Another BOJ flop

During the first several years of Abenomics, the BOJ actively pushed monetary stimulus.  Their announcements were often more aggressive than expected, and the yen depreciated sharply on this news.  The inflation rate rose from negative territory up close to the 2% target.  This year, however, the BOJ seems to have given up on monetary stimulus.  Most of the recent announcements have been less aggressive than the markets expected, and the yen has appreciated from a low of about 125 to the dollar, to 105 as of yesterday.  Today the BOJ produced another disappointing announcement, much less than markets expected, and the yen plunged another 3%, to 102.  This is not rocket science,  If the BOJ allows a strong yen they will fail to hit their target.  If they do enough stimulus to dramatically weaken the yen, they can hit their target.  So why don’t they?

This also shows why we cannot rely on policy discretion.  Policymakers simply are not willing to carry out their instructions.  A CPI or NGDP futures targeting regime (level targeting) would solve the “problem”. Which is probably why it won’t be adopted.

Why did the BOJ allow this to happen?

Screen Shot 2016-07-29 at 1.30.12 PMPS.  It’s amazing how similar Abenomics is to FDR’s policies.  You have highly successful monetary stimulus which is abandoned for no good reason.  You have a weird mixture of fiscal stimulus and austerity.  And you have the government putting the cart before the horse, by trying to pressure firms to raise wages:

Openly pushing companies to raise wages is just one of the unorthodox economic policies attempted under the Abe government to jump-start an economy that seems stuck in a long-term rut.

I wish they’d go back to trying to raise NGDP, that’s the only durable way to get higher wages.

PPS.  Here is a typical media report on the BOJ:

But the truth is, at this stage, three years into his radical program to restart Japan, the BOJ might just be a spent force.

Face palm.

Yeah, the BOJ is out of ammo.  Maybe they can borrow some ammo from Zimbabwe.



29 Responses to “Another BOJ flop”

  1. Gravatar of Gary Anderson Gary Anderson
    29. July 2016 at 10:38

    They should do something along the lines of the TLTRO program in the ECB. No fan of the Eurozone, but Draghi may end up being the smartest and fairest banker in the entire world.

    But until the law is changed, the TLTRO program will likely not be permitted. The BOJ is only allowed to do QE and we are way past that working.

  2. Gravatar of marcus nunes marcus nunes
    29. July 2016 at 10:48

    And the beginning was so promising…

  3. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    29. July 2016 at 10:55

    I am very disappointed at Kuroda.

    LDP will fail to win the Diet someday for dysfunctional MP.
    BOJ will kill LDP again.

    No Japanese politician realize the importance of level-targeting as far as I know.

  4. Gravatar of Ray Lopez Ray Lopez
    29. July 2016 at 12:31

    Noah Smith’s latest blog has an answer to Sumner’s riddle: people have bounded rationality so to the extent there’s any money illusion, it quickly goes away over time. Pretty simple and surprising (well no) that Sumner doesn’t note this; in fact, Sumner himself forgets that money is neutral long term, even he admits this.

    PS–monetarism doesn’t work, but fiscal policy might (again, Noah Smith’s latest): “So what does Gabaix’s theory say we should do to boost the economy? Fiscal stimulus. When consumers are short-sighted, they will consume more of any windfall or tax cut they receive, which enhances the power of spending increases and tax cuts to increase growth.”

  5. Gravatar of Randomize Randomize
    29. July 2016 at 12:41

    Ray, monetary policy is only neutral if it’s consistent. A long-term policy of erratic decision making and failure to meet their own targets will absolutely result in real losses.

  6. Gravatar of Gary Anderson Gary Anderson
    29. July 2016 at 14:10

    Are you guys interested in why Greenspan behaves the way he does, trying to push yield up when he was the godfather of structured finance and bond hoarding?

    Ray, monetary policy would work if they didn’t sterilize it. But it has to be carefully applied according to Eric Lonergan.

