The Nightmare Scenario for Japan: the Noah Smith edition

A few days ago, economist Noah Smith wrote about a possible collapse of Japan’s economy related to a chain of events if Japan chose to directly monetarily finance Japan’s debt. He wrote, “If all goes perfectly [in this situation], Japan can avoid” this:

Direct monetary financing will lead eventually to hyperinflation, which acts much like a total default on all public and private debts.

Either a default or a hyperinflation would cause every Japanese financial institution, and most Japanese businesses, to fail. Maybe Japan would be OK, since it wouldn’t owe very much to foreigners — most of Japan’s debt is domestically financed. Businesses would eventually reorganize, new financial institutions would emerge to lend them money and workers would find something to do. But the disruption to economic life would be so huge that it might put the country in danger of an extremist takeover — probably by right-wing elements, since Japan lacks a powerful left wing. An extremist regime would probably wreck the economy with bad policy, pushing Japan out of the ranks of rich developed countries.

 

If all goes perfectly?

There are several reasons why this could happen only in a universe parallel to our own. In our neck of the  multiverse, Japan would need to be attacked for it to be pushed out of the OECD. “Bad policy” does not take one of the most developed countries and turn it poorer than Mexico, also part of the OECD, in a year, five or ten.

Japan getting knocked out of the OECD would mean its GDP/capita would fall 50% from around $36,000 to that closer to Mexico, around $18,000 or Greece which fell from  $32,000 to $25,000, yet still in the OECD.

 

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