Lost in translation?

A few days ago I did a post discussing the recent Japanese proposal for a 3% inflation target.  Britmouse recently sent me a link suggesting it was an NGDP targeting proposal, not an inflation target:

The head of Japan‘s biggest opposition party said he will make Prime Minister Yoshihiko Noda‘s management of the world’s third-largest economy a key issue in seeking to unseat him in next month’s election.

“This election will be a fight to win back Japan,” Shinzo Abe told reporters at Liberal Democratic Party headquarters yesterday in Tokyo after parliament was dissolved for the Dec. 16 vote. “I will do all I can to end the political chaos and stalled economy.”

Public support for Noda plummeted as he pushed through a bill doubling the five percent sales tax in a bid to rein in the world’s largest public debt and restarted some nuclear reactors following last year’s Fukushima disaster. Opinion polls show his Democratic Party of Japan is set to lose power, making way for the country’s seventh leader in six years.

In a nationally televised press conference, Noda said he decided to call the election after reaching deals to pass a deficit financing bill and electoral revisions. Polls show four- fifths of voters support neither main party, signaling that the next prime minister may have to form a coalition government.

Abe advocates increased monetary easing to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan. (8301) In an economic policy plan issued yesterday, the LDP said it would pursue policies to attain 3 percent nominal growth. The party governed Japan for more than half a century until ousted by the DPJ in 2009.  (Emphasis added.)

The Liberal Democratic Party (which isn’t particularly liberal or democratic) seems to be running on a market monetarist platform.  In the world’s third largest economy.  And it’s likely to win. Interesting.



62 Responses to “Lost in translation?”

  1. Gravatar of nickik nickik
    17. November 2012 at 18:48

    3% nominal growth is a nice compromise between what I would want 0% target and what you want 5% target.

    You would susepct a almost stable price level or it could just be that it is a journalistic error.

  2. Gravatar of Benjamin Cole Benjamin Cole
    17. November 2012 at 18:50

    Let us hope that at long last the Bank of Japan has figured out that zero inflation—if inflation can even be so accurately measured—is a bad policy.

    It is fascinating to watch the globe’s major central banks slowly—slowly, slowly!—migrate towards Market Monetarism.

    As Scott Sumner has pointed out, organizations and governments are extremely loath to ever admit mistake.

    Even in obviously lost causes–think Vietnam, Afghanistan—some sort of emperor’s clothing has to be put on the policy correction, even at the expense of life and treasure.

    Congrats to all active players in the MM movement. Keep on being active!

  3. Gravatar of Scott Sumner Scott Sumner
    17. November 2012 at 19:16

    nickik, I don’t favor 5% NGDP growth for Japan.

  4. Gravatar of dtoh dtoh
    17. November 2012 at 20:29

    I took a look at the articles in Japanese. The NGDP target was stated in the context of general economic policy not monetary policy. LDP is pushing 2 to 3% CPI increase as the monetary policy so still no consideration whatsoever of NGDP as a monetary policy.

    That said, the frequency and stridency of Abe’s comments are noteworthy. On top of the CPI target, he is pushing for unlimited bond buying, demanding that BOJ “take responsibility” if they miss the target (i.e. BOJ head resign), appointment of a BOJ head amenable to accomodative monetary policy, zero or negative rates paid on bank reserves, and rescinding the BOJ law to eliminate BOJ independence if they fail to set and make an inflation target.

    Pretty radical stuff, and it looks like the LDP will win the election.

  5. Gravatar of Saturos Saturos
    17. November 2012 at 21:58

    nickik, Japan’s trend RGDP growth is 2%, as they are a stagnating economy with practically no population growth. So the proposal would give GDP deflator inflation of 1%.

