Abenomics is doing better than I expected (shades of grey)

Here’s commenter dtoh:

I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

This is half wrong.  Certainly less effective than I had hoped, but more effective than I expected. In my early posts on Abenomics I suggested that it was likely to have a positive effect, but that Japan would fall short of the 2% inflation goal.  I expected about 1% inflation, still a significant improvement.  Japan has exceeded 1% inflation, even if you discount the effects of the sales tax. The yen has also depreciated much more than I (and the markets) expected.  Japanese stocks have risen much more than I (and the markets) expected.  Indeed by almost every metric they’ve done better than I expected.

So why does dtoh (a careful reader) have the opposite impression?  Because I am also very pessimistic about Japan, due to its big public debt and rapidly falling working age population.  I supported the sales tax increase, but even as I did so I predicted it would hurt the economy, and it has.  And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly.  That’s Japan.

Read this and this for my earlier pessimism about Japan.

For the same reason, people often wrongly believe I’m a fan of the Chinese government, or its economic policy.  It’s a bad policy–perhaps as bad as Greece. But if China ever became as rich as Greece it would be the single most successful economic policy in all of world history.  And China probably will become as rich as Greece, as moving from a nightmarish policy under Mao to a merely bad policy under Deng and Xi has released the entrepreneurial energies of the Chinese population.

Real world economics is never black and white; it’s always about shades of grey. I’ve frequently pointed out that Abenomics was doing all sorts of things that the liquidity trap Keynesians said was impossible.  It boosted stock prices, it depreciated the yen, and it boosted nominal and real GDP.  That made me seem like an optimist. But I also said it would fall short of the announced goals, and I now feel that more strongly than ever.  Contrary to dtoh, if Japan does well I will be forced to admit I was wrong, as I did not expect Japan to do well.

I’ve also been saying that while QE and forward guidance helped, the Fed has consistently been too optimistic about US growth.  We are in a Great Stagnation. Just yesterday I noticed that Fed officials are hard at work explaining why their latest 3% growth forecast will fail to materialize, just like the previous 5 years.

A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

By the way, Nick Rowe recently had this to say about central bankers:

But I do have a lot more confidence in the BoC than in the BoJ, ECB, or the Fed. Yes. The people who run the BoC are better macroeconomists, they speak with one voice, and they have the support of the government in doing what they are doing. You do not hear them say totally stupid things, like you do with people making decisions at other central banks.

Yesterday I noticed a perfect example of what Nick was thinking about:

Japan is in danger of falling into a recession as the yen’s decline reduces the purchasing power of households and squeezes corporate profits, said a former deputy governor of the Bank of Japan.

“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”

Hmmm . . . .

Totally off topic, fans of drug legalization will love this youtube.



25 Responses to “Abenomics is doing better than I expected (shades of grey)”

  1. Gravatar of effem effem
    23. September 2014 at 06:05

    Stock prices went nowhwere in USD. It’s simply a currency effect. That’s like saying “oil in japan is doing very well.”

  2. Gravatar of Michael Michael
    23. September 2014 at 06:07

    Is it fair to say that your optimism/pessimism on Japan is about nominal vs real?Abenlmics can help address the nominal problems and therefore Japan is doing better than it would otherwise be doing without Abenomics.

    Yet Abenomics is powerless to address the underlying structural issues, other than making it perhaps marginally easier to address them by not dumping gasoline on the fire.

  3. Gravatar of ssumner ssumner
    23. September 2014 at 06:44

    effem, Why not tell me how they did in Brazil reals, or Venezuelan Bolivars? Who cares how Japanese stocks do in terms of US dollars? Who made the US the King of the World?

    BTW, You are wrong; Abenomics raised Japanese stock prices from 8700 to over 16000–that’s far more than the exchange rate changed.

    Michael, I thought Japan would fall short on both nominal and real targets. I believe Abenomics can help RGDP growth a little, but not a lot. The best effect will be to reduce the debt burden.

