Japan: Ichiro Ozawa, Japan's wannabe prime minister, is known as the "Destroyer" for breaking up governments. But the veteran political operator's skills look transferable. He might also make a good job of destroying the economy. Hopefully, such destruction would be creative.
Ozawa's chance will come if a Democratic Party of Japan leadership vote on September 14 goes his way. He is challenging Naoto Kan, the current party leader and prime minister. Kan has been in power for a whole three months and is therefore ripe for destruction. Ozawa has a fair chance of winning because he's strong in the party. Does his lack of popularity among voters matter?
Kan has been far too tentative for Ozawa's tastes, offering only token stimulus and talking of fiscal "consolidation." The economy grew by only 0.1 per cent in the second quarter and prices have fallen by 0.9 per cent in the past year. Small wonder Ozawa's platform is built on "aggressive fiscal stimulus", according to a study by the University of Tokyo.
A small problem is that Japan has by far the worst debt to GDP ratio among major economies. As Ken Rogoff, a former IMF chief economist, has argued, it's hard to control debt once it exceeds GDP. How about 200 per cent of GDP, Professor Rogoff? But the interest yield on Japanese government bonds is exiguous, at not much more than 1 per cent, so the debt is not yet so problematic - and might not seem an obstacle to still more spending. Ozawa's policies could get a long way quite fast. The fiscal deficit this year is already expected to be around 7 per cent of GDP. Aggressive stimulus in the final three months of the year could set the stage for double digit deficits in subsequent years. In just five years, even assuming the economy grows, debt might climb to 230 per cent of GDP.
But almost certainly the deterioration would be far more rapid. Japanese bond yields, though ultra-low, have not proven impervious to Ozawa's challenge. If he were in office and actively pursuing fiscal expansion, Japan's debt yields might spiral. Meaning, the hideously large debt would finally drive the fiscal deficit far higher and become intolerable.
Japan's only route then would be drastic fiscal reform or, more probably, huge resort to the printing press, as Latin America did in the old days and Zimbabwe in more recent times.
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This would mean Japan's post-bubble deflation would finally be over. The destroyer would have brought about inflation and an intense economic crisis that would leave a clean slate. This would be creative destruction, Schumpeter-style.
Things are unlikely to take this course. Kan will probably prevail. Ozawa wouldn't last. But there is one truth in Ozawa's unlovely campaign. The Bank of Japan really ought to be willing and able to get inflation higher. Why doesn't it have an inflation target?
