Abe’s first mistake

I can’t say this was unexpected, as Abe indicated he’d do this during the campaign:

Japan’s $117 billion economic stimulus package is a positive start to revive a frail economy. But the government needs to follow this up with long term structural changes and the central bank has to chip in with some bold moves – otherwise disappointment is sure to follow, analysts said Friday.

Faced with an economy in recession, Japan’s new government unveiled the country’s biggest spending boost since the financial crisis and one it hopes will boost economic growth by 2 percentage points and create 600,000 jobs.

Japan’s economy, the world’s third largest, has contracted for two quarters running, pushed into a recession by weak global demand for its exports.

“Japan’s economy has been very weak over the past couple of quarters and some stimulus is necessary to get the growth rate up at least over the near term,” Thomas Byrne, senior vice president at Sovereign Risk Group, Moody’s Investors Service, told CNBC Asia’s “The Call.” “Other things are necessary to keep the growth rate up over the longer-term though.”

Shinzo Abe, who became Japan’s new prime minister last month after his Liberal Democratic Party was returned to power with a comfortable election win, has promised to revive the economy and urged the central bank to introduce aggressive monetary easing and double its inflation target to 2 percent.

(Read More: Bank of Japan to Consider Easing Again in January)

But analysts said that Friday’s stimulus measures are likely to have only a short-term boost and should be just the start of steps needed to really kick start the Japanese economy.

“The latest package is big and I expect there would be a bigger bump to growth, but I would also expect that it would have the same short-lived impact as past stimulus and growth would fall back,” said Tim Condon, head of research, Asia ING Financial Markets in Singapore.

“I would be much more positive if the Bank of Japan (BOJ) says it agrees with Mr Abe and that it is going to change the way it does do monetary policy and become much more accommodative,” he added.

The expectation of aggressive monetary easing and a much bolder BOJ since Abe, who was prime minister in 2006-2007, returned to power has sparked a bull run in Japanese markets.

But nonetheless very disappointing.  Obviously fiscal stimulus hasn’t worked in the past.  Japan has run massive budget deficits, producing a mindbogglingly large national debt, and has seen NGDP fall for 20 years—perhaps the worst long term aggregate demand performance by a developed country in recorded history.  That’s right, the worst—and in a country where the national debt has soared to over 200% of GDP. When you have a central bank that repeatedly raises interest rates during a period where (GDP deflator) inflation is negative, you aren’t going to get any “ooomph” from deficit spending.


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54 Responses to “Abe’s first mistake”

  1. Gravatar of Saturos Saturos
    11. January 2013 at 05:42

    Matt Yglesias has starry-eyed faith in Abe, supports stimulus: http://www.slate.com/blogs/moneybox/2013/01/11/_10_3_trillion_yen_stimulus_plan_for_japan.html

    he hasn’t taken a look at Japan’s debt, clearly.

    But he makes up for it with this report on Kocherlakota’s latest speech: http://www.slate.com/blogs/moneybox/2013/01/11/kocherlakota_speech_monetary_policy_is_too_tight.html

  2. Gravatar of Saturos Saturos
    11. January 2013 at 05:42

    This doesn’t sound good either: http://www.bls.gov/news.release/pdf/ximpim.pdf

  3. Gravatar of JN JN
    11. January 2013 at 06:20

    Scott,

    If you take Japan’s RGDP per capita since 1980 (PPP or not), the economic performance of the country looks a lot less dreadful (which doesn’t necessarily mean that their monetary and fiscal policies were adequate).
    We cannot expect a country that sees its employed population shrink (mainly due to ageing) to boast impressive aggregate demand growth and economic figures, can we?

    What’s your stance on this?

  4. Gravatar of ssumner ssumner
    11. January 2013 at 07:09

    Saturos, Thanks, that’s good to see (Kocherlakota, I mean.)

    JN, I agree, but it’s real GDP per capita growth since 1993 has been very disappointing. I also agree that demand-side problems are not the whole story–supply-side issues are even worse.

    Here’s another way of looking at the picture–why is Japan poorer than Germany, and much poorer than the US? I can’t think of any good explanation other than bad economic policy (supply and demand side).

  5. Gravatar of Brian Donohue Brian Donohue
    11. January 2013 at 07:27

    Scott,

    This is a good site:

    http://www.tradingeconomics.com/

    Japan’s GDP growth since 1993 has been on a par with Italy, a country that operates under a different monetary regime but shares the distinction with Japan as being the two oldest large countries on the planet.

