Japan: More questions than answers

Paul Krugman has done a series of posts suggesting that recent policy announcements in Japan may have led to dramatically higher inflation expectations, and much lower real interest rates.  I’d like to agree with him, but I’m having trouble processing some of the information.  I hope to learn more by reading commenters’ reactions to this post.  The first Krugman post noted:

And here’s an important point that has gone remarkably unreported, except on a few financial blogs: something dramatic does seem to be happening on the expected inflation front. Here’s the 5-year breakeven, the spread between indexed and non-indexed bonds:

. . .

The big move actually came before Abe took office, maybe reflecting the sense that the political environment had changed and that the Bank of Japan’s freedom to impose monetary orthodoxy was about to end. Whatever caused it, this is a remarkable change — it’s the kind of upward move in inflation expectations advocates of radical monetary policy in the US can only dream of. And coupled with a fiscal boost, it could mean that Japan’s long deflationary era is finally coming to an end.

There’s no maybe about it, the surge in the Japanese stock market and the big plunge in the yen began right when Abe announced he’d push for a 2% inflation target, well before the election.  (It was mid-November.)  But I don’t see a “dramatic” increase in 5 year inflation expectations in the graph he provides—just a modest boost that was even smaller than we got out of the various QE programs.  Maybe I misread the graph, but it looks to me like inflation expectations rose by about 10 basis points between mid-November and today.

More likely, Krugman is referring to the nearly 100 basis point rise over the past 12 months.  That is pretty large, although US TIPS spreads have occasionally moved by comparable amounts in recent years, but it doesn’t seem to be linked to either rumors about BOJ policy changes, or dramatic changes in the value of the yen (or Japanese equity prices.)  The link between rumors of monetary easing and big stock/exchange rate moves is so obvious that I’m reluctant to attribute a big move in inflation expectations to policy changes, unless there is confirmation in other markets.

Please convince me I am wrong.

In the next Japan post Krugman provides this graph, using 10 year rates:

That data looks wrong to me.  It seems to show 10 year Japanese bonds yields (yellow line) falling to about 0.25%, whereas they are actually over 0.80%.  But is the nominal rate wrong, or is the breakeven inflation rate (red line) wrong?  It appears to me that the nominal rate is wrong, as the other graphs Krugman provides suggest 10 year yields are near 0.80%, which is correct.  In contrast, the inflation spreads seem right, as they are consistent with his other post, close to the 5 year spreads.  But that means the real interest rate (green line) must be incorrect, it should be closer to zero.

Even stranger is the fact that the real interest rate estimates provided would be roughly correct for the US, where 10 year real rates have fallen from positive to significantly negative in the past year or two.

Putting aside the question of whether the real rate estimates are correct, what do we make of Krugman’s claim that easier money will reduce real rates, and not raise nominal rates?  I have an open mind on this question.  In the past I’ve seen easier money raise both real and nominal rates, but I don’t think it raises real rates all that often.  The effect can depend on lots of factors, including whether the policy is a one time change, or expected to lead to permanently higher inflation and NGDP growth.  With QE combined with IOR in the US there might also be a market segmentation argument.  So Krugman might be right.

But I think it’s also possible he is wrong to get optimistic about the fall in Japanese real rates.  (Never reason from a . . . )  David Glasner has talked a lot about the fact that the zero rate bound is a problem because it can prevent nominal rates from falling to equilibrium, and hence can hold real rates above where they need to be for macro equilibrium.

Now consider the fact that in the US the real yields on 10 year Treasuries has been on a downtrend since the early 1980s, from about plus 7.0% to negative 0.6%.  That’s a huge drop, and it obviously is not all due to “easy money.”  Indeed inflation has fallen sharply over that 30 year period, as has NGDP growth.  Maybe the recent drop is easier money, that’s debatable, but surely not the entire 30 year downtrend.

