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Japan: a political earthquake needed


The senior government official shook his head vigorously in affirmation. "Yes, Japan's budget deficit will grow. Yes, there will be a government bond crisis." Then he said: "The best scenario for Japan would be an earthquake that struck the downtown headquarters of the ruling Liberal Democrats when all its senior politicians were there. Then we might get some of the reform Japan needs."

Certainly Japan needs a political earthquake, similar to Italy's in the early 1990s, which swept away the old politicians and their methods. Until that happens, the economy will continue to stagnate, the Nikkei will languish and the yen will be as sick as a dog.

Since the financial asset bubble burst in the late 1980s, the politicians have applied huge dollops of fiscal stimuli to avert collapse. Japan needed this like a hole in the head but supply-side reform was beyond the politicians' ken. And being in a decade-long recession meant that more spending fuelled massive deficits.

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