  6. Gravatar of BoJ might become the first central bank in the world to introduce NGDP targeting « The Market Monetarist BoJ might become the first central bank in the world to introduce NGDP targeting « The Market Monetarist
    17. November 2012 at 22:39

    […] Oops – Scott also comments on this story. Share this:Email Pin ItLike this:LikeBe the first to like this. Leave a Comment […]

  7. Gravatar of Major_Freedom Major_Freedom
    17. November 2012 at 23:41

    Yay! No mention of distortions to economic calculation.

  8. Gravatar of Rien Huizer Rien Huizer
    18. November 2012 at 03:03


    Lars Christensen just had a post suggesting that the Japanese hire the dissident Riksbank director Svensson who publicly ignores Sweden’s commitment to EUR membership -though temporarily halted by ill judged involvement of the Swedish public) and advocates NDGP targeting which in a small open economy would probably result in downward pressure on the key exchange rate.

    Actually that is a very good idea. Assuming that what the LDP really want: downward pressure on the JPY, i.e. the tool, not necessarily the resulting benevolent domestic monetary policy effects, choosing Svesnson would send a powerful signal to the markets:

    – making the BoJ less independent, but
    -balancing that by leaving policy to a non-Japanese speaking foreigner with a reputation for advocating predatory exchange policies..

    At least no Japanese would have to suffer if policy failed.

  9. Gravatar of nickik nickik
    18. November 2012 at 03:52

    @Scott Sumner What would you suggest for japan then?

  10. Gravatar of nickik nickik
    18. November 2012 at 03:56


    Yes I understand that, but whats you point? Insofar my understanding goes, it does not acctually matter (in terms of your theory) what the inflation (CPI, or deflator) is as long as MV is stable (or stable growth).

  11. Gravatar of Bill Woolsey Bill Woolsey
    18. November 2012 at 04:50


    Market Monetarists consider variation in nominal GDP to keep some measure of the price level or inflation stable to be undesirable.

    That criterion can be met with any target growth path of nominal GDP–0%, 1.5%, 3%, 5%–are ones that are promoted by various market monetarists. However, the criterion is also met by ones like -20%, or 10,000%, which no market monetarist advocates.

    The criterion for what is the best trend growth path for nominal GDP are different than the arguments for having a trend growth path for nominal GDP (rather than for the price level or inflation.) I don’t think it is correct that most market monetarists entirely ignore the implications of the trend growth path of nominal GDP for trend inflation. Sumner seems to lean in that direction at least, but that would be one of his more controversial views.

  12. Gravatar of Saturos Saturos
    18. November 2012 at 06:41

    And even Sumner agrees that “there are significant non-linearities at the zero lower-bound”, which means you want positive trend inflation, particularly in nominal hourly wages.

  13. Gravatar of nickik nickik
    18. November 2012 at 07:41

    Bill Woolsey

    Im awary that nobody is advocating crazy nominal growth paths like 1000% or something.

    What I was really asking is what Sumner would do for japan if it is not 5% growth target.


    One could argue that wages should grow in a growing economy and thus a 0% target would allow to wages to keep up with growth without haven unions fight for rases all the time.

    Of course the other way around could be argued that 2% inflation would make the economy more compeditive since workers get there rases with a lag (if they can get them).

    The pro-deflation argument is that the prices contain the most information and that they are least effected by insertion effects (since with a 0% the central bank would not have to to much most of the time, when V is stable).

    Hayeks notion of stable nominal income would probebly best for a very high emigration countrys.

  14. Gravatar of marcus nunes marcus nunes
    18. November 2012 at 08:14

    A few months ago I argued Japan was a “poster child for NGDP targeting”. It seems Mr. Abe agrees:

  15. Gravatar of Saturos Saturos
    18. November 2012 at 10:35

    John Cochrane says the US Treasury should go long now:

    David Henderson also has a post.

  16. Gravatar of Scott Sumner Scott Sumner
    18. November 2012 at 17:32

    dtoh, Talk about low expectations! They are shooting for 3% inflation and 3% NGDP growth?