Now consider that the reasons offered for lower trend real interest rates in the US, hold even more strongly in Japan, which is gradually dying out as a country.  It’s very possible that the last 12 month’s worth of lower real yields on 10 year Japanese bonds in not easier money, but rather part of a long term trend similar to the US.  If so, the zero bound problem might well get worse in the future.

The lower the equilibrium real rate, the higher the expected inflation rate required to keep (Wicksellian equilibrium) nominal yields above zero.  If the equilibrium real rate falls to negative 1% on 10 year bonds, it’s probably even lower on short term debt.  In that case even raising Japanese inflation from minus 0.3% to plus 0.7%, would do nothing but offset the fall in the equilibrium real rate, leaving Japan just as stuck at the zero bound as before, with the credit markets not able to reach equilibrium.

Just so I am not misunderstood:

1.  I agree with Krugman that the modestly higher inflation expectations since November are policy related, and are good news.

2.  I worry that the much larger fall in real rates over the past 12 months may reflect increasing pessimism about Japan’s long term equilibrium growth, and lower expectations of its long term equilibrium Wicksellian real interest rate.  I hope I’m wrong.  I hope it is due to expectations of stimulus.  But we pretty much know that the recent big move in Japanese equities and the yen was driven by policy rumors, and yet the Japanese equivalent of our TIPS spread moved up only about 10 basis points on the news.  That tells me that the markets are slightly more hopeful, but on balance are just as skeptical of Abe as Noah Smith.

PS.  I do expect Japan’s birth rate to bounce back at some point, so the “dying out” comment should not be taken literally.


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30 Responses to “Japan: More questions than answers”

  1. Gravatar of Tommy Dorsett Tommy Dorsett
    13. January 2013 at 19:01

    Here’s the five-year breakeven spread from Bloomberg:

    http://www.bloomberg.com/quote/JYGGBE05:IND

    Looks like two jumps, one in starting just before the spring of last year and one in the fall.

  2. Gravatar of Geoff Geoff
    13. January 2013 at 19:09

    I appreciate the desire by NGDP targeting theorists to believe that NGDP targeting works in every country. But if a transition to adopting NGDP targeting calls for higher inflation now and in the foreseeable future, then it MAY have extremely undesirable and unforeseen consequences.

    For example, and I brought this up in a prior post, I don’t believe more inflation is a wise idea in countries that have very high levels of debt relative to tax revenues. In the case of Japan, I think this especially applies. Inflation that increases an indebted country’s interest costs would result in expenses rising exponentially while tax revenues rise linearly.

    Contrary to the oft-repeated mantra “inflate one’s way out of a debt problem”, I think for Japan it’s “inflating one’s way out of a debt problem will make the debt problem worse.”

  3. Gravatar of Tim Tim
    13. January 2013 at 19:17

    Real interest rates could also be on a downward trend because of the higher saving rate in emerging economies, especially china. I know chinas current account surplus is no larger than the nordic countries or germany and switzerland, but its still ballooned in recent years, causing the “global savings glut”.

  4. Gravatar of Benjamin Cole Benjamin Cole
    13. January 2013 at 19:43

    Fascinating commentary.

    I agree with Sumner that the real risk going forward is not inflation (and hasn’t been for years) but zero-bound perma-gloom, ala Japan.

    As Sumner relates, check out yields on sovereigns, last 20-30 years. Down, down, down, down, down. When gilts hit zero bound they cannot go lower, so then….

    Then, we don’t know.

    We do not know what will make yields go back up or how to re-start the economies of the world trapped in zero bound.

    I believe in Market Monetarism, but it will have to start with rampant money printing, and perhaps sustained for 10 years. After all, Japan tried QE for five years, and worked, but then they stopped and went back into perma-gloom. Still mild deflation.

    So maybe the USA has to stick with $85 billion a month in QE for 10 years. Why not? Because five years of QE worked in Japan? It didn’t. So maybe 10 years are needed.