  4. Gravatar of Tom Tom
    23. September 2014 at 06:56

    Professor Sumner, wouldn’t you argue that Japan would be better off if they adopted a more aggressive target (NGDP or even Inflation)? My understanding is that the BOJ sort of dipped their toes into a more aggressive policy stance. If they had come out and explicitly stated they would target a more aggressive rate and QE would not stop until they reached that target, I think they would have been much more effective.

    On the real side- I would argue that rGDP is predicated on having stability. Without economic stability people are less inclined to spend/invest. Having a central bank with credibility and an explicit goal in mind would certainly help on that front as well (as long as they hit their target…)

  5. Gravatar of dtoh dtoh
    23. September 2014 at 07:12

    A few comments.

    1. I too am pessimistic about Japan. I think it’s very unlikely they will engage in any kind of meaningful structural reform. (That said, I do think there are some structural changes taking place outside the purview of the bureaucrats and I am curious to see the impact of these changes.)

    2.The tax increase was a bad, bad idea. There was never any intention (IMHO) to use it to reduce the deficit. It was just a way to throw money at the construction companies and other supporters of various LDP factions. Basically a political bone that Abe had to throw his rivals within his own party.

    3. The inflation goal was stupid. It was a way to sell the package to wage earners and labor unions. The whole point of monetary policy is to reduce real wages and this doesn’t happen if nominal wage growth matches NGDP growth. Without this, monetary policy is ineffective and pointless. And the monetary supply does not directly drive inflation. Inflation happens when you get an expected imbalance in supply and Japan. Japan is nowhere near close enough to it’s full productive capacity or full employment for this to happen. IMHO, you would need to a year or two of real growth at 2 or 3% for this to happen.

    4. Stock prices and inflation are no measure (perhaps a good indicator but not an end goal) of the success of monetary policy. NGDP is the measure of success and when you are coming out of a period of low or no growth, this will mostly translate into real rather than nominal growth.

  6. Gravatar of Nick Nick
    23. September 2014 at 07:42

    Prof Sumner,
    You have seemed pessimistic on Japan to me for as long as I’ve been reading this blog. Of course, some people are in total denial … and I guess you seem optimistic to them.
    I really don’t know much about the details of Japanese politics, but I think the question of how much ‘proper monetary policy’ can do for them is sort of moot at this point. The monetary and fiscal divide has been breached … Politicians are running campaigns based on combined monetary and fiscal action. This is good (for a country with serious problems) but it sort of makes a mockery of trying to pick out how much good could be done by money alone.
    The only way they’ll ever get ‘proper’ monetary policy in japan will be when there is a political consensus smart enough that fiscal / supply side policy changes will be more achievable as well.

  7. Gravatar of Brian Donohue Brian Donohue
    23. September 2014 at 10:22

    I find the term ‘Japan pessimist’ to be very unhelpful. Compared to what? To consensus expectations (which range from meh to catastrophe)? To other developed countries?

    Japan is an outlier in so many ways. Yeah, a lot of government debt, but a rich citizenry too, an educated workforce, world-beating companies, low unemployment.

    The closest comparison I can come up with is Italy. Another very old country with an awkward debt. I’m more pessimistic about Italy than Japan, but I suspect they both will muddle through, and life in those two countries will be pretty good for most people for the foreseeable future.

  8. Gravatar of Nick Rowe Nick Rowe
    23. September 2014 at 12:40

    Scott: yep. And there was also that example of the chief economist at the Dallas Fed you recently blogged about, making a second year mistake. http://www.themoneyillusion.com/?p=27490

  9. Gravatar of benjamin cole benjamin cole
    23. September 2014 at 15:57

    The global monetary asphyxiation brought about by the world’s central banks is resulting in defeatism in all quarters, including in market monetarist circles, I am sad to say.

