Market monetarism in Japan
Lots of people favor monetary stimulus, lots of people favor austerity, and lots of people favor structural reform. But outside the market monetarist community you won’t find many that favor all three.
Except in Japan:
The Abe administration nominated a proponent of reflationary monetary policy to the central bank’s board, buttressing Governor Haruhiko Kuroda’s effort to end a two-decade slump in the world’s third-biggest economy.
The government proposed economist Yutaka Harada to replace Ryuzo Miyao, whose term ends March 25, according to a document distributed to reporters at parliament Thursday. The Waseda University professor, who has said Japan can beat deflation by printing money, co-edited a 2013 book “Reflationary Policy Revives Japan’s Economy” with Deputy Governor Kikuo Iwata and Koichi Hamada, an adviser to Abe on monetary policy.
The pick would give Kuroda another ally on the board after a decision in October to increase already unprecedented easing was carried by the narrowest margin since 2008. Prime Minister Shinzo Abe will have another chance to bolster Kuroda’s sway on the board when an opponent of the extra stimulus steps down in June.
“The nomination is a good news for Kuroda,” said Junko Nishioka, an economist at Sumitomo Mitsui Banking Corp. and a former BOJ official. “He will keep a majority on the board and win what he wants. But the 2 percent inflation target is still out of reach. Kuroda’s struggle will continue.”. . .
In an interview with Bloomberg News in 2002, Harada said the central bank held the key to ending deflation, which began to grip the economy in the late 1990s as Japan stumbled into a recession amid a banking crisis.
“We just need to print money,” said Harada, who was a deputy director at the finance ministry’s Policy Research Institute at the time.
“If the BOJ buys all of the bonds from Japan’s debt market, that will create inflation without a doubt. That’s it,” Harada said. “Deflation will be over if the BOJ buys them under the condition that it would continue the purchases until 2 or 3 percent of inflation is achieved.”
In 2012 paper published before Abe took office pledging to shake Japan out deflation with Abenomics, Harada said the “absence of any real monetary policy” had contributed to Japan’s two decades of stagnation.
Bond Purchases
The BOJ has room to buy more government bonds and should boost stimulus to accelerate inflation, Harada said in an interview with the Asahi newspaper posted on Jan. 21.
“Harada has been a well-known monetarist and a strong supporter on quantitative easing,”Masaaki Kanno, an economist at JPMorgan Chase & Co., wrote in a note.
Miyao was a professor at Kobe University before taking up his post on the board. The term of Yoshihisa Morimoto, an executive at Tokyo Electric Power Co. before he joined the BOJ, is set to end on June 30. Morimoto dissented in October’s 5-4 vote to increase stimulus, which gives the central bank room to buy every new bond issued by the finance ministry.
The openings on the board comes as the BOJ approaches the two-year mark after Kuroda introduced the asset purchase program in April 2013. The plunge in oil prices is challenging Kuroda’s effort to spur 2 percent gains in consumer price that he said at the time the BOJ could achieve in about two years.
JPMorgan is among banks forecasting consumer prices will decline in coming months due to the effects of cheaper oil. The BOJ’s main inflation gauge slowed to 0.5 percent in December.
Easing Expansion
A majority of economists see the BOJ adding to easing by October this year as inflation slows.
Etsuro Honda, another adviser to Abe, said policy board selections are crucial to give Kuroda flexibility as he seeks to revive the economy.
In Harada, Kuroda would also find support for his case that Japan’s government must tackle its debt problem to put the economy on a long-term stable footing.
“Harada isn’t just a reflationist,” said Hamada. “He understands the importance of fiscal consolidation and he’s very serious about it.”
In a book published in 2013, Harada advocated Japan’s participation in the Trans-Pacific Partnership, a U.S.-led free-trade initiative that Abe is negotiating to join as part of his effort to revive the economy.
Paul Krugman likes to point out that market monetarists don’t have much influence. Perhaps not, but our ideas do seem increasingly popular in the world’s 3rd largest economy.
Now if only we could convince them to do price level targeting, or better yet NGDPLT.
HT: James in London
Tags:
6. February 2015 at 12:44
Great news for Japan! More MM data to come.
6. February 2015 at 15:55
It is also refreshing to meet a central banker who can speak clearly. This fellow Yutaka Harada says, “We just need to print money.” I nominate Hirada for the Federal Reserve Board.
