Did Kuroda luck out?

Most people will think this post is sour grapes on my part, but I’ve never cared what most people think.  I simply offer my honest opinion.  I was skeptical of Kuroda’s plan to peg bond yields.  (In this post I suggested that it was a positive step, but likely to have only a very small impact.)  But as of today the policy seems to be working.  The yen has lost about half of the ground gained over the last year. Recall it moved from about 125/dollar a year ago to 100 in late summer.  Now it’s plunged to 112.8.


So was I wrong?  I still don’t think so; rather I think that Kuroda got lucky.  Just after the policy shift, US bond yields started rising, in both real and nominal terms. Rates in some other important countries also started increasing.  This made the pegged 0% yield on 10-year JGBs look increasingly unattractive.  The yen depreciated.  If that change in global debt markets had not occurred, I doubt the policy would have had much impact.  Still, give Kuroda credit, as he was right and I was wrong.  (The markets were also wrong, and I’m a market monetarist.  Hence my incorrect prediction.)

If there’s a silver lining, it’s that I was less wrong than NeoFisherians who think a policy of lowering bond yields is disinflationary (I say never reason from a bond yield).  Keynesians who thought the BOJ was out of ammo were also wrong.  I always thought they had plenty of ammo, I just saw other tools as being more promising.

I’m not going to totally change my views based on this one data point, but I’ll file it away as one argument in favor of Ben Bernanke’s view of monetary policy.  (He’s the one who suggested this idea to Kuroda.)

PS.  If Japan were to hold the yen at around this level, then in the long run Japan would have about the same 2% inflation as the US is likely to have.  Markets currently don’t think the Japanese will do so, and thus they expect lower inflation in Japan.  But it’s entirely up to the Japanese where they want to set the exchange rate, and their inflation rate.  That’s a lesson I hope we can all agree on, except Noah Smith.

PPS.  Here’s another way of explaining my “lucky” argument.  The yen has fallen only slightly against the euro.  Europe also got lucky.




13 Responses to “Did Kuroda luck out?”

  1. Gravatar of Jeff Jeff
    23. November 2016 at 11:51

    I don’t really have anything to add here. I just couldn’t stand seeing your Trump posts get so many comments while this economics one didn’t get any.

  2. Gravatar of MFFA MFFA
    23. November 2016 at 12:29

    As a european who witnessed the strong rise of the dollar against the euro since the presidential election, the first thing that came to my mind when reading your post (before reaching the PPS 😉 ) was that indeed the depreciation of the yen against the dollar was probably more a case of the dollar strengthening. I would guess that to judge the depreciation of a currency you should always look against a basket of other currencies, because by looking at only one exchange rate then you don’t know if one is going up or the other is going down. Isn’t that standard practice?

    please keep up the macro posts, some of us still have much to learn 🙂

  3. Gravatar of ssumner ssumner
    23. November 2016 at 15:23

    MFFA, Agreed, but even against the euro it’s down about 3%, which is a decent move in just 2 weeks.

    And thanks Jeff and MFFA.

  4. Gravatar of B Cole B Cole
    23. November 2016 at 16:09

    Well, whether lucky or not at least Kuroda is trying—and his policy to hold down yields must be placed in context with his QE program and jawboning.

    The US economy exploded during WWII when the Fed vowed to buy all long-term Treasuries at 2.5%.

    The effective helicopter drops were met by huge output increases.

    Too bad it was for epalauts, weapons and misery and not houses, hospitals and parks.

    I prefer Kuroda to the rigidifying defeatism of ossified orthodox Western macroeconomists.

  5. Gravatar of bill bill
    24. November 2016 at 06:02

    I think we’re at an odd juncture in the US. Looking back, the Fed still has a lot to learn. Even for someone (like, I believe, Ben Bernanke and Janet Yellen) who thinks that the Fed was not at fault for where we were in late 2008, they need to realize that a different response could have gotten us back to full employment much faster. I don’t think they even believe that. I’d like them to change the regime to an NGDPLT one as well. But in the meantime, the present question is one of tactics, and for that, it kills me that they are going to keep the large balance sheet and pay more IOR.

    Oh, and I’m enjoying the econ AND the Trump posts.

  6. Gravatar of ssumner ssumner
    24. November 2016 at 08:21

    Thanks Bill.

  7. Gravatar of Mikio Mikio
    25. November 2016 at 06:23

    Hi Scott, here’s my quick take on how the Kuroda thing worked. Yes, it’s a result of the sudden shift higher in global yield curves – but still Kuroda in essense installed a “pro-cyclical automatic yen-printing machine”. In other words, he put in place a mechanism which ensures that Japan expands money when the global growth expectations pick up, adding to the momentum.

    Ignore the Bloomberg headline, it’s not what I said…


  8. Gravatar of ssumner ssumner
    25. November 2016 at 07:30

    Mikio, Yes, it’s pretty effective when there is a global upswing.

  9. Gravatar of Mikio Mikio
    25. November 2016 at 18:40

    My was that if the US hadn’t gone through a relief rally after the election (no matter who had won), Kuroda would have simply lowered the entire yield curve in December. Same money expansion effect. He would have needed to print even more throughout the yield curve. He said as much in comments at the Brooking Institute – that they can lower the entire curve if they want.

    Now the market has done it for him.

  10. Gravatar of Mikio Mikio
    25. November 2016 at 18:48

    It may have to do that Kuroda’s underlying macro view was quite constructive in the first place. He saw the relative weakness of 2016 as “artificially” depressing markets and global bonds yields due to political noise.

    You can see how many business surveys globally (Markit does them world-wide) have been steadily pointing higher since Jan./Feb.

    Lars Christensen has created a set of monetary condition indicators for various countries, which also show improving monetary conditions since about the same point in time.

    So it’s a mix of luck, intuition and discretionary judgement. Of course a rule-based approach is preferable – but it’s still good that he got it right for whatever reason.

  11. Gravatar of ssumner ssumner
    26. November 2016 at 12:41

    Mikio, Good points.

  12. Gravatar of HL HL
    28. November 2016 at 04:41

    About Mikio’s point. If they didn’t have any plan C at the time of the new overshooting / yield peg launch in September and instead simply made a bet on the macro improvement, then it would have been a case of gross malpractice by the BOJ. We are talking about a central bank that has barely begun to establish its IT credibility after 20 years of confusion and faced 20% appreciation in its currency and collapse in inflation expectations this year. The idea that luck and intuition played any role at all should be depressing in my opinion.

    My argument at the time was that they indeed had a plan C in the form of a bit more aggressive fiscal – monetary coordination (as the government is in the process of putting a bit more of public funds to work after the new supp. package). This would be consistent with your argument that the BOJ was ready to lower the entire yield curve. If I was wrong in that assessment, then the BOJ was just playing with fire. Happy ending so far, though.

  13. Gravatar of Geoff Orwell Geoff Orwell
    29. November 2016 at 20:22

    I dont think you were wrong at all. This is a USD story and he absolutely lucked out. The BOJ have given up and have sacrificed public policy to an era of fiscal dominance. They cant/wont now ease (in a traditional sense) in the next slow down and will rely on fiscal expansion and perpetual or longer dated issuance from the MoF. Meanwhile, the clock is ticking on that debt bomb.

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