Archive for the Category Japan


Abenomics after 5 years

Abe won a massive election victory in December 2012 on a promise of higher inflation.  He was subsequently re-elected in 2014 and 2017, again by a huge margin.  This sort of political success is actually very unusual in Japan, where PMs tend to come and go.  It’s also unusual that he made such a big issue of inflation, in a country full of elderly savers.  (So much for armchair public choice theory.)  So how’s he doing after 5 years, apart from being highly popular?

The most important impact of Abenomics was on NGDP, which had been trending downwards prior to his election:

It’s actually better than this Fred graph shows, as Q2 NGDP was revised up to 544.9 trillion yen, and the third quarter came in at a very strong 549.2 yen.

According to market monetarist theory, strong NGDP can be useful in solving 2 problems, excessive debt burdens and high cyclical unemployment.  Abenomics has been very successful on both fronts.  Unemployment had fallen to 2.7%, the lowest level in 23 years.  And the public debt to GDP ratio has leveled off, after soaring higher at a dangerous rate in recent decades.

The debt ratio achievement is especially impressive given the extremely unfavorable demographics facing Japan:

Normally a rapidly falling population makes the debt situation worse, and also makes it more difficult to boost NGDP.  Abe overcome this obstacle on both fronts.  The boost to NGDP also occurred during a period of fiscal austerity, which of course contradicts the Keynesian model.

The BOJ has an inflation target of 2%, and this is one area where they have fallen somewhat short.  Prices are up about 5% in five years, which is certainly better than the deflation that preceded Abenomics, but well short of success:

Don’t pay too much attention to the year-to-year changes, as the inflation rate in 2014 was boosted by a sales tax increase, and the inflation rate after 2014 was held down by plunging oil prices.  Most forecasters see an inflation rate of just under 1% going forward.  Over at Econlog I explain why that’s still too low, even though the Japanese economy can do fine with 1% inflation.

To summarize:

1. NGDP was a big success

2. The debt situation is dramatically improved.

3. The labor market is far stronger

4. Inflation is higher, but well short of the 2% target.

I’d say that Abenomics deserves a B+ on monetary policy.  I don’t know enough to comment on the other aspects of his policy, although obviously I don’t agree with his nationalism.

PS.  I’d like to thank Ralph Benko for his very generous comments in Forbes.  I still feel pretty good about the prediction I made in “An Even Greater Moderation”, which he links to.

The truth that dare not speak its name (or perhaps two truths?)

There’s a very good new post by Benn Steil and Benjamin Della Rocca that explains why the BOJ does not emphasize the exchange rate channel in their monetary stimulus:

In September 2016, the Bank of Japan adopted a new strategy to boost the flagging Japanese economy: “yield curve control,” or YCC. The aim was to widen the gap between long- and short-term interest rates, by keeping shorter-term (10-year) government bond (JGB) rates at 0%, as a means of encouraging bank lending. . . .

BoJ Governor Haruhiko Kuroda has trumpeted the policy’s success in boosting lending. As shown in the bottom left figure, though, lending did not increase because of the mechanism underlying YCC—that is, a widening of the gap between what banks pay to borrow funds short-term and what they receive from borrowers longer-term. . . .

What happened, then? After YCC was announced, the BoJ’s pledge to hold 10-year JGB rates at 0% pushed bond investors to find yield outside Japan. . . .this caused the yen to fall sharply, which boosted exports. . . .

[S]hortly after Prime Minister Shinzo Abe took office, the Obama administration admonished Japanese authorities for public statements calling for yen depreciation. Abe and Kuroda learned the important lesson that one may only target the exchange rate if one does not speak of it.

Off topic, I don’t often blog on the Lucas Critique.  I wonder if anyone has commented on its applicability to the concept to sexual harassment.  Suppose that over a period of decades society does not take charges of sexual harassment very seriously.  In that environment, there may well be very few false claims of sexual harassment.  However if policy changes in such a way that accusations are presumed to be true, and also result in severe consequences, then the Lucas Critique predicts a sizable increase in false accusations.

That does not mean that harassment charges should not be taken more seriously than in the past, and also result in serious consequences.  (On balance I think they should, despite the Lucas Critique problem.)  Rather it suggests that this is not an easy black and white issue.  There is almost certainly some degree of presumption of guilt that would be counterproductive.  Imagine a world where everyone (and I’m including men, as this group is also sexually harassed fairly frequently) could destroy the lives of anyone they disliked.  No one would want that kind of world, which means that no one who claims that accusations should always be believed is telling the truth.  We are all skeptics, it’s just a matter of degree.

