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Japan: No longer a basket case?

America’s political right is obsessed with the notion of a debt crisis, even in the face of inconvenient truths that have a habit of appearing out there in the real world.

As some lobbyist writes in the FT today, this is how debt crises are supposed to happen:

What happens when an economy runs out of fiscal space? The presumption is embodied in the image of “hitting the wall”. Under this assumption, public debt exceeds a certain limit and financial confidence collapses. As a result, interest rates rise, the currency falls and panic ensues.

Unfortunately, this has never really been observed. And the best possible example of an indebted, developed economy — Japan — completely refutes it. Japan’s ballooning debt has not led to higher interest rates, a falling yen or panic.

Even so, Adam Posen manages to fill an article with evidence-free reasons why the US should not indulge in a new New Deal.

I have no idea if he’s right or not (though I certainly don’t like the way he says it), but it seems to me that people are starting to re-assess Japan’s response to its long economic slump.

After all, in 20 years of depressed growth, Japanese unemployment never reached levels that the US has suffered since 2009. And when you factor in the past few years of recession and weak recovery in the west, Japanese growth during the past decade is actually not that bad.

Of course, Shinzo Abe isn’t an enlightened figure. He’s doling out cash to his cronies for political reasons, but coordinated easing from the BoJ and fiscal stimulus from the government seem like a much more sensible approach than what’s happening in the US right now.

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