Remember all those books in the 1980s about “kaizen,” “kanban,” “keiretsu” and all the other secrets of Japanese management that were supposed to save American industry? Well, it must have worked — and perhaps too well. Because American industry is back on top of the world, while Japan has been mired in a decade-long recession.
But now there’s a new secret from Japan that we’d be wise to learn — even though it doesn’t begin with a “k.” It’s “quantitative easing.”
It’s a tool of monetary policy that the Bank of Japan — Japan’s equivalent of our Federal Reserve — is starting to use to spark their once-great economy back to life. And if Alan Greenspan doesn’t start using it here in America pretty soon, our post-boom economy is going to slip into a long recession just like Japan’s did after its boom busted.
Quantitative easing is fundamentally different than the easing that the Fed’s been doing all year by lowering interest rates. To keep these two kinds of easing straight, let’s call the Fed’s type “qualitative easing.”
In qualitative easing, the Fed lowers overnight interest rates until they get so low that people give up on their low-yielding bank accounts and money-market funds — or, better yet, borrow money at the low rates — and start buying things or making investments. This is supposed to put more money into circulation — to expand the so-called “money supply.”
There are two reasons why the Fed might want to expand the money supply. One would be if it believed that the economy was headed for recession, and needed the stimulus of new business activity made possible by having more money around to spend or invest. Another would be if the Fed wanted to combat deflation — the opposite of inflation — a decline in the price level of goods, services and assets.
Japan has had both reasons to increase its money supply over the last recessionary, deflationary decade following the crash of its stock market and real estate market in 1990. After a boom in the 1980s, in the 1990s Japan has busted, with continuing drops in industrial production, exports, and consumer spending. And for the last two years, Japan’s consumer price index has declined every single month.
Japan has fought its economic contraction and its monetary deflation in all the traditional ways, including massive government spending on useless public works that have resulted in paving just about every surface in Japan other than the slopes of Mount Fuji. And they’ve tried good old fashioned qualitative easing, with interest rates effectively at zero for most of the last four years.
But the problem with qualitative easing is that sometimes, no matter how low you make interest rates, nobody wants to spend or to borrow. That’s because, even at zero interest rates, when you expect more economic contraction you’d rather have your money in the bank than in stocks — and when you expect more deflation, you’d rather keep your money in the bank than buy consumer goods that will just be cheaper next year.
That’s where quantitative easing comes in. With quantitative easing, the Bank of Japan expands the money supply by, in essence, cranking up the printing press — and using freshly printed money to buy up government bonds. The BOJ has already been buying 400 billion yen in bonds each month; now it’s throwing the printing presses into high gear and buying 600 billion yen’s worth.
If you’re like most people, the very thought of the government printing money raises the dreaded specter of hyperinflation — images of postwar Germany come to mind, where it took a wheelbarrow of inflated paper money to buy a loaf of bread. But after years of deflation — in which just a little money would buy a wheelbarrow of bread — a little remedial inflation is exactly what the doctor ordered.
Why not leave well enough alone? Wouldn’t it be wonderful to be able to buy a wheelbarrow of bread with just a little money? Well, no
