Japan: So far so good, but not enough

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.


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34 Responses to “Japan: So far so good, but not enough”

  1. Gravatar of Jeff Jeff
    12. April 2013 at 12:16

    Scott,
    I do like the oil analogy. To push it further, if for some reason the Fed conducted OMA buy buying and selling barrels of oil, I can imagine a host models designed around the price of oil and ignoring interest rates.

  2. Gravatar of ssumner ssumner
    12. April 2013 at 12:24

    Jeff, Good point. It’s the “Cantillon effect” misconception.

  3. Gravatar of Geoff Geoff
    12. April 2013 at 12:57

    If the Fed conducts OMOs by buying barrels of oil, and it does not change the nominal demand and price of oil, then there will be no changes to other spending and prices brought about by the oil seller’s spending. If the oil sellers aren’t bringing about changes to nominal demand and prices, then it is logically necessary to conclude that the Fed’s continuous OMOs cannot raise NGDP or aggregate prices.

    The reason this is the case is that if the Fed conducts OMOs in oil only, then oil seller’s spending becomes the only conduit by which the Fed affects aggregate spending and prices. If the oil sellers are claimed by the anti-Cantillon crowd to not be selling oil into any different demand or price, then they are not bringing about any changes to other sellers of non-oil related commodities.

    Example:

    Suppose I am the central bank and the reader of this post is the only seller by which I conduct OMOs. Suppose for one year I do not conduct any OMOs. Whatever spending you engage in, and whatever your demand does to other prices, let us denote the resulting resulting NGDP and aggregate prices as “market determined spending and prices.” This is the baseline.

    Now suppose I start engaging in OMOs by buying whatever it is you are selling, day after day, week after week, year after year. If the claim put forward by the anti-Cantillon effect advocates is that my OMOs do not change the nominal demand or prices of anything you are selling, then it follows that your spending cannot change either. To argue otherwise would be like claiming that you can sell the same goods at the same prices year after year, but then for some reason you are able to increase your spending year after year.

    Obviously if I as the central bank affect NGDP and aggregate prices, in the upward direction, week after week and year after year, then it follows that the spending from you the seller MUST keep increasing year after year. If your spending doesn’t keep increasing, then the only place the money from my OMOs can go is accumulating in your bank balance, rising year after year as you hoard the additional inflation, and continue to spend the same as you did before.

    Thus, to deny that the Cantillon effect changes the prices of that which is purchased via OMOs, it literally to deny logical necessity.

    My only guess as to how anyone can deny the Cantillon effect, is if they have some psychological barrier preventing them from accepting the implications of their other desire for the central bank increase NGDP. Is it the implication of accepting the fact that OMOs benefit the initial receivers but not everyone else at that time, which would reveal central banking to be an elitist system? Is it having to explain to people that wanting to have a central bank increase NGDP, carries with it the ugly truth that the people you’re talking to are going to experience a reduction in their purchasing power due to the increased price of that which the central bank is purchasing, as well as the increased prices of that which the sellers spend money on, and so on? Is it not wanting to have to explain this to the people being told that OMOs are good for them?

    Whatever the reason, I know that those who tell people that central banking is not a system that benefits a elite class of financiers, that it benefits them, that they need it, etc, are pulling the wools over their eyes. I’m not fooled.

  4. Gravatar of Bogwood Bogwood
    12. April 2013 at 13:08

    There is a very strong argument for higher oil prices and this oversight is part of an ambivalence this non-economist feels when reading and listening to Dr. Sumner. Studying the depression seems to be basing policy on an N of .5(not emphasizing the previous decades). There is a nod toward libertarianism but abandoned just when it counts. There is an impression he thinks he is “right” when the odds of some generalized rightness are low(maybe some error bars). NGDP is probably as flawed as GDP. We need to work through the employment bubble and get back to baseline(50-60% eligible workforce). Many jobs do not belong in the covered employment sector. Ground up rather than top down is harder but more resilient. Is he a closet growther? Since continuous growth is mathematically impossible growthers are: insert ad hominem.

