PITTSBURGH, Pennsylvania -- Beware of economists promising easy solutions for complex problems, in this case, Japan's painful and protracted slump following the collapse of inflated asset prices in 1989. Princeton economist Paul Krugman advises Japan's government to combat deflation by announcing official targets for domestic price increases, then pursuing sufficient monetary expansion to achieve them. Now his colleague, Lars Svensson, touts a dual effort to raise domestic prices and drive down the international value of the yen as a "foolproof way to jump-start the economy."
These well-intentioned proposals ignore international responses and neglect domestic costs. Worse yet, the Princeton money doctors fail to recognize that Japan's economic quandary arises from structural and institutional difficulties rather than macroeconomic imbalance.
Is unilateral currency devaluation a feasible option for Tokyo? What of the reaction by Japan's trading partners, especially in Asia, to a cheaper yen and the resulting "short-term competitive edge" for Japanese export goods? Svensson's claim that this "is not a beggar-thy neighbor policy" because all will gain in the long run rings hollow, especially in view of Tokyo's recent rush to slap "emergency" limits on imports of Chinese farm products.