The world (and especially the internet/media) is like a giant high school, where we are all expected to conform to popular belief.  When that consensus changes, we are expected to dutifully fall in line.  I transferred from that high school to utilitarianism when I was in my 20s.

PS.  Here’s Scott Alexander:

About 30% of the victims of sexual harassment are men.

Abe reasons from a price change

Here’s the FT:

Shinzo Abe has demanded Japanese companies lift pay by three per cent next year as he uses his big victory in last week’s election to intensify his push to boost the country’s economy.

The Japanese prime minister’s decision to give a specific number marks a deepening of government interference in private sector wage settlements. Last year, Mr Abe simply called for pay rises at least as great as the year before.

Would higher wages be good for the Japanese economy?  It depends.  If the higher wages are achieved through more aggregate demand, then they might be associated with higher employment.  If implemented via less aggregate supply (as Abe proposes), they will lower employment.

Consider the following two options:

If the BOJ adopts an expansionary monetary policy, boosting NGDP, then the demand for labor will increase.  This will boost growth, increase wages, and employment will rise to point B.

If the BOJ does not boost NGDP but Abe pressures firms into raises wages anyway, then employment will decline to point C.

It’s very demoralizing that top officials in Japan the US and Europe continue to make the EC101 error of reasoning from a price change.  Over and over again.

Why do we even bother teaching EC101 in colleges?  What’s the point?

PS.  Now that taxes are in the news let me agree with Jeff Flake, who is calling for tax reform, not tax cuts.

Tax reform would be one of the very best things the GOP could do right now.  Tax cuts would be among the very worst moves they could make.

It’s often said that the modern GOP exists for one purpose only, to enact tax cuts.  I don’t think people have fully internalized the implication of that truth.  If and when the GOP does enact tax cuts and/or reform, it will no longer have a reason to exist.  Tax reform might end up being a major achievement, or it might not.  But either way the enactment of a major tax bill will mark the end of the modern GOP.  They will no longer have a reason to exist.

I have no idea what will take it’s place.  Perhaps a white nationalist Bannonite party.  National socialists.  But whatever it is, it won’t be the modern GOP—which will be dead.

PPS.  On the graph, I forget to label points B and C as a 3% wage gain.

Warsh on fiscal and monetary policy

Because Kevin Warsh is apparently the frontrunner for Fed chair, his record has been attracting a lot of attention.  Here’s Ike Brannon of the Weekly Standard:

In 2010, in his waning days on the board, Warsh remained preoccupied with the specter of inflation despite the complete lack of evidence suggesting its incipient appearance. In an FOMC meeting late that year he argued that the Fed should consider pulling back on its quantitative easing despite the fragile nature of the economy, reasoning that if it were to do so it would prompt Congress and the White House to act with another round of expansionary fiscal policy.

Suggesting that the Fed play political chicken with Congress is, in a word, insane. The Federal Reserve has a legislative mandate to pursue both full employment and price stability in monetary policy. What Warsh suggested would have effectively set that aside and inserted the Fed into the middle of a highly charged political battle that could have harmed the economy. People who allege that Warsh’s appointment would make the Fed more political can point to this as Exhibit A.

I agree that this sort of policy would be insane, although I’m not sure that this is precisely what Warsh was proposing.  I found this passage in the transcript of the November 2010 meeting, which suggests a slightly different interpretation (albeit equally “insane”):

First, my views on policy. As I said when we met by videoconference, my views are increasingly out of step with the views of most people around this table. The path that you’re leading us to, Mr. Chairman, is not my preferred path forward. I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting it rest where it should lie. We are too accepting of dangerous policies from others that have been long in the making, and we should put the burden on them.

I can think, Mr. Chairman, of a tough weekend that the Europeans had, particularly your counterpart at the ECB, in the spring or summer, when we all knew that the European Central Bank, rightly or wrongly, was going to take action. But Jean-Claude Trichet did not take action until very late that Sunday night, until the fiscal authorities did their part. He thought that if on Friday night he were to say all of the things he’d be willing to do, he’d be taking the burden off the fiscal authorities. He chose to wait. I think we would be far better off waiting. If we proceed on this path, as I suspect we will, I would still encourage you to put the burden where it rightly belongs, which is on other policymakers here in Washington, and to do so in a way that is respectful of different lines of responsibility.