  5. Gravatar of dtoh dtoh
    12. April 2013 at 14:22

    Scott,
    You said,
    “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.”

    You’re talking about nominal yields. Investors, consumers and businesses are rationale, they don’t make decisions based on nominal yields, they make decisions based on real (inflation adjusted) yields. You and every commenter on this blog needs to stop talking about nominal yields. They are irrelevant.

    Same with the zero rate bound. It only exists in a world of nominal interest rates where inflation and real bond yields don’t exist.

    This mistaken focus on nominal yields is a plague on economics and on the correct understanding of how monetary policy works.

    BTW – It’s Kathy Matsui not Mitsui

  6. Gravatar of dtoh dtoh
    12. April 2013 at 14:36

    Scott,
    And to concisely restate what I explained in an earlier comment.

    1. The rise in equity prices is prima facie evidence that expected NGDP has risen.

    2. Unless you believe NGDP growth will be all real growth with no inflation, then higher expected NGDP growth implies higher expected inflation.

    3. If expected inflation has risen and nominal bond yields are flat, then real yields have fallen. (Real bond prices have risen).

    4. Higher expected expected NGDP and higher real financial asset prices > Higher spending by businesses and consumers = Higher actual NGDP.

  7. Gravatar of Bill Ellis Bill Ellis
    12. April 2013 at 15:52

    Scoot says (again), ” …. expected NGDP growth is too low. If that were boosted via fiscal stimulus then interest rates would rise. ”

    Not if the Fed didn’t not want them to. The Fed could make a commitment not to as credibly as anything else.

  8. Gravatar of Suvy Suvy
    12. April 2013 at 17:43

    So far so good? They’ve had an almost 25% fall in their currency while trying to stimulate exports at a time when the import all their energy. How could that possibly lead to good consequences.

    The Japanese bond market has been its most volatile in years, maybe even decades. The yield volatility has spiked and any sort of shift in their yields could trigger a major, major selloff. The Japanese had to halt trading on the JGB futures markets several times this week alone; the JGB market is not a free market by any stretch of the imagination.

    Japan is completely insolvent; money printing cannot solve that situation and may actually make things worse. Japan’s interest rates cannot shift 200 basis points or they will completely collapse(200 basis points is the level where Japan’s debt service exceeds its revenue). This doesn’t even include the feedback effects that could result from a 50-100 basis point shift which could drive a selloff.

    We’re witnessing the beginning of the end for Japan. It’s game over, they are completely insolvent and the only way out will be for them to restructure their debts. The markets are showing massive signs of stress; it will happen in time.

  9. Gravatar of Benjamin Cole Benjamin Cole
    12. April 2013 at 18:37

    Amazingly, there is a headline today that the USA is warning Japan against “competitive devaluation.”

    Yes, you there, on your little island nation, stay in perma-recession forever.

    Aside from the annoying reality that the USA feels obligated to stick its nose into everyone else’s affairs, this is also terrible policy. Of course, Japan needs to go hard into QE, probably even much harder than they are. Sheesh, they should just monetize government debt to wipe it out and get the economy going at the same time.

    Japan can never be insolvent—it owes money, but in yen, and to itself largely. They can always print more money.

    They should print money until they are knee-deep in yen.

  10. Gravatar of ssumner ssumner
    12. April 2013 at 18:56

    dtoh, I’m afraid it’s inflation that doesn’t exist. Nominal interest rates most certainly exist. But I agree that the zero rate bound is not that important, except in a psychological sense.

    You said;

    “And to concisely restate what I explained in an earlier comment.”

    Which also restates what I said in this post, NGDP expectations and inflation expectations and RGDP growth expectations have risen.

    Bill, I fail to see how that has any bearing on this post.

    Suvy, For the 100th time, you are confusing real and nominal interest rates. Please stop.

    Ben, Yes, I’ve already written a post on that, will put it up tomorrow. It’s sickening.

