Japan’s Miser Mentality

Thinking about Japan these days, it’s hard to resist the image of an entire country sitting in the middle of giant piles of gold, mesmerized by the thought that as long as it remains surrounded by the gold, everything will be okay. It’s like something out of Frank Norris’ novel McTeague. The fact that the gold isn’t doing anything at all doesn’t matter as much as the mere fact that it exists.

This image came to mind again today when the Bank of Japan announced that, for the first time in three years, it had cut the overnight call rate–the rate that private banks charge each other to lend money overnight, and the equivalent of our fed funds rate–to 0.25 percent. Considering that the call rate had previously been just below 0.5 percent, the cut isn’t going to flood the market with new loans. But it is an interesting move because it’s the first time in recent memory that the Japanese government has tried to stimulate the economy with monetary, rather than fiscal, policy. Along the same lines, the BOJ announced that it would seek to expand the money supply and to inject liquidity into the market at every opportunity.

Nonetheless, the fact that interest rates are already effectively nil means that the practical impact of the rate cut will be quite small. At a time when Japanese banks are carrying hundreds of billions of dollars in bad loans on their books, and when the Japanese Parliament has been singularly unsuccessful in putting aside partisan differences to pass real banking reform, banks are being cautious in a way that they weren’t during the heyday of the Bubble Economy. And the BOJ’s move, while welcome, is itself an expression of a lack of faith in the Japanese economy, which is sinking deeper into recession and shows no–that is, no–signs of recovery. Yesterday, Japan’s Economic Planning Agency called the economic situation “very severe” and suggested that continued global turmoil would create an “extremely dangerous” situation at home.

Not surprisingly, though, the planning agency also said that Japan’s continued massive trade surplus should keep the country relatively safe. And nary an article on Japan appears without mention of the trillions of yen that now rest safely in Japanese savings accounts. Far be it from me to wish for the destruction of all that hard-earned money. But it’s certainly true that one of the reasons Japan has moved so slowly to solve its massive problems is that those savings accounts have kept the crisis from becoming as urgent as it really is.

The thing about what’s happening in Japan, in fact, is that although we think it’s bad, it’s really much worse, at least in the sense of what it’s doing to the global economy. The disappearance of the Japanese market for East Asian goods, the drying up of Japanese loans, and the weak yen have all exacerbated an already troubled situation. In the simplest sense, if you remove a sizeable chunk of the world’s economy from the process of consumption, the economy has to feel it. How Japan ended up here remains somewhat mysterious (certainly an aging population, anxious to protect its resources for retirement, has something to do with it). But that it is here, and that “here” is a place where supply really is not creating its own demand, is not mysterious.

Insofar as the BOJ’s decision was a tentative step toward inflating the yen, it was a good idea. What Japan really has to do, after all, is–as Slate’s own Paul Krugman has suggested–convince its citizens that if they don’t spend those piles of gold, they’ll be worth less next year than they are today. That will mean, of course, that the yen will weaken. But the paradox here is that until Japanese consumers leave the vault behind, the yen will never be able to be genuinely strong. Only when demand for credit is flowing again will interest rates rise to globally competitive levels. And that won’t happen as long as the miser mentality prevails.