    Saturos, Japan’s trend RGDP growth is actually 1%, not 2%.

    nickik, I think they should start off with a 3% NGDP target. Later they could adjust that if they see any problems. But a sudden move to 5% would be destabilizing.

    Saturos, I’m not sure we need positive trend inflation, but we do need positive trend nominal wage growth.

    Does Cochrane believe in the EMH?

  17. Gravatar of TravisV TravisV
    18. November 2012 at 19:57

    Professor Sumner,

    I am very surprised that you haven’t been promoting this excellent video of you and Beckworth:


    People NEED to watch this!

  18. Gravatar of Major_Freedom Major_Freedom
    18. November 2012 at 20:32


    Those who really understand the market process will tell you that if NGDP falls, and the Fed is not burning paper notes, and not destroying the computer servers in which “digital” money information is stored, then a fall in NGDP suggests that the Federal Reserve System increased NGDP by too much prior. This is because the standard of what NGDP should be, is what the purely free market process would have generated, NOT the non-market, arbitrary decrees of the government.

    The notion that the fall in NGDP “made things worse” gets the causality reversed. The market determined fall in NGDP is an EFFECT of the cause that caused both the financial crisis and the inevitable recession tendency (past inflation distorting economic calculation). A market determined fall in NGDP is not an exogenous event that causes recessions. It is part of the recession process of correction.

    Re-inflating to “prevent recession” will only intensify the recession tendency and kick the can down the road, so to speak.

  19. Gravatar of Major_Freedom Major_Freedom
    18. November 2012 at 20:38


    The unemployment equilibrium doctrine has been theoretically refuted and empirically falsified. Higher price inflation does not help the labor market.

  20. Gravatar of TravisV TravisV
    18. November 2012 at 23:41


    I don’t understand. If inflation is bad for the labor market, why didn’t voters punish FDR for massively devaluing the dollar in 1933?

    And why didn’t voters punish Reagan for allowing 4%+ inflation during the post-1983 “Reagan Recovery”?

  21. Gravatar of Saturos Saturos
    19. November 2012 at 00:54

    Does Cochrane believe in the EMH?

    Sorry, can you explain to a dullard like me how his argument violates EMH? Surely it’s not unreasonable to infer that rates won’t stay this low forever – even you make that inference, it’s a key part of your argument…

    Isn’t it harder to cut real wages without trend inflation, even with positive trend nominal wage growth?

    And you need to do a post on the video TravisV just linked to!!

  22. Gravatar of Saturos Saturos
    19. November 2012 at 02:21

    Has Scott already seen this? It’s pure gold: https://www.youtube.com/watch?v=RdeT0C7_3GM

  23. Gravatar of Bob Dobalina Bob Dobalina
    19. November 2012 at 04:23

    Sorry, can you explain to a dullard like me how his argument violates EMH?

    I’m guessing that you can back out implied forwards from the term structure– therefore there already exists a market consensus rate path/

    The term structure is not infinite, however, which I think is a possible flaw in Scott’s argument.

  24. Gravatar of Steve Steve
    19. November 2012 at 06:21

    The jump in stocks after QE Indefinite was announced was put forth as evidence of QE’s success. How is the even larger plumment in stocks since the election to be interpreted?

    Also, any thoughts on WSJ article today on “Investment in US falling off cliff”

  25. Gravatar of Major_Freedom Major_Freedom
    19. November 2012 at 07:49


    The jump in stocks after QE Indefinite was announced was put forth as evidence of QE’s success. How is the even larger plumment in stocks since the election to be interpreted?

    Not enough QE, silly. The market is predicting inadequate NGDP growth, right after they predicted sufficient NGDP growth that made the stock market initially jump. Trust me. All investors price stocks using models that contain NGDP. Don’t bother asking any of them about it though. They would probably joke around with you and act like they have no idea what you’re talking about. But you know better, wink wink.