    I am surprised how little this very possible scenario is discussed in economic circles, except rarely by Sumner. Sumner is one of the few wondering if zero-bound will be a chronic situation, unless our Fed can act with resolve.

    We are talking about long-term QE, and some serious pay-down of the national debt.

    If we want to escape zero bound.

    No one really knows how to get Economy Grandma back up off the Zero Bound Ice once you get there. I suspect Friedman was right—print lots of money relentlessly—but we don’t know for sure. Printing lots of money is the nest option we have now.

    We know for sure that tight money will keep us down on the Zero Bound Ice for at least 20 years, ala Japan.

    The other big questions—I guess these are nearly taboo questions—is what to do with the huge Fed balance sheet, which has to be transferred to the Treasury, and if independent central banking makes any sense when it becomes a serious revenue function.

    There is a possibility the Fed could wipe out half the national debt in the next 10 years (only $10 trillion is outstanding).

    Or, did independent central banking ever made sense—”independent public agency” is another phrase for “ossified.”

  5. Gravatar of Don Don
    13. January 2013 at 21:45

    Perhaps real rates included some kind of risk premium that would not apply going forward. The risk could a default or abrupt monetary change that is now less likely.

  6. Gravatar of dtoh dtoh
    13. January 2013 at 22:58

    Scott,
    MOF stopped issuing JGBi in 2008 and has had an aggressive buy back program since then. I suspect there are almost none still outstanding and certainly no liquidity. I don’t think you can draw any conclusions from published JGBi price data.

  7. Gravatar of himaginary himaginary
    13. January 2013 at 23:42

    “It appears to me that the nominal rate is wrong, as the other graphs Krugman provides suggest 10 year yields are near 0.80%, which is correct. In contrast, the inflation spreads seem right, as they are consistent with his other post, close to the 5 year spreads.”

    As dtoh pointed out, MOF Japan stopped issuing TIPS in 2008, because Lehman shock pushed up the rate. So currently the longest maturity of 10-year TIPS is in fact about 5 years. Therefore, it seems that BEI calculation uses nominal rate of 5 year yields or so.

  8. Gravatar of Scott N Scott N
    14. January 2013 at 00:18

    “[W]hat do we make of Krugman’s claim that easier money will reduce real rates, and not raise nominal rates?”

    I think the clearest illustration of this occurred in the fall of 2010 at the outset of QE2. This link shows a chart of US 30 year treasuries, TIPS, and the breakeven rate. http://goo.gl/Qt5wS

    In the chart, note that the breakeven rate shot up between 4 October 2010 and 15 October 2010. What happened during that time to cause this? If you search Google News on those days you will discover two events: (1) Bernanke gave a speech on 4 October (after markets closed) that was widely viewed as hinting at QE2 (contrary to contemporary hindsight analysis this did not happen at Jackson Hole; it happened on this date) and (2) the FOMC minutes from the September meeting were released on 12 October 2010 and they pretty much confirmed the Fed was going to embark on QE2. There are two distinct spikes in inflation in that chart and they coincide with these two events.

    Now back to your original question. If you look at the chart you will see that most of the inflationary spike was due to real interest rates falling rather than nominal yields rising. Eventually, they both rose together, but the initial spike in inflation was largely caused by real yields falling.

  9. Gravatar of RebelEconomist RebelEconomist
    14. January 2013 at 00:54

    Scott, to add to what dtoh said, I would also be cautious about drawing conclusions from Japanese yields because they may well be calculated on a different basis from elsewhere – so called “simple yield”.