In fact, perhaps the Mercatus Center can create an annual award news event, “The Yutaka Hirada Trophy,” honoring the central banker who spoke most clearly during the year.
I would marry lots of printing money to tax monetization, in the case Japan.
6. February 2015 at 21:16
Keep in mind that if you account for the fact most of Japan’s debt is owned by Japanese, and Japan has a high savings rate, in fact the “Debt-to-GDP” ratio is much lower than Greece’s and is around 125%, not close to 200% as widely reported, and not much more great than the USA’s ratio of around 100%. So the tipping point for Japan’s debt has not been yet reached. When it does, then you monetarists will see what happens when a country recklessly inflates their money supply–it becomes a wreck. The wildcat banks of the Midwest before the US Civil war (during the US ‘free banking’ era) proved that; compare to the soundly managed NY State free banks, which did not fail much as they were adequately capitalized.
PS–Denmark just announced it is going to spend a boatload of money defending their peg vs the euro…this too will end badly, Denmark will lose to the speculators. It shows the power of the market vs central banks. Market Monetarists take note; the Fed is impotent.
7. February 2015 at 01:43
I do not get it. If in August the government of Japan announced across the board wage cuts of 20%, then this week announced employment gains, not one nice word would be said.
Instead in relative global value, compared to August, Japan cut wages 20% by letting their currency slide and I’m supposed to be impressed by employment gains????
7. February 2015 at 05:43
But this can’t work!
Paul Krugman’s model says so!
(Snark)
: -)
7. February 2015 at 05:47
Since when does Krugman have a model ?
7. February 2015 at 07:06
@Derivs,
That’s ridiculous. The relevant price index for Japanese workers is the Japanese CPI, which has hardly moved at all, not the exchange rate. The depreciation of the yen makes Japanese exports cheaper and their imports more expensive, but the CPI includes import prices. Japanese labor is cheaper on the world market, but that does not mean that they have all taken real pay cuts, since the vast majority of what they consume is produced domestically.
I don’t know which is worse: (i) that you didn’t know this and yet you feel free to criticize what you don’t understand, or (ii) that you did know it and are dishonest.
7. February 2015 at 07:57
I really wanted to agree with Brad (about an hour in) that the world would be a better place if he’d been poorer;
https://www.youtube.com/watch?v=Aix82gWijYw#t=28
But, even if it meant he couldn’t have afforded to go to Harvard, I couldn’t go there.
7. February 2015 at 09:16
Off-topic:
A very nice chart that shows the relationship between wage growth and 25-54 employment ratio.
1) Historically, we need an 80% 25-54 employment ratio to get decent wage growth.
2) There is wage stickiness if the 25-54 employment ratio is under 78%.
http://equitablegrowth.org/news/u-s-wage-growth-remains-sluggish-despite-employment-gains/
7. February 2015 at 11:23
Jeff,
I was hoping for (iii), and that it was going to be an attack on my manhood.
I just became accustomed to converting things to global purchasing power.
In July ’14, both you and I take a job in Hong Kong on a 2 year contract. We have a choice whether to get paid in 10,000,000 Yen or 100,000 USD. I chose USD and you chose Yen. Yen goes to 120 and you are still being paid 10,000,000 Yen for the next year and a half. Feels good? If equal employees are still offering service at 10,000,000 Yen or 100,000 USD who do you hire, with whom is it becoming cheaper to produce with? In ratio, can a Japanese worker still purchase the same amount of gold with their salary as an American worker? (Personally, I hate gold, but it does provide a nice global value reference point).
7. February 2015 at 11:35
Jeff:
“That’s ridiculous. The relevant price index for Japanese workers is the Japanese CPI, which has hardly moved at all, not the exchange rate.”
It is ridiculous to define what a “relevant” set of prices are for anyone. It is not “ridiculous” for a Japanese citizen to consider themselves, correctly, as better or worse off because of what occurs with the Japanese Yen exchange rate.
7. February 2015 at 11:42
Good news for Japan, and another natural experiment to build on 2013USA. I’ve argued before that looser monetary policy will help Japan make changes that can increase growth.
There was a time when Milton Friedman’s views had little influence…
Dervis — I don’t think anyone in Japan feels they are 20% poorer, nor will PPP GDP per capita reflect such a change.