  26. Gravatar of Major_Freedom Major_Freedom
    19. November 2012 at 08:08


    Has Scott already seen this? It’s pure gold


    More like pure drivel.

    “Suppose you operate a business. If you suddenly expect faster nominal GDP growth in the future, you suddenly expect more customers to be willing to spend more money on your products in the future. In order to meet this extra demand, you must increase your investment spending today. Or suppose you were a consumer. If you suddenly expect faster nominal GDP growth in the future, you suddenly expect to have more money income in the future, which makes it easier for you to borrow and spend today.”

    There is so much wrong in this paragraph it is difficult to know where to begin.

    1. It does not follow from higher NGDP growth expectations that a particular individual business will earn higher revenues. NGDP is the sum of all business revenues. NGDP can go up or down, and an individual’s revenues can go the other direction. Think bonds versus stocks.

    2. NGDP includes spending on capital goods, which are factors of production. A particular business may experience higher NGDP growth as higher prices for capital goods. In this scenario, there is no higher revenues, but rather higher costs.

    3. It does not follow from higher NGDP growth expectations that a particular individual worker will earn higher revenues. NGDP is the sum of expenditures on final products. NGDP can go up or down, and an individual’s wages can go in the other direction. Virtually no wage earner today takes into account NGDP expectations of the future when deciding on how much to borrow and spend in the present. They take into account their own individual markets.

    4. More borrowing and spending is not necessarily a good thing, so the argument that higher NGDP growth makes it easier to borrow and spend in the present, can actually be a knock against NGDP targeting.

  27. Gravatar of TravisV TravisV
    19. November 2012 at 08:19

    Major_Freedom, you still haven’t answered my questions:

    If inflation is bad for the labor market, why didn’t voters punish FDR for massively devaluing the dollar in 1933?

    And why didn’t voters punish Reagan for allowing 4%+ inflation during the post-1983 “Reagan Recovery”?

  28. Gravatar of TravisV TravisV
    19. November 2012 at 08:30

    I just watched this link from Saturos:


    Awesome stuff! My favorite part was the argument that if demand in the economy is low, then there’s a strong correlation between NGDP and RGDP. I’m surprised that I don’t hear Sumner and Beckworth make that point more often.

  29. Gravatar of nickik nickik
    19. November 2012 at 08:39


    I would stop talking about voters and what they do. Voters have not a lot of insentive to do the right thing. They do not have alot of infomration an what is going on and what they do not know economics. Also they get constatnly hammered by propaganda.

    In 1933, people thought that money was easy and not tight. The hole money was tight view only came into beeing much latter (60s). Most people dont even understand what inflation is, neither do they understand what a central bank does.

  30. Gravatar of TravisV TravisV
    19. November 2012 at 09:28


    I disagree. General economic conditions almost always have a huge impact on voting behavior. Look at how well they predict incumbent presidents’ share of the popular vote, for example.

    Given this undeniable fact, and given Major_Freedom’s argument that inflation hurts ordinary workers, you would expect voters to have punished FDR in 1936 and Reagan in 1984.

    Exactly the opposite happened, though. That’s enough evidence to show that inflation is not remotely as bad for living standards as Major_Freedom asserts that it is.

    Real growth and aggregate demand have a much stronger impact on voting behavior than inflation. Policymakers dismiss that fact at their peril.

  31. Gravatar of Negation of Ideology Negation of Ideology
    19. November 2012 at 17:28

    Travis –

    Good point. People describe the economy as “good” or “bad”, they don’t usually talk about statistics. I think it’s quite possible that NDGP is a good proxy for general economic conditions. NGDP collapsed and Hoover was punished, it recovered and Roosevelt won eveywhere but Maine and Vermont. NGDP grew too fast and Carter was punished, it stabilized and Reagan won everywhere but Minnesota and DC.

    It would be interesting to see the relationship between NGDP and the incumbent party’s relection vote percentage.

