There are at least three criteria for judging whether Japan’s new monetary stimulus is a success:

1.  Did it boost expected NGDP growth?

2.  Did it result in 2% expected inflation?

3.  Will it allow Japan to exit the liquidity trap?

Regarding the first criterion, it’s already a success.  There’s no plausible model that has monetary stimulus boosting real equity prices by more than 50% in a few months, and failing to boost expected NGDP growth at least a tiny bit.  So that’s already a done deal.

Regarding the second, consider this:

TOKYO (Reuters) – The Bank of Japan has taken all necessary steps to meet its 2 percent inflation target in two years and will try to minimize the market disruption from its massive bond buying, Governor Haruhiko Kuroda said on Friday.

Kuroda conceded that some people doubted the BOJ could meet its inflation goal and said unexpected events could mean it would take longer than planned, but said the BOJ would maintain its new policy framework for as long as needed.

“We feel we’ve taken all necessary steps to achieve 2 pct inflation in two years, but it’s not appropriate to limit our policy to two years,” Kuroda said in a speech.

Unfortunately Japan does not have adequate CPI futures markets, but my sense is that they have not done enough.  Indeed I think Mr. Kuroda understands this, which is why he extends the timetable to more than 2 years.  Elsewhere they indicated that they would define success not just in terms of inflation but also RGDP growth, which is an implicit nod toward NGDP targeting.  That’s good, but it would be better if they made it explicit.

Of course the biggest mistake is a lack of “level targeting.”  If they fail to hit their 2% inflation target it will most likely be due to the decision to go with growth rate targeting, rather than the level targeting that Bernanke once recommended the Japanese adopt.

The third goal seems the least likely to be met, despite this optimistic report from Goldman Sachs:

In further evidence of growing exuberance over prospects for Japanese stocks, U.S. investment bank Goldman Sachs late Thursday upgraded its 12-month target for both Japanese benchmarks – the Nikkei and Topix – on expectations of bumper earnings growth.

It increased its target for Nikkei (Nihon Kenzai Shinbun: .N225-JP) to 16,000 from 15,000 and for the Topix to 1,350 from 1,250 earlier, which marks a near 20 percent upside from current levels.

“Last week’s announcement by [Bank of Japan] Governor Haruhiko Kuroda was the most credible attack on deflation that Japan has seen in a very long time, there’s prospect for Japan to exit this liquidity trap and get its domestic economy back on its feet,” Kathy Mitsui, chief Japan strategist at Goldman Sachs told CNBC on Friday.

And yet long term bond yields are still ultra-low.  I don’t see even a shred of evidence that Japan is likely to exit the zero rate bound in the foreseeable future.

Still, faster expected NGDP growth is the most important objective, and there’s no doubt in my mind that they’ve already had limited success in that very important endeavor.

Some commenters complain that I never take a stand on what will “work.”  OK, the yen has fallen from 76 to 99.  I say that if the BOJ cuts the yen to 125/$, they will likely get inflation.  If they cut it to 140 they will almost certainly get inflation.  Recall that the yen was in the 120s as recently as 2007.  The BOJ knows what it needs to do; will it do it?

PS.  Off topic Paul Krugman recently criticized the claim by David Andolfatto and Tyler Cowen that interest rates might actually be too low in the US and Europe.  Kudos to Krugman for not mischaracterizing their views (and implying they favored tighter money.)

I certainly understand the Wicksellian equilibrium rate argument, but I think it causes more to confuse than enlighten (partly for “never reason from a price change” reasons.)  In my view the key problem is that expected NGDP growth is too low.  If that were boosted via fiscal stimulus then interest rates would rise.  If boosted via monetary stimulus then rates might either fall or rise.  If it was a large and persistent monetary stimulus then long term rates would probably rise.

The following analogy might help:  Oil prices are currently below their Wicksellian equilibrium level.  I.e. a monetary policy initiative that pushed us toward macro-economic equilibrium (under almost any new Keynesian criterion) would likely raise nominal (and perhaps even real) oil prices.  On the other hand no one would argue that higher oil prices would help the US recovery.

