\nAnd while the Bank of Japan has said that it will do everything to ensure financial stability, it has little scope to work with, given the low level of interest rates and the massive amount of debt. While disasters result in a lot of reconstruction work, the challenge for Japan will be paying for it.\n<\/p><\/blockquote>\n
This AAP article (March 12, 2011) – Japan earthquake risks fiscal crisis<\/a> – was representative:<\/p>\n
\nThe massive Japanese earthquake has raised the chances of a fiscal crisis in the world’s third largest economy and could affect countries around the globe, analysts in Europe and the US say.\n<\/p><\/blockquote>\n
The analysts are wrong. This crisis, bad as it is, has not changed the underlying risk associated with Japanese fiscal policy execution. The problem is that if the conservatives get into the heads of the Japanese politicians the latter might start believing that their fiscal options have been reduced. The operational reality is that they have not been reduced.<\/p>\n
The Japanese government will be able to fully provision a recovery and reconstruction, however, painful and long that might take, as long as their are real goods and services available for purchase. The constraints will be in terms of real resources and time.<\/p>\n
The press reports were all quoting some “British consultancy Capital Economics” who must be seeking clients because they were one of the first to jump onto the fiscal crisis bandwagon. They are not backward in telling us about themselves, describing their company as the “leading independent macroeconomics research consultancy” but didn’t add where! I wondered what the geographical limits on the “leading” was. Conclusion: not very broad given their public statements.<\/p>\n
The Capital Economics report was quoted as saying:<\/p>\n
\nIt may be several days before the costs of the disaster are clearer … The greater the social and economic damage, the larger the threat to the government’s ability and willingness to ward off a fiscal crisis.\n<\/p><\/blockquote>\n
I will be months before the costs in real terms are fully assessed and a lifetime for some coming to terms with the personal and social costs. But the next statement is just a straightforward lie.<\/p>\n
What is a fiscal crisis when we are talking about a nation that is fully sovereign in its own currency? Answer: there is no meaning that can be attributed to the term.<\/p>\n
A fiscal crisis is besetting the governments of Greece, Portugal and Spain – because they are struggling to advance public purpose in their nations and cannot raise the funds to maintain existing programs. The reason is clear: they surrendered their currency sovereignty. Only the interventions of the ECB are saving the Eurozone from total meltdown but the underlying solvency problem for the individual member states is getting worse as the days go by. The intervention of the Euro bosses is failing.<\/p>\n
But none of that is relevant to Japan – except that their export markets might be damaged if the Eurozone collapses. Even so, that is not a fiscal crisis. It would just signal a larger fiscal intervention was called for to make up for the spending collapse.<\/p>\n
The same predictions were bandied about after the January 1995 earthquake in Kobe. I checked back to my notes and documents for 1995 when the Kobe earthquake struck. It was clearly a major disaster in terms of infrastructure damage and personal tragedy.<\/p>\n
The New York Times<\/a> said at the time (June 6, 1995):<\/p>\n
\nThe reconstruction of Kobe may cost well over $120 billion, making the earthquake the most expensive natural disaster in human history.\n<\/p><\/blockquote>\n
There was certainly major economic disruption. The port was severely damaged and roads were blocked.<\/p>\n
This report<\/a> documents some of the shipping disruptions:<\/p>\n
\nThe docks used by the huge ships, which generally carry about 2,800 containers each, were damaged, as were the tall cranes that lift them. The bridges to the islands were also damaged, making it impossible for heavy trucks to move the containers, which accounted for up to 50 percent of Japan’s international containerized trade.\n<\/p><\/blockquote>\n
And countless other stories about the economic dislocation caused by the earthquake.<\/p>\n
The Nikkei barely missed a beat and there was also positive economic news via the “few bright spots include the computer chip and steel industries, the latter partly boosted by rebuilding in the Kobe earthquake zone” (Source: Asia Week – July 14, 1995<\/a>).<\/p>\n
But within days of the 1995 Kobe earthquake, mainstream bank and finance economists (the cohort that usually gets every forecast wrong) were out in force telling anyone who listened that the disaster would drive the Japanese government bankrupt. Apparently the public debt level was “explosive” – around 85 per cent of GDP – well beyond the Reinhardt-Rogoff catastrophe level of 80 per cent.<\/p>\n
At the time, the conservative Japanese economists (like Makato Yano and his ilk) aided and abetted by a bevy of US mainstream macroeconomists were preaching the Ricardian Equivalence line and pressuring the Japanese Ministry of Finance to cut back the “out of control deficit”. This led to the fiscal austerity packages in 1997 which caused the economy to double-dip.<\/p>\n
This paper – The Japanese Economy in the 1990s<\/a> – is an excellent account of the fiscal debate in the 1990s in Japan. It concluded that:<\/p>\n
\n… fiscal policy supported the growth of the Japanese economy in the 1990s, but … the stimulus was insufficiently strong to realise the full utilisation of capital and labour. This is an important observation … revealing the inadequacy of public policy. The government is held responsible for inadequate employment, bad performane of business firms and the associated tragedies and unhappiness.<\/p>\n
Perhaps more interesting to theorists is the rejection of the Barro and Lucas’s theory of the irrelevance of fiscal policy to economic growth … all economic theories … have to be verified empirically and that the theory of fiscal irrelevance can not be adequately verified by studying the Japanese economy in the 1990s. By contrast, the Keynesian theory underlying this paper can be verified.<\/p>\n
It is surprising that the irrelevance theory has been tacitly or overtly accepted by almost a generation of economists without being empirically tested … In my view, unfortunately it has now been adopted by many intermediate macroeconomic textbooks and even some introductory ones. The author hopes that the irrelevance of fiscal policy has been rejected convincingly for Japan in the 1990s and that it will be similarly rejected by empirical tests for other countries, inviting a resurgence of Keynesian economics in the world.\n<\/p><\/blockquote>\n
The reality is that Ricardian Equivalence and the broader irrelevance of fiscal policy theories have been systematically rejected in many nations since they were introduced to the literature. The pity is that they are still being used to give “authority” to the politicians who are deliberately undermining the prosperity of their nations by imposing fiscal austerity.<\/p>\n
In terms of Japan after the Kobe earthquake there was no fiscal crisis. The only thing that happened was that the conservatives won the policy debate and further inflicted damage on the Japanese economy. It was only expansionary fiscal policy after 1998 that returned the economy to growth and some stability.<\/p>\n
IN my notes and documents for 1995 I found this chart from the Bank of England quarterly bulletin<\/a> which shows how demand for long-term Japanese government bonds soared after the Kobe earthquake. Here is the movement in yields on 10-year bonds (remember yields move inversely with demand (price)).<\/p>\n
![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2011\/03\/Japan_Kobe_bond_yields.jpg\" "\\"Japan_Kobe_bond_yields\\"")
<\/a><\/p>\n