  7. Gravatar of Rajat Rajat
    29. July 2016 at 14:28

    Your Econlog post refers to another example of reasoning from a price change, and by elite macroeconomists (as well as by a PhD econ graduate). I’m convinced this is the reason why central banks like the BoJ, Fed, ECB, RBA and so on keep monetary policy too tight – they see low interest rates and relatively strong asset prices with not much real GDP growth and conclude that the tentative steps they’ve taken have been too extreme and potentially harmful. I cannot believe we are living in a world where central bankers are calling for fiscal stimulus. I guess they think of all the infrastructure that could be built and think back to their youth and childhood when a lot of existing infrastructure was built. But they ignore the fact that infrastructure is really expensive and time-consuming to develop now in western countries (we can’t or don’t follow the Hong Kong model you’ve suggested!) and is often perverted by political priorities.

  8. Gravatar of Max Max
    29. July 2016 at 15:03

    So is this is an example of a central bank trying to inflate and failing? (Sure, you can say they’re doing it wrong – but doing it wrong still counts as trying and failing).

  9. Gravatar of bill bill
    29. July 2016 at 16:22

    I think “plunged” to 102 should be “spiked” or “rose”.
    It’s like your post from a months ago about the reporting of exchange rates.

  10. Gravatar of Benjamin Cole Benjamin Cole
    29. July 2016 at 16:23

    Excellent blogging.

    And in Japan, Haruhiko Kuroda has the example of Takahashi Korekiyo no less.

    Send in the helicopters.

    Ray: I guess the Japanese in the Great Depression did not know that money was neutral, ergo the economy boomed under monetary stimulus.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    29. July 2016 at 18:17

    “Yeah, the BOJ is out of ammo. Maybe they can borrow some ammo from Zimbabwe.”

    Made me laugh. Nicely put. So, on one hand, it is desperately important not to let the inflation genie out of the bottle, yet central banks regularly “run out” of the ability to let the inflation genie out of the bottle … Conventional wisdom as oxymoron.

  12. Gravatar of Major.Freedom Major.Freedom
    29. July 2016 at 18:21

    I said years ago on this blog that the more artificial (meaning abivefree market) monetary “stimulus” is used, the more is needed to give the same boost in the future.

    Japan (and the US) continue to go down the path of ever more quantities of inflation needed to get the same nominal resultant growth rates.

    Sumner the madman continues to ask for more.

  13. Gravatar of Gary Anderson Gary Anderson
    29. July 2016 at 19:46

    There can’t be inflation, Major. The Fed cannot raise rates. It probably cannot raise rates significantly for years. And the new BIS LCR requirements show that besides clearinghouse demand for bonds, bank demand for pristine collateral is being REQUIRED. Scott Sumner needs to read this, because I have been speaking about bond demand. This, Scott, is right from the’s mouth:

  14. Gravatar of Ray Lopez Ray Lopez
    29. July 2016 at 21:53

    @Randomize- “Ray, monetary policy is only neutral if it’s consistent.” – yes, the Lucas critique. I’ll leave it to our host to explain why NGDPLT (a predictable rule) would not violate the Lucas critique.

    @Gary Anderson – thanks, it also reminds me of how in a Managed Gold Standard (which BTW is not the same as a true gold standard) central banks screwed up the natural restorative effects on balance of trade deficits of free gold movements by sterilizing gold movements (i.e., Au imports/exports into the country).

    @Benjamin Cole, serial propagandist: You keep repeating the same lies. I see you’ve dropped your common misconception that New World silver caused a 16th century Spanish boom in Europe after I pointed out the graph that real Spanish wages declined from 1425 (before Columbus) until 1800, showing new silver was not a stimulus for Spain; but you cling to the fiction that money stimulated Japan in the Great Depression, after I pointed out it was fiscal policy (Manchuria) that helped GD Japan, which still suffered. Keep repeating lies?

  15. Gravatar of HL HL
    30. July 2016 at 01:46

    I absolutely agree with you on Japan. This is already one of the sharpest rallies in the yen in nearly 30 years. Yet all the BOJ can do are minor tweaks for silly issues like USD financing condition for Japanese businesses (perhaps taking cues from the bean counters at BIS) and JGB market liquidity (which can be mitigated significantly by changing the haircut structure for collateral transactions and expanding the role for JGB lending facility).

    They promised to review the entire policy framework in September, and Kuroda said he would not abandon “2% inflation ASAP” promise in that review. Perhaps they could do something on the permanent JGB reinvestment, NGDP level target (the explicit target of the Abe cabinet already), or explicit JGB ownership promise (e.g. “we will target 60% of JGB ownership”). I am not so sure that they (or Obama folks) can muster enough political courage to launch (or tolerate) it 7 weeks before the presidential election in the US. And as for the helicopter money option, the sequencing so far indicates that perpetual debt conversion is the only approach that is feasible in the remainder of the year, since it is unlikely that the government will introduce another supplementary budget.

