Things are improving in Japan

Nothing dramatic, but Tyler Cowen linked to a Financial Times article that has some positive data:

“We are still seeing input costs rising from energy and a weakening yen,” said Takuji Aida, chief economist at Société Générale in Tokyo. “But pass-through momentum is getting stronger,” he said, noting in particular a 0.8 per cent rise in the cost of clothes and footwear.

Wages are beginning to pick up, too, he said, judging by a 1 per cent rise in the sum of all workers’ salaries and bonuses in the April-June quarter. “Deflationary pressure is easing,” he said.

CPI in Tokyo in July, considered a leading indicator for the rest of the country, rose to 0.5 per cent from 0.4 per cent in June, she noted.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on the previous month.

A few comments:

1. Although the goal is 2% inflation, you really want to focus on NGDP growth, which is a better indicator of demand-side growth.  NGDP and RGDP both rose briskly in the first half of 2013, especially by Japanese standards (trend NGDP is negative for Japan, so 3% NGDP growth is like 5% or 6% in the US.)

2.  From the very beginning of Abenomics I’ve claimed that the markets show the policy is likely to boost inflation, but will fall short of the 2% goal without more stimulus than markets currently expect.  I still believe that.  Just as I still believe US growth in 2013 will be about 2%, and I still believe low interest rates are the new normal, and I still believe the China boom is not over.  I stand by my predictions.

3.  Unemployment was 4.2% when Abenomics was announced in November 2012, and 4.3% when Abe took office this January.  Japanese unemployment rates are not comparable to Western data, but the 3.8% rate is low by recent Japanese standards (post 1998), and total employment is higher than a year ago despite a workforce that is shrinking.  BTW, Japan has one of the most stable Phillips curves of any country in the world, and it even looks like Japan!

4. The 3% sales tax increase planned for 2014 is likely to slow growth.  But I’m reluctantly supporting it because their fiscal situation is so bad.  Let’s hope the BOJ offsets the (negative) effects on NGDP, excluding taxes.  Fortunately Japanese tax rates (share of GDP) are low, so doomsday fiscal forecasts for Japan will probably be proved wrong.  They have lots of room to raise revenue if needed.

5.  Tyler focuses on distributional effects but I think that’s a mistake.  The old people elected Abe because they understood it’s not a zero sum game and they didn’t want Japan to commit suicide (even if inflation eroded their savings.)  As RGDP rises, even groups that might appear to be worse off (savers, workers), will often gain over time.

PS.  As usual Marcus Nunes got there before me.  Marcus (and several commenters) also sent me a very thoughtful paper on Japanese policy by Kikuo Iwata, the Deputy Governor of the BOJ.



17 Responses to “Things are improving in Japan”

  1. Gravatar of Mikio Mikio
    2. September 2013 at 11:10

    Thanks for the post, Scott. Interest in Japan has faded over summer, but I think they are being under appreciated. NGDP has picked up in Q2 vs Q1, as Q1 NGDP was stronger than in Q4/2012. People focuss too much on RGDP.

    I agree, however, that at the current policy setting they will undershoot 2% inflation. But 1.2% or whatever is better than 0%.

  2. Gravatar of Geoff Geoff
    2. September 2013 at 12:47

    NGDP = RGDP + i


    RGDP = NGDP – i

    There is nothing “real” about RGDP. It is just a measure of dollars spent, not the amount of real goods produced.


    A lower unemployment rate doesn’t necessarily mean those increased jobs are in sustainable lines.

  3. Gravatar of H_WASSHOI (nekomimi) H_WASSHOI (nekomimi)
    2. September 2013 at 12:48


    >will fall short of the 2% goal without more stimulus than markets currently expect

    You can find the words “the McCallum rule” in this minutes.

    I think Iwata-sensei persuaded the other BoJ members of the policy board.

    Now, BoJ’s policy tool is the monetary base.

    From April, Kuroda-san and Iwata-sensei are repeatedly saying “We will adjust the policy without hesitate if needed”

    Kuroda-san took summer vacation, and cared kids who visited BoJ (Aug.23) .

    I think it is the sign of rule based policy.

    So I am very optimistic about achieving the 2% goal.
    (I doubt current market estimates about the BoJ’s will)

    Due to “rule based policy”, adjustment may be delayed if there are.
    (good change, no bad effect of “time inconsistency”)

  4. Gravatar of Edward Edward
    2. September 2013 at 12:59


    “A lower unemployment rate doesn’t necessarily mean those increased jobs are in sustainable lines.”

