6 months in Japan

Last November 15th I did a post after day one the Great Japanese Bull Market.  Here are a few excerpts:

Each day I check out the major stock markets.  This morning I saw that Hong Kong and Singapore were down over 1%.  Britain, Germany and France were also down.  But the Japanese market, which tends to move with the other Asian markets, was up by 1.90%.  That’s a surprisingly large divergence.  Is there any news?  It turns out that there is news, but only if you don’t believe in “liquidity traps.”  Travis Allison sent me the following:

The yen slumped to the lowest in more than six months against the dollar on prospects Japanese elections next month will hand power to an opposition party that advocates more aggressive monetary easing.

.   .   .

Japan’s currency weakened to almost a two-week low versus the euro on speculation the vote will favor Shinzo Abe, who called for the central bank to provide unlimited stimulus.

.   .   .

The yen dropped 1.4 percent to 81.39 per dollar at 8:47 a.m. New York time, after touching 81.46, the weakest level since April 25. It depreciated 1.7 percent to 103.92 per euro.

.  .  .

“The biggest economic problem is prolonged deflation and a strong yen,” Abe, the head of the largest opposition Liberal Democratic Party, said in a speech in Tokyo today. “Markets will only start to react once unlimited monetary easing is conducted.”

Of course if you are one of those Keynesians who do believe in liquidity traps, then you’d have to conclude that this speech had no impact on the Japanese exchange rate, or the Japanese stock market.

And if you believe in liquidity traps then you also must believe that the fact that the Swiss franc has been stable at 1.20 per euro for the past 14 months is just an amazing coincidence, having nothing to do with the fact that in September 2011 the Swiss government announced a policy of pegging the SF at 1.20 per euro.

And yet if you read the economics blogosphere you’ll find one economist after another prattling on about how monetary policy is ineffective at the zero bound.  Outside of the blogosphere it’s even worse, even though our best-selling monetary textbooks say that view is wrong.

BTW, the yen fell to 101.6 today.  Back when I wrote that post the Nikkei rose from 8665 to 8830.  Today it rose another 416 points to 14,607.  Up 68.6% since the Abe speech.  How many Keynesian bloggers were on the story from day one?

Yes, they are also doing a bit of the same fiscal stimulus that failed miserably over the past 20 years, producing the worst AD performance in modern world history as the debt ballooned to over 200% of GDP.  Keep in mind that almost all of the stock price increases have been on news of monetary stimulus and/or a falling yen.  Also keep in mind that monetary stimulus depreciates a currency and fiscal stimulus appreciates a currency.

PS.  Abe was wrong about one thing.  Markets start reacting when “unlimited monetary easing” is anticipated, not when it is conducted.

PPS.  Of course stock markets outside of Japan are plunging, as they steal jobs from America and Germany with their beggar-thy-neighbor policies.  Oh wait . . .

Update:  Even more evidence on Japan from Lars Christensen.  And although my belief in the EMH leads me to wimp out on market predictions, Lars Christensen is less inhibited (and hence much richer.)  His predictions from last year are looking pretty good right now.


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53 Responses to “6 months in Japan”

  1. Gravatar of joe joe
    10. May 2013 at 04:20

    You can’t just look at the stock market without examining the companies’ fundamentals. Have cash flows improved somewhat b/c of a falling yen? Perhaps, but not by 68%. Have Japanese citizens seen their standard of living improve? It is questionable b/c import prices have risen but unemployment was already quite low, around 4.5%.

  2. Gravatar of ssumner ssumner
    10. May 2013 at 04:49

    Joe, Stock markets are forward-looking.

  3. Gravatar of Nick Rowe Nick Rowe
    10. May 2013 at 05:07

    Yep. And the other very recent good news (though ZeroHedge thinks it’s bad news) is that Japanese bond yields are rising: http://www.zerohedge.com/news/2013-05-10/japanese-government-bonds-halted-limit-down-yields-spike-10-week-high-worst-day-5-ye

    What I don’t understand is why it took the bond market so long to react. Why did yields first fall, and then rise? Sure, there’s the liquidity effect vs the whole term structure at work, but I still can’t figure out any consistent story about the timing that isn’t just an ex post rationalisation.

