Japan's 'Liquidity Trap'

If Japan's government wanted to get really creative about spurring its economy, it could try this: Fly over Tokyo in a helicopter on a sunny day and scatter billions of yen notes.

There'd be a scramble for the bills. Some would be quickly spent. Business would bustle. More workers would be hired. The only cost: paper, ink, and fuel.

We aren't advocating this unorthodox approach to shifting the world's second largest economy into higher gear. But, in fact, Japan has done something similar. It has issued government vouchers to households to encourage spending.

So far, however, results aren't visible. More is needed. Japan's economy is still dragging, to the chagrin of Asian neighbors who badly need fresh sales to the large Japanese market.

Those vouchers, combined with other government measures, do appear to have convinced foreign investors that Japan's economy will soon turn around. They propelled the Japanese stock market to the best performance among the seven largest industrial countries during the first quarter.

Japanese investors themselves have been more timid. Still smarting from the burst stock and real estate bubbles of 10 years ago, they aren't pumping money into stocks. Japanese consumers, meanwhile, continue to save madly and spend cautiously.

That's what economists call a "liquidity trap." To get out of it, the government has mounted huge spending programs and propped up shaky banks with infusions of capital. Further, the Bank of Japan lowered interest rates in mid-February to just about zero.

All these actions are intended to break the trap and get banks to lend more easily to businesses, and consumers to open their wallets and purses more readily.

It may be the Bank of Japan's recent actions are sufficient to expand the money supply - the fuel of economic activity. So far, though, the bank has not seen fit to adopt an openly monetarist policy where it, in effect, prints money by buying large amounts of government debt held by the public. That's the orthodox equivalent of throwing cash from a helicopter.

In the US, Paul Volcker, then chairman of the Federal Reserve, adopted a monetarist policy in 1979 to carry out the reverse task: stopping inflation. The Fed set a low target for money growth and stuck to it, even when interest rates briefly climbed into the double-digit sky. Mr. Volcker's policy worked. Inflation slowed.

If the Bank of Japan created lots of money, Japan's economy would soon revive. And that is badly needed.