  11. Gravatar of dtoh dtoh
    12. April 2013 at 19:24

    Scott,
    You said;
    ” I’m afraid it’s inflation that doesn’t exist. Nominal interest rates most certainly exist. But I agree that the zero rate bound is not that important, except in a psychological sense.”

    I should have said…. “expected” real interest rates. Inflation does not exist, but the expected rate of inflation has certainly increased.

    You said;
    “Which also restates what I said in this post, NGDP expectations and inflation expectations and RGDP growth expectations have risen.”

    I agree but I don’t think you have convincingly explained the causation.

    “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. “

    Isn’t it expected NGDP growth that boosts real equity prices and higher real equity prices that boosts actual NGDP.

    Or to put the question to you, what is it that that boosts actual NGDP?

  12. Gravatar of dtoh dtoh
    12. April 2013 at 19:27

    Scott,
    And before you answer my last question, remember what you always say, “Expectations have to be about something.”

  13. Gravatar of Suvy Suvy
    12. April 2013 at 23:30

    “For the 100th time, you are confusing real and nominal interest rates. Please stop.”

    It doesn’t matter. Even if you’re nominal rates move, it increases your borrowing costs exponentially when your debts are 25 times your revenues while your revenues move linearly. It’s just basic math.

    It doesn’t matter what the real rates are; all that matters are the nominal rates–it’s basic math. Their government is insolvent; the price will be paid eventually. The only question is when.

  14. Gravatar of Suvy Suvy
    12. April 2013 at 23:30

    Think about it, exponential growth vs linear growth. Over time what will win out?

  15. Gravatar of Suvy Suvy
    12. April 2013 at 23:45

    Prof. Sumner,

    Let me give you a very simple example. Suppose a person earns $1000/year and has a total debt burden of $25000. The current interest payments cost $500/year($250 of which is interest). If all of a sudden, suppose this person gets paid $200/year more(20% increase in income); however, his interest rates shift rise by 3% when a 100 basis point shift in their rates causes their debt service costs to increase by $250. What that means is that his debt service is now $1250 while his income is at $1200. For a 3% increase in interest rates, it requires an income increase of 25% to be able to service the debt alone.

    The only way for a country to keep sustain such a system is through accelerating increases in the amount of debt monetized or to restructure the country’s debts. It’s just basic math.

  16. Gravatar of Suvy Suvy
    12. April 2013 at 23:49

    Prof. Sumner,

    Why else would the Japanese government halt the trading of their bond futures and bonds? There’s something that just isn’t right.

  17. Gravatar of dtoh dtoh
    13. April 2013 at 01:41

    Suvy,
    Let me give you a very simple example. Suppose a person earns $1000/year and has a total debt burden of $25000. The current interest payments cost $500/year($250 of which is interest). If all of a sudden, suppose this person gets paid $200/year more(20% increase in income); however, his interest rates shift rise by 3% when a 100 basis point shift in their rates causes their debt service costs to increase by $250. What that means is that his debt service is now $1250 while his income is at $1200. For a 3% increase in interest rates, it requires an income increase of 25% to be able to service the debt alone.

    The only way for a country to keep sustain such a system is through accelerating increases in the amount of debt monetized or to restructure the country’s debts. It’s just basic math.

    The first problem with your analysis is that you’re only looking at the interest payments. If the 3% increase in rates is due to a 3% increase in inflation, then every year even though the person pays an extra $750 in interest payments, the amount of principal which he owes also falls by 3% ($750) in real terms so it’s a wash.

    Also, you’re assuming JGBs are floating rate so the interest rate goes up immediately on the entire government debt, which is not the case. It’s mostly fixed and the average maturity is 6 years. That means that even after 6 years, the interest payments in your scenario would only have increased by 1.5%.

    If you make a more likely assumption that the rate for newly issued JGBs goes up by 2% (BOJ inflation target). Then after one year, the average rate on all outstanding JGBs would have gone up by just 17 bp. Assuming that total government debt is 300% of GDP, we are talking about a net increase in interest payments equal to just 0.50% of GDP.

