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Japan was a 'zombie state,' even before the earthquake

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No wonder the debt increases. Adding debt is the path of least resistance. And this is the path politicians tend to follow. As we mentioned here two weeks ago, the Bank of International Settlements estimates that Japan’s debt will reach three times national output by the end of this decade.

This was the status of things when the teacups began to rattle and fall. Zero interest rates, money-printing and large fiscal deficits were already regular, every-day, business-as-usual components of the Japanese economy. Take them away, and all the unhappiness that the Japanese authorities had tried to avoid for so long would suddenly fall upon them.

As it turned out, the teacups fell upon them first. And then the sea rose up and threatened to swallow them whole. And if that weren’t enough, their power plants turned against them too. Their recent quake was the most expensive natural disaster in history – likely to cost $200 billion to repair, according to an estimate from Goldman Sachs. The Tokyo stock exchange saw its biggest sell-off in 24 years – a loss in market value of $610 billion.

Under these circumstances, austerity was not only out of the question, it was no longer even part of the conversation. Reprising almost the exact words used by Ben Bernanke, Larry Summers and Tim Geithner in the autumn of 2008, the Japanese announced they would deal with the emergency at hand and worry about the long-term integrity of their national finances later.

In came the Bank of Japan with ¥15 trillion ($189 billion) of QE on Monday and another ¥21 trillion ($264 billion) on Tuesday. By Wednesday, almost $700 billion of new funds had been made available. On Tuesday, the price of gold also sank $30, prompting observers to speculate that Japan was selling gold in order to raise cash.

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