  6. Gravatar of ssumner ssumner
    11. January 2013 at 07:37

    Brian, Yes, I agree that Japan is every bit as screwed up as Italy. And that’s the problem. Italy is a very poorly governed country, with enormous supply side problems. I’m not sure if aging is a cause or effect or neither. I suspect neither, as Germany is also aging fast.

    Saturos, I just found an old post that covers the same ground as Yglesias:

    http://www.themoneyillusion.com/?p=17433

  7. Gravatar of Don Don
    11. January 2013 at 07:38

    The stimulus is not that big and Japan would benefit from some disaster preparedness infrastructure. But, think of this as a small insurance policy on making sure that the monetary policy changes are effective before the next election.

    It is better that a few people say that fiscal policy was more important than monetary policy in Abe’s success than have a many people say that monetary policy is impotent.

  8. Gravatar of ssumner ssumner
    11. January 2013 at 07:57

    Don, I agree it’s relatively small; certainly it’s not what’s causing the yen to plummet (fiscal stimulus appreciates currencies.) Nor did it cause the surge in stock prices.

    But even if it is small, it’s still a bad policy, and it might lull some people into thinking monetary stimulus is not needed. It is.

    Fiscal stimulus is not “insurance” because it doesn’t work.

  9. Gravatar of JVM JVM
    11. January 2013 at 08:04

    Why was the Nikkei up 1.5% yesterday while other Asian markets retreated? I assumed the news must have been better than it looked.

  10. Gravatar of Saturos Saturos
    11. January 2013 at 08:33

    Hang on, Scott, don’t you normally judge fiscal stimulus (such as ARRA) ineffective from its failure to immediately raise stock prices? And why shouldn’t the NGDP-boosting effect of fiscal stimulus sometimes outweigh the capital-inflow effect, and cheapen the currency? Seems like you have a double standard here.

  11. Gravatar of Saturos Saturos
    11. January 2013 at 08:45

    And Angus says that surprise deficits don’t raise interest rates: http://mungowitzend.blogspot.com.au/2013/01/james-buchanan-personal-remembrance.html

  12. Gravatar of Saturos Saturos
    11. January 2013 at 08:50

    Off topic: Scott, would NAFTA work as a monetary union?
    http://www.theatlantic.com/international/archive/2013/01/forward-to-north-american-union-for-europes-sake/267055/

    And you might find this one interesting: http://www.theatlantic.com/health/archive/2013/01/study-the-new-less-social-psychology-of-chinas-generation-without-siblings/267057/

  13. Gravatar of Saturos Saturos
    11. January 2013 at 08:54

    Miles Kimball has had a … strange, conversation about inflation targeting on Twitter: http://storify.com/mileskimball/twitter-round-table-on-targeting-core-inflation

  14. Gravatar of RebelEconomist RebelEconomist
    11. January 2013 at 09:13

    “When you have a central bank that repeatedly raises interest rates during a period where (GDP deflator) inflation is negative”

    Er….when did the BoJ do this? If memory serves me correctly, they increased their policy interest rate once, by 25bps only, in August 2000, when deflation looked like receding. And that might well have been the right thing to do, had they not headed straight into the dotcom bust. People with axes to grind often say silly things about economic events in Japan (another one is that the 2% consumption tax hike in 1997 – that just happened to precede the Asia crisis – was a great policy mistake).

    I agree that Abe is a disaster though. Grandson of a former prime minister, member of Mori faction of LDP, brief experience of heavy industry. Hot-housed graduate of a relatively lowly-rated private university. Nationalist sympathies that could damage Japan’s production links with China enough to overwhelm any economic stimulus he might instigate. A step backwards for Japan.

  15. Gravatar of RebelEconomist RebelEconomist
    11. January 2013 at 09:41

    Ah, I forgot that the BoJ also reduced banks’ current account balances at the BoJ, and “encouraged the overnight call rate to rise” to 50bps in a couple of steps in July 2006 and February 2007…..before running into the financial crisis. Sorry!

    I hardly think that these small monetary policy changes were major mistakes that explain Japan’s re-descent into economic slump. In each case, they were unluckily followed by major negative external shocks.

  16. Gravatar of TallDave TallDave
    11. January 2013 at 10:30

    It’s amazing that such a high-trust society can have such a stagnant economy.

    My favorite Japan story is the $1.4B bridge used daily by a couple dozen commuters.

