The FT is interviewing many of the G20 leaders this week. Taro Aso of Japan makes a point here that is, so far, lost on the other leaders. He is reflecting on the Japanese bubble of 1989, exemplified by a drop in land prices of 87%.
He makes the point that dropping interest rates to zero will not bring back investment by itself while people and businesses are pre-occupied with reducing debt.
Transcript: FT interview with Taro Aso | Financial Times
It was back in [the early 1990s] that the Japanese bubble economy collapsed. At that time, land prices in six major cities in Japan dropped by 87 per cent. The government at that time strove to reduce interest rates; in fact the Bank of Japan dropped interest rates to close to zero in order to stimulate the economy – but to no effect. That was because falling land prices and equity prices caused businesses to go into insolvency. As a result, businesses were forced to switch their management policy from maximising profits, to minimising debt.
He is very focussed on stimulus packages as the solution and obliquely criticises Germany for not following that approach.
This gets interesting because US, Japan, UK, and Germany represent a large proportion of the world economy, and one of the four is focussed on regulation not stimulation.
In this case the banking model is broken, and more broken than Japan experienced in 1989, nonetheless the bubble aspects of the economy are identical with asset values falling dramatically.
This sets the stage for an interesting outcome this week in London.
Other interviews so far:
Transcript: FT interview with Manmohan Singh – India
Transcript: Stephen Harper interview – Canada
Transcript: FT interview with Lee Myung-bak – South Korea
Transcript: FT Interview with Sergei Lavrov – Georgia
Transcript: FT Interview with Barack Obama – US
Bankwatch 