Commenters: I am not saying Krugman is wrong, he understands these distinctions, as do (presumably) the other participants in the debate.  However when these ideas get out into the real world they become widely misunderstood, losing the subtlety of the original claim.  Best to avoid all discussion of interest rates. And inflation.  Focus on NGDP expectations.

David Glasner has a typically excellent piece on Ralph Hawtrey and the “Treasury View.”  It seems the Keynesians have been unfairly maligning Hawtrey for all these years.   (Why am I not surprised, they don’t just adopt Keynes’s ideas, but also his smear tactics.)

Here’s Hawtrey:

What has been shown is that expenditure on public works, if accompanied by a creation of credit, will give employment. But then the same reasoning shows that a creation of credit unaccompanied by any expenditure on public works would be equally effective in giving employment.

The public works are merely a piece of ritual, convenient to people who want to be able to say that they are doing something, but otherwise irrelevant. To stimulate an expansion of credit is usually only too easy. To resort for the purpose to the construction of expensive public works is to burn down the house for the sake of the roast pig.

That applies to the case where the works are financed by credit creation. In the practical application of the policy, however, this part of the programme is omitted. The works are started by the Government at the very moment when the central bank is doing all it can to prevent credit from expanding. The Chinaman burns down his house in emulation of his neighbour’s meal of roast pork, but omits the pig.

I’m sure my wife wouldn’t appreciate the Chinaman reference, but otherwise a great analysis.  I’ve always liked Hawtrey, but now I appreciate him more than ever.  And here’s David:

Keynesians are no doubt offended by the dismissive reference to public-works spending as “a piece of ritual.” But it is worth recalling the context in which Hawtrey published his paper in 1925 (read to the Economics Club on February 10). Britain was then in the final stages of restoring the prewar dollar-sterling parity in anticipation of formally reestablishing gold convertibility and the gold standard. In order to accomplish this goal, the Bank of England raised its bank rate to 5%, even though unemployment was still over 10%. Indeed, Hawtrey did favor going back on the gold standard, but not at any cost. His view was that the central position of London in international trade meant that the Bank of England had leeway to set its bank rate, and other central banks would adjust their rates to the bank rate in London. Hawtrey may or may not have been correct in assessing the extent of the discretionary power of the Bank of England to set its bank rate. But given his expansive view of the power of the Bank of England, it made no sense to Hawtrey that the Bank of England was setting its bank rate at 5% (historically a rate characterizing periods of “dear money” as Hawtrey demonstrated subsequently in his Century of Bank Rate) in order to reduce total spending, thereby inducing an inflow of gold, while the Government simultaneously initiated public-works spending to reduce unemployment. The unemployment was attributable to the restriction of spending caused by the high bank rate, so the obvious, and most effective, remedy for unemployment was a reduced bank rate, thereby inducing an automatic increase in spending. Given his view of the powers of the Bank of England, Hawtrey felt that the gold standard would take care of itself. But even if he was wrong, he did not feel that restoring the gold standard was worth the required contraction of spending and employment.

From the standpoint of pure monetary analysis, notwithstanding all the bad press that the “Treasury View” has received, there is very little on which to fault the paper that gave birth to the “Treasury View.”

PS.  To give you an idea of how far things have regressed since 1925, uber-Keynesian Ed Balls is proposing that Britain burn down the house without the pig inside.  He wants fiscal stimulus, but also wants the BoE to keeps its 2% inflation target.  And Ed Balls is the guy that people like Paul Krugman cite with approval.

PPS.  Off topic, but I really respect people who keep an open mind.  Here’s David Andolfatto:

Apart from all this, it will be interesting to see how the experiment in Japan plays out. Most of the massive purchases announced by the BOJ are for JGBs — I’m really skeptical what sort of effect this should have (since the operation constitutes swaps of two assets that are close to perfect substitutes–although some purchases will take the form of higher risk assets–seeNoah Smith on this). But what I think really does not matter–it is what market participants think–and the program does appear to be having some effect in financial markets.

