Nonetheless, Mr. Koizumi is right about one thing: Japan cannot go on like this. Swelling public debt will eventually threaten the government’s solvency; the festering financial problems of the banks will soon require a government bailout that will swell that debt even further. Something must be done. But the actions Mr. Koizumi has proposed could tip Japan into full-blown depression.

 

There is an answer to this dilemma, one that has become almost orthodoxy among economists who have tried to think seriously about Japan’s plight. This answer involves unconventional monetary expansion, with the Bank of Japan buying dollars, euros and long-term government bonds; it also involves accepting and indeed promoting mild inflation and a weak yen. I could explain why this would probably work, but what’s the point? It’s not about to happen.

 

For the real tragedy right now is that however innovative and open-minded Mr. Koizumi may be, he will fail unless other important players — mainly the Bank of Japan, but also the U.S. Treasury Department — are prepared to learn from Andrew Mellon’s mistake. And all the evidence is that they are not. The head of the Bank of Japan insists that the country’s continuing slump is the result of inadequate reform — that is, insufficient purging of the rottenness. And although the details are in dispute, the U.S. Treasury secretary, Paul O’Neill, appears to have warned Japan not to let the yen weaken too much.

 

Poor Japan. It is the victim of those who refuse to learn from the past, and thereby condemn others to repeat it.

 

So even three years after the famous 1998 liquidity trap paper, Krugman was still favoring monetary stimulus over fiscal stimulus for countries at the zero bound. But I’d like to focus on the comment regarding our Treasury officials.  Krugman’s right that they have consistently warned the Japanese not to engage in “currency manipulation”.  What our Treasury doesn’t understand is that all central banks manipulate currencies—-that’s their job!  The only question is how.  And don’t say “It’s OK to manipulate the purchasing power of a currency but not the foreign exchange value.”  If the manipulation is done via central bank policy, then the two types of manipulation are identical. For decades, the US Treasury has been (unknowingly) warning the Japanese not to manipulate their economy out of deflation.

 

Ironically, a healthier Japanese economy would also be good for the US, boosting our exports and creating good jobs.  Pity that we are so dense.

 

PS.  Over at Econlog you’ll find a Trump post that is perhaps a bit less “unhinged” than usual.  At least I hope so.