Japan’s history is full of moments when the elites rallied around a dramatic shift in strategy. In 1868, its leaders ditched hundreds of years of feudalism in response to the threat of western colonialism. In 1945, they abandoned the pursuit of “greatness” via military means and set diligently about the task of achieving economic prosperity. Now, after 15 years of deflation, Japan’s leadership has dramatically reversed course again by going hell for leather for inflation. In strategic terms, the sudden shift is reminiscent of the notorious attack on Pearl Harbor.
Readers may consider the comparison to be in poor taste. Precious lives will not be lost as a result of an expansion of the monetary base, however dire the warnings from alarmists who say it will lead to hyperinflationary ruin. Yet there are interesting parallels. By 1941, Japan’s war planners thought conflict with the US was inevitable. In July that year, Washington had imposed an oil embargo on Japan in response to its invasion of French Indochina. Tokyo decided it needed to grab control of oil in the Dutch East Indies, now Indonesia – an assault that, it guessed, would inevitably draw the US into the war. In other words, conflict with Washington was coming. Better to pre-empt it in the hope of gaining significant strategic advantage through a surprise attack.
Something of the same calculation is going on when it comes to inflation. The logic goes a bit like this: Japan’s current fiscal position is unsustainable; you cannot borrow half of what you spend indefinitely, particularly when your working population – and thus your likely tax base – is going to shrink indefinitely; Japan’s population, currently 127m, will fall to 108m by 2050.