    And since you did not acknowledge on your earlier post my evidence of an important misconception that you keep making – namely that Japan is free to depreciate the yen if it wants – I shall repeat it here: http://www.japantimes.co.jp/text/nb20111229a4.html

    Make no mistake, whether Japan is in a tough situation or not, your own country will complain if Japan is perceived to be disadvantaging US industry. To make matters worse, Abe has also been backsliding on whether Japan will sign up to the Trans Pacific Partnership free trade agreement involving the US, because Japanese farmers, who form part of the LDP’s core support, don’t like it: http://www.bloomberg.com/news/2012-12-27/japan-to-deepen-discussions-about-trans-pacific-trade-pact.html

  10. Gravatar of Nick Nick
    14. January 2013 at 03:03

    The bond market doesn’t believe Abe will overcome the BoJ/MoF aversion to high growth / high interest rates. I hope the market is wrong, but Japanese prime ministers don’t average very long terms, and the MoF has the details of everyone’s tax audits, so a lot of potential scandals to bring uppity politicians to heel, eg look at what happened to Ozawa, or the amount of dirt that appeared during Abe’s last premiership.

  11. Gravatar of Lars Christensen Lars Christensen
    14. January 2013 at 04:42

    Scott,

    I broadly agree with Krugman here. There has been a policy change and the markets are expecting more monetary easing. The scale of the easing is uncertain and different markets give slightly diverging “estimates” of the scale of monetary easing. Overall, you got to be optimistic that Japan is moving away from deflation.

    However, an important point that both you and Krugman miss is that the BoJ actually changed its inflation target last spring (February) and also at the same time announced at it would do open-ended QE. The announcement certainly was made in a rather unclaer way and it took analysts and market participants sometime to realize that the BoJ actually had changed its pollicy and its policy targets. I actually think this have been more important for longer-term inflation expectations than the Abe effect. The Abe effect, however, seem to have had a strong impact on the shorter-term inflation expectations. This could indicate that Noah Smith’s claim that this is a more temporary measure rather than a fundamental long-term change.

  12. Gravatar of dtoh dtoh
    14. January 2013 at 04:57

    Scott,
    I think the other thing here is that we really don’t have any idea what is the slope of the price indifference curve between holding financial assets versus spending on real goods and services nor do we know how a change in expectations will cause that curve to shift and or change shape. Accordingly, we don’t know either a) how much of a change in real financial asset prices (real rates) is required to bring about a given change in NGDP, b) nor do we know what will be the relative change in real versus nominal rates.

    What is obvious however is that market (equity and fx prices) wholeheartedly endorse and have validated your view that monetary policy works just fine at the nominal ZLB.

  13. Gravatar of Jason Odegaard Jason Odegaard
    14. January 2013 at 05:23

    PS. I do expect Japan’s birth rate to bounce back at some point, so the “dying out” comment should not be taken literally.

    Thank goodness, I wouldn’t want Japanese culture to disappear from the earth!

  14. Gravatar of RPLong RPLong
    14. January 2013 at 06:22

    Here’s a throwaway theory, take it or leave it…

    …Considering just how long Japan has been in a slump, we are basically reaching the point where eventual turnaround of some kind is inevitable. When it does occur, everyone will be tempted to proclaim it the effect of somebody’s policy.

    But how reasonable is that? After all these years, economic and political conditions in every country in the entire world have changed so dramatically that it’s no longer “ceteris paribus” anymore.

    So I say that whenever Japan turns itself around, it’s going to have precious little do to with monetary policy or good governance. But what do I know?

  15. Gravatar of Negation of Ideology Negation of Ideology
    14. January 2013 at 06:23

    Benjamin Cole – Awesome, comment, especially:

    “We are talking about long-term QE, and some serious pay-down of the national debt. ”

    Hehe, here! More QE until either we hit the NGDP target or the Fed owns the entire national debt. At that point, we can celebrate for a day or two – and then the Fed can buy up all the state and local debt, secured by future federal aid to the states. The federal government with be net interest rate positive as it should be. And it will be risk free.

    As for Fed independence – if you take away the banker appointed seats on the Fed Regional Banks then I have no problem with it. It would then be like the independent Judiciary. I also have no problem with your idea of making it part of the Treasury. Then the President is in effect given authority over the economy, which seems appropriate because that’s who the voters assign credit or blame.