  17. Gravatar of RebelEconomist RebelEconomist
    11. January 2013 at 10:51

    @TallDave, given that Japan’s finance minister is now Taro Aso, son of the chairman of Aso Cement, I think you can expect some more bridges to nowhere.

    It would be funny if it wasn’t tragic. But hey, if they force the BoJ to try something like NGDP targeting, it will all be worth it.

  18. Gravatar of Suvy Suvy
    11. January 2013 at 11:21

    They can’t inflate their way out because of the nonlinear relationship that develops between revenues and expenses when you have debts that are 20-25 times your revenue. If they just let things stay the way they are, their economy is going to flat out collapse under too much debt and no demand. So they’re simply kicking the can down the road, can’t really say I’m surprised.

  19. Gravatar of Suvy Suvy
    11. January 2013 at 11:26

    Japan spends double what they make and they also spend 50% of their tax revenues on debt service. They spend another 65% of their revenues on social security. They can’t even afford a 50 bp move in their interest rates. If they have any sort of move in their interest rates, they’ll end up in hyperinflation and will be forced to devalue their currency massively. This means that any sort of inflation would blow them up instantly

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. January 2013 at 12:24

    All this shows that James Buchanan knew of what he wrote (a big influence on him was his sojourn in Italy). The best obit was, as usual, The Telegraph’s;

    http://www.telegraph.co.uk/news/obituaries/finance-obituaries/9791656/Professor-James-Buchanan.html

    ‘The television comedy series Yes Minister [later 'Yes, Prime Minister'] was based on Buchanan’s public choice theory, revealing a world of politics as based on calculation, spin and cynical self-interest.’

  21. Gravatar of ZHD ZHD
    11. January 2013 at 12:28

    Scott I know this is off topic but do you have a link to where you first outline the contract specifications for an NGDP futures contract?

  22. Gravatar of W. Peden W. Peden
    11. January 2013 at 13:32

    I wonder if there’s a symmetry between severely deflationary policies and severely inflationary policies as far as encouraging bad policies goes. Chronic high inflation encourages what Keynes called “pseudo-solutions” (like price & wages policies) that hurt long-term growth. Similarly, I wonder if one can argue that severely deflationary conditions (either a sudden move to a chronically different price path or just a big deflationary collapse of demand) can encourage bad policies.

    I imagine a fair few parallels can be drawn between Japan over the past 20 years and the US after the Great Depression. As in inflationary countries, both Japan and the US used all manner of pseudo-solutions. Some of the ideas that FDR had about encouraging profits by restricting supply were bizarrely stupid, while the Japanese use of fiscal stimulus in spite of an independent central bank is an example of insanity- doing the same thing over & over and expecting a different result.

    20+ years and the Japanese are still using pseudo-solutions to demand deficiency. At this stage, it would probably be better to accept a 0% inflationary environment and focus instead on supply-side improvements.

  23. Gravatar of Ritwik Ritwik
    11. January 2013 at 17:13

    You don’t find it odd that the worst aggregate demand performance is matched by a superior-to-others aggregate supply performance, despite worse demographics and sclerotic firms?

  24. Gravatar of Steve Steve
    11. January 2013 at 17:19

    Louisiana Governor Jindal proposes ending state income tax

    http://www.reuters.com/article/2013/01/11/us-usa-louisiana-taxes-idUSBRE90A02K20130111

  25. Gravatar of Benjamin Cole Benjamin Cole
    11. January 2013 at 21:13

    Note to the Inflation Hysterics:

    They have had minor deflation for 20 years in Japan.

    In that 20 years, the Nikkei Dow is down 80 percent, property values are off 80 percent, real wages have fallen, the national debt has exploded, and Korea and China have seized the Far East in commercial terms, and even culturally (see Gangnam Style).

    Note to those who enshrine Central Bank Independence: Really?

    You think voters would have chosen what the Bank of Japan has done to that nation?

    Are the words “independent public agency and “ossification” synonymous?

    Abe needs to rip open the front doors of the Bank of Japan, open the windows, and announce the central bank salaries will be tied to real GDP growth henceforth.

    They need to print money to the moon.

  26. Gravatar of OhMy OhMy
    11. January 2013 at 21:25

    After the biggest real estate collapse in the history of humankind Japan has had 20 years of stable GDP and low unemployment. The “cost” is a stock of government “debt” the government services with a mouseclick and zero long term interest rates.