I second the motion for an annual Yutaka Hirada Trophy
7. February 2015 at 11:49
The plunge in oil prices is challenging Kuroda’s effort to spur 2 percent gains in consumer price that he said at the time the BOJ could achieve in about two years.
This is another of those problematic sentences. A fall in the price of oil raises living standards, it’s a productivity gain. This is an opportunity for the CBs to fuel a boom, and perhaps a lesson in why NGDPLT is superior to IT/PLT.
7. February 2015 at 12:00
The idea that legalized counterfeiters, and commercial bankers who expand credit, can bring about price inflation even when interest rates are “very low” is certainly not an idea unique to (anti) market monetarism.
It is not true that a rejection of the “central bank increasing the base money supply can convince enough people to raise aggregate spending even when interest rates are ‘very low'” makes one necessarily “influenced by (anti) market monetarist” ideas.
It is an idea also held by MMT, Austrianism, orthodox monetarism, and likely an assortment of other “schools”.
In short, to reject the “zero bound problem” is not a promotion of or dependency on, (anti) market monetarism.
7. February 2015 at 12:04
Ray, You said:
“Keep in mind that if you account for the fact most of Japan’s debt is owned by Japanese, and Japan has a high savings rate, in fact the “Debt-to-GDP” ratio is much lower than Greece’s and is around 125%, not close to 200% as widely reported, and not much more great than the USA’s ratio of around 100%.”
Leave it to good old Ray to provide Japan’s net debt ratio and the US’s gross debt ratio in the same sentence. I’ve learned to expect no less in deception from you. Or are you just clueless?
And you top it off by claiming:
1. Central banks are about to create hyperinflation (just like those wildcat banks did!!)
2. Central banks are impotent.
(add the letter “r” after the “o” in impotent.)
Derivs, How much are Japanese workers making in Zimbabwe dollars? That’s what I want to know.
7. February 2015 at 15:19
Ray,
How can a central bank with unlimited resources and virtually unlimited support from its consituents lose to speculators? For better or worse, the peg will remain.
7. February 2015 at 21:34
@Sumner – thanks, I did indeed use net and gross debt in the same sentence, for JP and US, respectively, but this being a sophisticated crowd (?) I figured they understood that; sorry if not. Central banks are impotent–not important–*except* to print inflation. That’s why I suggested a while ago you Google “coefficient of dynamic friction” and “coefficient of static friction”. Illustration: put a ruler on a textbook. Slowly incline the textbook. Ruler stays put (Fed is impotent). Keep doing that until the textbook approaches a 90 degrees incline. Ruler slides off book (that is hyperinflation, Fed is important now)
@Jason– I agree with you, *if* your assumptions are correct: unlimited resources to print money (true) and virtually unlimited support from the public (questionable). If. Tyler Cowen at Marginal Revolution has a post on Sumner’s topic of this thread, see: “From the comments, Scott Sumner by Tyler Cowen on February 7, 2015 at 4:19 pm in Economics | Permalink” See my comments to that post.
8. February 2015 at 09:13
@myself: follow-up observation: since Japan has lots of savers and few foreigner bond-holders, whereas in the USA it’s the opposite (not that many savers, and lots of foreign bond-holders of US debt), it’s not that illogical to compare net JP debt-to-GDP ratio to the US’s gross debt-to-GDP ratio.
8. February 2015 at 11:05
Ray, You said:
@Sumner – thanks, I did indeed use net and gross debt in the same sentence, for JP and US, respectively, but this being a sophisticated crowd (?) I figured they understood that; sorry if not. Central banks are impotent-not important-*except* to print inflation.”
So inflation has no real effects? Then why do you care?
And I love the way you say “yes, I juxtaposed the data in a grossly misleading way, but I thought your readers were sophisticated enough to understand my deceptive use of data.”
Priceless.
8. February 2015 at 12:26
If company C located in country C produces in countries A and B and all material prices are internationally set so there is never an arbitrage in material prices between A and B. Assume half of production costs are material and half are labor. Now if country A was to devalue its currency 20% relative to country B and C. The cost of production in A would now be 90% of the cost of production in country B. ALL of this came out of wages, as we already declared material costs to always be non-arbitrageable. This is simply what fx does to wage labor arbitrage. I never thought this was a contested issue. I think the Treasury watches this and reports to Congress every year on fx manipulation by trading partners attempting to obtain unfair advantages. As for employment, Company C, being led by profit motive should begin reallocating production to country A.