  4. Gravatar of W. Peden W. Peden
    10. May 2013 at 05:15

    Nick Rowe,

    “ZeroHedge thinks it’s bad news”

    I’m shocked.

  5. Gravatar of brendan brendan
    10. May 2013 at 05:33

    Joe, earnings expectations are surging in Japan- see this from lars.
    http://marketmonetarist.com/2013/05/09/monetary-policy-works-just-fine-exhibit-14743-the-case-of-japanese-earnings/

    ..assumedly due to surging sales/ngdp expectations.

    Scott, I bought some calls on the nikkei because of your november post. Thanks! Hopefully your former student G McD gets you to relax your EMH views a bit so you can trade on your insights too. You’re too humble.

  6. Gravatar of brendan brendan
    10. May 2013 at 05:46

    Nick, just some thoughts on how to interpret market reactions.

    In the 1965-1985 period it paid to “not fight the fed”. Simple rules like -“buy stocks after consecutive rate cuts” and “sell after consecutive rate increases”- delivered big returns.

    The strategy broke down during the great moderation.

    And seems to be working again post-2008.

    So maybe a simple proposition: In periods of NGDP instability markets tend to under-react to monetary policy changes.

    In your example, the liquidity effect dominates at first because it takes some for the market to fully price the offsetting effects from higher NGDP growth.

  7. Gravatar of Tommy Dorsett Tommy Dorsett
    10. May 2013 at 05:53

    Scott – How many more weeks of falling jobless claims/rising mortgage purchase appliications before you raise your 2% RGDP baseline? :)- What will KrugTron say if we end up with stronger growth and jobs this year when his zero rate trap and austerity model said just the opposite? I feel 2013 is shaping up to be a great year for Market Monetarism….

  8. Gravatar of ssumner ssumner
    10. May 2013 at 05:59

    Nick, That puzzles me too, and it’s not the first time I’ve seen this. You and I should open a hedge fund—Lars must know how.

    Thanks Brendan, I’ve added a link.

    Tommy, This is why we really need a NGDP futures market. I see a mixed picture—stocks seem to be signaling faster growth, and yet the bond market still seems to signal slow growth. I’m not quite sure what to expect.

  9. Gravatar of JJriverrun JJriverrun
    10. May 2013 at 06:09

    I’ve been puzzling over the Japanese bond market since April. Glad to hear there isn’t some obvious reason explaining why JGB bonds tanked from Fed-April. A further post on this aspect of market reaction to QE(if you have any ideas) would be interesting.

  10. Gravatar of Ashok Rao Ashok Rao
    10. May 2013 at 06:14

    I think you attack many of cruder Keynesians. Big, big difference between “monetary policy useless at ZLB” to “fiscal policy only useful at ZLB” or irrelevant person vs. Krugman.

    Here’s Krugman from today:

    “what has been needed all along to calm the markets isn’t austerity “” which doesn’t seem to help at all “” but a liquidity backstop from the ECB, which works wonders.”

    Or in a post called the Land of Rising Suns:

    “The good news for Abenomics keeps rolling in; of course, it’s not over until the sumo wrestler sings, but there has clearly been a major change in Japanese psychology and expectations, which is what it’s all about.”

    And this quote is especially important for this discussion:
    “Why does this seem to be working as well as it is? *Long ago I argued that to gain traction in a liquidity trap, the central bank needed to credibly promise to be irresponsible “” that is, convince investors that it would not rein in monetary expansion once the economy was at full employment and inflation was starting to rise.* And this is a hard thing to do; no matter what central bankers may say, history shows that they often revert to type at the first opportunity. ”

    So I really think you’re giving Keynesians the short end of the stick here. I read every Krugman post and I always feel he’s been fair on the importance of easy money during even liquidity traps. The policy has to be more “exotic” is all he has ever said.

  11. Gravatar of MarketMonetarist MarketMonetarist
    10. May 2013 at 06:21

    “Yes, they are also doing a bit of the same fiscal stimulus that failed miserably over the past 20 years, producing the worst AD performance in modern world history as the debt ballooned to over 200% of GDP.”

    Ouch.