  16. Gravatar of ssumner ssumner
    14. January 2013 at 06:46

    Tommy, That looks exactly like Krugman’s graph.

    Geoff, You said;

    “I appreciate the desire by NGDP targeting theorists to believe that NGDP targeting works in every country.”

    I can’t imagine who you are talking about. I don’t believe that. Please tell me which “NGDP theorist” you are referring to?

    Tim, Yes, I’ve discussed the global savings issue, although as you say China’s role is overrated—in the future I expect China to become a much bigger factor.

    Ben, Good obserrvations. People underestimate what it will take for Japan to get out of the zero rate bound. The US has inflation 2% higher than Japan, and even we have been stuck here for years.

    dtoh, Thanks for that information. That makes me even more suspicious of the real interest rate data.

    Thanks himaginary. So I was right that the graph is mislabeled.

    Scott N. I agree.

    Rebeleconomist, I have seen no complaints about the recent fall in the yen, so I don’t take your criticism very seriously. The US is focused on China, and we don’t even do anything about that issue. The idea that we would punish Japan for trying to escape deflation is pretty far-fetched. But even if true, it doesn’t really have any impact on the economics of anything I’ve written on Japan, only where the blame lies (Washington or the BOJ.) Note that we don’t punish Germany when it runs big surpluses, or when the euro falls against the dollar.

    Nick, I fear you may be right.

    Lars, Good point about the earlier policy shift. But do you have data showing a big recent increase in inflation expectations? I don’t see it. Maybe the problem is what dtoh identified, the inflation expectations data are not reliable.

    dtoh, I obviously agree on your second point about the markets. I’ll defer commenting on the inflation expectations until I’m convinced we have good data.

    Jason, Yes, I love Japanese culture.

    RPLong, Any nominal turnaround will most certainly be due to monetary policy.

  17. Gravatar of Ed Ed
    14. January 2013 at 08:39

    It has been rather dramatic since the BOJ announced a 1% target: http://www.diigo.com/item/image/2jl7s/xih7?size=o

  18. Gravatar of Lars Christensen Lars Christensen
    14. January 2013 at 08:43

    Scott, yes I can send you the data tomorrow.

  19. Gravatar of Jeff Jeff
    14. January 2013 at 09:27

    @Geoff,

    Higher expected inflation does not change the servicing cost on existing debt unless and until it is rolled over. So some of your worry is unfounded.

    Furthermore, to the extent that higher nominal rates on the debt reflect higher expected inflation, you can think of the expected inflation part as early repayment of principal. If expected inflation goes from zero to five percent, and the nominal rate goes from two to seven percent as a result, the real value of a bond declines by five percent a year, i.e., the extra 5 percent nominal interest is really principal repayment.

    In fact, I’ve always thought that one of the strongest arguments against high, fully-anticipated inflation is that is shortens the real maturity of non-indexed debt.

  20. Gravatar of Brian Donohue Brian Donohue
    14. January 2013 at 09:50

    Scott,

    Excellent post. The 30-year trend in real rates seems primarily demographic-driven. Do you agree? Japan is ahead of the US, but all around the world we have rich, aging societies looking to deploy capital reasonably safely in order to generate income for retirement. Simple supply and demand, no?

    What other elements of the story am I missing?

  21. Gravatar of Yancey Ward Yancey Ward
    14. January 2013 at 11:09

    Japan will turn around once it’s destroyed it’s currency and present bondholders. Increasingly, this is what I think of market monetarism.

  22. Gravatar of Geoff Geoff
    14. January 2013 at 13:04

    Dr. Sumner:

    “I can’t imagine who you are talking about. I don’t believe that. Please tell me which “NGDP theorist” you are referring to?”

    I’m sorry, I was inferring from a lack of positive statements from the NGDP literature I have read (I think it’s relatively a lot) of the form “Country X should not be engaging in NGDP targeting, because…”

    If NGDP targeting would be destructive in country X, I also see a lack of explanations for why NGDP targeting promotes well being in other countries, but not country X.

