’s long recession, it will also be the beginning of the end of Richard Koo’s thesis that monetary policy is powerless in a balance sheet recession, and that only fiscal policy can offset private sector deleveraging.
And we can only regret that Japan did not do this many years earlier, instead of wasting all those years and letting Japan’s government debt/GDP ratio climb. Because that high debt/GDP ratio is the only reason why someone might want Japan’s economic recovery but not want the higher interest rates that will accompany that recovery. Which is no reason to try to stop the recovery. Though it is one additional reason to regret not having done something like Abenomics a lot earlier.
Meanwhile, Japan’s market has gotten tremendously volatile lately, and we’re still in the early moments of any real world recovery, so the question remains far from settled.
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