  12. Gravatar of marcus nunes marcus nunes
    10. May 2013 at 06:24

    I think I got it right back last July when I wrote “Japan poster child for NGDP targeting”. And then, Abe came along…
    http://thefaintofheart.wordpress.com/2012/07/08/japan-poster-child-for-ngdp-targeting/

    Seems that after 13 years they decided to take Bernake´s advice! Pity Bernanke himself is more reticent…

  13. Gravatar of brendan brendan
    10. May 2013 at 06:34

    When he talks about credible irresponsibility he’s saying that IF the Fed is to gain traction at the ZLB, here is how it must work. But he never expresses strong confidence that it will work.

    So Krugman is cautiously optimistic about what Scott advocates and utterly confident in conventional fiscal stimulus.

    Also, since almost all of Krugman’s beliefs are expressed with utter certainty- to the point that anyone who disagrees w/ him is stupid or corrupt- his cautiousness in advocating monetary stimulus is particularly striking.

  14. Gravatar of brendan brendan
    10. May 2013 at 06:34

    *I was responding to Ashkok about krugman.

  15. Gravatar of ssumner ssumner
    10. May 2013 at 06:38

    JJriverrun, Before I do a post, I need to think up a theory.

    Ashok, I notice you don’t quote the Krugman posts where he mocked my view that the BOJ was capable of stimulating the economy at zero rates. Why no quotations from those posts?

    And if you are right, then why not do “exotic” monetary stimulus rather than fiscal stimulus? Doesn’t he repeatedly tell his readers that we must do fiscal stimulus because nominal rates have fallen to zero?

    Marcus, Yes, very ironic.

  16. Gravatar of Ashok Rao Ashok Rao
    10. May 2013 at 06:56

    “Ashok, I notice you don’t quote the Krugman posts where he mocked my view that the BOJ was capable of stimulating the economy at zero rates. Why no quotations from those posts?”

    Because they’re well-established in the body of every post on Krugman here, I’m conveying the information that you’re not. Why be redundant?

    Krugman has a doubt that is well-bore by two decades where the second Japan hinted at inflation, BOJ came down. Do you not think – after BOJ did manage to gain traction – Krugman has conceded enough?

    “And if you are right, then why not do “exotic” monetary stimulus rather than fiscal stimulus? Doesn’t he repeatedly tell his readers that we must do fiscal stimulus because nominal rates have fallen to zero?”

    Maybe this is PK’s version of “fiscal multipliers are a measure of central bank incompetence”? He has less faith, as he mentioned, in central banks credibly committing to inflation. Is he really wrong in that doubt?

    The ECB acts ridiculous when zero rates aren’t even a problem. They’ve shown a complete disregard to the “secondary” mandate of employment (as in Maastricht).

  17. Gravatar of Joe Joe
    10. May 2013 at 06:58

    Krugman:

    “I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness. But I gather that some readers are confused – haven’t I been arguing that monetary policy is ineffective in a liquidity trap? The brief answer is that current policy is ineffective, but that you can still get traction if you can change investors’ beliefs about expected future monetary policy – which was the moral of my original Japan paper, lo these 15 years ago. But I thought it might be worthwhile to go over this again.”

    That’s been a pretty consistent view of Krugman’s for a while. So to say Krugman holds the view the BOJ is incapable of stimulating the economy is incorrect.

  18. Gravatar of ssumner ssumner
    10. May 2013 at 07:02

    Ashok, I don’t think you understand the debate. Krugman wasn’t claiming the BOJ opposed inflation, he claims they supported inflation and tried to inflate for 20 years, and kept failing. I claim they never tried (until recently.)

    I do agree that he is now moving in the MM direction on Japan.

    But the implication is that the problems in places like Europe are caused by tight money at the ECB, not fiscal austerity.

  19. Gravatar of Suvy Suvy
    10. May 2013 at 07:22

    Take a look at utilities costs; they’ve started to spike. This is a country that imports all of its energy and they’ve devalued their currency by about 25-30%. That’s a corresponding 25-30% spike in energy costs and input costs. You’re about to see out of control cost push inflation.

    By the way, I don’t think I’ve ever seen an opportunity like this. I’ve been short the Yen for a while and it’s been a very good trade so far. I think it’s a one way bet. If the Yen starts to avalanche, the BOJ can’t stop the avalanche without forcing a default.

