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Thursday, May 23, 2013

Paul Krugman, "Japan the Model": Ignore "Fake Scandals" and Look to Japan for Guidance

Paul Krugman disappeared from the op-ed page of The New York Times when the Benghazi, AP and IRS scandals broke. Okay, Krugman knows absolutely nothing about Libya and al-Qaeda, and perhaps he has no personal insights involving the Justice Department's seizure of Associated Press telephone records. But to simply ignore the IRS matter? It was almost as if a sports writer had suddenly decided to take a holiday during the World Series.

Today, Krugman finally provides us with "Conscience of a Liberal" guidance concerning the underlying nature of the ruckus buffeting his beloved Obama administration. In a Times op-ed entitled "Japan the Model" (http://www.nytimes.com/2013/05/24/opinion/krugman-japan-the-model.html?_r=0), Krugman writes:

"In America, for example, there are still more than four times as many long-term unemployed workers as there were before the economic crisis, but Republicans only seem to want to talk about fake scandals."

Ah yes, "fake scandals" of the kind that have Lois Lerner scurrying to plead the Fifth. "Fake scandals" that result in blistering rebukes of Obama from Times columnist Maureen Dowd (see: http://jgcaesarea.blogspot.co.il/2013/05/maureen-dowd-when-myths-collide-in.html). "Fake Scandals" that prompt a dyed-in-the-wool liberal columnist such as Eugene Robinson of The Washington Post to write an opinion piece entitled "Obama administration mistakes journalism for espionage" (http://articles.washingtonpost.com/2013-05-20/opinions/39391166_1_gary-pruitt-espionage-act-fox-news), which begins:

"The Obama administration has no business rummaging through journalists’ phone records, perusing their e-mails and tracking their movements in an attempt to keep them from gathering news. This heavy-handed business isn’t chilling, it’s just plain cold.

It also may well be unconstitutional."

Yup, it's all the fault of the Republicans.

But the real purpose of Krugman's op-ed today is to praise "'Abenomics' — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe." Observing that "nobody else in the advanced world is trying anything similar," Krugman proceeds to observe:

"The good news starts with surprisingly rapid Japanese economic growth in the first quarter of this year — actually, substantially faster growth than that in the United States, while Europe’s economy continued to shrink. You never want to make too much of one quarter’s numbers, but that’s the kind of thing we want to see.

Meanwhile, Japanese stocks have soared, while the yen has fallen. And, in case you’re wondering, a weak yen is very good news for Japan because it makes the country’s export industries more competitive."

However, before lending too much credence to Krugman's ballyhoo, you might want to have a gander at what Reuter's columnist James Saft had to say about "Abenomics" in a recent Economic Times article entitled "Weak yen a boon for investors, not Japan" (http://articles.economictimes.indiatimes.com/2013-05-15/news/39282115_1_exporters-abenomics-nikkei):

"Buy Japanese stocks if you must but don't expect Abenomics and the fall of the yen to revitalize Japan's economy. The yen has fallen by more than 20 percent since Prime Minister Shinzo Abe, who advocates aggressive monetary and fiscal policy, was elected in December, busting through the 100 yen to the dollar level last week.

In part the theory behind Abenomics is that a weaker yen will revitalize industry, which will export more and plow the proceeds into hiring and capital investment. The stock market certainly believes: benchmark shares in Tokyo are up 36 percent this year and more than 68 percent over six months.

But a look at the actual data shows Japanese companies, like British ones during a similar bout of currency weakness in 2008, appear to be more eager to use a newly competitive currency to pad profits through higher margins rather than higher export volumes. Thus far, Japanese exporters appear to be doing just that. Despite yen falls the price of Japanese exports in local currency has barely budged.

. . . .

Abenomics contains an irony: the effect of its stimulus will be enjoyed in substantial part by hedge fund managers and clients in New York and London and by workers in Japanese factories as yet unbuilt in places like Kentucky."

Will the purchase by the Bank of Japan of government bonds, driving money into the Japanese stock market, result in a sustained economic recovery? I doubt it. Business spending in Japan is still weak (see: http://www.investing.com/analysis/business-spending-in-japan-remains-weak-despite-abenomics-167735), and the aging and shrinking of Japan's population spell future disaster (see: http://www.investing.com/analysis/abenomics-will-accelerate-japan's-descent-168235).

Bottom line: I wouldn't place my money on  a quick fix that brings about a rapid rise in stock market prices, but which does not assure sustainable economic growth. Thursday's decline in Japanese share prices is a harbinger of future chaos out of the Far East.

Or stated otherwise, given that benchmark shares in Tokyo rose some seventy percent in six months and the yen fell more than twenty percent during that same period, is it any wonder that "nobody else in the advanced world is trying anything similar"? I don't think so.

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