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Recovery in Japan

September 2, 1998

Mark Thornton, adjunct scholar on the Mises Institute and economic advisor to the Office of the Governor, Alabama, writes the following response to an editorial in the Investor's Business Daily on Japan.

IBD correctly argued, with regard to Japan's economic problems, that flooding the market with newly credited money is no solution.

However, in order for Japan to get back on the right economic track, the full implications of the Austrian theory of the business cycle need to be understood. Dr. Thornton's letter appeared in the August 21, 1998, edition of that newspaper.

* * *

Dear Editor:

You are absolutely correct that Paul Krugman's idea to save Japan with more inflation is Keynesian nonsense. However, trying to maintain the monetary status quo is also a bad idea. Japan has been trying to manage the money and banking system for years and they are still stuck
in economic depression. Additional government spending on public works has also been tried and has failed.

The real solution for Japan is liquidation. The Bank of Japan should allow interest rates to rise to their natural levels in the marketplace and the Japanese government should not try to prop-up
their corrupt banking and financial institutions.

Japan also needs to cast off its notion of guaranteed jobs and low unemployment at any cost. The result would be a sharp but short period of financial pain that would result in a cleansing of bad debts and untenable economic relationships. The owners would change but Japan's factories, infrastructure and workforce would remain to be the basis of future prosperity.

While the economic pain would be intense in the short run, the pain can be reduced with tax cuts on labor and capital, reductions in government spending and debt, and a dramatic loosening of bureaucratic red tape and restrictions on international trade.

Japanese management styles and its managed economy were once thought to be an economic panacea for those who crave government control and power. But they has proven once again to not work. The radical liquidation medicine of market-determined interest rates and free-market forces will work to restore Japan to economic prosperity.

Dr. Mark Thornton
Economist, Office of Governor Fob James
mthornton@bank.state.al.us


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