  20. Gravatar of ssumner ssumner
    10. May 2013 at 07:26

    Here’s Krugman:

    “Notice the huge increase from 1999 to 2003: that’s the BOJ’s quantitative easing policy, an attempt to end deflation by stuffing the banks full of reserves in the hope that the money would go somewhere. It didn’t. So the BOJ was trying to fight deflation; it simply failed.”

    http://krugman.blogs.nytimes.com/2010/07/30/japanese-monetary-policy-wonkish/

    They’ve tried to inflate and failed. That was his claim. And it was false. We now see what happens when they try to inflate.

    His claim never made any sense, as the BOJ raised interest rates each time inflation rose close to zero. So it wasn’t trying to inflate.

    Yes, he always thought a higher inflation target might work (but he also said it might fail.) But that’s up the the Japanese government, not the BOJ. It would be insane for the Japanese government to do fiscal stimulus while refusing to raise the inflation target to 2%, and yet Keynesians seemed to want the Japanese government to do precisely that sort of insane policy.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. May 2013 at 07:52

    Nick Rowe wrote:
    “What I don’t understand is why it took the bond market so long to react. Why did yields first fall, and then rise? Sure, there’s the liquidity effect vs the whole term structure at work, but I still can’t figure out any consistent story about the timing that isn’t just an ex post rationalisation.”

    Kuroda announced the specifics of the Japanese large scale asset purchase program on April 3. Ten year Japanese government bonds peaked the following day with the yield closing at just under 0.45%. Bond yields are now over 0.6% (which is causing Tyler Durden’s head to explode). The BOJ recently updated their monthly monetary aggregate data and the monetary base rose by 14.9 trillion yen in April which is the largest increase in nominal terms in BOJ history.

    In short, Japanese bond yields only started to rise after the BOJ actually started to buy them. How counterintuitive is that?

  22. Gravatar of Max Max
    10. May 2013 at 08:18

    Nick, “What I don’t understand is why it took the bond market so long to react.”

    Just a wild theory, but maybe it’s caused by a divergence of opinion between Japanese and non-Japanese investors, with Japanese opinion holding sway in the bond market due to low foreign ownership.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. May 2013 at 08:27

    “They’ve tried to inflate and failed. That was his claim. And it was false. We now see what happens when they try to inflate.”

    And, actually, the 2003-2007 period (around the time of the first Japanese ryōteki kin’yÅ« kanwa which ran from March 2001 to March 2006) is called the Koizumi Boom in Japan.

    Tim Duy recently did a post on the Nikkei 225 at 14,000 where he claimed that the Japanese mistake was in tightening fiscal policy everytime their economy started improving. But I pointed out in comments that the Japanese did no fiscal stimuli at all between April 2003 and August 2008 and the IMF’s estimates of the Japanese structural (cyclically adjusted) budget balance shows consistent tightening of fiscal policy in 2004, in 2005, in 2006 and in 2007. And exports weren’t responsible for the Koizumi Boom because net exports barely changed at all between 2002 and 2007.

    (Note that Krugman never ever talks about any of this, because to do so would be to admit that the liquidity trap is a figment of his imagination.)

    The mistake the Japanese made then was in monetary policy. They reduced the monetary base by 20% from March 2006 to September 2006, and the stock market and the economy started to soften the following year.

  24. Gravatar of Nick Rowe Nick Rowe
    10. May 2013 at 08:27

    Mark: someone who commented on one of my old posts said that his father had once accidentally connected the power-assist steering hoses the wrong way around. So if you tried to turn the steering wheel to the right, the power steering pump overpowered your arms, and turned the steering wheel to the left, and the car would then turn left. He said the steering was so counterintuitive it was impossible in practice to drive the car.

    It’s a bit like that with monetary policy and interest rates. Except the power steering pump has got expectations too.

  25. Gravatar of Britmouse Britmouse
    10. May 2013 at 08:28

    Every time I think I come close to understanding Krugman’s position on the BoJ he seems to change it. Now he is implying that inflation is a meteorological phenomenon.

    “the shocks of the past two years have changed Japanese perceptions of what must be done enough to make irresponsibility “” or, actually, a serious, sustained commitment to higher inflation “” credible, at long last”

    I guess there’s a more generous interpretation of that paragraph.

  26. Gravatar of brendan brendan
    10. May 2013 at 08:48

    Here’s the question for Krugman:

    If, at the ZLB, after 20 years of zero NGDP growth (expectations anchored enough yet?), Japan’s central bank can spur a 50%+ market rally, huge currency depreciation and an expected surge in corporate profits…if it is that easy…

    why the hell are we still talking about fiscal stimulus?

