Krugman: Can Japan pull it off?

Can Japan actually end decades of deflation?

Paul Krugman examines former Bank of England Monetary Policy Committee member Adam Posen's attempts to square the circle between his support for expansionary fiscal stimulus in Britain — where it hasn't happened — and opposition to the same in Japan — where it is apparently about to begin.

Posen wrote, in the Financial Times, that:

Mr Abe’s new fiscal stimulus initiative is therefore questionable. Not because another 2 per cent of GDP will be the proverbial tipping point on Japanese debt sustainability, for the factors protecting Japan from overt fiscal crisis remain. Nor because it will be ineffective; if anything, when combined with monetary expansion and a likely consumption tax rise in the near future, I expect its multiplier and thus short-run impact to be high.

The additional stimulus in Japan is counterproductive because it adds to the long-term costs without addressing Japan’s real problem: a return to deflation and an overvalued exchange rate.

Krugman is "a bit puzzled". He agrees that deflation is Japan's problem, because deflation forces short-term interest rates to bump against the lower bound. Since interest rates can't go below zero, that is, they are forced to remain slightly positive. That means that real interest rates — the nominal interest rate plus inflation — are forced to be significantly higher under deflation than they would be with mildly positive inflation, reducing the effectiveness of monetary policy.

So far, so macroeconomics 101. Where Krugman disagrees with Posen is how to break out of the deflation trap. Posen argues that unconventional monetary policy — quantitative easing and the like — can be enough. It's a monetary problem, so it ought to have monetary solutions. But Krugman argues that there may be a better way:

The credibility of a higher inflation target in the face of the deflationary bias of central bankers may well be best established by (a) reducing the central bank’s autonomy and (b) getting the central bank in the business of supporting — indeed, monetizing — government deficits, at least for a while. Gauti Eggertsson made this point long ago (pdf), pointing to Japan’s successful polices in the first half of the 30s as a clear example. Indeed, Gauti argued that having a large government debt can be a real advantage in such circumstances: efforts to raise expected inflation gain extra credibility if the government would clearly benefit in fiscal terms, and the central bank is sufficiently subordinated to elected officials that investors believe that it will take these fiscal benefits into account.

In other words, it all comes back to the question of central bank independence. If the government destroys that independence (even if it does it for paleo-conservative, nationalistic, reasons), and engineers a situation where inflation would make it better-off, then inflation expectations can be raised far higher than an independent central bank could ever do alone. Especially one which has so consistently failed to reverse the trend as the national bank of Japan.

Visiting Japanese Prime Minister Shinzo Abe speaks during a joint press conference held after official talks with his Vietnamese counterpart. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.