A few comments:

1.  Warsh’s comments in the transcripts are consistently disappointing, on almost every level.  Unlike other people I often disagree with (Krugman, Summers etc.) he doesn’t have a first rate mind.  His reasoning process is poor and he lacks good communication skills.  He has very poor judgment when interpreting data.  I really don’t know what he’s trying to say here, but the reference to Trichet is interesting.  Trichet was trying to encourage fiscal authorities to adopt more contractionary fiscal policies, not expansionary policies.  Trichet did not want to “bail out” expansionary policies with ultra-low interest rates, and Warsh seems to be endorsing Trichet’s approach.  And given Warsh’s reputation as a conservative, and the massive deficits being run by Obama back in 2010, I find it odd that Warsh would be advocating fiscal stimulus, as Brannon suggests.  But again, the passage is so garbled that I could easily be wrong.

2.  Warsh doesn’t seem to take the Congressional mandate seriously.  He seems to believe the Fed should be free to ignore this mandate, as a way of pressuring Congress to do what a few unelected private sector bankers want it to do.  To say that’s deeply disturbing is an understatement.  The Fed’s only argument for policy independence is that they are selfless non-political technicians trying to achieve goals set by Congress.

It is, of course, good news that equity prices have moved up, but I’m less convinced of their durability if this achievement is mostly because of what we’re doing here in the FOMC rather than because of what’s going on in the real economy.

This is disturbing on so many levels.  Start with the fact that no one could care less whether Warsh thinks the rise is equity prices was “durable”.  His opinion is worthless.  The fact that he thinks his opinion is worth mentioning is itself quite revealing.  And of course it’s not a question of monetary policy vs. the real economy; policy impacts stocks precisely because it impacts the real economy.  And of course he was totally wrong; the rise was durable.  Indeed stocks could crash tomorrow, and still be far above 2010 levels.

Warsh was also totally wrong about the NAIRU:

I share the staff’s view that the NAIRU has moved up.

In researching this post I came across this very revealing passage:

CHAIRMAN BERNANKE. President Evans, did you have a question?

MR. EVANS. Well, I just wanted to ask a question and offer a reaction to something that has come up at the last several meetings. I second the proposal of characterizing what optimal policy is in some way that we could better appreciate. President Bullard was absolutely correct when he pointed out that, after a big shock, optimal policy could well lead to fairly substantial gaps, or however you want to describe this outcome. But it’s also the case that bad policy would lead to gaps like that, too, and we need to understand why the current situation should be characterized as optimal and not simply bad. [Laughter] I mean, there is just a presumption here.

MR. BULLARD. Can I just clarify?

CHAIRMAN BERNANKE. President Bullard. November 2–3, 2010 141 of 238

MR. BULLARD. I just said that merely saying that unemployment is high and inflation is very low doesn’t tell you anything one way or the other about the quality of the policy, so that’s consistent with what you’re saying. It could be that we are following completely horrible policy, but we can argue that.

MR. LACKER. My point was that we don’t want to lead people to believe that, if unemployment is ever high, it’s because we have failed and are doing bad policy. You’d agree with that, wouldn’t you? MR. EVANS. I second the proposal for clarity on all of these objectives. [Emphasis added]

This is an amazing exchange–just amazing.  It perfectly demonstrates why we need the sort of accountability I’ve called for in recent posts.  Evans is right, OF COURSE you’d want to be able to discriminate between bad outcomes due to bad policy, and bad outcomes due to bad luck.  The Fed needs to establish a criterion by which policy actions can be judged, at least retrospectively.  If the Federal Reserve cannot establish a set of agreed upon metrics by which to evaluate whether previous policy stances were too expansionary or too contractionary, then the Fed ought to be abolished, with monetary policy turned over to the Treasury.

I found the experience of reading this transcript to be very depressing, giving me even greater respect for Ben Bernanke.  There were many people resisting monetary stimulus for reasons that are very hard to understand.  Bernanke is very polite, but it must have been an incredibly frustrating experience for him, knowing that the economy needed more stimulus and finding so much resistance.  In retrospect, it’s clear that many of his comments at the press conferences were attempts to explain the views of the committee as a whole, not necessarily his personal views.  Here I’m especially thinking in terms of his warnings about costs and risks associated with QE.