    Britmouse seems to have caught Krugman’s escape route. These are special circumstances because of the tsunami!!

    So don’t dare generalize the result. Hilarious.

  27. Gravatar of John S John S
    10. May 2013 at 08:51

    A bit off-topic, but here’s Yglesias supporting helicopter drops:

    http://www.slate.com/articles/business/moneybox/2013/04/helicopter_money_federal_reserve_should_print_money_and_give_it_directly.html

    I asked you a few months ago why we can’t do this (for econ reasons, not legal ones), and you told me it was b/c 1) OMO reduce govt debt, and 2) later this kind of policy might require drastic measures to stave off hyperinflation. But then,

    1) Why can’t we reduce debt in other ways (like running a budget surplus)?

    2) Why would it cause hyperinflation? Couldn’t we start small (say $500 per person/year) and then gradually replace OMO’s with check heli-drops? And couldn’t the Fed get better with practice?

    OMOs rely on the banking sector to lend more, but that depends on biz conditions and a lot of other things going right. Giving money directly seems like it would have a much more direct impact immediately on NGDP growth and promote faster deleveraging. It also seems like it would cause less distortion of asset prices and interest rates, since the money would be spent according to individual preference (some on goods/services, some to add to cash balances, some on investments, some to pay of debt etc).

    This just seems much more natural than concentrating all the new money in bank reserves and puffing up the stock and housing markets.

  28. Gravatar of Edward Edward
    10. May 2013 at 09:17

    John S, you’re right.

    Scott, the news so far seems to be good from Japan.
    Unfortunately, the VSP’s are at it again in America. I heard a rumor saying that Plosser, the perma-hawk, is saying that QE might need to be tapered off. I’m not sure if this is true. But if it is, WTH is WRONG with these people?!(the hawks)

    on a more theoretical note, lets say in about 20years, (given the SNAIL’s pace the VSP’s have in actually listening and adopting new ideas) the fed finally adopts NGDP level targeting. What happens if it overshoots? Lets say the markets underestimate NGDP growth in 2023 and in December of that year figures come out that NGDP growth accelerated to 10% rather than 5%. I hate to play devils advocate, and argue in favor of the hawks, but the only way they will accept NGDPLT is if the Fed is just as ferocious on the overshot upside as well as the downside. And level targeting from an overshot upside will entitle more brutal recessions than if the fed just targeted the RATE OF NGDP.

    Unless, the Fed were to simply subtract the extra NGDP from one year from the target from the NEXT year. Would that be a solution you think?

  29. Gravatar of James in London James in London
    10. May 2013 at 09:23

    I think that oft-repeated video from Hitler’s bunker used in spoofs well summed up the state of mind of bond investors:
    http://vimeo.com/65679960

    They must have yield, but their mandates won’t let them take risk. And if they can’t have yield then they just have to for safety. In a sense it is a sort of regulatory failure, or risk managers failure, forcing insurance funds and pension funds and others to continue buying government bonds to meet their liabilities and avoiding any other riskier asset due to its relatvely higher volatility compared to govvies, as the models say volatilty costs too much capital.

  30. Gravatar of Ashok Rao Ashok Rao
    10. May 2013 at 10:04

    “Ashok, I don’t think you understand the debate. Krugman wasn’t claiming the BOJ opposed inflation, he claims they supported inflation and tried to inflate for 20 years, and kept failing. I claim they never tried (until recently.)

    I do agree that he is now moving in the MM direction on Japan.”

    They may not have tried to aggressively inflate, but they did want to end deflation. But whenever they came close they rose rates, as you note, and that’s Krugman’s point.

    That BOJ was too conservative. And I think that’s the general critique of monetary policy at the ZLB if anything.

  31. Gravatar of J J
    10. May 2013 at 11:26

    Professor Sumner,

    You need to get a new meme going: #thereisnoliquiditytrap

  32. Gravatar of J J
    10. May 2013 at 11:35

    With regards to the Krugman discussion…

    The problem is that Krugman contradicts himself. He says he means that monetary policy is viable at the ZLB, but that it’s difficult. But then he says that we need fiscal stimulus because monetary policy isn’t an option. And he can’t claim that more monetary policy just isn’t politically feasible: it clearly is feasible, and fiscal stimulus clearly is not.

