About those Japanese inflation-phobes

We bloggers get all kinds in our comment sections.  One of my favorites are those sophisticated folks who assure us that we just don’t understand how politics works in the real world.  You know the type, the one’s who say central bankers could never go for an idea as crazy as NGDPLT.  Or the ones who lecture us about how the Japanese are different;  “They are a bunch of elderly savers.  They don’t want inflation, and are happy in their deflationary paradise.”  Yes, with a national debt equal to 240% of GDP and rising steadily.

Now it looks like the Japanese have elected a new government, which won by a landslide.  And that government ran on a platform of higher inflation.  Lars Christensen points us toward an article by Ambrose Evans-Pritchard:

“Its very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision,” he said.

The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply. “An all-out attack on deflation is on its way,” said Jesper Koll, Japanese equity chief at JP Morgan.

Mr Abe plans to empower an economic council to “spearhead” a shift in fiscal and monetary strategy, eviscerating the central bank’s independence.

The council is to set a 3pc growth target for nominal GDP, embracing a theory pushed by a small band of “market monetarists” around the world. “This is a big deal. There has been no nominal GDP growth in Japan for 15 years,” said Mr Christensen.

The yen depreciated sharply to Y84.48 against the dollar on Monday, the weakest in nearly two years, as traders bet that the LDP will this time bend the Bank of Japan to its will.

I’ve never been much interested in whether or not my ideas are “politically realistic.”  I’m sure that when the first Swedish intellectual proposed a system of universal education vouchers, including for-profit schools, they told him or her that it would never work in socialist Sweden.  Political reform proposals are always politically unrealistic, right up until the time when they are adopted.

So the next time you tell me that one of my ideas is not “politically realistic,” don’t be offended if I brush off your warning.

PS.  Lars adds the following warning:

PS a friend of mine who once spend time at the BoJ is telling me not to get overly optimistic…

I think that’s right.  The yen has fallen, but only to 84/$.  Stocks have risen, but only about 12%.  The market loves MM, as do the Japanese voters.  But Japanese bureaucracies are very powerful, and change may be incremental, not radical.

PPS.  I’m not certain about the NGDP target; some have told me that the correct translation was a 2% to 3% inflation target.  Time will tell.



25 Responses to “About those Japanese inflation-phobes”

  1. Gravatar of Left Outside Left Outside
    17. December 2012 at 15:45

    It’s all getting quite exciting isn’t it?

  2. Gravatar of Left Outside Left Outside
    17. December 2012 at 15:51

    That’s a bad sign, of course, monetary policy should never be exciting. If it’s exciting you’re doing it wrong.

  3. Gravatar of bill woolsey bill woolsey
    17. December 2012 at 16:00

    I think this is the way it needs to happen.

    Not central bank technocrats seeing the light, but rather the politicians deciding to give them new constraints.

    It looks to me like it is the politicians in Great Britain that are pressing the BOE to change–to the point of bringing in a foreigner.

  4. Gravatar of ChargerCarl ChargerCarl
    17. December 2012 at 16:01

    Pretty amazing how a bunch of fringe bloggers were able to change the discussion even in Japan.

  5. Gravatar of johnleemk johnleemk
    17. December 2012 at 16:19

    I second ChargerCarl. When I started reading this blog 3 years ago I couldn’t even imagine any government or central bank, let alone the Japanese and British authorities, openly pushing for a nominal GDP target of any kind.

  6. Gravatar of ssumner ssumner
    17. December 2012 at 16:44

    Left Outside:

    “That’s a bad sign, of course, monetary policy should never be exciting. If it’s exciting you’re doing it wrong.”

    That’s right.

    Everyone, Yes, I’m amazed at the progress as well.

  7. Gravatar of John John
    17. December 2012 at 18:17


    Don’t you worry that the newfound fascination with NGDP targeting is simply a means to inflate more? Once another crisis hits and unemployment rises, what’s stopping policymakers from switching to an even more inflationary policy. It has to be admitted that NGDP targeting requires quite a bit of monetary inflation at this point as we’re seeing that it would involve extremely large asset purchases above and beyond those required to lower interest rates to the zero lower bound.

  8. Gravatar of Anthony Louis Burns Anthony Louis Burns
    17. December 2012 at 18:34

    Mr. Summers,

    I would like to be the first to congratulate you. Keynes tried, Friedman tried, Scott Summers killed recessions (and maybe history in the process).

    Enjoy the accolades, for a job well done, by this time next year you’ll be rolling in them.


