Specialist Addresses Foreign Policy Class

By: Barbara Passey

Posted: 5/27/05

Japan Specialist and Senior Economist Adam Posen of the Institute for International Economics addressed Professor Christian Broda's International Financial Policy Course 33502 at Gleacher on May 14. Preceded by Professor Broda's macro analytic framework, NY-based Dr. Posen says he is interested in Japan because, "It's a good intellectual challenge and it was the most interesting event in recent years."
He pointed out that during the 80s, the US had thought it was falling behind Japan and a sense of worry had developed on that topic. And when the Japanese stock market, financial system, and economy fell into disarray, there was a feeling that it could happen in the US.
Then, he traveled back through the 80s and 90s to set the scene for what happened during the Plaza and Louvre Accords. He explained how Japan's economic history books now place blame for Japanese problems on these accords. These books say that Japan was forced to print yen and cut interest rates in response to demands made at these exchange rate confabs, referring to the "Jello" theory of economy where the source of the bubble in the economy was caused by excess liquidity.
Further, on the topic of the bubble in the economy, he highlighted domestic factors such as overestimates of productivity growth that may also have contributed to the "perfect storm" that he saw as the 90s wore on. In addition, he focused on the Liquidity Trap and how Japan's interest rates stubbornly refused to get up off the mat and how the Bank of Japan, especially under Hayami, failed to generate success toward resuscitating the economy with monetary means.
By Posen's estimate, more than a trillion dollars worth of Japanese GDP was lost in the past 15 years. During that time, he noted, Europe was also growing slowly. Japan was not poor. It had and has tremendous household savings. He questioned why the Japanese accepted such low returns on these savings. He concluded that there were surprises in the exchange rate system of Japan and that these were:
1. Deflation does not move up and down ---he called it "inertial"
2. Private savings never left Japan
3. The contrast between the small impact of quantitative measures versus
the sizable impact of levels of expectations
4. the unexpectedly small pass-through effect of exchange rate effects
5. FX intervention by the Japanese authorities had no impact on either the upward or downward paths