    If you assume that Japanese tax revenue is 30% of GDP, then a 2% tick up in NGDP (inflation only and no real growth), will generate an annual increase in tax revenue equal to 0.60% of GDP. So the gain in tax revenue more than offsets the increase in interest expense.

    I’m sure you can pick out arbitrary numbers for interest rates, inflation, tax revenue, etc. to make the numbers for current cash flow look worse, but don’t forget that a sovereign has a lot of options when its debt is denominated in its own currency (e.g. borrow more money, raise taxes generally, raise the consumption tax, raise taxes on interest payments on government bonds, cut spending, etc).

  18. Gravatar of ssumner ssumner
    13. April 2013 at 04:37

    dtoh, I think I didn’t word my comment about expected NGDP and stock prices very well. I didn’t mean to suggest the higher stock prices caused higher NGDP, but rather were an indication of higher NGDP. As in the answer to the question: “How do we know that NGDP expectations have risen?”

    Suvy, Sorry, but your example is a freshman economics 101 error in calculating real and nominal costs. You are mixing up stocks and flows.

  19. Gravatar of dtoh dtoh
    13. April 2013 at 05:54

    Scott,

    Let me ask you three questions.

    1. If you measure price as expected real risk adjusted after tax IRR, do you think OMP causes a significant change in the price of equities relative to other financial assets?

    2. If the price of oranges rises relative to apples, will this cause a marginal increase in the exchange of oranges for apples?

    3. If the real price of financial assets rises relative to the price of real goods and services, will this cause a marginal increase in the exchange of financial assets for real goods and services?

  20. Gravatar of Suvy Suvy
    13. April 2013 at 05:58

    Dtoh,

    Uhhh, when your debts are 25 times your revenues, you’re not paying back much principal–you are rolling over your debts. The term structure of the debts are also crucial, which means that shorter term structures need to be rolled over more frequently.

    “If you make a more likely assumption that the rate for newly issued JGBs goes up by 2% (BOJ inflation target).”

    I never made that assumption. The assumption I made was that their revenues would increase by 20% while their interest rates move 3%. There’s no way a 2% inflation target would cause revenues to increase by 2%.

    When you look at Japan, they spend 50% of their revenues on interest and they spend almost 70% on social security. They have 25% of their population over the age of 65 and a third over the age of 60. Japan has more people dying than being born while they sell more adult diapers than kids diapers for god’s sake. Their mandatory expenses(debt service, social security, and education) already far exceed their revenues.

    Japan has had 6 prime ministers in 5 years; they’ve had even more finance ministers. If you look at the last 10 Fed chairmen, you’d have to go back to the 20s. There’s a reason why they halted the JGB futures from trading three times this week alone. The Japanese bureaucrats already know that they’re in major trouble. Why else would the government halt trading in your bond futures and in your bond market? They all know how bad it is.
    “When it becomes serious you have to lie”–Jean Claude Junker, Prime Minister of Luxembourg

    The structural problems in Japan cannot be changed. They have very high debt levels(both public and private), they have a falling population, and they have a falling workforce size. So you basically have a smaller and smaller revenue base while mandatory expenses keep moving up. Just take a look at how bad Japan’s budget, here it is:
    http://www.mof.go.jp/english/budget/budget/fy2013/01.pdf

    Japan could impose massive austerity, raise taxes, and allow massive amounts of immigration, but that will have demand side implications. Massive amounts of immigration means that they’ll probably have nominal wage deflation. If Japan raises taxes and cuts revenues, it’ll have some major demand side implications.

    “Sorry, but your example is a freshman economics 101 error in calculating real and nominal costs. You are mixing up stocks and flows.”