    Anthony Louis Burns

  9. Gravatar of Simon Simon
    17. December 2012 at 18:54

    Scott, how heavily regulated are Swedish schools? Is there a strict curriculum they must all adhere to, or are they allowed to offer personalised a personalised curriculum to appeal to certain consumers? For instance, could a Swedish school not teach evolution, instead teaching intelligent design, to attract Christian Fundamentals? Supposing vouchers came to the US, would such schools flourish? Would you be in support of such schools? Or is your support for vouchers conditional on government regulation that sets the boundaries for what can and cannot be taught?

  10. Gravatar of jknarr jknarr
    17. December 2012 at 20:15

    I keep thinking about the compatibility of fractional reserves and NGDP targeting. If they adopt NGDP, then reserves need to be ditched, in my opinion. Debt no longer would be a necessary intervening factor between policy stance and growth.

    NGDP stabilization lowers the operating and refinancing risks for corporates and households. Hence it will likely shift outward the demand curve for debt for any level of interest rate. I’m not sure why the US Treasury needs to backstop and make IOR payments via the Fed if we are targeting NGDP. Fractional lending could in fact work adversely to NGDP targets.

  11. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 20:25

    I’ve never been much interested in whether or not my ideas are “politically realistic.”

    Well that’s a bunch of bologna, because that is precisely the argumentative route you often take against the “idealogue” Austrians who you say are proposing politically unrealistic actions like abolishing the Fed.

  12. Gravatar of Don Geddis Don Geddis
    17. December 2012 at 20:55

    John claims: “NGDP targeting requires … extremely large asset purchases above and beyond those required to lower interest rates to the zero lower bound.

    You sound like one of those people of the concrete steppes.

    The real prediction from theory, is that if the Fed could credibly promise/threaten that future NGDP growth would in fact be much higher in the future, that ACTUAL asset purchases today would be LOWER than they currently are.

  13. Gravatar of RebelEconomist RebelEconomist
    18. December 2012 at 02:55

    You are barking up the wrong tree here, Scott. Can you give an example of “those sophisticated folks…..who say central bankers could never go for an idea as crazy as NGDPLT”? That is not a tendency that I have noticed in the comments. If anything it is the other way round, as exemplified by John on 17 December 2012 at 18:17.

    From what I have read here, I believe you when you say that “I’ve never been much interested in whether or not my ideas are “politically realistic.”” But you have to admit that, at the present time in the indebted, uncompetitive old industrial economies, intentionally or not, your proposals are politically appealing, never mind realistic. You are pushing at an open door.

    I say more in a comment on your following post.

  14. Gravatar of ssumner ssumner
    18. December 2012 at 05:43

    John I completely disagree with the premise of your question. NGDP targeting is not inflationary, and requires less asset purchases than we are doing — far less.

    Simon, The government should never tell schools that they cannot teach X. You might be able to construct an argument that there is a minimum of information that must be taught–say reading, writing, and arithmatic. Beyond that, leave it to parents, who can decide much better than governments. No system is perfect, but parents will make fewer mistakes than governments, and the mistakes won’t harm millions of children. I don’t know what requirements Sweden has.

    Can I assume from your post that you’d oppose having the US move toward a Swedish-style welfare state? If so, I agree.

    jknarr, Yes, drop IOR.

    Rebeleconomist. You’ve obviously read far fewer comments than I have. From day one I’ve been told my ideas were totally unrealistic, and that central bankers would not be interested—they were committed to inflation targeting.

  15. Gravatar of Peter Peter
    18. December 2012 at 06:17


    “It is widely believed he will seek to pressure BOJ into pursuing a more aggressive economic easing and allowing the inflation rate to double to 2 percent. In addition, the new leader said he was considering a “large-scale” extra budget for fiscal 2012, with a nominal economic growth target of 3 percent a year.”

    This seems to suggest that the central bank will get a 2% inflation target and that fiscal stimulus will then try to get 3% NGDP growth. That doesn’t make any sense. But I suppose we shouldn’t be too surprised by that.

  16. Gravatar of Peter Peter
    18. December 2012 at 06:23

    Later on in the article there are better news:

    “As an added bonus, Abe has just the man needed for the job – ex-MOF vice minister Eijiro Katsu is his stated choice to replace [BOJ Governor] Shirakawa when his term expires next April.

    “Katsu is the mastermind of the recent tax-hike bills and disaster reconstruction spending. He is, in my personal view, fully committed to generating first-and-foremost a sharp pick-up in nominal GDP growth, as this is the absolute necessary condition to start long-term fiscal consolidation.”

  17. Gravatar of Simon Simon
    18. December 2012 at 06:47

    Scott, thanks for your response. As an evangelical Christian and a father it disturbs me to no ends that my children have to be taught from curriculum decided by technocratic experts. I yearn for the day when parents get to have a say in their children’s education. Then we can put faith and God back at the centre of education, end teaching ‘theories’ such as evolution and ‘man made’ climate change (theories about as coherent as what too many Austrian fans on your blog espouse!) and give children the truth about intelligent design and the dangers of loose morality.