  32. Gravatar of TravisV TravisV
    19. November 2012 at 17:57

    Negation of Ideology,

    Below is an excellent post by Nate Silver, where he looks at correlations between economic indicators and presidential vote share:


    He found the BLS job growth rate during the year leading up to the election to be the most useful metric. Other experts such as Larry Bartels have found that the real personal income growth rate has an even stronger correlation. However, Silver found that that metric is less reliable in real-time because it’s prone to dramatic revisions.

    In February, Silver felt that if employment growth met or exceeded 150,000 jobs per month, then Obama would be re-elected. Seems like that was a good estimate in retrospect.

  33. Gravatar of Dtoh Dtoh
    20. November 2012 at 03:48


    Abe is saying 2-3% CPI. His party’s official platform is 2%. The 3% NGDP is unrelated to comments on monetary policy. I guarantee you NGDP has to be a lot higher than 3% to hit a 3% or even 2% CPI.

  34. Gravatar of Saturos Saturos
    20. November 2012 at 06:16

    Housing starts are at a new high: http://www.floatingpath.com/2012/11/20/october-housing-starts-highest-july-2008/

    Meanwhile, the brilliant Jeffrey Lacker: http://www.marketwatch.com/story/fed-cannot-allow-temporary-inflation-spike-lacker-2012-11-20-8915930?siteid=bnbh

  35. Gravatar of Saturos Saturos
    20. November 2012 at 07:54

    Everybody, check out #krugmanbondfilms trending on Twitter. Any ideas?

    Oh, and relatedly, can any of you suggest whether I should go see Skyfall this weekend? I’ve been getting mixed reviews. (It hasn’t opened yet here down under.)

  36. Gravatar of Doug M Doug M
    20. November 2012 at 08:37


    894k anualized, while an improvement, is still an anemic level of home construction. The bottom of the housing cycle may have passed, but we haven’t seen much of an upswing yet.

  37. Gravatar of TravisV TravisV
    20. November 2012 at 09:15

    Jeremy Grantham!

    I would love to read Scott’s take on this:


    The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16).


    Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!

  38. Gravatar of Major_Freedom Major_Freedom
    20. November 2012 at 12:23


    “The ability of the Fed to offset head winds is not infinite,” [Bernanke] continued. “In the worst-case scenario where the economy goes off the largest fiscal cliff … I don’t think the Fed has the tools to offset that.”

    Oh come on Ben! You have a whole raging fan section at MoneyIllusion who knows you can hit CTRL+P as many times as you want!

    Just do 250% NGDP growth targeting, level targeting, and we’d be out of this mess in no time!

  39. Gravatar of PrometheeFeu PrometheeFeu
    20. November 2012 at 14:28


    Have you talked before about how to pick the target? After all, if we’ve had poor monetary policy for a long time, the long-run trend in the past isn’t necessarily what we want to replicate.

  40. Gravatar of Saturos Saturos
    20. November 2012 at 16:16

    MF, “5% NGDP targeting, level targeting” is the parody line.

    Thanks for putting that up, I’d been meaning to myself. But even Scott had been predicting that Bernanke would claim to be unable to offset the cliff.

  41. Gravatar of Dtoh Dtoh
    20. November 2012 at 18:48

    Shirakawa’s comments today were interesting. Noteworthy he said higher inflation would lead to higher long term rates which would cause capital losses on bank’s holdings of JGBs. I’ve always suspected that Japanese monetary policy was driven primarily to protect Japanese banks but its rarely been expressed this overtly. The BOJ is still stuck in era when banks were the main source of capital for industrialization.