    Fiscal policy has been remarkably successful.

  27. Gravatar of Brett Brett
    12. January 2013 at 00:20

    Noah Smith over at Noahpinion made a good point about how a lot of this is just standard LDP pork to their rural supporters, including a bunch of construction companies that apparently become LDP boosters and GOTV when they get construction contracts.

    I expect a huge chunk of it will just be pissed away like Japan’s ’90s era fiscal stimuli, mostly on rural construction projects.

  28. Gravatar of RebelEconomist RebelEconomist
    12. January 2013 at 01:05

    Scott, you believe that an AD boost from fiscal policy is automatically offset by an inflation-targeting central bank, right? In that case, I presume you reject the Keynesian idea that fiscal policy can boost AD with no inflation as long as there are unused resources?

  29. Gravatar of RebelEconomist RebelEconomist
    12. January 2013 at 01:37

    Benjamin, do you not see a disconnect between your correct observation that deflation in Japan has been minor (actually -0.3% from the peak of the consumer price index until now) and your equally correct observation of the huge changes since Japan’s bubble burst, that might suggest to you that monetary policy is not to blame for Japan’s predicament?

    While I have no doubt that Japan could have washed away its problems with high inflation if the Americans had accepted the exchange rate implications of that approach (which they did not), because that inflation would have involved wasting the small savers that form the backbone of Japan’s funding Japan might have been a quite different country today – and don’t forget that Japan’s GDP per capita remains far ahead of Korea even now. Anyway, Japan’s economic problems are fundamentally structural, and so are amenable to structural solutions, if they can ever get leadership that is up to the job.

    As for Gangnam Style, keep seeing the PSYchiatrist for your econosexual obsessions.

  30. Gravatar of TravisV TravisV
    12. January 2013 at 06:52

    Is this story a good example of the flawed “low interest rates = easy money” argument? Or isn’t it?

    “Wells Fargo’s Mortgage Gains May Be Unsustainable”

    http://dealbook.nytimes.com/2013/01/11/wells-fargo-profit-jumps-24-percent-in-fourth-quarter-driven-by-mortgages

    The Fed has been a big buyer of mortgage bonds in an effort to drive down interest rates. But banks have not cut ordinary borrowers’ rates by the same amount.

    That means the difference, or spread, between the rates increased last year. Wells Fargo’s gains from this activity totaled $10.3 billion in 2012, more than double the previous year.

    Those gains may be hard to beat.

    While the Fed has promised to purchase more mortgage bonds, interest rates may not fall much further. If mortgage rates stagnate or rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will make less of a gain when selling the mortgages.

  31. Gravatar of Geoff Geoff
    12. January 2013 at 07:16

    A video of Ben Bernanke as an infant has just been released over the internet.

    Don’t miss it!

  32. Gravatar of Geoff Geoff
    12. January 2013 at 07:17

    Sorry, bad link.

    Try again.

    A video of Ben Bernanke as an infant has just been released over the internet.

    Don’t miss it!

  33. Gravatar of ssumner ssumner
    12. January 2013 at 07:50

    Saturos, I don’t recall what I said about ARRA. I doubt I said it had no impact on stock prices. More likely I said that the stock market told us in late 2008 and early 2009 that whatever fiscal stimulus was done was not going to be nearly enough to promote a robust recovery. And it wasn’t. And even if the 1.5% stock gain was 100% due to fiscal stimulus, it’s not going to significantly change the growth trajectory of Japan.

    I wouldn’t rule out the possibility that fiscal stimulus might lead to expectations of a more expansionary monetary policy. But even if true, Abe would be better off doing the monetary expansion w/o the fiscal stimulus.

    I can’t comment on the exchange rate depreciation effects of more NGDP, as I haven’t seen models like that. The only fiscal policy models I’m familiar with predict currency appreciation. The fact that the exchange rate fell suggests to me that investors view this as more evidence that Abe is sincere about shooting for a 2% inflation target. But I’m open to the possibility that it might somehow have depreciated the currency. If so, I’d still prefer using a monetary approach. It’s not hard to do with monetary policy–they’ve done more than 15% in just 2 months.

    And I can’t help but point out that fiscal stimulus in Japan already has failed on numerous occasions over the past 20 years.

    My colleague also found that deficits don’t boost interest rates–he interpreted that as support for Ricardian equivilence.

    A single currency could work with Canada, but wouldn’t be optimal. I don’t see it working well with Mexico, but can’t be certain.