    Perhaps the politics of aging means that central banks cannot seriously target inflation that is significantly above long-term potential growth. That is, the best you can hope for is 1:1 ratio between inflation and RGDP, not 2:1 or even 3:1…and there can’t no genuine symmetric CPI inflation target as the targeting exercise itself is completely asymmetric due to the reasons you have explained before…there is just way too much misunderstanding about central banks, especially among old voters living on fixed income.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. July 2016 at 04:03

    ‘But they ignore the fact that infrastructure is really expensive and time-consuming to develop now in western countries…’

    Actually, with modern construction methods, it’s less expensive to do the actually building nowadays.

    ‘…and is often perverted by political priorities.’

    Yup, that’s the problem.

  17. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2016 at 04:41

    Ray: the horrid Manchurian invasion was financed by helicopter money. Of course, Japan would have been better off spending the money at home.

  18. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2016 at 05:32

    Ray: There were recurrent plagues in Spain through the years you cite, as well as Spanish-style government, meaning wars and indolence. Labor was imported France, from where the derogatory word “gabaucho” is derived, the Spaniards looked down on the light-0skinned stable keepers. So wages could drop even in a relatively prosperous growing economy, one of the results of an open border.

    I think of all the people who ever considered the import of gold and silver into Spain, you are unique in concluding it had no effect, and did not (relatively) create an economic boom, as “money is neutral.”

    But then, I think you are unique in concluding that the occupation of Manchuria, and related fiscal stimulus is what boosted Japan out of the Great Depression. Are you unaware of the connection between final and monetary stimulus, and that fiscal stimulus is neutral unless financed by monetary expansion?

    An increase in the money supply will bring additional real production online, and when domestic resources are used to full capacity, then additional resources are imported where legal. At full capacity you might see some inflation.

    As for the famous Spanish inflation, it ran at about 1% to 1.5% annually for centuries after the gold and silver was brought back. The boogyman inflation is remarkably feeble though history, meaning scarce episodes such as weimar and Zimbabwe must be lovingly tended to constantly. The vast stretches of run-of-the-mill moderate inflation and growth are ignored.

    BTW, the most valuable product the Spaniards brought back was….potatoes. Although the lowly potato took a couple hundred of years to win acceptance….

  19. Gravatar of engineer engineer
    30. July 2016 at 05:49

    Question for economists:
    1) Seems to me that in a country were the population is declining and where increased productivity/increased efficiency leads to price reductions, the natural rate of inflation is negative. As long as everyone is employed, companies are profitable, the government fiscal house is in order…what is wrong that this? I recall it has to do with the stickiness of wages vs prices…but in a country marked by labor shortages and very few layoffs, does this really apply? Company profits have been hurt by an unwillingness to cut staff in the past (which seems a bit unique to Japanese culture).
    2) Hasn’t Japan already had decades of high fiscal stimulus why would anyone believe this would be helpful? Maybe energy related infrastructure might be something fulfilling longer term needs (if they want to get away from nuclear), and some want more military spending…but transportation infrastructure is already overbuilt.
    3) If they are going to print money, would it not be more beneficial to just payoff the huge debt that has accumulated from years of fiscal stimulus. Isn’t this really basically a tax by debasing the currency?

  20. Gravatar of ssumner ssumner
    30. July 2016 at 08:19

    Max, You asked:

    “So is this is an example of a central bank trying to inflate and failing?”

    Good question. No, they were trying and then stopped trying. How do we know this? How do we know they are not still trying, and failing? One way we know is that the recent decisions have mostly been to do nothing, or to do far less than the markets expected.

    When the BOJ was aggressive, things went well. When they stopped being aggressive (not just my view, but also the market view) they failed.

    Central banks have infinite ability to inflate, so it’s essentially impossible to try to inflate and fail. But I suppose I need some criterion to judge my theory, so I’ll say if the BOJ buys up more than 50% of global assets and still fails to inflate, then they’ve tried and failed.

    Bill, Good catch, it should have been “spiked”.

    Lorenzo, I wish I had said that!