    Even economists forget that the US economy grew by 20 percent in real terms from 1976 to 1979–pre-Internet and before much globalization! This kind of growth is possible if you have an aggressive central bank.
    Japan? If the demand is there people in the economy will adapt. They will delay retirement, women will enter the labor force, they will import more labor, or offshore some operations to Southeast Asia.
    Say “no” to defeatism!

  10. Gravatar of Major.Freedom Major.Freedom
    23. September 2014 at 22:24

    Japan’s high debt is made possible by Japan’s excessice monetary inflation. Central banks make it easier for governments to borrow.

    All the years of “rooting” for inflation have been years of “rooting” for more public debt.

  11. Gravatar of Saturos Saturos
    24. September 2014 at 01:00

    David Andolfatto interviews Markus Brunnermeier on the connections between monetary, fiscal and financial stability: http://www.stlouisfed.org/publications/Connecting-Policy-with-Frontier-Research/Markus-Brunnermeier.cfm

  12. Gravatar of TallDave TallDave
    24. September 2014 at 05:16

    And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly. That’s Japan.

    Yep. At the same time, though, I don’t think Japan has quite as many structural problems as is commonly thought — there’s a lot of ruin in every country, after all — and with better monetary policy they might begin to experience of sort of virtuous cycle in which higher economic growth enables cultural and policy shifts that lead to more growth.

  13. Gravatar of ssumner ssumner
    24. September 2014 at 06:04

    Tom, Yes, a better target would help, NGDPLT.

    dtoh, I mostly agree on 1, 3, 4.

    I disagree on 2. Government spending in Japan has been soaring for the last decade, long before the tax increase. If they are determined to spend that much they need to pay for it.

    Nick, FDR gave us pretty good monetary policy, combined with bad policy in other areas.

    Brian, Good point.

    Nick Rowe, Yes, he’s an endless source for nonsense.

    TallDave, That’s possible, but unlikely.

  14. Gravatar of dtoh dtoh
    24. September 2014 at 06:14

    On taxes. They said they were going to use the tax increase to pay for existing spending. They used it to justify and pay for more spending.

  15. Gravatar of Nick Nick
    24. September 2014 at 06:27

    I sort of feel like the story of FDRs confused combined monetary and fiscal policy supports the point I was trying to make. If only there were a book I could read that captured your views on this…

  16. Gravatar of TravisV TravisV
    24. September 2014 at 11:35

    Prof. Sumner,

    You might be interested in the following discussion between Josh Hendrickson, Mark Thoma and Simon-Wren Lewis:

    What Do We Want Out of Macroeconomics?


  17. Gravatar of ssumner ssumner
    24. September 2014 at 16:38

    dtoh. That’s not how I read it. First they spent a lot of money–long before they raised taxes. That created a situation where Japan would go bankrupt without a tax increase or deep cuts. I might have prefer cuts, but given they weren’t willing to do that, a tax increase was better than bankruptcy or hyperinflation.

    Nick, Yes, if only.

    Thanks Travis.

  18. Gravatar of Fed Up Fed Up
    24. September 2014 at 17:32

    Maybe the middle class is not doing as well as you think?


    “He and his wife are among legions of middle-class families who are straining under the weight of accelerating costs for a range of essential services from day care to health care. And now a study by the Center for American Progress shows just how heavy the burden has grown: For a typical married couple with two children, the combined cost of child care, housing, health care and savings for college and retirement jumped 32 percent from 2000 to 2012 “” and that’s after adjusting for inflation.

    Compounding the pain is that average pay for Americans is barely topping inflation.

    The figures help explain why many Americans feel stressed even as the economy has strengthened “” and why some feel bewildered to hear that overall inflation in the United States is, if anything, too low.

    From TVs, computers and cellphones to clothing and cars, many goods have dropped in price in the past decade. Those declining prices have helped keep overall inflation historically low “” even lower than the 2 percent the Federal Reserve thinks is ideal.