    I look forward to the day when our vision for the future becomes reality!

  18. Gravatar of Peter Peter
    18. December 2012 at 06:48

    Swedish schools are very regulated. The state mandates what should be taught at different years (a 280 pages document for year 1-9). Evolution is one such thing. I’m not sure if it would be ok to also teach intelligent design.

  19. Gravatar of dtoh dtoh
    18. December 2012 at 07:27


    1. Abe’s pronouncements about monetary policy have been very specifically about inflation targets not NGDP targets. There were some misleading articles in the English language press, but he has been very clear on this.

    2. It would be interesting to know the catalyst for Abe’s strong public emphasis on this. There has always been tension between elected politicians and the BOJ on this issue, but I’m very curious to know what caused Abe to come out so strongly on this and who is advising him.

    3. The significance of this can not be understated. Japan has been the basket case of sluggish economic growth and if a more expansive monetary policy can reverse 20 years of stagnation, it becomes very difficult to argue either a) that monetary policy doesn’t work at the ZLB or b) that it produces only inflation and no real growth. There could not be a better case study. Japan and the LDP were the last people in the world one would have expected to make major public issue out of monetary policy. This is a really, really important development.

  20. Gravatar of Daniel Daniel
    18. December 2012 at 07:57



    You’re doing it right

  21. Gravatar of Major_Freedom Major_Freedom
    18. December 2012 at 08:36


    Simon, The government should never tell market actors that they cannot compete in money production. You might be able to construct an argument that there is a minimum of protection of property. Beyond that, leave it to market actors, who can decide much better than governments. No system is perfect, but market actors will make fewer mistakes than governments, and the mistakes won’t harm millions of children.

    Oh woops, you weren’t being serious. You were just playing the role for the sake of appearances. Silly me.

    If market actors are too stupid to produce money in a competitive division of labor, if market actors are too stupid to set their own prices and interest rates, if market actors are too stupid to understand the “danger” of money hoarding, then how in the world can they be smart enough to teach their own children? Moreoever, how can they be smart enough to elect other market actors to become politicians who manage a monopolistic money production operation on behalf of the entire country? Wouldn’t that operation be managed by the same stupid people?

    I guess market actors are both stupid and smart, when it suits your agenda.

  22. Gravatar of ssumner ssumner
    19. December 2012 at 06:07

    dtoh, Did you see Peter’s comments?

    Peter, That’s unfortunate, but the system is still much better than ours. We dictate coverage and give no school choice.

  23. Gravatar of dtoh dtoh
    19. December 2012 at 16:08

    I did. I haven’t really been following internal politics in the LDP. There’s does seem to be disconnect between the English language press. There has been nothing in the Japanese press to suggest any connection between the LDP’s proposed monetary policies and a nominal GDP target.

    I actually had a couple of fairly long discussions with Koll about NGDP targeting. He was very skeptical that any a policy of NGDP targeting could be effective. Although perhaps even my poor exposition of your views caused him to him to rethink the subject.

    As for Katsu, I would be surprised if he were selected to the BOJ post. He was the architect within the Ministry of Finance of the recent extremely unpopular increase in the consumption tax so I think there would be a lot of opposition to his selection but it could happen. A much more likely candidate would Heizo Takenaka, an academic and former Finance Minister, who has done a fair amount of research on money supply issues.

    However, as I said I haven’t spent much time following internal LDP politics so I may be entirely wrong on this.

  24. Gravatar of Major_Freedom Major_Freedom
    19. December 2012 at 23:27

    Those MMs who are calling for Japan to go into inflationary mode, are really asking for Japan to blow up. Why? Because when debt is 20, 25 times the government tax revenue, a non-linearity arises between revenues and expenses. Unfortunately, most academics and central bankers believe that when a country gets to a point where it has to inflate or default, they are somehow choosing among two mutually exclusive options. What is more likely however is that one causes the other.

    If with that much debt a central bank tries to inflate its way out of the problem, and this moves the swaps curves or debt costs, then expenses grow exponentially while revenues grow linearly.

    So for Japan, which has around 25 times debt to government revenue, if they should ever go insane and take the advice of MMs, and go into inflationary mode, and the swaps curves move 200 or 300 bps, then they will end up owing more in interest than they take in as tax revenues. They’ll be toast.

    Japan isn’t a case of if, but when.

  25. Gravatar of ssumner ssumner
    20. December 2012 at 17:28

    dtoh, Thanks for the info–you certainly know 100 times more than I do about Japan.

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