    HL, Careful with that aging argument. In 2012 Abe campaigned on a promise of inflation, and then also did so in the next election. That’s almost unprecedented. He won massive victories by Japanese standards, in a country with lots of old voters. I don’t think many pundits have processed the implications of that fact, as it doesn’t fit their preconceived priors. The old people in Japan voted for a guy promising higher inflation.

    Engineer, There is no such thing as a natural rate of inflation, I think you mean to refer to the “optimal” rate of inflation.

    The strongest argument for higher inflation in Japan is the government debt burden. Deflation is an unearned gift to bondholders.

  21. Gravatar of Gary Anderson Gary Anderson
    30. July 2016 at 08:49

    Lol, Scott, if they bought 50 percent of the global assets, the Japanese people would have even less savings than they have now. Japanese savings for main street have declined.

    If I owned the BOJ I would have a website,

    Scott, you are only hurting yourself by denying (by silence) the implication of all this new bond demand which is why the Fed is frozen. Yes, just like that commercial, frozen. Massive bond demand is what is pushing yields down. Even Beckworth gets it, Scott.

  22. Gravatar of Ray Lopez Ray Lopez
    30. July 2016 at 12:49

    @Benjamin Cole – Your statement: “So wages could drop even in a relatively prosperous growing economy, one of the results of an open border. ” is belied by the fact the period from 1300 to 1850, Spain oscillated from having closed borders (kicking out Jews, Arabs) to as you claim open borders, but the one constant was real wages decreasing. Since wages are an important component of GDP, for GDP to rise you must assume land and capital values increased, as well as net imports (gold, silver, booty from numerous wars) to offset the real wage decline. See: Spanish real wages, estimated – Spanish real wages 1300-1850 (data from Alvarez-Nogal & de la Escosura 2013). Avg Spaniard poorer in 1850 than 1300, steadily dropping from 1400 peak until 1800.

    While 1400 was a peak for wages after the Black Death (labor scarce), and may explain your ‘importing French labor’, it cannot be denied that Spain suffered in real GDP/capita say historians, through the New World era (after 1492), due to (say most) wars of conquest vs the Dutch, English, others. New World precious metals did not save Spain. Agree? That’s the verdict of history, not me talking.

    As for pre-WWII Japan fiscal and monetary policy going hand in hand, that may well be, so my question to you is what is Sumner’s take on fiscal policy? I never hear him talk about it, it’s as if NGDPLT cures all ills.

  23. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2016 at 17:45

    Ray: The history of Spain after silver was brought back from the New World, and wars, plagues, migration etc, over centuries cannot be resolved in the microscopic forum provided here. Suffice it to say, relatively—relatively—Spain for a while boomed, believing (as did others) they had money. People would work those lumps of silver and gold.

    Scott Sumner understands very well the nexus between fiscal and monetary policy IMHO.

    Instead of printing money to inspire people to work to build armaments and invade Manchuria, Japan would have been much better off building bridges or sewer systems or just lowering taxes, and letting people drive the economy forward through ordinary domestic spending.

    n any event, if money is neutral, how does printing money result in economic growth whether dropped from helicopters or used in finance a horrific invasion of China? But it did in Great Depression, Japan.

    You are saying that printing money to give to people to act like soldiers is stimulative, but printing money and giving it to people to act like sewer workers and hsopital-builders is not.

    Helicopter drops would work in the Western World today.

    The US economy would also boom if after Trump or Hillary is elected, military outlays jump another $1 trillion, we do another $1 trillion of QE, and we invade Iran.

    The US would be better off, however, just doing another $1 trillion of QE and cutting taxes by an equal amount.

    But then, I believe the purpose of macroeconomic policy is prosperity. Evidently, most economists genuflect to theo-monetaristic totems, and that sacrifice is necessary to obtain true salvation. All the better if the sacrifice is made by others.

  24. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2016 at 20:53

    Interesting, FYI:

    “Stephen F. Cohen, professor emeritus of Russian studies at NYU and Princeton, spoke with CNN’s ‘Smerconish’ Saturday morning about Donald Trump, Vladimir Putin, and the ‘New Cold War.’

    Cohen says the media at large is doing a huge disservice to the American people by ignoring the substance of Trump’s arguments about NATO and Russia, and buying the Clinton campaign’s simplistic smear that Trump is a Russian “Manchurian candidate.”