    Yet when you consider that average health care and college costs rocketed more than 80 percent from 2000 to 2012, it’s easier to understand why many families feel they are struggling.”

    And, “A survey by Pew this year found that 57 percent of Americans felt their income was trailing the cost of living “” the same proportion who felt so in October 2008 when the Great Recession was raging. Just before the recession began, the figure was 44 percent.

    The sensation of being squeezed persists even though the consumer price index, the most widely followed inflation gauge, has risen less than 2 percent a year since the recession ended.”

    And, “We used to go out, we used to go to the opera,” Prosser said. But now, “between mortgage, bills and the child care payment, that’s pretty much everything.”


  19. Gravatar of dtoh dtoh
    24. September 2014 at 17:47

    The problem is that a lot of the tax increase is and will be used for increased spending not to pay down what’s already be spent.

    And…you can raise taxes without raising tax rates.

  20. Gravatar of TallDave TallDave
    25. September 2014 at 07:42

    TallDave, That’s possible, but unlikely.

    The Nikkei’s responses suggests it’s more likely than people think.

    Maybe it’s just because I grew up the 1980s, when Japan was on the glide path to economic dominance, but it seems like they’ve been in stuck in our 2008-9 since the early 1990s. I also suspect their inflation numbers are more skewed than ours, meaning monetary policy is even more contractionary than it appears. Additionally, Japan’s structural problems tend to exacerbate economic weakness (difficulty doing layoffs, etc), so there’s a whole negative feedback cycle that could be reversed.

  21. Gravatar of ssumner ssumner
    25. September 2014 at 09:56

    Fed up. You said:

    And, “We used to go out, we used to go to the opera,”

    This is not at all typical. I recently saw that Americans are eating out more than in the boom year of 2000. That hardly suggests a population that is struggling to make ends meet. Most Americans making $75,000 to $100,000 don’t save a penny. Try taking a week off from going to the mall!

    But I do agree that some prices rise faster than average and some rise slower than average.

    dtoh, I think we are talking past each other. I certainly agree that spending cuts or closing loopholes is better than higher tax rates. It’s up to the Japanese, not me, to decide what they want to do. My only point is that if they want to spend money like they have been doing over the past 10 years, they need to pay for it. So far all I see is higher spending and no attempt to pay for it–until this April.

    Less spending and closing loopholes is better than higher tax rates. High tax rates are better than big deficits. It’s up to the Japanese to figure out what is politically feasible.

    TallDave, The Nikkei is higher than before Abenomics, but in absolute terms it is certainly not at lofty levels–not even close.

  22. Gravatar of TallDave TallDave
    25. September 2014 at 11:20

    Scott — the delta is what’s interesting, not the absolute levels. The Nikkei is screaming that money has been too tight and looser money will increase real growth. Granted, they could still ruin things on the fiscal side.


    A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

    I hate when CBs say they’re having trouble inflating.

  23. Gravatar of dtoh dtoh
    26. September 2014 at 00:44

    The problem is that higher tax rates do not help pay for spending. They simply facilitate additional spending…. and they often lead to lower tax revenue.

  24. Gravatar of ssumner ssumner
    27. September 2014 at 08:11

    TallDave, I agree that higher Japanese stock prices reflect expectations of slightly higher growth, but I just don’t think the markets expect MUCH higher growth. Again, that’s why we need NGDP and RGDP futures markets.

    dtoh, I think you are missing my point. Spending rose sharply over the past 10 years without higher taxes. It remains to be seen what the effect of higher taxes will be on future spending. But yes, I’d love to see both taxes and spending be cut.

  25. Gravatar of Fed Up Fed Up
    27. September 2014 at 19:00

    “I recently saw that Americans are eating out more than in the boom year of 2000. That hardly suggests a population that is struggling to make ends meet.”

    They could be eating more out and still struggling to make ends meet. Some more details would be needed there. Are there more tow income families? Something related to their jobs? There could be other questions too.

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