Friday, November 21, 2014

How a Limo Ride With Paul Krugman Changed the Course of Abenomics

Japan lucked out if the only advice they received from Krugman was not to raise the sales tax--as sound advice as you can give.

Toru Fujioka and Simon Kennedy inform:
When Japanese economist Etsuro Honda heard that Paul Krugman was planning a visit to Tokyo, he saw an opportunity to seize the advantage in Japan’s sales-tax debate.

With a December deadline approaching, Prime Minister Shinzo Abe was considering whether to go ahead with a 2015 boost to the consumption levy. Evidence was mounting that the world’s third-largest economy was struggling to shake off the blow from raising the rate in April, which had triggered Japan’s deepest quarterly contraction since the global credit crisis.

Honda, 59, an academic who’s known Abe, 60, for three decades and serves as an economic adviser to the prime minister, had opposed the April move and was telling him to delay the next one. Enter Krugman, the Nobel laureate who had been writing columns on why a postponement was needed.

“That nailed Abe’s decision -- Krugman was Krugman, he was so powerful,” Honda said in an interview yesterday in the prime minister’s residence, where he has an office. “I call it a historic meeting.”

It was in a limousine ride from the Imperial Hotel -- the property near the emperor’s palace that in a previous construction was designed by Frank Lloyd Wright -- that Honda told Krugman, 61, what was at stake for the meeting. The economist, who’s now heading to the City University of New York from Princeton University, had the chance to help convince the prime minister that he had to put off the 2015 increase...

“I knew Krugman would be great but I didn’t think he’d come to Japan just for one meeting,” said Honda. “Then I heard by chance that he’d be here, and there was no way I was going to waste that chance.”

Honda succeeded in organizing a 20-minute meeting between the prime minister and the U.S. economist. It went about double the allotted time.

With a handful of aides and secretaries present at the reception room on the fifth floor of Abe’s residence in the Nagatacho district southwest of the Imperial Palace, Krugman began by praising Abenomics, describing how much he respected the program to revive Japan after 15 years of deflation, Honda said.

The only problem was the sales tax, Krugman said, according to Honda. Honda, Hamada and another aide, Eiichi Hasegawa, kept quiet. Honda says that by the end of the meeting, he was convinced Abe would decide on postponement.

Hamada, who had advised Abe on his pick for Bank of Japan governor, said that “Abe listened to Krugman’s view very carefully.” Hamada said in an interview Nov. 18 that “he probably helped the prime minister make up his mind.”

Abe himself highlighted his discussion with Krugman when speaking on the national public television broadcaster NHK three days ago.

Escaping Deflation

“He said we should be cautious this time in raising the sales tax and if we weren’t it would break the back of the economy,” Abe said. “He said if that happened, we wouldn’t escape deflation, it would be uncertain whether we could revive the economy and repair the nation’s finances. I think that’s the case.”

As for the current plan to boost the sales tax in 2017, Krugman says: “I understand that at some point they are going to need more revenue. I would prefer a conditional delay -- ’we will raise it after inflation is at 2 percent or something.’ I understand that’s not likely.”


  1. "...I would prefer a conditional delay -- ’we will raise it after inflation is at 2 percent or something."


  2. I knew the Japanese political situation was bad but i had no idea it was this bad.

    ’we will raise it after inflation is at 2 percent or something.’