    And it doesn’t necessarily mean they’re NOT in sustainable lines

  5. Gravatar of Edward Edward
    2. September 2013 at 13:07

    “I think it is the sign of rule based policy.

    Rules based Policy is great, if its the RIGHT RULE.

    One of the things that really, really pisses me off about John Taylor the economist is that he talks about rules based policy all the time in general and not specific terms, as if no one else in the world is in favor of it!
    (He doesn’t even talk about the Taylor Rule that much anymore!)

    Also, a bad rule like the gold standard will perform worse than a smart discretionary policy like QE.

  6. Gravatar of ssumner ssumner
    2. September 2013 at 13:09

    Mikio and H Wasshoi, Thanks for commenting, and I’m glad to hear that the people at the BOJ are not committed to the target.

    Do you know what page the words “McCallum Rule” appear on? I skimmed the money policy section, but didn’t see it.

  7. Gravatar of Edward Edward
    2. September 2013 at 13:09

    He doesn’t even allow comments on his blog, I suspect because he knows about the angry comments he might receive:

    “I dont give a sh** about your rule if it doesn’t work for me!

  8. Gravatar of H_WASSHOI (nekomimi) H_WASSHOI (nekomimi)
    2. September 2013 at 13:19

    >Do you know what page the words “McCallum Rule” appear on?


  9. Gravatar of Saturos Saturos
    2. September 2013 at 19:27

    I vote we all start calling Scott “Sumner-sensei”.

  10. Gravatar of dtoh dtoh
    2. September 2013 at 20:14

    I read Iwata’s paper as well. Very pleasing to read compared to the 20 years of incompetence by his predecessors, but let’s face it….

    Either 2% inflation is the target or grow the base at 60 to 70 trillion a year is the target. There might be a happy confluence where you hit both, but it would just be random.

    Let’s not kid ourselves. A rule based policy would be either

    1) We’re going to increase the base as much as we need to in order to hit 2% inflation target by 2015, or

    2) Our target is to grow the base at 60 to 70 trillion a year and inflation will be que sera sera.

    The current policy is not rule based. It’s “We”re going to waver between the two and see which way the political winds blow us.”

  11. Gravatar of John Papola John Papola
    3. September 2013 at 04:14

    Japan is clearly a great case for falsifying the so-called “liquidity trap” as anything more than a self-fulfilling Keynesian policy prophecy induced by Keynesians themselves.

    But I don’t understand why Japan should need faster NGDP growth. Aren’t expectations and long-run trends a big part of market monetarism. 30 years of flat NGDP should be enough time for expectations, wage rate structures and behavior to adjust, shouldn’t it?

    This celebration of Abenomics seems more like inflationism to me. Why am I wrong? Please don’t say “look at the results!” as I don’t find them sufficiently stark to have confidence in causality. What’s the theoretical basis for this? Are wages really sticky after 30 years of deflation?

  12. Gravatar of ssumner ssumner
    3. September 2013 at 05:24

    H Wasshoi, Thanks, I did a post.

    Saturos, That’s a first for me.

    dtoh, Fair enough, but it’s a step in the right direction.

    John, There are basically three arguments:

    1. Faster growth would improve the public debt situation. Growth as been so slow that even slightly faster growth would not boost nominal interest rates above zero, but would boost revenue.

    2. Wages may generally be flexible, but because of money illusion are downward inflexible, even in the long run.

    3. Slow growth creates zero interest rates, which makes monetary policy more inept.

    BTW, Japan has not had 30 years of deflation, 20 years of mostly deflation, not entirely.-which is still a long time.

    I also strongly disagree about causality. The rise in stock prices has clearly been linked to news announcements about QE and a higher inflation target. There’s no doubt about that in my mind.

  13. Gravatar of TallDave TallDave
    3. September 2013 at 07:55

    As RGDP rises, even groups that might appear to be worse off (savers, workers), will often gain over time.

    A key point, too often missed.

    I stand by my predictions.

    I’ll get a post up sometime this year for our 2038 China/Mexico bet, which will be fun to check in on as the years go by. Busy right now with a new daughter 🙂

  14. Gravatar of John Papola John Papola
    3. September 2013 at 13:51


    Some reactions. I assume in each instance of “growth”, you’re talking about nominal growth, not real growth. Is that so? It’s unclear.

    1. The use of inflation as a means to improve government debt is surely not costless. It’s merely a wealth transfer from creditors (most of whom are Japanese citizens) to the debtor, the Japanese government. Why is this beneficial? I see no real benefit from inflating away government debt in and of itself. It’s truly just a tax by another name.

