Evening Must-Read: Paul Krugman: Japan on the Brink

…has become… a sort of Rubicon for policy. And let me admit that people I respect–like Adam Posen, and some officials at international organizations–believe that Abe should go through with the hike. But I strongly disagree…. Right now, Japan is struggling to escape from a deflationary trap; it desperately needs to convince the private sector that from here on out prices will rise…. The pro-tax-hike side worries that if Japan doesn’t go through with the increase, it will lose fiscal credibility and… the bond vigilantes will attack. Why don’t I share that view? Partly because I don’t see how this supposed crisis of confidence is supposed to work…. When a country borrows in its own currency and doesn’t face inflationary pressure (quite the contrary), it’s very hard to see how a Greek-style crisis is even possible. Short-term interest rates are controlled by the Bank of Japan; long-term rates mainly reflect expected short rates. Yes, investors could push the yen down, but that would be a good thing from Japan’s point of view. Posen says stocks could crash, but I guess I don’t see why if interest rates stay low and corporate Japan becomes more competitive thanks to a weaker yen. Seriously: tell me how this is supposed to work… [how a] fear that Japan might eventually monetize some of its debt–isn’t actually a positive development. Meanwhile, it seems to me that Japan should be very, very afraid of losing momentum in the fight against deflation…. Could I be wrong?… Of course…. But it’s all about weighing the risks. Right now, the risk of losing anti-deflation credibility looks much worse than the risk of losing fiscal credibility. Please, don’t hike those taxes!