    Regarding China, they get off on the wrong foot in asserting that China’s one child policy is “strictly enforced.” It isn’t. The birthrate there is closer to 1.5 per family, slightly below the US. (at least last time I looked–perhaps it’s dropped recently.) They’ve had 30 years of “one child” policy, and their population is still growing.

    Rebeleconomist, You said;

    “I hardly think that these small monetary policy changes were major mistakes that explain Japan’s re-descent into economic slump. In each case, they were unluckily followed by major negative external shocks.”

    Of course you don’t! You think stable prices are a good thing. I didn’t say it was a bad thing, I said it would sabotage fiscal stimulus. Do you agree?

    Patrick, That’s an interesting quote–good to know people outside of economics are aware of Buchanan.

    ZHD, I am writing a paper on NGDP futures right now. Until then you can read my paper in Contributions to Macroeconomics (2006).

    W. Peden, Good point.

    Ritwit, I’d regard it as interesting . . . if it were true.

    Steve, Yes, a hopeful sign.

    OhMy, Even if you were correct (you’re not) your facts would point to Ritwik’s claim, not the success of fiscal stimulus.

    Rebeleconomist; You said;

    “Scott, you believe that an AD boost from fiscal policy is automatically offset by an inflation-targeting central bank, right?”

    I thought everyone believed that?

    You said:

    “In that case, I presume you reject the Keynesian idea that fiscal policy can boost AD with no inflation as long as there are unused resources?”

    Two problems. First, I don’t think Keyneisans believe this any longer. The facts suggest otherwise. At a minimum commodity prices would rise. And second, under a Taylor Rule approach even this won’t work.

    You are also wrong about Americans not accepting a depreciated Japanese exchange rate. It was 115 in early 2008, and there were almost no complaints from America. The BOJ did not have to let the yen rise to 75/$

    TravisV, It’s an even better example of “never reason from a price change.”

  34. Gravatar of Ritwik Ritwik
    12. January 2013 at 07:53

    Scott, conditional on the AD performance and the demographic decline, you don’t think the AS performance in Japan outdoes, say, UK? Or even US?

  35. Gravatar of Suvy Suvy
    12. January 2013 at 08:22

    For those pointing to the recent past and Japan’s recent deflation and saying they won’t have hyperinflation, it’s important to understand that this stuff isn’t linear. Using the recent past to predict the future rarely works, especially when dealing with rare events. Also note that financial crises like this happen once in a lifetime. This means that using any data set less that 50-70(minimum) won’t have the events we’re looking for. When you look back around 800 years, you see these type of events regularly.

  36. Gravatar of RebelEconomist RebelEconomist
    12. January 2013 at 08:27

    Well, all I can say, Scott, is that I have been watching the Japanese economy quite closely for nearly twenty years as an investor in JGBs, and I have never heard any other accusation, even from the Japanese government, that the BoJ is offsetting fiscal stimulus. Not being as aggressive as the government might hope, yes, but not actually going the other way.

    I certainly am right that Japan’s attempts to grow their way out of recession were constrained by the Americans though. The US slapped tariffs on Japanese cars in 1995 despite the fact that Japan was trying to deal with yen/dollar which had been under 80 – how’s that for sympathy! The difference between then and later is that the Japanese were actively intervening against the yen in 1995, whereas later they were not, and also the US had turned its attention to China by then. And by the way, you cannot blame the BoJ for yen exchange rate policy anyway, which is decided by the MoF.

  37. Gravatar of Mike Sax Mike Sax
    12. January 2013 at 08:43

    Saturos maybe Ygelsias has taken a look at Japan’s debt but just doesn’t care. After all, Japan has the lowest interest rates in the world.

    I can’t see why this is a worry.

  38. Gravatar of Mike Sax Mike Sax
    12. January 2013 at 08:47

    None of the debt phobes ever explain why it’s worth being a debt phoble when it has no impact on interest rates. Why should we care? Is it because maybe in Keynes’ “long run’ we might some day see the bond vigilantes materialize?

    I ask this question sincerely. Can anyone explain why the national debt level matters if it has no impact on interest rates-other than some day in the deep beyond it possibly could?

  39. Gravatar of Mike Sax Mike Sax
    12. January 2013 at 08:48

    None of the debt phobes ever explain why it’s worth being a debt phoble when it has no impact on interest rates. Why should we care? Is it because maybe in Keynes’ “long run’ we might some day see the bond vigilantes materialize?