    “That reckless branding of Trump as a Russian agent, most of it is coming from the Clinton campaign,” Cohen said. “And they really need to stop.”

    “We’re approaching a Cuban Missile Crisis level nuclear confrontation with Russia,” he explained. “And there is absolutely no discussion, no debate, about this in the American media.”

    “Then along comes, unexpectedly, Donald Trump,” he continued, “Who says he wants to end the New Cold War, and cooperate with Russia in various places… and –astonishingly– the media is full of what only can be called neo-McCarthyite charges that he is a Russian agent, that he is a Manchurian candidate, and that he is Putin’s client.”


    I find US foreign policy unintelligible anyway. But I do have suspicions there is a military-foreign policy community that thrives on conflict and fear-mongering.

  25. Gravatar of Postkey Postkey
    30. July 2016 at 23:43

    “I find US foreign policy unintelligible anyway. But I do have suspicions there is a military-foreign policy community that thrives on conflict and fear-mongering.”

    It was forever thus?

    “In a few words: there is no such thing as Soviet technology. Almost all — perhaps 90-95 percent — came directly or indirectly from the United States and its allies. In effect the United States and the NATO countries have built the Soviet Union. Its industrial and its military capabilities. This massive construction job has taken 50 years. Since the Revolution in 1917. It has been carried out through trade and the sale of plants, equipment and technical assistance.
    . . . Because 50 years of dealings with the Soviets has been an economic success for the USSR and a political failure for the United States. It has not stopped war, it has not given us peace.
    The United States is spending $80 billion a year on defense against an enemy built by the United States and West Europe.
    Even stranger, the U.S. apparently wants to make sure this enemy remains in the business of being an enemy.“

    “Taken together, these four volumes constitute an extraordinary commentary on a basic weakness in the Soviet system
    The Soviets are heavily dependent on Western technology and innovation not only in their civilian industries, but also in their military programs.
    An inevitable conclusion from the evidence in this book is that we have totally ignored a policy that would enable us to neutralize Soviet global ambitions while simultaneously reducing the defense budget and the tax load on American citizens.”

  26. Gravatar of ssumner ssumner
    31. July 2016 at 09:06

    Ben, Cohen said:

    “We’re approaching a Cuban Missile Crisis level nuclear confrontation with Russia”

    Oh really? Over what issue?

  27. Gravatar of Ray Lopez Ray Lopez
    31. July 2016 at 10:12

    @Benjamin Cole – “Suffice it to say, relatively—relatively—Spain for a while boomed, believing (as did others) they had money.” – I agree, and modify my views. Spain believed this even though real wages actually fell. Also, in fairness I bet a bunch of European countries had real wages fall in the 15th+ century after the initial rise in 1400 just after the Black Death. That is, I bet a lot of countries are similar to Spain. The influx of silver/gold may have arguably attenuated the fall in real wages, or, due to a rising European population clamoring for more silver/gold (sticky prices at work, very weak as inflation was so low) caused a small surplus (in exports) to accrue to medieval Spain, but any surplus due to New World silver / gold was attenuated by the numerous wars fought by Philip II (who founded the Philippines), I think we can agree on that.

    Your last point is quite interesting: the symbiotic relationship between monetarism and fiscal policy, that I wish our host would talk more about. For example, if you expand the money supply, by doing a helicopter drop by having the US Treasury (not Fed) get money from the Fed, hire workers to dig a hole and fill it up again, and/or build a bridge to nowhere, is that fiscal policy at work, or monetary policy, or a bit of both? Just giving the money to Joe Blow will arguably not stimulate the economy if Joe Blow just puts the money in the bank and/or under his mattress, agree? Later.

  28. Gravatar of Gary Anderson Gary Anderson
    31. July 2016 at 17:02

    So, Ray, do the Fed has no problem with big business putting money in the bank. But if the average Joe puts a little of the helicopter money into the bank that is bad?

    If the Fed thinks that, they are greedy, ignorant fools.

  29. Gravatar of Gary Anderson Gary Anderson
    31. July 2016 at 17:13

    Sorry, Ray, meant, “the Fed has no problem”

    I won’t vote for Trump because he is a racist, but, clearly, we undermined the Ukraine and Crimea was a response by Russia.

    Crimea was not done in a vacuum.

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