  42. Gravatar of TravisV TravisV
    20. November 2012 at 19:30


    Here is what Prof. Sumner has said recently about the ideal target:


    “Recall that in 2009 I favored going back to the old pre-2008 NGDP trend line, but more recently have advocated going just a third of the way back. The problem here is that while NGDPLT is completely automatic when fully implemented, discretion is required when deciding where to set the initial trend line. Last year Christy Romer did a NYT column calling for a return to the old trend line. Because we are roughly 10% below that line, this would entail quite rapid NGDP growth (and inflation) over the next few years. Because a lot of time has gone by, and because many wage contracts now reflect the lower NGDP trend line, I no longer favor going all the way back, but rather looking for a pragmatic compromise. I think Crook’s right that 100% level targeting right now (Romer’s plan) would currently lack credibility, there simply aren’t enough economists inside or outside the Fed that favor that degree of stimulus.”

  43. Gravatar of Doug M Doug M
    21. November 2012 at 09:05


    Perhaps things have changed while I wasn’t looking, but, in Japan, banks are the main source of capital for for indsutrialization. Japan doesn’t have nearly the sort of capital markets that exist in the US or Europe. Only a handfull of multinationals can raise money in the international capital markets.

  44. Gravatar of Saturos Saturos
    21. November 2012 at 09:39

    More on Japan (it’s a 2-3% inflation target, like Australia):

    and more on Bernanke:

    Also, from the Japan piece – someone give Yutaka Harada a medal:

    If the central bank doubted its own policies, how could it ask anyone else to believe in them?

    Also see the quote from Kozo Yamamoto.

  45. Gravatar of ssumner ssumner
    21. November 2012 at 17:54

    Thanks for the info dtoh.

    Thanks Travis, I’ll post a link. I agree with the guy who says growth will slow, although I expect a bit more growth than he does.

    Saturos, The long rate is the average of expected future short rates, plus a risk premium. So how does the Treasury save money by going long? And Skyfall is a decent film, nothing special.

    Steve, You said:

    “The jump in stocks after QE Indefinite was announced was put forth as evidence of QE’s success. How is the even larger plumment in stocks since the election to be interpreted?”

    If you believe in the EMH, then it reflects new information hitting the markets–presumably the big tax increases that are on the way. Unfortunately I seem to be the only person in the blogosphere who believes in the EMH. Sometimes I feel like I’m talking to a wall.

    Prometheefeu, Yes, I’ve done many posts explaining how to pick a target.

  46. Gravatar of DOB DOB
    21. November 2012 at 20:08

    If Japan should have a lower NGDP target because it has a slower population growth, shouldn’t we be thinking about redefining the target to NGDP per capita, or something like that?

    What other determinants are there for where the target should be set for a given country?

  47. Gravatar of John S John S
    21. November 2012 at 22:01

    Won’t more easy money just exacerbate the “zombie bank” and “zombie company” problems in Japan?

    Financial Times blog: “Yet the experience of Japan suggests there is one clear negative outcome from ultra loose monetary policy: it does structural damage to the economy.”


    Poor corporate strategy in Japan (excessive diversification by the conglomerates, revenue growth with paper-thin profits) certainly accounts for much of the “lost decades.” Yet wasn’t this poor strategy buttressed somewhat by easy money?

  48. Gravatar of Saturos Saturos
    22. November 2012 at 00:36

    Scott, yes but couldn’t preferred habitat theory lead to a deviation from that? Perhaps lenders now have a preference for going long, which could maintain a difference between the long yield and the geometric mean of expected short yields. Surely the market doesn’t really expect future yields to continue to stay that low.

  49. Gravatar of Saturos Saturos
    22. November 2012 at 00:40

    “If you believe in the EMH, then it reflects new information hitting the markets-presumably the big tax increases that are on the way.”

    But doesn’t the long run tax burden depend on the long run spending path alone? If investors are rational it doesn’t matter when the revenues are raised for the overall burden. There are short run fluctuations in output but surely the value of assets depends on the expected long run performance of the economy? (Yes, I really don’t know anything, do I) Or does Scott not believe in Ricardian Equivalence?

  50. Gravatar of Saturos Saturos
    22. November 2012 at 00:46

    Bernanke says that CPI inflation has averaged 2% over the past 4 years, is that right?

