NCPA - National Center for Policy Analysis

Where Japan Went Wrong

December 20, 1996

Not too many years ago, Japan's economy was hailed as a model for other countries. Now, that nation is entering its fifth straight year of weak growth. Economic observers say Japan is following the same Keynesian theories that were discarded long ago by other developed nations, specifically that when an economy is slumping the government can spend it back into prosperity.

  • Japan now predicts its economy will grow by only 1.9 percent in the 1997 fiscal year, the lowest forecast ever.
  • Throughout most of this decade, prices have been either stagnant or falling.
  • The government continues to try to prime the economic pump through lower interest rates and public spending programs totaling $600 billion in the last five years.

But these measures are not working. For businesses, the yen -- pushed upward by persistent trade surpluses -- has made it too costly to operate in Japan. Companies are now building more plants overseas than they are at home. Interest rates are now near zero. With prices falling, consumers get a positive real rate of return by holding cash -- rather than spending or investing. With the banking system in a crisis citizens keep as little money in banks as possible and banks are being forced to make as few long-term loans as possible.

American Enterprise Institute economist John H. Makin says the country must reform by rapid deregulation, along with lowering taxes -- including dropping plans to increase the consumption tax from 3 to 5 percent in April.

Economists say these policies have worked the world over -- from the Czech Republic, to Chile and the U.S.

Source: Perspective, "Japan's Keynesian Mistake," Investor's Business Daily, December 20, 1996.


Browse more articles on International Issues