The Japanese economy is recovering. Why? Prime Minister Junichiro Koizumi can hardly take the credit.
Koizumi used to tell us that government spending had to be cut because annual government borrowings of 30 trillion yen and more were bad for the economy. But in his current budget he has promised 36 trillion yen worth of borrowings (likely to be closer to 40 trillion yen). Meanwhile, his structural reform plans have barely got off the ground.
Two things spur much of the current recovery. One is the export stimulus from China's extraordinary economic progress. As I noted some time ago, sensible policies encouraging investment allowed China in the 1980s to begin to break the infrastructure cost burden that shackles most developing economies. This, together with cheap labor and an expanding domestic market, guaranteed more investment, which in turn guaranteed further cuts in infrastructure costs, which guaranteed even more investment.
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