    I have searched this blog, for example, for blog posts that warn of how NGDP targeting would be destructive in country X, but all I see are posts that call for NGDP targeting in every country mentioned.

    Of course, this is just purely anecdotal, and my search skills may be sub-standard, but I was under the distinct impression that the theory NGDP targeting promotes well being applies to all countries. If that is not true, I apologize, but I would be very interested in being corrected and shown in which specific country NGDP targeting would be destructive, and perhaps you can write a blog post on it, or a paper.

    My main argument is that a higher NGDP targeting, because it would call for more inflation in Japan, won’t be all sunshine and roses there at least, because of the large debt level relative to their tax base. Do you deny or agree with that assessment?

    …………….

    Jeff:

    “Higher expected inflation does not change the servicing cost on existing debt unless and until it is rolled over. So some of your worry is unfounded.”

    That’s technically true, but what I have in mind is slightly different. The Japanese government’s activity is a function of its existing debt levels and prices they are able to fetch for their debt. If what you have in mind is a situation where inflation is used to pay back existing debt, with no roll over of that particular debt, then yes, their debt costs would not rise on existing debt, only subsequent debt.

    But if they don’t roll over the debt at the same prices, then all their other liabilities and promises, for example healthcare, retirement benefits, education, and so on, would not be able to be financed because that activity depended on, and depends on, high debt principle prices.

    But what I am thinking is that they won’t just pay back the old debt with inflation and not borrow more. If they don’t borrow more, then their relatively smaller tax base would be insufficient to financing all the activity that depends on higher priced principled on continuously issued new debt.

    Do you honestly think that the Japanese central bank is unaware of this? I am betting almost for certain they get it, which is why they are scared to death to inflate as much as you and quote a few others are calling for. They have gone through something like 7 finance ministers in the last 6 years. Nobody can fix the mess.

    I don’t think Japan’s main problem can be solved by more inflation that would be associated with a higher NGDP targeting level. If it could, then the BOJ would have done that a long time ago, don’t you think? They aren’t stupid.

    Japan is in a “damned if you do, damned if you don’t” quagmire. They are so utterly dependent on high priced debt, that the Japanese government is advertising debt to prospective Japanese investors by having scantilly clad girls dress up to grab attention.

    More inflation, and I think the BOJ knows this, would devastate the country. All their liabilities and promises that require continuous high priced debt issuance, would be defaulted on if they ONLY paid back debt and didn’t roll it over, or rolled it over at far lower prices.

    “Furthermore, to the extent that higher nominal rates on the debt reflect higher expected inflation, you can think of the expected inflation part as early repayment of principal. If expected inflation goes from zero to five percent, and the nominal rate goes from two to seven percent as a result, the real value of a bond declines by five percent a year, i.e., the extra 5 percent nominal interest is really principal repayment.”

    What about their tax base? Inflation that increases debt costs from 2% to 5% would not raise tax revenues by the same amount.

  23. Gravatar of Doug M Doug M
    14. January 2013 at 13:43

    One explanation of the pattern of US Real Yeilds would be reacite expections.

    If the market expects that future CPI will be close to the 5 year historical average, then as CPI fell for a decade, the market was consistantly behind and demanded a higher interest rate. This would also explain the negative real rates through the “great inflation.”

    It is an explanation that files in the face of rational pricing, but it does fit the data.

  24. Gravatar of Bob Dobalina Bob Dobalina
    14. January 2013 at 13:45

    himaginary is Japanese. You can tell because he wrote “Lehman shock.”

  25. Gravatar of Nick Nick
    14. January 2013 at 17:09

    The earlier rise in breakeven rates, about +1% from Nov 11 to May 12, I fear was mostly caused by rising expectations that Noda would succeed in increasing consumption tax by 5%, rather than belief in change at the BoJ. Spread over 5 years naively a 5% rise equates to about 1%pa added to CPI, the whole move in the breakeven rates. Looking back at Apr97 when the tax rose 2% CPI jumped 1.4%, suggesting the rise in break-evens was perhaps 70% down to tax, leaving 30%, or 30bp belief in change at the BoJ.