  51. Gravatar of Saturos Saturos
    22. November 2012 at 03:14

    The Japanese have been following a steady nominal target for over a decade now; why are the markets reacting so positively to further expansion then?

    Anyway, the Economist has a piece on Japan: http://www.economist.com/blogs/freeexchange/2012/11/monetary-policy-japan?

    to which Ryan Avent responds: http://www.economist.com/comment/1759255

    And here is the follow up piece on the Cato conference: http://www.economist.com/blogs/freeexchange/2012/11/monetary-policy-2

  52. Gravatar of Saturos Saturos
    22. November 2012 at 03:31

    Here is an LSE review of Stiglitz, Spence, Romer and Blanchard on the economy: http://blogs.lse.ac.uk/lsereviewofbooks/2012/11/22/book-review-in-the-wake-of-the-financial-crisis/

    I just wanted to post it here before Tyler tweeted it.

  53. Gravatar of ssumner ssumner
    22. November 2012 at 12:03

    DOB, I’ve always argued it should be NGDP per capita, or something else. I just talk about NGDP for convenience.

    John S. Please don’t tell me that the Financial Times thinks the BOJ policy is “easy.” I feel like I’m living in a giant lunatic asylum.

    Saturos, Of course the market expects rates to stay low–why in the world wouldn’t they?

    You said;

    “But doesn’t the long run tax burden depend on the long run spending path alone? If investors are rational it doesn’t matter when the revenues are raised for the overall burden. There are short run fluctuations in output but surely the value of assets depends on the expected long run performance of the economy?”

    There are all sorts of problems here. The biggest problem is that you are confusing tax revenue and tax rates. The problem with Obama’s proposal is that it raises dividend tax rates from 15% to 43.4%, but raises very little revenue. In addition, you imply that spending drives taxes, whereas the reverse is equally true, if not more so.

    The Japanese nominal target has been too low—NGDP has been falling, making the labor market less efficient. However I would not expect miracles from a big faster NGDP growth in Japan, and apparently the stock market agrees, as Japanese stock prices have dropped from 39,000 to 9,000 over the past 21 years, despite the proposed increased in NGDP growth.

  54. Gravatar of dtoh dtoh
    23. November 2012 at 07:21

    I think it’s worth noting that there are some impediments in Japan which specifically hinder the effectiveness of Japanese monetary policy. As I have often argued in comments on this blog, I believe that monetary policy works primarily through the financial asset price mechanism, i.e. central bank actions raise real financial asset prices which causes consumers and businesses to exchange financial assets for real goods and services. This can take place through businesses and consumers selling assets which they hold in order to spend on goods and services or through businesses and consumers issuing new financial assets (including new borrowing) and then using the proceeds to buy goods (including capital items) and services.

    For this mechanism to work though, businesses and consumers must have the ability to issue new financial assets (including the ability to increase borrowing). CB action is done primarily through the purchase of government securities and so for this to have an effect on NGDP, either the government needs to increase spending or the higher prices in government securities needs to translate into higher real prices for other financial assets.

    The problem in Japan is that there is some disconnect between the government securities market and the market for other financial assets. Normally there is an asset allocation mechanism which will cause other financial asset prices to rise if the price of government securities rises. However, in Japan while this mechanism exists, the linkage between the markets is not robust.

    In particular, bank lending to businesses and consumers is less dynamic than in other markets for a number of reasons. Consumer lending prices tend to be fixed and both consumer lending and business lending are subject more to quantitative constraints than to pricing constraints. In particular much if not most banking lending is real estate related (either directly to real estate and development companies or through real estate collateralized lending to corporations) and is subject to rather slowly changing LTV limits.

    A problem with real estate lending is also that there are long delays for planning and approval which means that there will typically be a delay of a couple years before any change in borrowing costs are reflected in actual construction expenditure.

