Davos Newbies

Is anyone looking? 

You’d think that the steady disintegration of the world’s second largest economy would be a cause for comment. But because Japan’s problems are now longstanding, they are neglected like many running stories � they aren’t considered news.

Fortunately, Martin Wolf helps to set us straight. Martin provides a plausible solution to Japan’s lack of demand (plausible in the sense that, at a stretch, it might be adopted by policymakers).

The likelihood, however, is that the politicians and officials in Japan will continue to both dither and make wrong decisions, leading to an even worse economic crisis than they have now. That could at last set the stage for a healthy rebirth of the Japanese economy. It could, of course, also set the stage for a frightening, reactionary response in Japanese politics and society. I remain, though, an optimist against the evidence.

The issue that Martin doesn’t explore too deeply today (although he has done in previous columns) is raised in his second paragraph: “Japan’s experience in the decade since the end of its ‘bubble economy’ is an awful warning, one that the US Federal Reserve, struggling with a post-bubble economy of its own, has firmly in mind.”

Along with Martin, I don’t think the US will become another Japan, although there still seems to be considerable denial that it is suffering the hangover after the “benefits” of a bubble economy. But there remains a significant downside risk that consumer demand � the only thing keeping the US economy breathing right now � could evaporate, even with Fed rates down at 1% (which is where they are heading).

For a world where Japan is an economic non-starter at the moment, and Europe is moribund at best, a long period where the US engine remains in the sidings foretells tremendous economic woe ahead. And remember, I’m an optimist.