    Also, even though Krugman laments the difficulty of using monetary policy at the ZLB, he refuses to advocate for a regime change to NGDP targeting. He continues to repeat his idea that the only way for monetary policy to be effective at the ZLB is for central banks to overcome the problem of dynamic inconsistency. He has no problem promoting controversial ideas, so why doesn’t he push for a shift away from inflation targeting?

  33. Gravatar of Bernanke has not listened to Bernanke | Historinhas Bernanke has not listened to Bernanke | Historinhas
    10. May 2013 at 12:17

    […] Now Japan has apparently subscribed to Bernanke´s advice. It´s time Bernanke listens to himself! […]

  34. Gravatar of Scott H. Scott H.
    10. May 2013 at 13:01

    I had an idea. So I see that the stock markets are moving up for both Japan and the USA. The initial stages of this monetary push are going well. However, there is still work to be done. There is still deflation in Japan, and inflation levels in the USA haven’t budged either

    We need money supply to get with the program and grow more rapidly. Unfortunately, the Fed’s actions have lowered long term interest rates (reducing the overall spread for banks). The result is that banks have less incentive to lend. However, that does not cover ALL the disincentives. There is also the fact that the FED is now (as of 2008) paying interest on excess reserves. My idea is to stop paying that interest in the hopes of making sure screwed up incentive structures don’t derail Fed policy. (It will lead to more loans.)

    Also, I’m not an expert on this, but if the implementation of Dodd-Frank is holding loans back we must push against that as well. (Well, you know the 20% requirement is having a negative effect, but I don’t know what else there might be.)

  35. Gravatar of jor jor
    10. May 2013 at 13:05

    J, you say:

    “Also, even though Krugman laments the difficulty of using monetary policy at the ZLB, he refuses to advocate for a regime change to NGDP targeting.”

    Might wanna read this.

    http://krugman.blogs.nytimes.com/2011/10/30/a-volcker-moment-indeed-slightly-wonkish/

    There seems to be a disturbing amount of mis-characterizations going on right now.

  36. Gravatar of jor jor
    10. May 2013 at 13:08

    Try this one too:

    http://krugman.blogs.nytimes.com/2011/10/19/getting-nominal/

  37. Gravatar of Scott H. Scott H.
    10. May 2013 at 13:13

    I guess all I’m saying is that the mechanics of MM are a bit “Rube Goldbergesque” (well, in my opinion anyway). Instead of cheering the first stages of the process, we need to be making sure the following stages are set to go.

  38. Gravatar of The Kuroda recovery will be about domestic demand and not about exports | The Market Monetarist The Kuroda recovery will be about domestic demand and not about exports | The Market Monetarist
    10. May 2013 at 13:24

    […] PS Scott Sumner also comments on Japan. […]

  39. Gravatar of ssumner ssumner
    10. May 2013 at 14:11

    Mark, Good observation.

    Britmouse, The problem is that his position is subtle, and he changes his emphasis in subtle ways. Combine the two and it’s very difficult to pin him down. I think the biggest difference between myself and Krugman is that he’s always argued that monetary stimulus done the right way might work, and I’ve always argued that it will work, without imposing significant risk on the government finances.

    John, Sure, we could do a helicopter drop, but there are much less costly methods. So if we really wanted to do monetary stimulus, why not just use QE and NGDPLT?

    Edward, I favor NGDPLT in both directions. But if we did NGDPLT, we’d never have a 5% overshoot.

    Ashok, You said;

    “But whenever they came close they rose rates, as you note, and that’s Krugman’s point.”

    No, that was my point, the argument Krugman disagreed with.

    J, Has Krugman done even one post mocking Ed Balls for opposing an increase in the BoE’s inflation target?

    Scott, My very first post criticized IOR. And I also oppose Dodd-Frank.

    I actually favor a 20% downpayment requirement, but it’s not in D-F.

    Jor, Yes, you are right that Krugman endorsed NGDP targeting.

  40. Gravatar of Ashok Rao Ashok Rao
    10. May 2013 at 14:27

    “No, that was my point, the argument Krugman disagreed with.”

