Japan's Economy Shows Limits of Keynesian Policies

Daryl Montgomery submits: In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

Daryl Montgomery submits: The Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

In 1997, the SE Asian Tigers all faced severe economic stresses, partially triggered by a primarily foreign capital-funded massive real estate bubble in Thailand. Today the EXACT same thing is happening as untempered foreign investment into Thailand’s real estate market has created not a “soaring” real estate market as economists always incorrectly explain them, but massive real estate market distortions better known as a bubble.

By Peter Boone and Simon Johnson Bubbles are back as a topic of serious discussion, as they were before the financial crisis.  The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control?

"You think things are bad here - you should see Japan!" For policy makers grappling with the financial crisis, Japan has long been the cautionary tale. It still is, and not just for the reasons that you think. This week's surprise moves by the Bank of Japan tell us how uncomfortable it can get for a central bank trying to combat deflation - when the government is running up a mountain of debt.

Bernanke should brush aside the babbling barons of bubbleism, and get on with doing his job Bubbles can be bad for your financial health — and bad for the health of the economy, too. The dot-com bubble of the late 1990s left behind many vacant buildings and many more failed dreams. When the housing bubble of the next decade burst, the result was the greatest economic crisis since the 1930s — a crisis from which we have yet to emerge.

Authored by Andrew McKillop,

Patrick Chovanec is an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China. Prior to that, he worked for several private equity funds focused on China, and continues to serve as a fund adviser. He's also got a blog. This is part one of a two-part interview I did with him on China's economy.