I’ve consistently made the following arguments about Abenomics:
1. The data suggests that the new BOJ policy has raised inflation, and inflation expectations. There is a mountain of evidence on that point.
2. Japanese inflation is likely to fall short of 2% (except for the sales tax bounce) unless the BOJ takes further steps. That’s less clear than the first point, but seems a reasonable way to read market indicators such as long term bond yields.
3. It really doesn’t matter whether they hit 2% inflation, they shouldn’t even target inflation. Rather what matters is if they can move NGDP growth into positive territory–at least 2% to 3%. It’s still unclear if they will achieve that, but they’ve made progress.
Many commenters sent me a Noah Smith post that correctly pointed out that the more reliable “core-core” inflation rate is only running about 0.7%. Mark Sadowski pointed out that just three weeks back Noah Smith had a post that showed the core-core rate had recently risen, and was at the highest rate since the 1990s.
Noah concluded with this odd assertion:
So basically, Abenomics has not yet shown that a central bank can hit a 2% inflation target after a long period of deflation. That proposition remains an article of faith. Perhaps the target will be hit…perhaps not. (Of course, if it’s not hit, expect a few supporters of monetary easing to say that the Bank of Japan was just not committed enough to hitting it…)
As I said, I never expected Japanese inflation to hit 2%, but I’m more interested in the question of whether the failure to do so would indicate that the BOJ did not do enough. Hmmm, let me think about it. Let’s see . . . I’m probably not a complete moron. So yes, I guess I’d have to say that if inflation falls short of 2.0% then the BOJ would not have done enough to hit 2.0%. After all, if doing X moved inflation up to the highest levels since the 1990s, then it stands to reason that doing 10X or 100X would boost inflation even more. If moving the yen from 80 to 100 to the dollar boosted inflation, then it stands to reason that pegging the yen at 100 million, or 100 trillion to the dollar would do the job. If not, how about 100 quintillion yen to the dollar? (I stole this argument from John Locke–I only steal from the best.)
Or maybe I made a mistake somewhere. The NK model says “overheating” causes inflation. So if a currency peg of 100 quintillion to the dollar didn’t lead to overheating, then I guess it could not boost inflation above 2%.
Perhaps I’m overreacting to an italicized word (enough), but I couldn’t help thinking that there was a bit of snark directed at those who would claim that a failure to hit 2% inflation was due to insufficient monetary stimulus. What else could it be due to? Japan has the world’s largest budget deficit outside Egypt and Venezuela.
Perhaps a more interesting question is whether the reason Japan did not do enough (should it fail to hit 2% inflation) was that there were political barriers to currency debasement. Say they worried that the US would send in the Marines if the yen was pegged at 100 quintillion to the dollar. But as far as technical barriers, I’m pretty sure that if the Zimbabweans found a way, the Japanese could as well. They aren’t morons.
PS. The earlier Noah Smith post that Mark linked to ends as follows:
Monetary policy skeptics will doubtless still find no end of reasons to denigrate Abenomics, but so far their warnings have not been borne out.
Yes, that’s MUCH better.
PPS. Just want to make it clear that Noah is not a moron–indeed he’s smarter than me. Nor is he a phony. I always try to inject a bit of humor into Noah Smith posts, and the Batman reference was already used. Keeps me sane.
PPPS. John Locke is definitely not a moron.