    In addition because banks intermediate much of the holding of JGBs, the incentive for asset reallocation is dulled compared to a more dis-intermediated environment where there would be more incentive to sell JGBs in favor of higher yielding assets. IMHO bank management in Japan is not accountable to shareholders and thus content to remain marginally profitable which they can do with fairly narrow spreads and by relying on rather high and un-competitive transaction fees which the government has failed to reform.

    Another problem is that CB OMP work not just through the impact on real prices of financial assets but also through expectations by shifting the preference curve between holding financial assets and spending on goods and services. After 20 years of stagnation, there is little expectation that any change in government policy will cause a change in AD.

    On top of all this, Japan has huge structural impediments to growth way beyond the problems noted above but as this comment has already become MFesque in length, I’ll refrain from elaborating on them here.

  55. Gravatar of Saturos Saturos
    23. November 2012 at 07:51

    Thanks Scott. But even you know that rates have to come back up to normal levels within the next 20 years…

  56. Gravatar of ssumner ssumner
    23. November 2012 at 09:26

    dtoh, I don’t think the impediments you mention inhibit the effectiveness of monetary policy, as they are real factors. Monetary policy can boost NGDP in any economy, no matter how messed up the real side (see Zimbabwe). It’s all about expectations of the hot potato effect.

    Saturos. It depends what you mean by “normal.” I agree that money is neutral after 20 years, but I think the new Wicksellian equilibrium rate will be much lower than what we saw in the 20th century. And the markets agree with me.

  57. Gravatar of Saturos Saturos
    23. November 2012 at 09:42

    Japan, for all its awesomeness, is still basically a closed, messed-up society (which perhaps goes towards explaining the anomalous economic underclass it has: http://noahpinionblog.blogspot.com.au/2012/09/japanese-poverty-whos-to-blame.html). I’m going to be a Sumnerian and invoke “culture” here…

  58. Gravatar of Dtoh Dtoh
    23. November 2012 at 19:58

    I’m sure you disagree because you underestimate the importance of the financial asset price mechanism and believe the HPE can operate absent the financial asset price channel.

    If I understand your point correctly, you’re dead wrong. Japanese lack of growth and poverty has nothing to do with culture…it’s a pure product of bad economic policy. With better policy, Japan could easily achieve 8 to 10% RGDP growth for the forseeable future.

  59. Gravatar of Saturos Saturos
    24. November 2012 at 04:45

    Dtoh: Oh really? Then how on earth do you explain this: http://marginalrevolution.com/marginalrevolution/2012/11/sentences-to-ponder-the-culture-that-is-japan-no-rising-sun-this-time-around.html

    Of course, there are interactions with policy – but there is no legislation which could be passed all of a suddent which would boost growth by eight percentage points.

  60. Gravatar of dtoh dtoh
    24. November 2012 at 07:10

    The aging population and reduced birth rate (not to mention low immigration) are a result of poor economic policy and low economic growth not the other way.

    I guarantee you would get a minimum 8% economic growth within 4 quarters if you reduced taxes, eliminated regulation and opened up immigration. I own several businesses in Japan. Compared to virtually any other country, the workforce is more diligent, better educated, better at collaboration, and more entrepreneurial. On top of that, there are huge pent-up economic aspirations and huge latent demand for more and better housing and other infrastructure. You could do 8% growth with your eyes closed!

  61. Gravatar of ssumner ssumner
    24. November 2012 at 11:18

    I think you both have good points. It’s almost impossible for a developed country to get 8% growth for any extended period of time. On the other hand Japanese Americans are far more productive that Japanese in Japan. The system does matter a lot. If I recall correctly, Japanese Americans are almost twice as productive as the Japanese in Japan–but don’t quote me on that.

  62. Gravatar of dtoh dtoh
    25. November 2012 at 12:00

    Impossible …. yes, but only because it’s politically impossible to put in the regulatory and tax policies necessary to achieve that kind of growth. There’s nothing economically impossible about it… especially in the case of Japan.

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