  26. Gravatar of Benjamin Cole Benjamin Cole
    14. January 2013 at 20:19

    Negation of Ideology–

    Thanks for your comment, I hope you are still reading.

    Yes, Japan never got out of zero bound, even after five years of QE.

    We are going to have to go into hot and heavy with QE.

    Even worse (and here I depart from my fellow Market Monetarists): I think the Fed has no credibility. I think no federal agency has any credibility. Thanks decades of lying by both parties and PR masquerading as government. Yes, Saddam has weapons of mass destruction, and we will get the economy going again. And make the tax code fair.

    In other words, forward guidance is worth nearly nothing.

    The Fed is going to have to print money like there is no tomorrow.

    But it can’t—it is the Fed. It is independent, self-exalting, hidebound, encrusted, risk-averse, and worse, but I can’t think of the right way to phrase it just yet.

  27. Gravatar of phil_20686 phil_20686
    15. January 2013 at 05:27

    The natural rate of interest is controlled by the marginal benefit of deploying capital vs the response of savings preferences to real interest rates. If there are players in the economy who could build a factory and get a 5% return on investment, then they will do that whenever the interest rate is below 5%. (lots of caveats about efficiency that I don’t see as being important).

    At the moment we have a bit of a perfect storm: There is not much scope for deploying more capital in the developed world, and those countries that need to build their capital stock seem to have plenty of geopolitical risk built in. The baby boom generation is in their fifties and are saving like crazy for retirement, and they seem to have a negative slope: they are close enough to purchasing annuities that low interest rates make them save more rather than less. Finally, a technology shock can raise interest rates, as it renders large parts of the old capital stock useless and produces a lot of new potential investments with high return on capital. In the seventies we had: Perfection of mass production and management and a Large Young population, and increasing labour force due to women entering: now we have a large generation in their fifties, a stagnant/falling work force saving for retirement, and not so much in the way of widely applicable technological innovation.

    The first of these things to change will be demographic: When the baby boomers retire there will be a large dis-saving, as they go from being large net savers to net dis-savers. This will raise interest rates and be a drag on future RGDP growth due to lower capital investments. Eventually, we will understand how to make the internet work for us in a way that raises GDP rather than just creating lots of extra leisure. That will further raise interest rates, but this time it will increase RGDP rates at the same time.

    Prediction: the Natural Rate of Interest will bottom roughly when the center of the baby boomer generation reaches 65.

  28. Gravatar of ssumner ssumner
    15. January 2013 at 08:06

    Ed, Interesting. You may be right.

    Brian, I think it’s also partly the change in our economic structure. Now industries like Facebook and Google and Apple and Microsoft require less investment than old industries like autos steel and railroads.

    Geoff, You said;

    “My main argument is that a higher NGDP targeting, because it would call for more inflation in Japan, won’t be all sunshine and roses there at least, because of the large debt level relative to their tax base. Do you deny or agree with that assessment?”

    I disagree. Inflation is all roses for debtors. BTW, Kuwait would do very poorly under NGDP targeting, as the non-oil sector would be whipsawed.

    Nick, Very good observation. And did the slight dropoff occur when prospects for the tax receded, or was it actually instituted?

  29. Gravatar of Nick Nick
    15. January 2013 at 16:40

    Consumption tax legislation was passed early August 2012, it should rise 3% in April 2014 and another 2% in October 2015. There is some vague wording included mentioning the desirability of having decent growth before it happens. Perhaps the possibility of that get-out clause operating reduced the breakeven rates. More perhaps the steady drip of hardline comments from Shirakawa downplaying the BoJs February change.

  30. Gravatar of ssumner ssumner
    16. January 2013 at 16:47

    Thanks for the info Nick.

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