What you are saying is not incorrect if you are isolating a single subset. Unfortunately there are multiple subsets inside of this system. So you can easily lead someone to a very logical but nonetheless incorrect outcome from an unwillingness to try and reconcile the subsets to one another, inside of the system.
If Canada has no inflation and no change in NGDP, and America has no inflation and no change in NGDP, given only that information one could easily, and incorrectly, assume that a Canadian playing snowbird in Sarasota would obviously have need to change their consumption pattern. In reality, this year, the Canadian pensioner, who last year had his pension lasting until the 31st, finds himself broke on the 24th of the month if he trys to maintain the same consumption. But you wish to argue NOTHING changed. Another year of the same NOTHING and he will be broke by the 15th. Or, one can just tell him to go back to his country and that way nothing changed (ostrich trading). I’m not disagreeing with you, actually I agree with you, I am just simply saying you are looking at part of a picture.
Actually, I wish you were completely correct. I have a reasonably fair holding in Brazilian TIPS that get over 6%, which your way I should never lose on, but for some reason, with the currency down 20-25% in the past few months, all I see around me is blood. Guess I will need to spend a lot more of my year in Rio. Speaking of which, why am I writing this when there are thousands of scantily costumed young girls drinking and dancing on my street. Back out I go!!
8. February 2015 at 23:20
@Sumner-
I said: “Central banks are impotent -not important- *except* to print inflation.”
You said: “So inflation has no real effects? Then why do you care?
Seems you lack reading comprehension, since “except to print inflation” does not imply “inflation has no real effects”.
And I don’t care, except for my self interest. My only concern is protecting my family’s $8M to $20M net worth, most of it in DC area real estate, and, foolishly IMO, about $3M of that is in cash, which I feel will become worthless if the USA adopts your NGDPLT. Your NGDPLT movement is like the Linux movement was 15 years ago, when it was a threat to Microsoft (and as a Microsoft shareholder I was a anti-Linux ‘troll’ for years, until that threat died down). You even remind me of Linus Torvalds, who likes to verbally attack all who dare disagree with him.
9. February 2015 at 00:01
The only meaningful “real effect” that inflation has is on the redistribution of real wealth away from net wealth creating activities and towards real net wealth consuming activities.
If an activity were a net wealth creating one, inflation would not be needed to sustain it.
1What inflation does is mislead the entire population of investors into acting as if there is a higher demand for products that what is actually the case. No observable price or interest rate can enable and investor or split it into endogenous and exogenous componentz. Competition compels resources to be redirected as if there is a higher demand for products than what would otherwise be the case.
The greater the alleged need for more money to counteract declines in spending, the less more money is the solution.
When aggregate spending declines by market forces, this proves there was too much money issued prior.
9. February 2015 at 08:45
Ray, You said central banks have no real effects, didn’t you? Isn’t that what “impotent” means in economics?
derivs, Sorry, I don’t follow any of that. Maybe if you used economics terms like real exchange rates, price level, real wages, etc., your argument would be easier to follow.
9. February 2015 at 11:22
[…] he is said to favour fiscal consolidation and structural reforms for Japan. This of course is as Scott Sumner notices the unique market monetarist “policy cocktail” that would be the right one for Japan in […]
9. February 2015 at 12:25
Scott,
Derivs isn’t using economics terms because he doesn’t understand them.
I have to say, the quality of the comments here is really going downhill. There should be a limit of one really prolific troll per website, and we’ve already got Major Freedom. Ray Lopez, and now Derivs, should have to find another place to get their rocks off.
9. February 2015 at 14:52
“Derivs isn’t using economics terms because he doesn’t understand them.”
Jeff,
Agree, I have stated that repeatedly. I’ve never used the term “real wages” in my life. Not certain if I ever thought about them either.
But if you want to prove me wrong, on an issue I was more than happy to discuss no further, and do trade me Julys 10,000,000 Yen salary (I pay you), while you pay me Julys salary of 100,000 USD (since you insist NOTHING changed). I’m there for you for any size you want.
I’m curious though, is being a prick, and unnecessarily attacking someone, your general state, or does it build up in your frustrations throughout the day?
11. February 2015 at 01:43
An Austrian economist would not have accepted that job because they can tell what is coming.
http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html