    I ask this question sincerely. Can anyone explain why the national debt level matters if it has no impact on interest rates-other than some day in the deep beyond it possibly could?

  40. Gravatar of Mike Sax Mike Sax
    12. January 2013 at 08:58

    Scott I notice that when the monetary authority eases and the market rises you say that it was an effective policy but if the same thing happens with a fiscal policy you don’t use the same rule of thumb.

    Why did the rise in the Nikkei yesterday bode just as well as if the market rises in response to monetary easing?

  41. Gravatar of Benjamin Cole Benjamin Cole
    12. January 2013 at 19:45

    RevelEconomist:

    Anybody can point at any country and say “their problems are structural.”

    The fact is, there are so many layers of local, state, federal, regulatory and independent public agencies in any modern nation, plus dubious legal and tax systems, that the surprising part is that the private sector gets anything done at all.

    The USA prospered through the 1990s, and clogged up in 2008. So there were new structural problems?

    Yes, yes demographics, but that only explains so much—and does not explain the sudden wall Japan hit in 1992, after it went to tight money following the unfortunate 20 percent annual inflations rates of 1991 or so.

    It is like a light turned off in 1992, and stayed off since. My understanding is Japan has enacted some structural reforms in retail and labor markets, but so what?

    They are being asphyxiated by tight money.

    Hard to dance the Gangnam Style when you have a monetary tourniquet around your neck!

    Gangnam is booming, and Ginza is dying What does that tell you?

  42. Gravatar of RebelEconomist RebelEconomist
    13. January 2013 at 02:28

    Well Benjamin, there aren’t many countries that you could look at and say they have a public debt to GDP ratio of about 200%. Basically, there were lots of zombie borrowers after the stock and land price bubble of the 1980s burst, but rather than let them go, successive LDP governments kept doing fiscal stimulus until now the entire public sector is a zombie.

    But hey, what is the point of me arguing with someone who plainly knows nothing about the subject. For your information, Japan’s bubble began to deflate from pretty much from 31/12/1989. The highest its inflation rose in those years was 4%, with interest rates reaching a peak of about 6%.

    And by the way, since you revel in the relative success of Korea, did you know that during its crisis in the 1990s, Koreans voluntarily handed over their gold to the government to pay down their country’s debt ( http://news.bbc.co.uk/1/hi/world/analysis/47496.stm )? How’s that for masochistic austerity? If the Greeks would do that, their problems would be solved overnight.

  43. Gravatar of ssumner ssumner
    13. January 2013 at 08:28

    Ritwik, Not the US. And not the UK until the 2000s, after which UK supply-side policies got much worse. So now Japan might be slightly better than the UK, it’s a close call.

    Rebeleconomist, If the Japanese are telling you that highly expansionary monetary policies are producing 20 years of deflation, don’t you think you should question what they are saying? Look a little deeper–like into what they are actually DOING?

    The BOJ can depreciate the yen whenever it likes. They don’t have legal authority to peg it, I agree. But they can depreciate it. The yen plunged sharply on mere rumors that Abe would ask the BOJ to do a 2% inflation policy. Notice that no one in the US cared in the slightest when the yen plunged.

    Mike, I answered that above.

  44. Gravatar of dtoh dtoh
    13. January 2013 at 08:53

    Scott,
    So Abe’s main adviser on this stuff is a guy named Etsuro Honda who has made a couple of interesting comments including:

    1) The BOJ doesn’t believe that we can escape deflation with monetary policy alone, but they are wrong. Monetary policy is sufficient to eliminate deflation.

    2) Fiscal spending on infrastructure only makes sense if it produces a positive return. There ought to be an independent third party reviewing all infrastructure projects.

    He’s made quite a lot of other interesting comments as well.

  45. Gravatar of RebelEconomist RebelEconomist
    13. January 2013 at 10:24

    I know what the BoJ are doing, Scott, and it is emphatically NOT trying to stop inflation. On those occasions when they nudged up interest rates slightly – both pre-financial-crisis, when the BoJ’s swollen balance sheet was regarded as abnormal – what they were trying to do was to “normalise” monetary policy.

    It is hard to unravel why the yen has weakened. In addition to arguing for easier domestic monetary policy, Abe has also mentioned creating a “public-private fund” to buy foreign assets and suggested that Japan could buy ESM bonds.