    2. Isn’t the problem of sticky nominal wages principally (solely?) about unemployment? Japan doesn’t seem to have much of an unemployment problem, or does it? What am I missing here? And, as Selgin noted in Less Than Zero, there need not be actual nominal wage pressure if the deflation is driven by productivity growth. When Apple figures out how to make double the number of iPhones with the same workers through technology improvements, that drives the price of the iphone down but doesn’t put pressure on Apple worker’s nominal wages. This appears true writ large, provided stable NGDP (no growth or decline). The price declines come entirely from increases in aggregate supply relative to fixed nominal aggregate demand.

    3. What’s this talk of interest rates being a target for monetary policy! For shame!

    4. Stock market’s are great, but I’m thinking about real growth, employment and incomes. Seems like a more complicated causal story.

  15. Gravatar of Alldeles för roligt | Rättvist och balanserat Alldeles för roligt | Rättvist och balanserat
    4. September 2013 at 04:11

    […] en uppdatering om Japan (som kanske är intressant för vissa men inte sÃ¥där jättemÃ¥nga) pÃ¥ The Money Illusion som […]

  16. Gravatar of ssumner ssumner
    4. September 2013 at 06:02

    John. Yes, I mean nominal growth.

    You see no benefit from reducing a national debt that is over 200% of GDP? Does that mean you see no cost to raising the debt to 2000% of GDP? Or 20000% of GDP? I don’t follow that at all.

    As far as “inflating the debt away,” that’s not what I am calling for. I favor a policy of slow NGDP growth, perhaps 3%. Yes bondholders would be hurt slightly by a shift to positive NGDP growth, just as they were helped much more by the much bigger shift toward slower NGDP growth in the 1990s. I don’t recall conservatives complaining about the unfairness to debtors at the time. So I don’t see any major fairness issues. And you’ve ignored the zero bound issue, which is really important.

    2. Japan has a big unemployment problem, the data for Japan understate the true rate. The productivity argument overlooks the fact that productivity growth varies from one industry to another. So some Japanese industries need real wage cuts. That’s not easy to do when the price level is falling. It is much easier to do when prices are rising.

    3. I’m not in favor of targeting interest rates.

    4. I think you misunderstood my claim about stocks. I wasn’t saying stock prices are what ultimately mattered, I was addressing your causality concern.

  17. Gravatar of John Papola John Papola
    4. September 2013 at 10:26


    On Debt:

    I don’t see how inflating away debt is related to increasing debt. There’s not logical connection between my concern regarding inflating away part of the debt and the problems related to the Japanese government spending even more money.

    I see the problem with government spending as being one of real resource waste. If the Japanese government had incurred debt to create amazing, growth-enhancing value, the productivity gains would pay the debt off. But that’s not how governments work. They don’t have the profit and loss calculation. We have no idea what the real value of government expenditures are because they aren’t voluntary and thus not subjectively valuable. Even if we could, it’s pretty clear that Japan’s massive Keynesian “stimulus” program was a disastrous waste. Japanese society is already poorer for those boondoggles. The question now is who gets to pay for it? My point is that using NGDP growth to “reduce debt” does no such thing. It simply rearranges who is paying for the debt.

    None of that can be inverted to advocate more debt. Government is a bad allocator of resources. I don’t want them wasting any more. And I couldn’t care less about what “conservatives” said about then or now. That’s an ad hominem argument with no bearing on what is or is not right or fair. Surely you’ve heard that two wrongs don’t make a right. And which “conservatives” are you talking about? Did Milton Friedman have nothing to say about the impact of demand-deflation on debtors? I bet he did.

    2. You’re disaggregating productivity growth but them aggregating the “price level”. This is a mistake. Just as not all industries experience uniform productivity growth, not all goods and services experience uniform price increases when the “price level” is rising. Disaggregate both. Industries with low productivity growth will also face slow rates of competitive pricing pressure within the industry. Are Japanese hairdressers facing the need to reduce real wages relative to Toyota employees? Why? If Toyotas are getting cheaper per unit, doesn’t that free up income to continue paying roughly the same price for a hair cut AND buy other stuff? Pierce through the aggregation of the nominal story.

    3. So who cares if zero rates make monetary policy “more inept”? Isn’t that why we should switch to an NGDP level target and ideally a futures market? That was my point.

    4. I understand that you see there being causality between easier money and a stock market boom. But my original point was that this is not, in and of itself, a good thing that makes Abenomics worth celebrating. That’s all.

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