    I am not, the cost of servicing my debt and my interest costs are dependent on nominal rates and JGB volatility has already spiked within a week of the announcement. Just give it time; the debt crisis will happen and Japan will be forced to default. This will send shockwaves through the markets. The Japanese government is completely insolvent. If they do print more money, what happens when all of the insurance companies, banks, pension funds, etc head for the exits all at once. The Japanese bond market will collapse along with their currency.

    Why would it be a good idea to devalue your currency by 25% when you import all your energy? How does that make any sense? If that’s the only option, Japan really is finished.

  21. Gravatar of dtoh dtoh
    13. April 2013 at 06:10

    Suvy,
    There is a difference between arguing that there is a debt problem and arguing that higher NGDP growth will make the debt problem worse. I’m sympathetic to the first argument, I think the second argument is just wrong. Do the arithmetic with actual numbers.

  22. Gravatar of Mikio Kumada Mikio Kumada
    13. April 2013 at 06:36

    Scott, guys: aren’t you all being a bit too academic on the topic of bond yields?

    The market was a bit jittery and nominal yields have fallen sharply driving the entire yield curve lower and flattening it.

    But that’s because the BoJ is out there as a buyer with unlimited resources, telling everyone that it will be buying ~1.5% worth of 2012 NGDP per month of bonds up to maturities of 40 years.

    Bond yields are falling because there is an overwhelming buyer in the market.

    Don’t philosophize too much about it.

  23. Gravatar of Suvy Suvy
    13. April 2013 at 07:28

    “I’m sympathetic to the first argument, I think the second argument is just wrong. Do the arithmetic with actual numbers.”

    When interest rates begin to shift due to shifts in inflation expectations, the shift in interest rates worsens the original problem in a nonlinear manner when your debt/income ratio is 25. Any sort of shift in the Japanese bond rates could set off a major panic and crisis.

    In my eyes, you can’t separate the first problem from the second. There’s a reason why the Japanese government halted trading of JGB futures and JGBs several times this week. Everyone in there knows the situation is dire. How else could you have 10 finance ministers in the past 5 years? Why else would the government halt trading of JGB futures and JGBs?

  24. Gravatar of Mikio Kumada Mikio Kumada
    13. April 2013 at 07:59

    The reason Japan had 10 finance ministers in the past 5 years is the same reason it had 10 finance ministers in five years in the 1960s, 1970s, or 1980s: it’s political system and culture, which only rarely produces leaders that actually lead. It has nothing to do with debt.

  25. Gravatar of Erik M. Erik M.
    13. April 2013 at 08:10

    Thank you for this post. There is nothing more interesting to this non-economist than seeing you, Paul Krugman, and Tyler Cowen disagreeing on substance without talking past each other or getting into disputes about etiquette and tone.

  26. Gravatar of Mikio Kumada Mikio Kumada
    13. April 2013 at 08:26

    And it’s a very good idea to devalue when you are the world’s biggest creditor nation with your net assets abroad worth about 55% or GDP.

  27. Gravatar of Dick Fitzwell Dick Fitzwell
    13. April 2013 at 11:35

    4. Are the Japanese citizens better off when their currency buys less?

    No.

  28. Gravatar of Suvy Suvy
    13. April 2013 at 13:40

    Mikio,

    I think you need to take a look at the finance ministers of Japan through the 1960s; there were 5 total, 4 if you don’t count one guy coming back for a second time. There were a lot right after World War II when Japan was completely ruined(8 from 1941-1948 actually). Japan has had 48 finance ministers and 12 have came in the 21st century while 9-10 have came in the last 5 years. Not only that, but one of those guys actually killed himself.

    There have been more finance ministers over the past 5 years in Japan than there were from 1940-1950. Remember that 1940-1950 was during and after World War II when Japan even experienced hyperinflation due to war spending.

    There’s something the government officials know that we don’t. Their situation is probably worse than any of us here can actually imagine. Why else would a country have 10 finance ministers in 5 years during peacetime? Why else would the JGB futures market and the JGB market have trading halted three times in one week after a BOJ announcement.