Basically you had one group of people seriously trying to hit the Fed’s targets, and another group that looked for any excuse they could find to do nothing.

HT:  Stephen Kirchner, Adam Ozimek, Craig Torres

Off topic:  As a child I had a very severe case of hay fever (fortunately I outgrew it).  So I was pleased to see Japan’s number two political party plans to address this underrated problem:

Yuriko Koike’s ‘zero policy’ pledges:

Zero nuclear power

Zero corporate cover ups

Zero corporate political donation

Zero children waiting for places in day care

Zero passive smoking

Zero packed commuter trains

Zero putting down of unwanted pets

Zero food waste

Zero violation of labour laws

Zero hay fever

Zero disabled and aged people unable to receive means of transport

Zero overhead power cables

Are higher inflation rates inherently less stable?

Vaidas Urba directed me to a very interesting talk by Vítor Constâncio, Vice-President of the European Central Bank. Here’s one item that caught my eye:

Increasing the inflation target real interest rates could then be effective to eliminate negative output and unemployment gaps. These benefits of a higher inflation target can be outweighed by the broader costs of higher inflation, depending on the chosen level. Historically, relatively higher inflation has usually been associated with more volatile inflation.[30] Moreover, the ECB and many other inflation-targeting central banks have shown that other monetary policy tools are available when interest rates cannot be lowered further.

It’s true that the availability of alternative tools makes a higher inflation target unnecessary, but the first argument is a bit misleading.  While its true that “Historically, relatively higher inflation has usually been associated with more volatile inflation”, this isn’t actually relevant to the debate over whether the inflation target should be set at 2%, 3% or 4%.  Yes, inflation was both higher and more volatile during the 1960s-80s, but inflation was lower and more volatile during the gold standard era.

The greater stability of inflation since 1990 is due to the fact that central banks have started targeting inflation, whereas there was no consistent inflation target under either the Great Inflation or the gold standard.  Inflation will be more stable when it’s being targeted, regardless of whether the target is set at 2%, 3% or 4%. Now if you are talking about an extremely high target, say 17%, then I’d expect more volatility, as it’s unlikely the next government or central bank head would agree with that sort of specific number.  The real issue is not how high the target is, but rather the degree of consensus.  Maybe there is currently more consensus around 2% than 3%, but if the zero bound continues to be an issue then that consensus may reverse in the future.

The discussion also mentions NGDPLT, but doesn’t really offer any useful analysis of that proposal.

David Levey directed me to an interesting Vox essay by Athanasios Orphanides, which compares the debt situation in Japan and Italy:

For Japan, the dramatic rise of the debt ratio before the crisis reflects the lack of nominal growth.  While the long-term government bond yield appeared to be low (consistently below 2%), nominal GDP growth was even lower (about zero, on average). The adverse debt dynamics worsened after 2007, with the recession following the Global Crisis. Part of the problem was overly tight monetary policy: policy rates were constrained by the zero lower bound (ZLB), but the Bank of Japan was reluctant to employ the required QE policies. However, since 2013 the Bank of Japan has embarked on a decisive QE programme which has simultaneously boosted nominal GDP growth and depressed long-term government bond yields. Since September 2016, as part of its ‘Quantitative and Qualitative Monetary Easing with Yield Curve Control’ policy, the Bank of Japan has communicated explicitly its intention to keep the 10-year yield on government bonds close to zero and short-term interest rates negative until inflation rises to 2%, in line with its definition of price stability. This monetary policy has stabilised Japan’s debt dynamics and has provided the Japanese government more time to implement structural reform measures and complete the fiscal adjustment needed to bring its primary deficit under control.

Abenomics has modestly boosted inflation in Japan, but the rate remains below the BOJ’s 2% target.  In another sense, however, the policy has been a big success. Unemployment has fallen to 2.8%, NGDP growth has accelerated, and the debt ratio has stopped rising.  Japan is no longer on the road to bankruptcy.

That’s why I favored the monetary “arrow” of Abenomics, and I’m pleased to see even a partial success.  In contrast, Italy lacks its own currency and will have to combine fiscal austerity with supply-side reforms to solve its problems.  That’s much tougher to achieve.

PS.  Hester Peirce is my colleague at the Mercatus Center, where she focuses on financial regulatory issues.  In this link, she’s on a panel with Ben Bernanke, discussing Dodd-Frank provisions such as the “orderly liquidation authority”.