Selected Essays of James Tobin
Chapter 12: Keynesian insights for the Japanese economy
* I have come to these sessions for several years and always enjoyed them. I probably always say the same things; I hope people don’t remember. One of the same things I say is that Japanese macroeconomic policy is perversely and inexcusably incompetent, and I surely would say that again. It’s true – as Paul Krugman, a fellow participant in this program, has been saying and as I have said here in previous years – that Japan has reinvented the Keynesian liquidity trap It can now reappear in classrooms where it had been long ignored or at best barely mentioned as a curiosum of the Great Depression. We did have zero interest rates in the United States around 1934–5 – zero short-term interest rates, also much lower long-term interest rates relative to short-term than Japan has now. That leads me to believe that Japan needs to shorten, and in fact monetize, the debt of the government so its yields are not such an obstacle to private credit expansion and economic activity. As Paul has stressed, the real interest rate in Japan, at least the short-term safe real rate, needs to be negative to spark the economy. Paul therefore calls on the Bank of Japan to create inﬂationary expectations. I don’t think that is within the central bank’s capability, given so much excess supply throughout the economy. The markets want to be deﬂating, and I don’t see how government oﬃcials can persuade the public to anticipate inﬂation instead. There is...
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