    You don’t think negative of a negative makes positive? They did try to end deflation and failed. Whatever Krugman disagreed wrt that, if they rose rates as soon as inf came 0, then that’s a good reason not to believe BOJ can credibly commit to MM ways.

    Do you really not see the last few columns (actually most everything after Abe) as 95% in agreement with you? That is fiscal multiplier as CB incompetence and that they can get traction at ZLB?

    He just has less faith in them.

  41. Gravatar of Rademaker Rademaker
    10. May 2013 at 15:28

    “keep in mind that monetary stimulus depreciates a currency and fiscal stimulus appreciates a currency.” – I don’t see that. A deteriorating fiscal position as a result of deficit spending often leads to expectations of future inflation engineering to return the nominal solvency of the government.

  42. Gravatar of J J
    10. May 2013 at 15:58

    Jor,

    Fair enough. But, I think you missed my point. I didn’t say Krugman dislikes NGDP targeting, but that he doesn’t advocate for it. Those are two posts from about a year and a half ago. How many posts has he written since then in which he pushes for fiscal stimulus? How about one recently: http://krugman.blogs.nytimes.com/2013/05/10/land-of-the-rising-sums/

    He discusses inflation expectations and monetary policy in Japan, but his conclusion is that we need fiscal stimulus. His views don’t make sense to me because, when asked, he agrees that monetary policy is very possible at the ZLB. Yet, his crusade is for fiscal stimulus. Moreover, his argument for fiscal policy is that monetary policy is ineffective!! Why doesn’t he talk about NGDP targeting as often as Sumner does or as often as he talks about fiscal policy?

  43. Gravatar of ssumner ssumner
    10. May 2013 at 16:44

    Ashok, I don’t follow, Are you saying that if the BOJ does policy X that shows they are incapable of committing to policy Y? When did a central bank ever commit to inflation, and fail to get it? I’m saying they should have committed to it, and if they did they would have succeeded (at least if one assumes level targeting.)

    Rademaker, Yes, if governments are broke. But keep in mind that Krugman insists that the “government is broke” model doesn’t apply to countries like Japan. So yes, that’s a valid point, but can’t be used to defend the Keynesian model. Maybe Cochrane could use it.

    J, I’ve been asking those questions for 4 1/2 years.

  44. Gravatar of Rob Rob
    10. May 2013 at 17:53

    Japan is a really fantastic example of why monetary policy>fiscal policy even at the zero bound. They were given a broken window about on par with the alien invasion Krugman dreamed of, Larry Summers and Krugman both predicted it would help(the macro situation) but actually Japan continued to stagnate. Now that they finally started doing aggressive monetary policy, their economy is taking off like a rocket. I guess ironically Japan is -1 for Krugtron the invincible?

  45. Gravatar of TallDave TallDave
    10. May 2013 at 20:20

    Nick Rowe — great question.

    Mark Sadowski — great answer.

    Also, LOL @ ZH :)

  46. Gravatar of Ashok Rao Ashok Rao
    10. May 2013 at 21:59

    “Ashok, I don’t follow, Are you saying that if the BOJ does policy X that shows they are incapable of committing to policy Y? When did a central bank ever commit to inflation, and fail to get it? “I’m saying they should have committed to it, and if they did they would have succeeded (at least if one assumes level targeting.)”

    I’m curious if they couldn’t successfully end deflation, would a commitment to IT be credible?

  47. Gravatar of Rien Huizer Rien Huizer
    10. May 2013 at 23:45

    Scott,

    I just cannot believe that stimulating domestic demand (apart from corporate investment) is an important issue for Japanese politicians. And given Abe’s stance on CB independence, politicians have more influence over monetary policy, not less. All these guys are interested in is an externally strong and competitive homeland, docile consumers and lethargic voters. And inflation damages the savings (in bank accounts) of the elderly, an importnat LDP constituency and over represented in the country electoral districts. The country has a very long history of consumer demand suppression, especially during the era when the LDP dominated. I guess they just want to go back to the past and protect their national champions. MM is perfect excuse to do that, ie that their current policy is opportunistic rather than long term and structural.

    Now an interesting question as far as I am concerned is, does it matter if MM is conducted by politicians who find it useful for a while (it gives business its lower exchange rate and imported inflation is not an issue) but once external competitiveness is restored, go back to dominant supply side policy?

