Macroeconomic Policy Divergence Between Germany and Japan, 1970s to the Present: Varieties of Capitalism, Ideas, Interests, and Institutions

Among those who examine the comparative political economy of advanced industrial democracies, Germany and Japan are often classified in the same category and viewed as distinct from that of the Anglo-American model.  However, a careful examination of Germany and Japan's macroeconomic policies reveal stark differences over an extended period of time. In the midst of the oil crises, Japan took up Keynesian policies seriously for the first time as part of the so-called “locomotive strategy.” Later, in the 1980s, monetary policy became quite expansionary and contributed to the Japanese speculative bubble. Germany in the 1970s and after behaved quite differently.  Monetary policy always remained fairly restrictive and, while budget deficits increased because of high unemployment and weak tax revenues,  successive governments tried to restrain and reduce these budget deficits where possible rather than keeping them high as part of a Keynesian strategy.  This economic policy divergence between Germany and Japan continues today.  Japan has pursued successive rounds of quantitative easing and other forms of monetary expansion well before that of even the United States, while Germany has been the biggest proponent of austerity in Europe and the biggest opponent of quantitative easing.  In this paper we argue that variations in the interplay of political economic interests and economic ideas play a critical role in explaining this divergence.  Orthodox economic ideas have been stronger in Germany and weaker in Japan due to historical and institutional reasons, while economic interests in favor of looser economic policies have been weaker in Germany and stronger in Japan. Ideas and interests have interacted to drive this divergence.