    “no one in the US cared in the slightest when the yen plunged” They will if they perceive that Japan deliberately weakened the yen: http://www.japantimes.co.jp/text/nb20111229a4.html

  46. Gravatar of dtoh dtoh
    13. January 2013 at 14:55

    Rebel,
    Re Japan FX. I think the right way to look at this is that a) capital flows are the biggest determinant of fx over the short run, b) if you assume that Japanese inflation is going to increase by 2%, then real expected returns in yen have dropped by 2% and c) therefore you are going to see a large capital movement from yen into dollars driving up the price of the dollar relative to the yen.

  47. Gravatar of RebelEconomist RebelEconomist
    14. January 2013 at 00:17

    dtoh, operative words being “if you assume”!

    Like many other investors in Japan’s bond market, from time to time I have paid the price for making such assumptions!

  48. Gravatar of ssumner ssumner
    14. January 2013 at 08:25

    dtoh, Thanks, That’s hopeful.

    Rebeleconomist, They opposed the government’s effort to raise the inflation target to one percent. If they were actually trying to “normalize” monetary policy as you say, then they are morons. There is observational equivilence between being inflation hawks, and acting exactly as if you are inflation hawks out of stupidity, but not being inflation hawks in your heart of hearts. So let me just say that no central bank has ever tried to inflate, and acted like they were trying to inflate, and failed.

    Sorry, but raising interest rates as a way to increase inflation doesn’t even pass the laugh test. Even Keynesians who disagree with me on the liquidity trap would find the argument absurd.

  49. Gravatar of RebelEconomist RebelEconomist
    14. January 2013 at 09:23

    Sometimes you are irritatingly obtuse, Scott! As well as price stability, the BoJ was concerned about the size of its balance sheet, so it seized on the easing of deflation in 2006 to edge moneymarket interest rates above zero so that its balance sheet would start contracting (which it did). The BoJ had two concerns, and when it looked like making progress on one, its attention shifted to the other. The BoJ’s MPC’s decision left real interest rates still well below 1%, which THEY saw as still being “accommodative”.

    It is easy for you to criticise the BoJ in hindsight, but remember that in 2006 both deflation and quantitative easing were seen as abnormal and to be handled with care.

  50. Gravatar of ssumner ssumner
    15. January 2013 at 08:12

    Rebeleconomist, If you say that price stability was their goal, and the CPI is almost unchanged from 20 years ago, then why do you claim the BOJ failed? I’m the one that claimed they succeeded, not you. Your last response is defending the BOJ as if you think they succeeded.

    I think you are confused about what we were debating. You act like its a debate over whether BOJ policy was sound or defensible. It’s not.

  51. Gravatar of ssumner ssumner
    15. January 2013 at 08:13

    BTW, If they wanted a small balance sheet, then the BOJ policy was exactly the opposite of what they should have been doing. Australia’s balance sheet is 4% of GDP, Japans’ is 23%. You get a smaller balance sheet with faster NGDP growth.

  52. Gravatar of RebelEconomist RebelEconomist
    15. January 2013 at 10:02

    I think you must be trying to wind me up, Scott. As I am sure you know, when they talk about achieving price stability, central bankers tend not to aim at literally fixed prices. In 2006, like the Fed, the BoJ had not formally defined their inflation target, but informally put it at a positive inflation rate of about 1% eg here: http://www.boj.or.jp/en/announcements/release_2006/k060309b.htm/

    Clearly, against that 1% target, the BoJ have strictly failed (although I don’t recall that I actually “claimed” that). But not by much. And considering the powder keg of debt that they sit on and the rapacious morons they have to deal with in politics, the BoJ have done a pretty good job.

  53. Gravatar of ssumner ssumner
    16. January 2013 at 16:49

    Rebeleconomist, So then I’m right, they are not held back by the “liquidity trap.”

  54. Gravatar of RebelEconomist RebelEconomist
    17. January 2013 at 02:29

    Correct, Scott! At last you have written something that I agree with!

    The BoJ has actually still been the most adventurous central bank so far, buying some stocks even before the financial crisis. For sure, even with limited ability to intervene in fx, the BoJ could cause inflation if they were reckless enough, but they want to avoid uncontrolled inflation that might cause worse problems than it solves.

    The tragedy of this is that, because the debt is largely held internally, a good government would have so much power to relieve the tensions that are holding Japan back, but the infantile politics of Japan, and the morons that it usually brings to office, just does not produce the leadership to do it.

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