    I have yet to see a sharp increase in private consumption as a result of this. And likewise, great concern among the elderly (often with a large postal savings account as their main financial asset) about inflation.

    Given the structure of the Japanese economy, Japan is unlikely to see the CPI go up rapidly through consumer import prices.

    In addition, we have yet to see the construction boom resulting from the tsunami. After the Kobe earthquake, there was a large expansion, but not this time. Maybe Tohoku does not have the same priority, maybe they want to restore nuclear power first, but if that construction gets underway, it might easily be interpreted as the result of monetary policy.

    I do not know, but an MM commitment does not look like the sort of thing Japanese politicians would like to be constrained by, once that time comes.

  48. Gravatar of 6 months in Japan « Economics Info 6 months in Japan « Economics Info
    11. May 2013 at 07:00

    […] Source […]

  49. Gravatar of J J
    11. May 2013 at 07:29

    Rob,

    That’s an oft-cited point, but I think it misses the subtlety of the broken-window argument. Obviously, if everything on planet earth were destroyed, we would not be better off. No Keynesian would advocate such destruction. The idea of breaking windows or taking things and burying them is that there is excess capacity and we want to put that capacity to work. Lowering AS a little to get a boost in AD can raise output. That doesn’t mean that lowering AS a lot will be good. If a company loses everything, then they will not be able to pay to fix the broken windows and the AD increase will not occur. The disaster in Japan was too large and too comprehensive to be a proper test of the broken windows hypothesis.

  50. Gravatar of Rob Rob
    11. May 2013 at 08:54

    J,
    Actually the idea is that the efforts to reconstruct the damage will lead to more spending than there would otherwise be increasing the velocity of money, increasing AD. Actually if you are claiming that it was a huge leftward shift in Japans AS AND an increase in AD from reconstruction you would definitely expect naive inflation as both of those effects raise price level, instead you saw nothing on the inflation front.

    They actually said it themselves, pretty much right after it happened.

    Krugman
    “And yes, this does mean that the nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole. If this sounds crazy, well, liquidity-trap economics is like that “” remember, World War II ended the Great Depression.”

    Summers
    “. . . add complexity to Japan’s challenge of economic recovery. It may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength.”
    I seem to remember an even worse quote from him but did not want to spend the time to find it.

    The point is this, if monetary policy is constrictive and stays that way(or if there is inflation targeting) I will always be safe predicting that broken windows will only lead to having less goods in the economy equal to a broken windows worth of resources.
    The only way a broken window can ever do anything is if they will lead to more spending than would otherwise have occurred, I think in the case of the earthquake that “should” clearly be true and yet no inflation. (Also in the case of everything being destroyed money would all become worthless and most people would die, if movies are correct we would resort to a form of tribal cannibalism, this scenario is out of the purview of standard Macro analysis).

  51. Gravatar of Japan Is About To Prove Keynesian Economics Entirely Wrong – GEEKKENYA Japan Is About To Prove Keynesian Economics Entirely Wrong - GEEKKENYA
    11. May 2013 at 15:31

    […] Which is why Japan is proving to be such an interesting example. As Scott Sumner points out here. […]

  52. Gravatar of Edward Lambert Edward Lambert
    11. May 2013 at 20:31

    Scott, Look back at labor share of income for Japan over the years… and also look at it into the future.
    If labor share stays low, the abenomics will fail just like the fiscal stimulus’ from the past.
    Apply your insights about labor share targeting for monetary policy to Japan. The answers will come clear.

  53. Gravatar of o. nate o. nate
    14. May 2013 at 12:07

    Scott, I assume you’ve seen Christina Romer’s paper on Japan’s monetary policy, but in case you haven’t:

    http://emlab.berkeley.edu/~cromer/It%20Takes%20a%20Regime%20Shift%20Written.pdf

    She has a very interesting thesis that for monetary policy to get traction at the ZLB the most important thing to do is to change growth expectations, and the best way to do that is by regime change – meaning a bold and unmistakable shift in policy. She goes into detail about why Japan’s recent moves may be seen as bolder than the Fed’s actions have been. She also reference FDR’s policy in the 1930s as the only historical example of successful monetary policy at the ZLB. It seems natural to argue that switching to NGDP targeting would be a regime shift of the kind Romer describes.

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