Flassbeck-Economics, February 2013

With Abenomics (the economic approach of the new Prime Minister Abe) at full speed, Japan has a comeback as a challenging case at the global stage and many take a closer look. Last week, Paul Krugman as well as Martin Wolf in the Financial Times have been trying to justify what is criticized by many as a new and irresponsible spending spree. No doubt, Abenomics is a well intended exercise and should be applauded by reasonable people all around the world, in particular in those circles where austerity mongers are still hoping to find someone out there who could import a bit more and absorb their own exports.

However, even well-intended policies may lead to questionable results if the underlying analysis is flawed. Abenomics and most of its academic followers like Paul Krugman regard a protracted liquidity trap as the main reason for the Japanese weakness. Martin Wolf departs from that but remains within the financial flow framework, which does not allow him to make the crucial point although he mentions it in passing.

The purpose of Abenomics is undeniable. Despite the highest public debt level in the world, the Japanese government has decided to stimulate the domestic economy becaus…

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