Market monetarists emphasize that interest rates are an unreliable guide to the stance of monetary policy.  Monetary stimulus can lower rates via the liquidity effect, but it can also raise rates via the expected inflation and income effects.  Here’s the Financial Times:

BoJ deflation war begets curious results

Japanese companies that borrow money from Mizuho Corporate Bank, one of the country’s largest lenders, received a small but unpleasant surprise this week when the bank decided to raise the rate of interest it charges on some of its loans.

The move, which was mimicked by two smaller lenders, Shinsei and Aozora, sat oddly because it came just a few days after Japan’s monetary authorities announced a dramatic effort to make money cheaper and more abundant.

In its most assertive attempt yet to stimulate the economy and end years of corrosive price declines, the Bank of Japan is doubling the amount of money in circulation by sharply increasing purchases of government bonds and other assets.

The central bank’s new policy, which it began to implement on Monday, should have pushed the cost of borrowing down, not up, from what are already historically low levels. Mizuho’s decision to increase its long-term prime lending rate, by 0.05 percentage point to 1.2 per cent, reflectedgyrations in Japanese bond markets that have followed the BoJ’s announcement.

Don’t trust the media.  Don’t trust the old monetarists, the new and old Keynesians, the RBCers, the Austrians, the MMTers, or the new classicals.  Only the market monetarists offer a model that allows you to make sense of what’s going on in the world.

PS.  Not all non-market monetarists are wrong about interest rates, but they are all wrong about something.  Maybe it’s the importance of demand shocks, maybe it’s the fiscal multiplier, or the effectiveness of monetary policy at the zero bound.  Or whether QE will create high inflation.

. . . .I predict people will say it was a bubble, even though it wasn’t.  The term ‘bubble’ can mean many things, but the sine qua non of definitions includes “rejection of the EMH.”  But the EMH says that bitcoin is very likely to crash.  Why is this so, and why don’t people know this?

1.  We know that market volatility is serially correlated.  Markets that have been highly volatile are likely to remain highly volatile.

2.  According to Köpa Bitcoin 2020, Bitcoin prices are super volatile.

3.  The EMH predicts that expected returns are near zero.  Combined with high volatility, this mean the EMH predicts that bitcoin will exhibit large price increases and large price decreases at various times in the future.

When the bitcoin price crash comes, most people will wrong say; “Aha, I told you that it was a bubble.”  But why?

Because they wil have forgotten about their first bubble prediction.  People were calling it a bubble at $2, and again at $30.  Now it’s over $200.  If it plunged to $35 dollars, the bubble predictors will say they were right all along, but they will have been wrong.  They’ve merely remember their bubble predictions, not where bitcoin was when the made the predictions.

[Ha! I wrote this yesterday and delayed posting–that’ll teach me.  It’s $160 tonight]

But the internet never forgets anything.  And I’ll search and search and expose every phony “I told you so.” I can’t predict where bitcoin is going, but I can predict there will be many false “bubble” claims when it eventually crashes—and it will crash.  The only question is whether it will crash from a price so far above the current price, that it’s still a good buy at $200. $160.

And the EMH says that the answer to that question is; “God only knows.”

Memo to commenters:  All comments telling me why bitcoin is a bubble will be ignored, as they’ll show you missed the entire point of the post.

Narrative one:

One story after another of record employment in the UK:

October 2012

December 2012

February 2013

Meanwhile American employment continues to lag 3 million behind the levels of early 2008, despite the fact that America’s population growth rate is higher.  What explains the UK employment miracle?  Deficit spending.  Only Japan and Egypt run larger budget deficits than the UK.  How can the UK be running massive budget deficits as employment surges to records?  Only the Keynesian model can explain this correlation.

Narrative two:

One story after another of near-zero RGDP growth in the UK.

And what explains this slow RGDP growth?  The government has been talking “austerity” for the past three years.  And the Keynesian model predicts that austerity will correlate with slow growth.  So perhaps there’s also a link between austerity talk and RGDP.  Let’s see . . . I’ve got it, the expectations channel!

So it doesn’t matter which narrative you prefer, either way the Keynesian model has been completely vindicated—it explains Britain’s situation perfectly.