    On top of this, Japan has the worst population demography combined with the worst on balance sheet public debt situation while their private debts are very high as well. Now, you’re starting to see volatility spike in the Japanese currency markets, debt markets, and future markets. Savings and investment rates have plunged along with their current account(which has bounced slightly up, but not nearly high enough to sustain their deficit). If there is an uptick in inflation and everyone who bought those JGBs(Japanese citizens) head for the exits all at once, you’ll see a currency crisis combined with extremely high levels of inflation that will eventually lead to default.

    On top of this, you’ve got increasing tensions with China(Senkaku Islands) combined with the issues in Korea between the North and the South which could spill over.

    When you combine everything together that’s happening at once, it spells disaster. Money printing cannot solve Japan’s problems.

  29. Gravatar of Mikio Kumada Mikio Kumada
    13. April 2013 at 20:34

    Suvy, ok. I admit that I didn’t research the number of finance ministers in past decades.

    I just wanted to make a point not to read too much into the fact that Japan had “too many” government changes in recent years.

    The link I see is political: the electorate was unhappy with the government’s economic performance post-Koizumi and post-Global Financial Crisis.

  30. Gravatar of dtoh dtoh
    13. April 2013 at 21:08

    Suvy,
    You said;
    “There’s something the government officials know that we don’t. Their situation is probably worse than any of us here can actually imagine. “

    And….any thoughts on who killed JFK. Seriously though, everyone understands the problems and their severity.

    You also said;
    When you combine everything together that’s happening at once, it spells disaster. Money printing cannot solve Japan’s problems.”

    But you’ve been arguing that money printing (i.e. a more accomodative monetary policy) will make them worse.

    I don’t think anyone would disagree with the statement that money printing alone cannot solve all of Japan’s problems.

    However, they will certainly help to ameliorate some of them.

  31. Gravatar of Suvy Suvy
    14. April 2013 at 09:36

    Dtoh, Mikio, Prof. Sumner,

    Japan will implode regardless of policy due to their fiscal situation. However, if the monetary policy causes inflation expectations to shift and place an upward pressure on interest rates, it could detonate their debt bomb. You’re starting to see signs of increasing volatility in both the JGB markets and certainly in the JGB futures market. I’m pretty sure the Ministry of Finance knows it too–why else would they halt trading 3 times in the first week after their announcement of monetary policy. Japan’s printing more than 75% of what we’re printing here for an economy a third of the size and if interest rates shift from a rise in inflation expectations; Japan is finished.

  32. Gravatar of Kenan Kenan
    14. April 2013 at 13:44

    The problem is that Japan has had tight money for so long that it has made their debt problem huge and unavoidable. Now they don’t really have a choice, they can go on with tight money and their problems will get even worse, or they can start being accomodative and their situation will still be bad and it will perhaps trigger a flight out of jgb’s and yen, but that was inevitable with their debt buildup anyway. Loose monetary policy will actually make this unwinding a lot easier relative to a tight policy, but it will still be hard in an absolute sense.

  33. Gravatar of ssumner ssumner
    22. April 2013 at 10:46

    dtoh, You said;

    If the price of oranges rises relative to apples, will this cause a marginal increase in the exchange of oranges for apples?”

    No, never reason from a price change. Transactions are caused by differences in opinion, not changes in value that everyone agrees on.

    Suvy, No, real debt service costs matter, not nominal costs.

    Mikio, My point is that easy money can make yields go up or down. Either is possible.

    Kenan, Yes. As you say it would be better, but still a big mess.

  34. Gravatar of Classical Values » On Market Monetarism Classical Values » On Market Monetarism
    28. April 2013 at 20:22

    […] This will be an interesting year, with Japan finally raising its inflation target to 2% (not quite NGPLT but movement in the direction that NGDPLT would have indicated) in response to decades of very low NGDP growth.  If Japan succeeds, the US may finally consider a similar adjustment to its 2% target (current policy has not produced much movement, because it amounts to standing on the brake of long-term expectations while flooring the gas on short-term action). […]

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